Report No. 27374-IND Indonesia Development Policy Report Beyond Macroeconomic Stability December 4, 2003 Poverty Reduction and Economic Management Unit East Asia and Pacific Region Document of the World Bank CURRENCY EQUIVALENTS (As of December 3,2003) CurrencyUnit =Rupiah (Rp.) US$l =Rupiah 8,500 FISCAL YEAR: January 1-December 31 Regional Vice President: Mi-. Jemal-ud-dinKassum Country Director: Mr. Andrew Steer Chief Economist: Mr. Homi Kharas Task Team Leader: Ms. Mona E. Haddad Acknowledgements This report was written by a core team consisting of Magda Adriani, Vivi Alatas, Jehan Arulpragasam, Mona Haddad (TTL), Joel Hellman, Bert Hofman, Yoichiro Ishihara, Menno Pradhan, Kurnya Roesad, Megawati Sulistyo, and P.S. Srinivas. The team received inputs from Jasmin Chakeri, Anne-Lise Klausen, Anthony Kuek, Neil McCulIoch, Kathy Macpherson, Stefan Nachuk, Djauhari Sitorus and Anthony Toft. Peer Reviewers were Joachim von Amsberg, Chatib Basri (University of Indonesia) and Stephen Schwartz(IMF). The report was discussed with the Government on November 20 and 21,2003. The Sector Director is Homi Kharas, the Country Director is Andrew Steer. Nina Herawati and Dewi Widuri formatted the document and prepared it for printing. Cover Design: Grha Info Kreasi ABBREVIATIONS AND ACRONYMS ACC Anti Corruption Commission ILGRP World Bank Financed Local Adat Traditional land rights Governance Project ADB Asian Development Bank ILO International Labor Organization AGO Attorney General's Office IMF International Monetary Fund ASABRI Pension Fundfor Police, Civil INPRES Presidential Instruction Servants and Military Defense IPO Initial Public Offering Personnel I-PRSP InterimPRSP ASEAN The Association of Southeast Asian IPW Indonesian Procurement Watch Nations ISIC International Standard Industrial ASKES Health Insurance Classification BAPPENAS National Planning Development JAMSOSTEK Provident Fundfor Private Sector and Agency SOEs BAPPEPAM Capital Market Supervisory Board Kabupaten District BI Bank Indonesia KADIN Indonesian Chamber of Commerce BII Bank International Indonesia KDP Kecamatan DevelopmentProject BKPM Investment Coordinating Board KEPMEN Ministerial Decree BKPMD Regional Investment Coordinating KEPPRES Presidential Decree Board KHL Adequate Living Needs BNI Bank Negara Indonesia KHM MinimumLivingNeeds BPK Supreme Audit Authority Kota City BPKP Central Government's Internal Audit KPK Poverty Reduction Committee BPN National Land Agency KPKD Regional Poverty Reduction BPR Bank PerkreditanRakyat Committee BPS Central Bureau of Statistics KPKPN Commission for the Audit of the BRI Bank Rakyat Indonesia Wealth of State Officials BTN Bank Tabungan Nasional LAP World Bank Land Administration BULOG National Logistics Agency Project CAR Capital Adequacy Ratio LNG LiquefiedNatural Gas CDD Community Demand Driven LP3ES Institute for Social and Economic Development ResearchEducation and Information CEIC CEIC Data Company Ltd. LPS Deposit Insurance Corporation CG Corporate Governance LTOs Large Taxpayers Offices CGI Consultative Group on Indonesia MDG Millennium Development Goals CLSA Credit Lyonnais Securities Asia MEMR Ministry of Energy and Mineral CPI Consumer Price Index Resources DAK Special Allocation Fund MFO Marine Fuel Oil DAU General Allocation Fund MOF Ministry of Finance DGT Directorate General of Taxation MOHA Ministry of Home Affairs DPR House of Representatives MOPS Mid Oil Platts Singapore FATF Financial Action Task Force on MOUs Memoranda of Understanding Money Laundering MPR People's Consultative Assembly FDI Foreign Direct Investment NCCT Non-Cooperative Countries and FSN Financial Safety Net Territories FY Fiscal Year NGOs Non Governmental Organization GDP Gross Domestic Product NPLs NonPerforming Loans GFA Gross Foreign Asset NTB Nusa Tenggara Barat ' GO1 Government of Indonesia NTT Nusa Tenggara Timur GTZ German Technical Cooperation ODA Official Development Assistance Agency OJK Financial Services Authority IAIS International Association of Insurance OPK Rice Subsidy Program Supervisors oss One Stop Service IBRA Indonesian Bank Restructuring PEM Public Expenditure Management Agency PERDA Regional Regulation ICRG International Country Risk Guide PLN State Electricity Company IGGI Inter Governmental Group on PMDN Domestic Investment Indonesia PMON State Debt Management Office PP Government Regulation PPATK Financial Intelligence Unit PPM Post ProgramMonitoring PROPENAS National Five Year Development Program PRS Poverty Reduction Strategy PRSP Poverty Reduction Strategy Paper Puskesmas Health Community Center RASKIN Rice for the Poor RBC RiskBasedCapital RCA Revealed Comparative Advantage REER Real Effective Exchange Rates REPETA Annual Development Plan S&P Standard and Poors SAKERNAS National Labor Force Survey SARS Severe Acute Respiratory Syndrome SBI Bank Indonesia Certificates SGP Scholarship and Grant Program SITC Standard International Trade Classification SMERU Social Monitoring and Early Response Unit SMEs Small and Medium Enterprises SOEs State Owned Enterprises SUSENAS National Social and Economic Survey TAP Decision TASPEN Pension Fundfor Civil Servants TI Transparency International TimInti The Core PRS Team UNCOMTRADE UnitedNationCommodity Trade UPP UrbanPoverty Eradication Program UUPK Basic Forestry Law of 1967 VAT Value Added Tax WTO World Trade Organization TABLE CONTENTS OF PAGENo. INTRODUCTION EXECUTIVE SUMMARY i CHAPTER1: MAINTAINING MACROECONOMIC STABILITY 1 RECENTDEVELOPMENTS 1 Political Developments 1 Market Sentiment 1 The RealEconomy 2 Employment,Income andPoverty 4 MonetaryPolicyandInflation 4 InternationalTrade andPayments 4 Fiscal Policy 5 ExternalFinancingNeeds in 2004 6 Medium-TermMacroeconomic Outlook 6 THEWHITE PAPER 7 MaintainingMacroeconomic Stability 8 Tax Reform 9 Tax AdministrationReform 9 PublicExpenditureManagement 10 Decentralization 11 State DebtManagement 12 CHAPTER 2: RESTRUCTURINGAND REFORMINGTHE FINANCIAL SECTOR 15 RECENTDEVELOPMENTS 15 ImprovedPerformanceof the BankingSector 16 IBRA is Ready to Close 18 CapitalMarkets andMutualFunds 18 THEWHITEPAPER: RESTRUCTURINGAND REFORMING THEFINANCIALSECTOR 19 Financial Sector Safety Net andFinancial Stability 19 The BankingSystem 20 Anti-Money Laundering 21 CapitalMarkets 22 InsuranceandPensions 23 CHAPTER3: INCREASINGINVESTMENT,EXPORTSAND EMPLOYMENT 27 RECENTDEVELOPMENTS 27 Trends inInvestment, Exports andEmployment 27 What Affects Investors? 28 THEWHITE PAPER 29 ImprovingInvestment Policy andApprovals 31 PromotingIndustryandTrade 33 HarmonizingRegionalRegulations 34 Employment 35 Infrastructure 37 Developing Small and MediumEnterprises, and Cooperatives 38 CHAPTER4: MEETING INDONESIA'S GOVERNANCECHALLENGES 41 GOVERNANCE THEWHITEPAPER AND 43 Public Financial Management 43 Legal and Justice Sector Reform 44 Public Administration Reform 49 ACCOUNTABILITYAND THEWHITEPAPER 52 CHAPTER5: REDUCINGPOVERTY 53 INDONESIA'S POVERTYCHALLENGE 53 ADDRESSING CHALLENGE:THEWHITE PAPERANDBEYOND THE 54 An Emerging Poverty Reduction Strategy for Indonesia 55 Opportunity Creation 56 Empowerment and Accountability 58 Human Capital 59 Social Protection 62 TABLES TEXT IN Table 1.1. Sovereign rating comparison Table 1.2. Sources of growth comparison in2002 Table 1.3. 2004 Financing needs and CGIdisbursement request Table 1.4. Internationalcomparison of major indicators upon the IMF graduation Table 1.5. Macroeconomic stability measures in the White Paper 9 Table 2.1. Indonesian financial sector in2002 15 Table 2.2. Financial sector measures inthe White Paper 20 Table 2.3. Market ranked by corporate governance by CLSA 23 Table 2.4. Insurance sector profile in2002 24 Table 3.1. Indonesia revealed comparative advantage 28 Table 3.2. Main policy measures to improve the investment climate and 31 promote industry and trade Table 4.1. Legal andjustice sector reformmeasures in the White Paper 45 Table 4.2. Public administration reform measures in the White Paper 50 Table 5.1. Change in poverty headcount index from 1996to 2002 53 Table 5.2. Poverty eradication measures inWhite Paper 54 FIGURES Figure 1.1, Markets are supportive 1 Figure 1.2. Non-oil and gas trade growth rate slowed 3 Figure 1.3. Exports were increasingly driven by foreign firms prior to the 3 crisis Figure 1.4. Indonesia's export to China and the world Figure 1.5. Inflation further declining Figure 1.6. Private capital account turns positive Figure 1.7. Fiscal consolidationcontinues Figure 1.8. Medium-term growth projection Figure 1.9. Inequality among local governments 12 Figure 1-10. Government debt i s further declining 12 Figure 2.1. Key financial indicators of banking systemhave improved 16 Figure 2.2. Interest rate spreads are on the rise 17 Figure 2.3. Mutual funds have soared 19 Figure 3.1. Indonesia's export performance lags its neighbors' 27 Figure 3.2. Competition from China i s rising 27 Figure 3.3. Fewer firms are set up 28 Figure 3.4. Manufacturing employment i s falling 28 Figure 3.5. Macroeconomic instability, policy uncertainty and corruption are 29 the main obstacle Figure 3.6. Decentralization has exacerbated the problems 29 Figure 3.7. Time and cost o f starting a business in Indonesia 32 Figure 3.8. Productivity has not matched increase inreal wages 35 Figure 3.9. Comparison o f value added by labor in selected sectors, 2000- 35 2001 Figure 3.10. Strikes are frequent and many production days are lost 36 Figure 3.11. Perception o f infrastructure quality 37 Figure 4.1. Extent of consensus within government 42 Figure 4.2. Perceptions o f key elements o f "governance" 2002 42 Figure 5.1. Where are the poor? 55 Figure 5.2. Many Indonesians lack access to basic services 54 Figure 5.3. L o w land registration inIndonesia 57 Figure 5.4. Most roads indistricts are of inferior quality 58 Figure 5.5 Road access i s not equally distributed 58 Figure 5.6. Indonesia is behind its neighbors in science and mathematics 60 achievements Figure 5.7 The poor are vulnerable to adverse shocks 62 BOXES Box 1.1. Overseas treasures 5 Box 3.1. White Paper priorities o f the business community 30 Box 4.1. The supreme court blueprints 46 Box 4.2. Reformo f the law on the Attorney General's Office (AGO) 48 Box 4.3. Integrity pacts in Solok 51 Box 5.1 The doctor i s out... 61 Box 5.2. Expensive subsidized rice 63 STATISTICAL AMVEXES EXECUTIVE SUMMARY Indonesia is entering a new phase in its economic percentage points below levels achieved before the management. At the end of 2003, the country will crisis, and its composition shifted dramatically be the last among the countries affected by the toward property investment. Exports have Asian crisis to complete its IMF supported contributed less to growth than in other Asian program. Over the last three years, Indonesia has countries, but exports to China grew by 60 percent made remarkable progress in achieving in 2003. For 2004, the Government expects macroeconomic stability, in reducing the growth to reach 4.8 percent, supported to some economy's vulnerability, and in restoring external extent by an improving international environment viability. The decision not to renew the IMF andlow interest rates. supported program was therefore broadly welcomed by the markets, the international A virtuous circle of improved macroeconomic community and Indonesians. The release of the indicators continues to build up. Inflation has Government's "Economic Policy Package Pre and shown a remarkable slowdown over the year, Post ZMF," better known as the White Paper, mainly on account of a stable exchange rate and shows that Government is committed to continued modest base money growth. Lower inflation, now sound macroeconomic policies and financial sector below 6 percent, enabled Bank Indonesia to bring restructuring. The Paper also sets out an ambitious down interest rates. Lower interest rates cut agendaof measures to increase investment, exports interest payments in the state budget, paving the and employment creation. Together these measures way for further fiscal consolidation in 2003, could lay the basis for higher growth, more jobs, despite higher fuel subsidies than initially and lower poverty. Higher growth i s a must: budgeted. The 2003 state budget deficit is poverty benefited from macroeconomic stability, expected at 1.9 percent of GDP. Public debt as a but is still at 16 percent of the population, and a share of GDP also continues to decline and will majority of Indonesians earn less than two dollars a reach 67 percent by end-2003. The 2004 budget day. Keeping implementation of the White Paper approved by parliament inNovember demonstrates on track will not be easy in the months ahead the Government's commitment to further fiscal leading up to the elections of 2004, but the consolidation; the budget deficit is projected at 1.2 Government's real challenge will be to ensure that percent of GDP. Financing needs would increase critical measures are prioritized, and policy in 2004, despite further fiscal consolidation, as measures taken indeed support the White Paper's exceptional financing dries up with the end of the goals. IMF program, and debt service will increase from 31 percent of revenue in 2003 to 37 percent in RECENTDEVELOPMENTS 2004. The amount being requested from the CGI i s in the range of $2.5-3.0 billion. The markets reacted calmly to Indonesia' decision not to extend aprogramwith the IMF,reassuredby THEWHZTEPAPER the Government's achievements in stabilizing the economy and reducing macroeconomic risks. The White Paper promises continuity in Growth remains modest at 3.5-4 percent, but the macroeconomic and financial sector policies, and economy has performedbetter than expected. The aims for reforms to improve the investment Marriott bombing, SARS, and the Iraq war all had climate. The document, issued as a Presidential a limited effect on growth, a testimony to the Instruction and a parallel central bank Governor country's reduced vulnerability. Over 80 percent decree, includes an impressive set of time-bound of growth in 2002 and 2003 came from private policy actions. The White Paper came about in a consumption, which was boosted by declining process of consultation with major stakeholders, interest rates and expanding credit. Investment has and for its implementation the Government has set remained at 20 percent of GDP, some 10 up a secretariat that keeps track of progress on the i paper's policy actions. Early implementation sector, whereas capital markets remain progress i s promising: Of the 43 actions due end- underdeveloped, and their potential in financing September 2003, the government completed 36 on development underutilized. time. All the remaining action plans not completed in September were done in October. Of the 54 The measures in the White Paper are steps in the actions due in October, the Government completed right direction to strengthen the financial sector. 37 on time. Among those, the establishment of the The plans to complete a financial safety net are Investment and Trade Team and the Presidential sound, but require careful sequencing, coordination Decree on Government procurement stand out. and timing intheir implementation. Completion o f the sales o f banks taken over will not only help the Macroeconomic Stability. The White Paper treasury, but also return more o f the banking comprises the measures needed to achieve a system to the private sector. The measures in the healthy fiscal position, lower inflation, and White Paper will need to be complemented with sufficient international reserves. The Government more forceful efforts to improve governance o f plans to offset lower exceptional financing with state-owned banks, including full enforcement by further fiscal consolidation through reforms and the supervisor o f prudential regulations for those modernization o f the tax system, increased banks, and by the Government of accountability efficiency in government spending, and effective for results. Beyond the White Paper, the ` debt management. In addition, and quite Government should strive for diversifying the remarkable for an election year, the Government financial sector, and further develop the capital also remains committed to continued market and sound institutional investors such as privatization-10 enterprises in total will be on the insurance and pension funds. This would yield the block to raise more domestic financing to cover the longer term risk financing that more rapid growth deficit. Together with the low domestic interest requires. rates and stable exchange rate the central bank is aiming for, the zero deficit and "Maastricht norm" Investment Climate. Recognizing the dire shape debt level the Government i s aiming for by 2006 Indonesia's investment climate i s in, the White are well within reach. Paper aims to improve it. Indeed, according to a recent survey among firms, a host o f issues i s Financial Sector Reform. The White Paper lays holding back investment. Critical obstacles are out a host of measures to continue financial sector policy uncertainty, legal uncertainty, and reform and restructuring. Progress has been made corruption in both national and local governments. in restructuring and strengthening the banking Many o f these obstacles have resulted from weak sector. BRA has sold several banks taken over institutions, including tax and customs during the crisis, the Government has begun administration and the judicial system. The White reducing its stake in state-owned banks, and Paper i s a good start to tackle some of these commercial banks balance sheets show significant difficult issues, and the Investment and Trade improvement with reductions in non-performing Team established under the White Paper can play a loans and stronger capital adequacy ratios. Behind major role in driving this agenda forward. The such improvements, weaknesses remain. policy actions are helpful in their aim to simplify Restructuring of non-performing loans was not investment and clarify the roles and responsibilities always conducted on the basis o f commercial o f the various levels o f Government. It also viability. The improved capital-adequacy ratios promises to address the excessive regional taxes may overstate the robustness of the banking system issued since the onset of decentralization. On as government bonds and restructured loans in infrastructure, the announced implementation of bank portfolios remain large. State-owned banks Law 20/2002 and a regulatory body for Telecom s t i l l comprise almost half of Indonesia's banking are the most important steps. A better investment sector, and they suffer from weak internal controls law would be helpful in increasing investment, and governance as recent events in BNI and BRI although the current one i s probably not a major illustrate. The financial sector i s not well bottleneck. Improving it will require extensive diversified, and relies heavily on the banking 11 consultations with stakeholders before the draft is management, the Anti-Corruption Commission, the sent to Parliament. judiciary commission, and the reform blueprintsof the Supreme Court are all encouraging. These Trade. The measures proposed on trade are less initiatives need to be matched by the measures, promising, and hardly support the goal of budget, and people it takes to create strong accelerating export growth. Already, protectionist institutions. A litmus test in that respect is the measures such as import registration and licensing Anti-Corruption Commission, whose members are have cropped up in recent years. The setback in about to be selected at the same time the CGI the WTO negotiations have probably increased the meets. On other areas, the White Paper measures pressures for protectionist measures, notably in need more work: the draft revised law on the agriculture. Indeed, higher tariffs on rice, attorney general's office falls short of the soybeans, and corn-all staples for the poor-are necessary overhaul of this institution, and the being contemplated. And BULOG, the logistics planned public services law will do little for agency, seems to be keen to use its new status as a services without complementary civil service non-profit enterprise for expanding its role in the reforms. trade of these commodities. The proposed trade law could in this respect be helpful, but could also Poverty Alleviation. Poverty reduction i s not the be used to justify more of the same. The main focus of the White Paper, but the forthcoming draft law should therefore be carefully macroeconomic stability and higher growth the scrutinized. The announcement of an expansion of paper aims for is one of its pillars. The other is counter-trade seems unproductive. Apart from the better services for the poor, and Indonesia i s fiduciary concerns such measures bring with them, lagging in this respect. More than half of the measures do not help Indonesia's image of a Indonesians do not have access to one of the basic country that has overcome the crisis, and restored services in health, education, water, or sanitation, external viability. and better governance is required to improve this. The White Paper reconfirms the Government's Governance. Better governance i s key for commitment to develop a comprehensive Poverty reducing policy and legal uncertainty, and Reduction Strategy Paper (PRSP) by mid-next therefore for improving the investment climate. year, and presents a number of measures that can Five years after Reformasi, governance continues create opportunity for the poor, improve their to be the Government's biggest challenge. human capital, and safeguard the vulnerable. The Corruption has become less predictable, not least success of the forthcoming PRSP will depend on because of decentralization. Unpredictable and whether it will ultimately yield an enhanced inconsistent court rulings issued by an unreformed poverty focus of government policies and justice sector continue to haunt investors, and tax programs. To this end, the strategy needs to be administration and customs remain a major integrated with existing budgeting and planning nuisance for business. It is important to recognize procedures and sector strategies. The measures to that these governance problems exist within a improve services for the poor included in the framework of tremendous political, economic and White Paper need to be complemented with those institutional changes. These changes have marked that make decentralization work, and improve Indonesia's transition to a more open, competitive governance in service delivery. Access to land can society and provide new opportunities for catalyze credit for the poor and SMEs, and the improving governance. The results of these Government i s encouraged to scale up its rather remarkable changes are evident in the new level of modest commitment on land titling made in the transparency and competition in Indonesian public White Paper. Finally, the plans to revamp life, but now need to be complemented by Indonesia's social safety net need wide rebuilding the institutions that would match this consultation to ensure that the desire for a more increasedtransparency with more accountability. just society is matched with the Government's goal to create more productivejobs. The White Paper is a step along this journey. Measures supporting better government fiduciary iii iv INTRODUCTION The year 2004 will mark another crucial step in document shows continuity in macroeconomic Indonesia's long-term transition. The country will policies and financial sector reforms, but also go to the polls to elect new national and regional proposes a set o f specific policy and institutional Parliaments, and for the first time in the history o f measures to address issues that have undermined the Republic, to directly elect a President. This the country's investment climate. While the milestone in the country's democratization i s timetable for adopting these measures i s a short accompanied by one in economic policy: for the term one - fifteen months - many o f the proposed first time since the onset of the crisis, the measures address fundamental longer term Government will not have a program supported by problems, and some will take several years to see the IMF. The Government's decision to graduate through fully. The Government has set up a from its IMF program i s warranted by the strong monitoring team in the Coordinating Ministry for improvements in the country's macroeconomic the Economy. The private sector, which has a high conditions, and has been broadly welcomed by the stake in the measures included in the paper, has markets and the internationalcommunity. emerged as an independent monitor, with representatives from the Indonesian Chamber o f The Government's "Economic Policy Package Pre Commerce, the Jakarta Japan Club Foundation, and Post IMF" or White Paper, issued as a AmCham Indonesia, the International Business presidential instruction on September 15&, has Chamber, and a number o f independent helped build confidence in the Government's economists. Other independent representatives o f policies in the election year ahead. The policy the private sector and civil society will also be package i s intended to "bridge the credibility gap" monitoring progress, as Minister Boediono expressed it, a gap as important as the financing gap to be filled after Since the White Paper i s so central to Indonesia in Indonesia's exit from the IMF-supported program the year ahead, much o f this CGI brief i s devoted and Paris Club. to discussing it. Beyond recent developments, the report discusses and analyzes the policy actions The White Paper i s a unique document: it i s the from the White Paper we feel are critical. The first time that the Government commits itself report also points at the White Paper measures that transparently to a time-bound action plan to may not necessarily be in line with the stated goals implement policies,. Other Government o f the document. And finally, the report identifies documents, such as the annual plan (Repeta) and policies that are needed beyond the White Paper to five-year plan (Propenas), include policy ensure Indonesia builds on the macroeconomic directions, but none o f these identifies specific stability achieved to attain more rapid growth and policy actions and a specific timetable. The poverty reduction. CHAPTER1: MAINTAININGMACROECONOMIC STABILITY RECENTDEVELUPMENTS elected. Only parties or coalitions that have won 3 percent (in future elections 15 percent) of the Indonesia's decision to move to a post-program Parliamentary seats in the April 2004 can propose monitoring arrangement with the IMF marks the candidates for the Presidential elections. The next phase in the country's economic recovery. Presidential elections are likely to take two rounds: Indonesia i s the last of the former crisis countries a first round in July, and if none of the candidates to graduate from an IMF supported program, and achieves a straight majority, a run-off between the this step was generally welcomed. Over the last two top candidates in September. Presidential few years, the country has regained candidates run on one ticket with the Vice macroeconomic stability. Although maintaining it Presidential candidates, whom they are required to will remain a challenge, Indonesia is much better announce before the first round of elections placed to do so than three years ago. without the possibility of change after the first Macroeconomic indicators continue to improve round. Some fear that the long election process, and vulnerability i s down. Growth, however, which may take up to 6 months, could create remains a modest 3.5-4 percent, and poverty is uncertainty and slow down political decision stuck at 16 percent. An improving international making, which in turn may affect Indonesia's environment may notch this up a bit over the economy. Others point out that campaign coming year, but investment has yet to revive to spending may actually support the economy. levels that would sustain higher growth in the medium term. Maintaining macroeconomic ` MarketSentzment stability remains key to achieve such growth, as is tackling the remaining structural reforms, Market sentiment has remained broadly favorable improving the investment climate, and addressing despite several shocks over the past year (Figure poor governance. The Economic Reform Package 1.1). Indonesia was less affected by the Iraqcrisis Pre and Post IMF attempts to address these issues. in March and the SARS outbreak than neighboring The White Paper, as it is popularly known, lays out countries. The Marriott bombing inAugust briefly an impressive time-bound `program of economic hit the markets, but they recovered quickly with reforms to maintain macroeconomic stability, the Rupiah stabilizing at around Rp. 8,500 and the restructure and reform the financial sector, and Jakarta Stock Exchange index reaching a 3-year increase investment, exports, and employment. high in October, on the back of a global recovery The challenge now lies in implementation, and in in stock markets. The rating agency Moody's ensuring that individual measures are not only upgraded Indonesia's rating from B3 to B2 in implemented on time, but contribute to the stated September followed by Standard and Poor's from goals of the program. Figure 1.1. Marketsare supportive ~ ~ ~~~ Pod2icaZDeveZopments stock index (1983=100) exchange rate (RD/$) The political situation remains stable, but electoral politics are expectedto intensify in advance of next year's general elections. Laws on the Presidential Election, Political Parties, and Membership of the DPR and MPR were passed during the year. During the next Parliamentary elections, voters have the possibility to "write in" candidates on party lists. But parties have the right to recall 400 7800 elected representatives if they diverge from party 350 7600 lines. For the first time in Indonesia's history, the Jan-03 Feb Mar M a y Jun Aug Sep President and Vice President will be directly Source: CEIC. 1 Table 1.2. Sources of growth comparison in2002 B- to B. These ratings have gained importance with the Government's plans to issue a global bond IDN KOR MYS PHL THA to finance the 2004 budget deficit. Current ratings are still only at the level o f early 1998, or 5 notches GDP 98 124 111 117 105 below investment grade (Table 1.1). Private consumption 109 118 112 118 105 TheRealEconomy Government consumption 112 105 142 108 114 Growth i s still modest, but the economy performed better than expected. Since the crisis, Indonesia's Investment 69 94 65 103 61 growth has by and large relied on consumption, and government consumption in particular. In Exports 96 184 126 96 148 other former crisis countries, reliance on investment (Korea, Philippines) or exports Imports 70 136 108 94 116 (Malaysia, Thailand) has been much stronger Note: IND- Indonesia, KOR- Korea, MYS- Malaysia, (Table 1.2). The Bali bombings, SARS, and the PHL- Philippines,and THA- Thailand. Iraq war all had a limited effect on Indonesia's Source: CEIC, staff calculation. growth, although it did strongly affect the tourism likely positive impact o f the 2004 election (in the industry. GDP growth i s expected to be in the 1999 general election food consumption growth range o f 3.5-4 percent in 2003, slightly short of the reached an all time high since the crisis at 5 Government's expectation o f 4 percent. An percent). However, private consumption i s improving international environment and further increasingly fueled by consumer credits: in declines in interest rates could support growth in September 2003 credit-financed consumption the year ahead, although lagging investment is reached 31 percent o f total, up from 26 percent in likely to put limits on GDP expansion in the the previous year. medium term. Private consumption remains the main source of Private consumption growth, accounting for 91 percent o f GDP growth in2002 and 83 percent inthe first three quarters of accountedfor over 80 2003. The recent decline in interest rates contributed to higher consumption growth, notably percent of growth in durables. Bank Indonesia's retail sales index sharply increased since mid-2003, and motorbike sales and car salesjumped by 32 percent (yoy) and 20 percent (yoy) in Q3 2003. The growth in food Investment i s still sluggish at 20 percent o f GDP, consumption has also accelerated since the third some 10 percentage points below pre-crisis levels. quarter of 2002, and may continue to rise with the The composition o f Indonesia's investment has been shifting to property investment, which now Table 1.1. Sovereign rating comparison takes up almost 80 percent o f the total. Incontrast, S&P Moody's investment in machinery and equipment declined Country Before from 23 percent o f total in 2000 to 18 percent in crisis Current Before crisis Current the first three quarters of 2003, a trend confirmed Indonesia BBB B Baa3 B2 by the 50 percent decline in machinery imports Korea AA- A- A1 A3 shown in the most recent trade statistics. Malaysia A+ A- A1 Baal Continued macroeconomic stability could support Philimines BB+ BB Ba2 Bal a revival in investment in the coming year, but Thaiikd A BBB A2 Baa3 without major improvements in the investment Note: investment grades are BBB- for S&P and Baa3 for - Moody's. climate (Chapter 3) such a rebound i s likely to be Source: World Bank staff based on data from S&P and modest. Moody's. 2 Figure 1.2. Non-oil and gas trade growth rate Figure 1.4. Indonesia's export to China and the slowed world (growthrate) (year-on-yeargrowth rate) yoy growth rate (%) / 70 7 60 - to Chins 50 - '- -40% // -6"% ~~~~~~~~~~~~~~~~lsi~l~liQ..$isriifrd;.:lii~ non-oilimports .30 2(H)1 2w2 2003 2000 2001 2002 2003 Source: BPS, staff calculation . Note: growth rate for 2003 i s for the first quarter (yoy). Source: DOTS IMF. comparative advantage. It also likely reflects the Indonesia's export performance has been mixed. dismal performance inFDIover the years since the Strong export growth in the first quarter of 2003, onset of the crisis: foreign-invested firms were the driven largely by rising commodity prices, main driver for export growth prior to the crisis, slumped in the course of the third quarter. For the but have beenlosing ground inrecent years (Figure first half of 2003, overall exports increased by 11 1.3). The real effective exchange rate, which has percent (yoy) to $30 billion, while oil and gas been appreciating since 2001, may also explain exports, aided by high oil prices inthe aftermath of some of the weak export performance such as the Iraq conflict, rose by 24 percent. Non-oil textile, even though it is still 20 percent below the exports grew by 8 percent (Figure 1.2), mainly pre-crisis, a level comparable to other countries in driven by higher exports in palm oil, metal ores, the region. rubber, and copper, which all benefited from a rise in international prices. The slow growth in Indonesia took advantage of booming trade with manufacturing exports may reflect increased China. Most observers have tended to focus on competition from countries such as China and concerns about growing import competition from Vietnam, which compete in the same low-skill China. However, the country i s rapidly emerging labor-intensive products in which Indonesia has a as a center for regional production networks and a Figure 1.3. Exports were increasingly driven by market for exports of intermediate inputs from foreign firmsprior to the crisis elsewhere in East Asia. The inputs are assembled (share of manufacturingoutput exported, by foreign in China for export to the rest of the world or for and domestic firms) consumption within China. While Indonesia's exports to the world grew at 3 percent in 2002, its exports to China grew at 32 percent and as much as 60 percent (yoy) in the first half of 2003 (Figure 1.4). 40% - - 30% - ForrignFirms 20% - Exports to China rose 10% 0% bv 60 Dement in 2003 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2wO 2001 J 1 Note: Domestic firms have less than 30% foreign ownership. Source: Industrial Census, BPS. 3 EmpZoyment,IncomeandPoverty Figure 1.5. Inflation further declining Modest growth failed to make a dent in (yoy growth rate of CPI) unemployment. By February 2003, 8.5 percent of the labor force is out of ajob, one percentagepoint more than the year before. " Despite unemployment, minimum wages were raised significantly since 2000, when they began re- emerging as a key element of economic and social policy. As a result, their levels in real terms in 2002 were considerably higher than their pre-crisis levels. Low growth and risingformal sector wages are likely to have affected formal sector -5 J employment. While industrial workers' real wages Dec.01 Mnr-02 Jun.02 Sep.02 D o c 4 2Mlar.03 Jun-03 Sop-03 rose by 7.1 percent (yoy) in Q3 2003, rural wages Source: BPS. (a proxy for the informal sector) rose by only by 1.6 percent (yoy) in June-August 2003. The trend inminimumwages is starting to change, however: limited, as commercial banks' lending rates the increasefor the Jakarta minimumwage in 2004 remainedrelatively high."' was in the order of 6.4 percent, in line with inflation. Achieving higher growth, perhaps 6 InternationalTradeandPayments percent per annum, would be critical if Indonesia i s Indonesia's balance of payments continued to to absorb the 2-2.5 million new labor market entrants each year. Higher growth would also be improve. The current account surplus reached $7.8 critical to further reduce poverty. Macroeconomic billion in 2002, and its trade balance registered a Although Indonesia's stability helped reduce poverty to pre-crisis levels, surplus of $23.5 billion. as prices of key commodities fell; more of the deficit of $15.7 billion on the services account i s typical for a developing country, it is under- same is unlikely to happen going forward. Moreover, income per capita i s still some 10 performing in one promising area: workers' remittances (Box 1.1). Since the second half of percent below the pre-crisis levels-20 percent, if 2002 net private capital has improved markedly. measuredby the World Bank's Atlas method. In part this is due to a rise inportfolio investment (Figure 1.6), but private exceptional financing Monetary PoZzcy andI nfZation (arrears and write-offs) still play a significant role Monetary indicators have continued to improve in 2003. Inflation has shown a remarkable slowdown Figure 1.6. Private capital account turns positive over the year, mainly on account of a stable (Private capital flows in the balance of payments) exchange rate and well-controlled base money US$billion 41L growth. Inflationreached 5.3 percent inNovember 6 1 2003 (yoy) or more than 5 percentagepoints lower than the same month in 2002 (Figure 1.5). 2 Although inflation may increase later in the year due to seasonal factors, the Government's revised target of 6 percent i s still well within reach. Declining inflation enabled Bank Indonesia to bringdown policy interest rates. The SBI 1-month rate stood at 8.5 percent as of mid-November 2003, some four percentage points lower than at end- 2002. The decline inthe policy rate contributed to -10J Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 QI lowering domestic interest payments in the state 97 98 99 00 01 ot 03 budget, but its impact on the real sector was Source: Bank Indonesia. 4 as well.'" Recorded net FDIalso turned positive in the second quarter of 2003, although this i s mainly Figure 1.7. Fiscal consolidation continues (budget deficit as a percent of GDP) due to technical factors such as definition changes 6% 7 rather than actual resumption of long-term private investment." External debt outstanding has been 5% i 4.8% stable at around $130 billion, but while government debt outstanding has increased 4% gradually, the private sector has further reduced its 3% external obligations. Short term debt over reserves Revisedbudget continued its declining trend, further reducing 2% Indonesia's vulnerability to external shocks. Internationalreserves topped $34.7 billion by mid- 1% November 2003, $3 billion higher than at end- 0% 2002. Reserves are also considerably higher than 2wO 2001 2002 2003 2004 previously expected, a fact that reinforced the Source: Ministry of Finance. Government's decision to graduate from the IMF- supported program, and Paris Club rescheduling. underfunded during the crisis. As a result, budgeted development expenditures were Fz~caZPoficy increased from 2.8 percent to 3.4 percent of GDP. Fiscal consolidation continues (Figure 1.7). The But actual spending has remained well below 2003 state budget is well on its way to achieve the budgeted, in part because of continued delays in targeted deficit of 1.9 percent of GDP."' Although the release of spending authority to the project the January 2003 decision to postpone fuel price managementunits. increases almost doubled spending on ill-targeted fuel subsidies, this i s likely to be offset by higher The 2004 budget approved by parliament in oil and gas revenues. Persistent under-spending of November demonstrates the government's development expenditures remains a concern. commitment to further fiscal consolidation. The During the 2003 budget discussion last year, budget deficit i s projected at 1.2 percent of GDP. parliament opted for higher development Non-oil and gas domestic tax revenues are expenditures to stimulate the economy and projected to increase from 11.7 percent in the 2003 improve the deteriorating infrastructure which was budget to 12.3 percent through reforms in tax administration. Such reforms will be critical fo I Box 1.1. Overseas treasures As typical of developing countries, Indonesia is a net importer of services (the services balance was in deficit by $15.7 billion in 2002). But it could step up its services exports. Total workers' remittances to Indonesia amounted to $1.3 billion in2002, barely 0.5 percent of GDP. The dollar value of these remittances rose sharply following the financial crisis, but they remain lower than other neighboring countries such as the Philippines where remittances reached $7.2 billion in 2002, or 9.2 percent of GDP. Like many other developing countries, Indonesia holds a comparative advantage in the supply of services delivered through the temporary movement of individuals (so-called Mode 4). Occupational categories in which Indonesian workers enjoy exportable competitive abilities cover a wide range of skill levels-from professions such as nurses, midwives, physiotherapists and accountants, to medium and lower skilled occupations such as construction crew, oil and gas workers, sailors and providers of personal care. Apart from issues of access, which Indonesia could help to solve in WTO's Doha round, ineffectual protection of overseas workers, and exploitation at home deter more Indonesians from going abroad. As a result, Indonesia i s missing out on a relatively stable revenue stream that for many other countries i s far larger than aid and export credits combined. If Indonesia would solve these issues much of the hole in the service account could be filled. 5 fiscal consolidation. On the expenditure side, fuel Table 1.3. 2004 Financingneeds and CGI subsidies are expected to decline substantially, disbursement request from Rp. 24.5 trillion in the revised 2003 budget to US$ Rp. 14.5 trillion. This is wholly on the account of billion lower international oil prices, as there is no plan to 1.Grossfinancingneeds(=2+3) 10.5 resume the fuel price mechanism at the moment. 2. Budget deficit 11 2.9 Although higher than projected oil prices ($22/bbl) 3. Amortization 7.6 will lead to higher fuel subsidies, a $1 increase in olw domestic 21 2.4 oil prices would have a net positive impact by olw external 5.2 roughly Rp.1.5 trillion. A 1percent increase in oil 4. Sources of financing (=5+6+7+8+9) 10.5 production would benefit the budget roughly Rp. 5. Bank financing 31 2.2 0.5 trillion. 6. Government bond issuance41 3.8 7. Privatization and IBRA asset sales 1.2 8. Non-CGI foreign financing 51 0.5 Fiscal consolidation i s tightly linked to 9. Total CGI financing requested 2.5-3.0 macroeconomic stability. Domestic interest I/includinggrantsinrevenue payments are likely to decline in 2004 on account 2/ scheduledamortizationanddebt buyback of lower domestic interest rates, which in turn 31 draw down of deposits depend on inflation and perceived risks. A 1 4/ includingdomestic andexternalbonds percent decline in SBIinterest rate roughly reduces 5/ includingexport credits Source: staff estimates. domestic interest payments by Rp. 2 trillion or 0.1 percent of GDP. External debt interest payments are less affected by changes in international interest rates, as around 70 percent of external At $2.5-3 billion, the government borrowing has a fixed rate. In contrast, a weakening of the Rupiah still has a requestfor CGZ small positive impact on the deficit. The Government made significant progress in debt financing is similar to management. Public debt as a share of GDP continues to decline and is projected to reach 67 that of last vear percent in end-2003, almost half of this is domestic. But the Government's financing needs issue (sum of domestic and external). The will sharply rise in 2004, and developing the remaining assets of IBRA, and privatization, domestic bonds market i s therefore crucial for should raise another $1.2 billion. Foreign fiscal sustainability. Successful auctions and financing remains necessary, however, not least to buybacks in2003 are therefore encouraging.vii limit pressures on the balance of payments and the currency. Other non-CGI sources, such as export ExternalFzhanczhgNeedszn206'4 credits, could finance in the order of $0.5 billion. Despite a lower deficit, the Government's This would imply a financing need from the CGI financing needs will be larger in2004 than the year of about $2.8 billion. Given the uncertainty that before. First, amortization i s some $2.6 billion usually surrounds these numbers, the projected higher than in 2003. And second, Paris Club amount being requested from the CGI i s in the rescheduling, which contributed some $3 billion to range of $2.5-3.0 billion (Table 1.3), around the financing in 2003, i s no longer available. same order of magnitude as last year. Therefore, the government has to raise $10.5 billion from various financing sources. The Medium-TermMacroeconomicOutlook Government is increasingly relying on domestic GDP growth is likely to accelerate in the coming sources for financing. The approved budget years. On the back of a projected international projects to raise some $2.2 billion from domestic recovery, and assuming absence of major bank financing, and almost $3.8 billion from bonds disturbances in the run-up to next year's election, 6 growth i s 3.5-4 percent in 2003 to 5 percent in 2006 in the base case scenario (Figure 1.8). The Figure 1.8. Medium-term growth projection Percent base case scenario assumes continued 7.0% 7 macroeconomic stability, and a gradual /- improvement in the investment climate. The HighCase Scenario external environment is expected to be favorable- the World Bank's Global Development Prospects 2004 projects world GDP growth to accelerate from 1.9 percent in 2002 to 2.9-3.0 percent in Base Case Scenario 2004-05, and world trade volume growth to 4 0% increase from 3 percent in 2002 to 7.9 percent in 2004-2005. The Government's growth projection 3.0% 4 of 4.8 percent for 2004 lies within the range of the 2002 2003 2W4 1005 1006 2001 possible, albeit at the higher end of it. In this Source: staff estimates. scenario, growth will increasingly be driven by investment rather than consumption. Increasing Pre-and Post IMF. Performance on this packagei s Indonesia's investment to GDP ratio i s key to the therefore crucial for higher growth. mediumterm growth prospects of the country, but it will not be easy to achieve. The saving rate THEWHITE PAPER declined to just above 20 percent in 2002 from well over 30 percent in the pre-crisis period The Government's decision not to renew its IMF (although arguably the pre-crisis level may not supported program was made in August 2003. have been sustainable). Inaddition, the increase in This followed a 2002 MPR decree and an external debt service pressures in the coming years examination of the options the Government had means less financial resources for investment. after the expiration of the Extended Fund Facility Indonesia's external debt service is projected to in end-2003. The decision was broadly welcomed increase from US$20 billion in 2003 to U S 2 3 by the markets and the international community, billion in 2004. It is therefore critical that and is warranted by the strong improvements inthe Indonesia attracts new foreign savings to satisfy its country's macroeconomic conditions in recent investment needs by improving its investment years and the achievement of external viability. climate. Indonesia's macroeconomic indicators are now broadly similar to those of other countries at the Stronger reforms could lead to higher growth. time of graduation (Table 1.4). Indonesia's Continued macroeconomic stability, a rapidly collaboration with the IMF will continue through improving investment climate (Chapter 3), and the post-program monitoring, a mechanism that better investment decisions by a stronger financial allows for regular discussions between authorities sector (Chapter 2) would lead to higher and more and IMFon key policy issues. productive investments that would accelerate growth. The World Bank foresees that growth in The Government's "Economic Policy Package Pre such a reformist scenario could reach 6 percent by and Post IMF" or White Paper was issued on 2006. Many of the neededreforms are included in September 15thas a presidential instruction (Inpres the Government's own Economic Policy Package No.5/2003). A separate instruction of the Table 1.4. International comparison of major indicators upon IMFgraduation 1/ ~~ Country Last purchase Credit rating Real GDP Inflation rate Budget balance (S&P) growth rate (% of GDP) Indonesia Dec 2003 B (current) 3.5-4 6.5 -1.9 Korea May 1999 BBB 10.9 0.8 5.8 Thailand June 1999 BBB- 4.4 0.3 6.7 Brazil Dec 1999 B+ 0.8 8.9 5.0 Mexico Dec 1995 BB -6.2 35.0 -0.2 1/ Indicatorsare at year of graduation; Indonesia'seconomic figures are the World Bank'sestimates. Source: World Bank staff. 7 Governor o f the central bank regarding monetary depend on their contents. Ensuring that the policy, and other measures within the competency individual measures indeed contribute to the stated o f Bank Indonesia was issued at the same time. goals o f the White Paper will require vigilance on The objective o f the new package i s threefold: (i) the part of the monitoring team, especially in the maintaining macroeconomic stability, (ii) run-upto the elections. This holds equally for restructuring and reforming the financial sector, measures not included in the White Paper, but that and (iii)increasing investment, exports, and could derail those proposed for, which could employment. The document came about in a undermine Indonesia's prospects for employment round of consultations with a variety o f creation. stakeholders. The Government set up a monitoring team in the Coordinating Ministry for the Initial progress inimplementing the policy package Economy. The team i s responsible not only for i s promising. The White Paper contains over a monitoring but also for prioritizing issues. The hundred actions to be undertaken over the next 18 Coordinating Minister for the Economy every months. Of the 43 action plans with a deadline in month reports the progress and prioritized issues to end-September 2003, the government completed the President and relevant Ministers at a policy 36 action plans on time. Further progress was level. The Chairman o f the monitoring team calls achieved in October. All the remaining action for follow-up meetings at the technical level. The plans not completed in September were done in private sector has also emerged as an independent October. Of the 54 action plans in October, the monitoring body for the implementation o f the Government completed 37 on time. In addition, White Paper, and academic groups plan to the Government completed 3 action plans ahead of establish the same mechanism. schedule. In the end the success of the Economic Policy MazntaznzngMacroeconomicStabih2y Package will depend on its implementation, and the Government will face several challenges in The objective o f the White Paper's macroeconomic package i s to maintain macroeconomic stability doing so. First, the sheer number o f measures i s large, and keeping these on track will require over the medium term. This complements the measures included in the Instructions o f the careful monitoring and management o f the agenda. Second, the individual measures are clearly o f Governor o f Bank Indonesia that aims to continue different orders of priority. Some have major the prudent monetary policy o f recent years. To maintain stability, the government has set the importance, such as new investment approval following direction for fiscal policy: legislationand changes in the decentralization laws to reduce policy uncertainty. Others are minor Reduce the budget deficit gradually to measures that came in on the behest o f a ministry achieve a balanced position over the period or agency in the (wrong) understanding that 2005-2006; inclusion in the White Paper would guarantee Reduce the stock o f government debt to GDP additional resources. Prioritizing among the to a safe position; measures i s therefore crucial. Reform and modernize the national tax system to create a reliable revenue source; Third, several of the policy actions included could Increase the efficiency of government be good or bad, depending on the substance of the expenditures; measures, which the White Paper does not describe Develop an effective debt management in detail. For instance, the quality of a Trade Law system. or a Law on Small and Medium Enterprises will 8 Table 1.5. Macroeconomicstabilitv measuresinthe White Paper Action Plans Outputs Date e Increase tax revenues, competitiveness and improve the Draft of amendment of tax Dec 2003 investment climate by simplifying the tax structure and rates law comparable to best practice countries e Broadenthe tax base Add 60 thousand Dec 2003 individual tax payers and 50 thousand companies e Deliberate the Draft Law on State Treasury Operation Treasury Law After law passed e Reorganize the Ministry of Finance by splitting the budget and Presidential Decree Mar 2004 treasury function e Continue policy to limit regional borrowing in 2004 consistent MinisterialDecree 2004 with Law No.1712003 and Government RegulationNo.23/2003 Move the State Debt Management Office (PMON) to the Presidential Decree Mar 2004 Treasury Operations, consistent with MOF reorganization e Optimize control of the money supply through SBI auctions and Boardof Governor On-going money market instrument and other monetary policies Decision Foreign exchange sterilization I intervention to reduce Rupiah Boardof Governor On-going exchange rate volatility Decision e Maintain a safe current account balance with increasing support Increased non-oil and gas 2004-2006 from non-oil and gas exports, tourism, overseas worker exports remittances a Maintain adequate foreign exchange reserves to cover imports On-going and official foreign debt service payments Source: World Bank staffbasedon PresidentialinstructionNo. 5/2003. The White Paper contains appropriate policies to stronger basis for fiscal consolidation in the years maintain macroeconomic stability-including to come. maintaining a low inflation rate, a realistic exchange rate, and sufficient foreign exchange TaxReform reserves. It also pushes the reforms to their next phase by focusing on building critical institutions The objective of the tax policy reforms in the and systems (tax administration and customs, debt White Paper is to create a sound and competitive tax systemthat encourages investment inIndonesia management unit), establishing procedures for and i s comparable to best-practice countries. checks and balances (government procurement, Indonesia's tax system i s sound-it has in place a treasury, accounting standards), and strengthening the regulatory framework to improve public modem value added tax (VAT) and income tax, it relies little on import duties, and it has a balanced expenditure management and the fiscal decentralization system (Table 1.5). Such reforms reliance on income and consumption taxes. But Indonesia's non-oil and gas tax revenue to GDP i s would provide a much stronger and more relatively low at about 13 percent in the 2004 sustainable foundation for fiscal consolidation. budget. Indonesia still relies on oil and gas The government now has a proven record in revenues, which account for about 20 percent of adequately managing macroeconomic policies, although with the IMF exit and the elections the total revenue, but these are subject to fluctuations depending on oil prices. Strengthening the tax economic and political environment ahead is more system-mainly through improved tax challenging. Implementation of the deeper institutional reforms-including tax administration but also through tax policy-would solidify fiscal consolidation, given that a large part administration, customs administration, and public of the government's expenditures are non- expenditure management-would provide a 9 discretionary. For that, the tax system can be PubLCExpendzyureManagement further simplified and its economic efficiency improved. The White Paper contains several policy actions to increase the efficiency of government expenditure. T aAdmhistration Reform These include reorganization o f the Ministry of Finance by splitting the budget and treasury Tax administration in Indonesia i s weak. Not only functions, increase the efficiency and transparency i s enforcement poor and collection low, but o f government procurement, develop a new corruption in the tax administration i s widespread. classification of government expenditures The coverage ratio (revenue collectedrevenue consistent with international practice, and gear up potential) i s slowly rising, but it remains low at for performance-based budgeting. Indonesia has around 75 percent in 2002. Moreover, weak now established the conditions from which to implementation of tax policy, such as VAT implement fundamental public expenditure rebates, undermines the efficiency o f the tax management reforms. The passing o f the State system and adds a burden to taxpayers. The Finances Law (No. 17/2003) and the release o f the various action plans in the White Paper aimed at M O F restructuring blueprint provide an improving tax administration are in line with a organizational and legal launching pad which to major reform program in tax administration tackle public expenditure management reforms. recently carried out by the Directorate General of The amount o f effort shown in the past year from Taxation (DGT), which includes: the Financial Management Reform Committee i s (i) anannualrevenuegenerationprogramaimed most impressive. at increasing tax collection in the short term through closer monitoring and enforcement; The action plans to improve public expenditure (ii)a preliminary set of structural reforms management have different levels of designed to create a foundation for implementation difficulty and priority. The strengthening the operations of the DGT; and complexity o f introducing a new expenditure (iii)acomprehensivemodernizationprogram. classification (from sectoral to functional) should not be underestimated; and more time may be DGT continues to make strong progress in needed for its implementation (a draft implementing its reform agenda. However, the classification i s proposed for December 2003). revenue generation initiative i s not likely to fully Similarly, transition to a medium term expenditure achieve tax revenue targets for 2003. Further framework and more performance-oriented system actions need to be taken, including the expansion needs to be carefully-staged. There are a number o f the large taxpayers offices (LTOs), extending o f difficult conceptual challenges in moving the DGT's governance framework to tax offices towards performance-oriented budgeting, not the beyond LTOs; implementing a strategy for least defining clearly what i s meant by administering small and medium taxpayers on a "performance". Nevertheless, pushing budget pilot basis; enhancing the flow o f information processes in this direction for the next budget between the budget and tax authorities; and round i s a worthy goal, as long as it i s understood simplifying refund and audit procedures. In these reforms are likely to take several years to particular, the VAT refund mechanism critically take hold. needs to improve as it i s especially important for exporters. For that, it would be important to allow The authorities' decision to reorganize the MOF DGT not to automatically audit all claimants; and create a new directorate general of Treasury in reimburse interest on the refund; discontinue the near future i s expected to accelerate the blanket requirements for all refund claimants to ongoing reforms in PEM. Key reforms awaiting submit all original invoices and the DGT to implementation at the DG Treasury on its creation examine each invoice; accelerate the introduction are: a comprehensive overhaul o f the obsolete of modern procedures for auditing refunds and government payment and receipt systems; a making payments. consolidation o f the government cash resources currently held in thousands o f bank accounts; a 10 transition in measured steps to an accrual based first and foremost, based on expenditure government accounting and reporting system; and responsibilities, which are unclear at the above all enhancing the internal control framework moment. and transparency o f government treasury (ii)Firmly embed the principles on which the operations. distribution of transfers should be based, and In addition to measures spelled out in the White clarify the institutional arrangements, thereby Paper to increase the efficiency o f government creating a greater degree of transparency and expenditure, it i s important for the maintenance of certainty in the allocation of resources. Over macroeconomic control that the scope of entities time, the transitional elements in the DAU covered in the state budget and their fiscal risks be could then be phased out, and its equalizing expanded, and the information presented to function strengthened. Current inequalities Parliament be progressively enhanced to include a are unacceptably high: in 2002, the richest medium-term fiscal position. Moreover, local government had 32 times the revenues decentralization of services to lower government per capita of the poorest one (Figure 1.9). At levels does not remove the central government's the same time, the role o f the DAK could be responsibility for general government fiscal expanded, particularly to assist poorer management, and there remains a need for regions in priority areas. coordination o f fiscal policy across government (iii)Expand the regions' revenue raising levels. authority, while banning nuisance taxes by transferring control over more significant Decmfra&ufion taxes (such as the Land and Building Tax) to The White Paper commits the government to local governments. The proliferation o f revising the key decentralization laws; Law nuisance taxes (see Chapter 3) shows that 2211999 and Law 2511999, by September 2004; local governments are looking for ways to and Law 34/2000 on Regional Revenue by June boost their locally raised revenues. An 2004. The revisions, if well coordinated, can be an expanded, but closed, list o f local taxes important factor in securing the medium- to long- would help curb this trend. Supervision o f term success of decentralization. Regional local regulations-on tax and others-should autonomy i s now more firmly embedded in the be strengthened in tandem. country's constitution. But the rapid decentralization and its hasty preparation have left The revisions of Law 22 and 25 are ongoing, and much unfinished business. Some remaining issues are scheduled to be completed by the end o f 2003. could undermine the potential efficiency gains o f However, it i s not clear whether this target i s decentralization and even trigger fiscal imbalances realistic. Law 34 was scheduled to be revised in and macroeconomic instability in the longer run. parallel, but the MOF has not yet received a presidential instruction to prepare a revised draft. Among the key issues that the actions in the White The DAK and DAU allocations for 2004 are Paper should address are: currently being debated in the DPR. The DAK (i)Clarifyprinciples of functional assignments distributions to regions in four areas (education, across levels of government (Law 22). The health, roads and irrigation) will be based on a set intergovernmental fiscal system needs to be, o f general, specific and technical criteria. The White Paper sets a measure to improve The richest local regional government accounting systems in line with State Finances Law (No. 1712003). All government had 32 matters related to financial management, including accounting standards and systems, would thus be governed by the State Finances Law and the times more revenues forthcoming Treasury Law, as well as their respective implementing regulations. than the Doorest one Implementation of this measure would help 11 1 Figure 1.9. Inequality among local governments (per capita local government revenueinRp.million, consolidated per province, 2002) Banten rslCarry-Over Jawa Timur HOwn SourceRevenue Yogyakarta OBorrowing 0Other Bengkulu HTax SharedRevenue 0Non-TaxSharedRevenue Gorontalo InDALJ SulawesiTengah 0DAK SumatraBarat Maluku KalimantanTimur -- ',' 1 0 500 1000 1500 2000 2500 3000 3.500 Source: Staff estimatesbased on informationfrom MOF remove the confusion created recently when the Ministry of Home Affairs issued a decree StateDebtManagement (Kepmendagri 29/2002) which introduces new Although the Government's debt i s projected to guidelines on regional financial management, decline further (Figure 1.10) its level i s still high, including a new budget structure based on performance budgeting. This overlaps with the and prudent debt management remains of paramount importance. The White Paper proposes State Finances Law which stipulates that regional two measures to consolidate state debt budgets have to be based on the accounting management. standards to be issued by the Central and Regional First, continue to limit regional Accounting Standards Committee. As a result, 56 borrowing in 2004. In the proposed measure, the percent of regions are using the new format for MOF will issue a decree explicitly banning regional governments from taking out loans, their 2003 budgets, based on the M o mDecree 29, except through the central government. This creating difficulties for the M O F to capture measure would provide another year for the regional budget information in a consistent manner. Implementation o f the White Paper government to work out the regional borrowing framework, strengthen local government fiscal measure would help put in place a consistent capacity, and put in place a local fiscal monitoring framework to ensure adequate fiscal monitoring. system. There also needs to be an inventory of all Figure: 1.10. Government debt is further declining liabilities of sub-national (including municipal) (Debt as a percent of GDP) governments and quasi-governmental entities owned and operated by them, in order to get a handle on emerging (quasi) fiscal risks. Second, move the state debt management office (PMON) to the Treasury Operations, consistent with M O F reorganization. The proposed 40%- consolidation of the public debt management 30%- functions under a newly established Treasury 20%- 10%. Actual ProjectionundertheBasecase Scenario 0% 4 2001 2001 2W3 2004 2W5 2006 2W 12 Source: staff estimates. Department in the MOF i s an essential first step towards comprehensive public debt management. percent in 2003, after having slumped a cumulative 33 Care should be taken to establish formal and percent during 1997-2001. frequent channels o f interaction between the other I' These figures are based on the latest quarterly labor entities that will be involved in domestic and statistics in February 2003. The sample household foreign public debt related transactions (such as number (15k thousands) i s less than Sakernas (Annual Bank Indonesia and the Ministry in-charge of Survey). The annual survey shows the unemployment monitoring State owned enterprises). Moreover, rate increased from 8.1 percent in 2001 to 9.1 percent in measures need to be taken to ensure adequate debt 2002. iiiWorking capital lending rate declined less than 2 management. International good practice calls for percent during the first eight months of 2003. Overall the consolidation o f authority within the loan outstanding grew by 21 percent in September Government Debt Management Offices, with a (yoy), but consumer credits outstanding grew faster at clear separation from fiscal and especially from 34 percent (yoy). The surge in consumer credits monetary policy; sound organizational structures supported strong private consumption of durable goods, allowing internal control; better information but households are accumulating debt. iv systems; and more technical staff. In Indonesia, Exceptional financing i s the gap between actual two key legislations need to be made consistent payment and scheduled payment, and includes debt (i.e. the Government Bond Law 2002, and the draft rescheduling, write-off and accumulation of arrears. " To be consistent with IMF BOP manual version 5, External Debt Law) so as to make comprehensive privatization and IBRA asset sales purchased by foreign public debt management in the Indonesian entities are now included in FDI. Thus, international government possible. sales of Indosat and several IBRA banks was now counted as FDI. Public debt management under the Treasury vi The original target was 1.8 percent. While the deficit Department i s likely to mitigate operation risks, did not increase, nominal GDPturned out lower. since policies and managements are expected to be viiIn April 2003, the government auctioned Rp. 2.7 conducted in the department. Apart from manage trillion of bonds in the domestic market, with a coupon sub-national and SOEs debt, the challenge for the interest rate of 12 percent and an 8-year maturity. MOF department i s (i) handling market risks such as also arranged for a successful debt buy-back falling due interest rate risks, liquidity and refinancing risks, in 2004 and 2005 in August. This was followed by a and exchange rate risks, and (ii)developing less successful treasury bonds auction in October, but the November auction again became a success, albeit at secondary government bond markets. a yield that was higher than in April, following the international trend towards higher yields. The measures in the White Paper give confidence macroeconomic stability will be maintained in the year ahead. But accelerating growth and creating jobs requires more: (i)a financial sector that efficiently and safely intermediates between savers and investors i s crucial for financing growth without the risks that triggered Indonesia's past financial crisis; (ii)an investment climate that entices levels of investment significantly higher than the current 20 percent of GDP; and (iii) policies that ensure that all Indonesians benefit from higher growth. The White Paper contains measures in each of these areas, and it i s to those this report now turns. iU S dollar prices for non-oil primary commodities rose 5 percent in 2002 and are expected to increase another 7 13 CHAPTER 2: RESTRUCTURING REFORMINGTHE FINANCIALSECTOR AND The health o f Indonesia's financial sector has Table 2.1. Indonesianfinancialsector in2002 improved significantly since the 1997-98 crisis. Assets Share No. of Progress has been made in restructuring and (Rp. trillion) (percent) institutions strengthening the banking sector. BRA has sold Banking 1,099 88.9 2,261 several banks taken over during the crisis, largely Commercialbank 1,089 88.2 138 to foreign investors. The Government has begun BPR 9 0.8 2,123 reducing its stake in state-owned banks. Banks Insurance 62 5.0 169 have reduced their non-performing loans and Life insurance 21 1.7 58 increased their capital-adequacy ratios. And Generalinsurance 15 1.2 102 regulation and supervision of the financial sector i s SocialInsurance 26 2.1 5 now better than before. However, recent events Reinsurance 1 0.1 4 such as a large banking fraud and volatility in the Pensions 37 3.0 331 mutual funds emphasizes that much remains to be EmployerPension 33 2.7 307 done to satisfactorily restore its function as a sound State-owned 26 2.1 71 intermediary and financier o f growth in Indonesia. Private 8 0.6 236 The key issue facing the sector i s to move from a FinancialInstitution 3 0.3 24 crisis management mode to a longer-term Multi-Finance 28 2.3 116 development mode. This requires first and Securitiesfirms 8 0.6 171 Pawnshop 2 0.2 1 foremost finishing the agenda o f restructuring the (pegadaian) banking sector and creating an appropriate financial sector safety net. Second, it requires TOTAL 1,273 100.0 3,380 increasing the role o f non-bank financial Source: Infobank Magazine (August 2003), ADB, Bank institutions in the sector, as they are better suited Indonesia,InvestorMagazine (July 2003). for development finance, and more eager to buy government bonds. The White Paper measures go a long way in addressing the banking sector The banking sector agenda. The Government needs to go beyond the White Paper measures to lay a solid basis for the accountsfor around further development of Indonesia's non-bank financial institutions. 90percent of RECENTDEVELOPMENTS financial assets Indonesia's economy traditionally relied predominantly on the banking sector to finance ensure that the banks operate on strictly growth. The banking sector still accounts for over commercial principles, while delivering high rates 90 percent of financial system assets (Table 2.1). of credit growth. Diversifying sources o f finance Inorder to finance higher levels of growth that the i s an important element of reducing the Government expects to achieve, credits from the vulnerability o f the economy as well as banking sector would need to grow substantially.' strengthening the financial sector. Capital markets, Can the banking sector deliver such growth in a non-bank financial institutions, and institutional sustainable and a prudent manner? With state- investors such as pension funds and insurance owned banks still comprising half of Indonesia's companies need to be strengthened to ensure that banking sector, and weak internal controls and they mobilize and efficiently invest long-term governance difficulties already manifesting domestic resources. themselves at one bank, it will be a challenge to 14 Figure 2.1. Key financialindicatorsof bankingsystem have improved NPLs in commercial banks Interest margins of banks percent of total percent percent 1 6 indonesia Dec 1998 Korea Malaysia Philippines Thailand -10 I I 0 10 20 30 40 50 60 1997 1998 1999 2000 2001 2002 2003 percent Profitability of the banking system Capital adequacy ratios of the banking system percent rates of return percent 20 10 4 y 0 - indonesia -10 - -18 -20 ! , -20 I I 1997 1998 1999 2000 2001 2002 2003 1997 1998 1999 2000 2001 2002 2003 Source: World Bank.East Asia Update: Progressin Financial and CorporateRestructuring,November2003. ZmprovedPerformance of theBankzngSector sector. As of mid-2003, the non-performing loan Key indicators of the Indonesian banking system (NPL) ratio stood at 7 percent, down from 12 percent a year ago. However, some banks reduced have drastically improved since the crisis, and are their NPLs by converting them into shares of now at par with other East Asian countries (Figure unlisted and often financially distressed 2.1). But the numbers alone hide some of the companies. While allowed by central bank underlying weaknesses of the sector. regulations, such practice raises concern whether these banks can recover much on these converted Loan quality has been improving due to the on- loans in the future. Furthermore, some banks going loan restructuring in the Indonesian banking simply extended the tenor of overdue loans, rather 15 Figure 2.2. Interest rate spreads are on the rise (percentage difference betweenrate) deposit and lending The Capital Adequacy Percentage l2 1 Ratio of banks 10 reached 23 percent 3 8 - 6 - governing mutual funds, and ongoing significant redemptions by mutual fund investors could 4 - reversethis trend. 2 - W Higher profits, combined with recent bonds issues 0 Jsn-01 May-01 Sap-01 Jan-02 May-02 Sep-02 Jan-OS May03 of some banks allowed the banks to restore their Source: Bank Indonesia. capital base. The capital adequacy ratio (CAR) of the banking system as a whole reached 23 percent than restructuring them based on commercial in June 2003, indicating that for the banking viability of the borrower. Many of these loans system as a whole capital positions are adequate to could return to problem status inthe future. support loan growth in the short-term. However, the large volume of government debt, many The decline in the NPL ratio also reflects the rapid restructured loans in bank portfolios, and the growth of new loans, the quality of which will only existing off-balance sheet commitments to future become evident over time. Banks have rapidly lending suggest that these CAR figures overstate expanded lending on a gross basis since 2002, in the robustness of the system. In addition, several particular in consumer credit. New bank loans banks have bought NPLs from BRA in recent amounted to Rp. 80 trillion in 2002, an increase of auctions, against which they may have to provision 40 percent over the previous year. As of August in the future. To sustain higher rates of credit 2003, new loans had reached Rp. 50 trillion or a growth, banks will have to further strengthen their similar level compared with the same period in capital positions. 2002. Risk management remains an issue in most banks, Banks have improved their profitability on the both with respect to assessment of credit risk and back of increased spreads. The decline in deposit management of operational risk. Weak credit rates, and hence funding costs, was not matched by assessment skills as well as the unwillingness to a similar decline in lending rates (Figure 2.2). take on fresh credit risks partly explain the current Hence interest margins-and profit margins- situation where many banks are still holding increased in 2002 through the first half of 2003. excessive liquid assets, usually in the forms of SBI Reflecting this, rates of return to assets and equity (Bank Indonesia's short-term certificates) and also showed continued improvement in 2002 and interbank loans, and are unwilling to make fresh the first half of 2003. commercial loans. Excessive liquidity i s also created due to the fact that most of the deposits in Banks have also reduced their reliance on the banking sector are short term. Around 66 government bonds for profits. Government bonds percent of time deposits are of 1 month duration currently account for 30 percent of total bank and 17 percent are of 3 month duration. With such assets, compared to 36 percent a year ago. The a short funding duration, banks are unwilling to proportion of banks' income from interest on provide much-needed long-term financing as it government bonds declined to 17 percent of total would lead to significant asset-liability duration income, compared to 22 percent a year ago. Apart mismatches. Banks also face constraints on the from the Government's repayment of bonds due, overall quality of human resources. In areas such much of this decline can be ascribed to the shift of as credit origination, risk management, and recapitalization bonds from banks' balance sheets technology, human resources are particularly into mutual funds. Recent changes in regulations weak, and institutions and programs to provide the 16 necessary skills are important for the overall approved IBRA's proposal to establish holding development o f the sector. companies to house these residual assets for eventual return to the private sector and to resolve Bank Indonesia's regulations have been the legal claims. significantly upgraded over the years and are now broadly inline with international norms. However, Closing IBRA on schedule would signal a clear the key issue remains one of consistent supervision break from the crisis, and can be positive. and enforcement, especially with regard to state- However, the Government should ensure that some owned banks. Some important recent regulations of IBRA's major responsibilities in the banking (i) banksabilitytobuyloansfromIBRA;(ii) sectoraretobetransferredtootherinstitutionsand limit require banks to include market risk in calculation these are satisfactorily implemented. IBRA of capital adequacy ratio; (iii) limit banks equity currently administers the deposit guarantee scheme investment in financial institutions; (iv) rule BI's and handles resolution of troubled banks. The short-term lending; and (v) set risk management Government has already planned to establish a requirements in banks. Bank Indonesia recently deposit insurance corporation (LPS) to assume commissioned a study o f banking architecture (or these functions. A draft law on LPS has been banking landscape) to develop a vision for the submitted to parliament. The Government intends future o f the banking sector, based on six "pillars": to establish a new unit in the Ministry o f Finance effective regulatory system; sound banking to take over IBRA's deposit insurance role in the structure; strengthening internal conditions o f transition to the LPS. The White Paper includes banks; independent and effective supervisory several other measures that together would system; reinforcement o f supporting infrastructure; constitute the country's financial safety net. and protection and empowerment o f customers. The study i s expected to form the basis for detailed CapdaZMarketsandMutuaZFunds planning for each of the six pillars. Indonesian equity markets have been one of the Implementationi s expected from 2004 to 2014. best performing equity markets in the world this year. The Jakarta Stock Exchange index was up /BRA zj. Ready tu CZum almost 43 percent in Rupiah terms and over 50 IBRA's five-year mandate is to end in February percent in U S dollar terms year-to-date (as of Nov. 2004 and the Government has announced that it 17, 2003). IPOs of Bank Mandiri and BRI have will be closed on schedule. BRA has already been added considerably to market capitalization, which gradually moving into a closure mode this year stood at about $30 billion as o f end 2002. while continuing its various asset disposal Government and corporate bonds have been initiatives. IBRA i s on track to meet its full-year trading in over-the-counter markets and in the 2003 budget contribution of Rp. 26 trillion. Until Surabaya Stock Exchange. September 2003, it had collected cash and bonds amounting to Rp. 15.2 trillion. But it i s likely that Recent developments in mutual fund are IBRA will continue to hold some assets as of its worrisome. Mutual funds have recently increased scheduled closing date. The Government has enormously in size (Figure 2.3). Some recapitalized banks in cooperation with fund IBRA is on track to managers have created mutual funds, whose underlying asset i s government (recapitalized) bonds. These mutual funds buy recap bonds from meet its budget the recapitalized banks, create an underlying pool o f assets, and sell claims on them to the public in contribution Of" RP. 26 the form o f mutual fund shares. Under the current tax regulation, returns from mutual funds are tax- - A trillion exempt for the first five years. With this year's significant decline in interest rates on banks time deposits, these mutual funds became attractive as a 17 0 tightening the oversight of money laundering activities; T j improving capital market supervision; Number of funds (LHS) 0 180 J- 160 -- y-:! - 100 0 consolidation of insurance and pension industries. 140 -- 120 ,etassetvalue (RHS) -- so The White Paper also addresses issues relating to improving the performance and governance of -- 40 -- 30 state-owned enterprises and advancement in the 40 -- 20 development of public accounting. 20 -- -- i o n , I I 1 ' 1 I ~. 1 1 1 1 i 1 ! i ~ 0 The Government's commitments in the White 1996 1998 2000 2002 Jan-03 Mar-03 May-03 Ju1.03 Sep-03 Paper, if implemented, are steps in the right Source: Bapepam. direction to strengthen the financial sector. It i s an ambitious agenda, though uneven in terms of substitute, and the proportion o f time deposits in emphasis across the segments of the financial total banks deposits declined. sector. It i s also far less specific interms of timing than some o f the other measures in the White Since October 2003, mutual funds have witnessed Paper, largely because many actions hinge on rapid redemptions. Almost Rp. 6 trillion worth of parliamentary approval o f legislation. In the near funds were withdrawn from mutual funds in future, measures proposed in the White Paper will October alone and the trend i s expected to need to be complemented more forcefully with continue. While some o f the redemptions could be efforts to put more public banks inthe hands of the driven by liquidity requirements, a more likely private sector, diversify the sources o f financing in reason i s the recent clarifications issued by the economy by further developing the capital Bapepam that these funds are not covered under market, develop sound institutional investors such the blanket guarantee had a phycological impact. as insurance and pension funds that can mobilize Some banks are bringing recapitalization bonds long-term domestic resources and allocate them previously put into mutual funds back on to their efficiently, and improve corporate governance so own books. Thus far, these sizeable redemptions as to reduce risk premiums associated with have not caused stress to the system, but close corporate lending and allow increased lending monitoring by the Government i s needed to ensure under prudentialregulations. no liquidity problems for banks. FzhanciaZSectuSafety Net andFzhancial THEWHITE PAPER:RESTRUCTURINGAND Stabz22y REFORMINGTHEFINANCIALSECTOR As scheduled in the White Paper, the Government The White Paper aims at restructuring and has prepared the financial safety net (FSN) concept reforming the financial sector. Specific proposed note and submitted the draft deposit insurance actions include (see also Table 2.2): (LPS) law as well as relevant amendments to BI 0 establishment of a financial sector safety net, law with respect to the lender of last resort including creation o f a deposit insurance function to parliament. Once these laws are corporation, establishment o f a lender o f last approved, the next steps involving establishment o f resort facility at Bank Indonesia, and the LPS and phased reduction in the current establishment of a financial services authority blanket guarantee can be implemented. The (OJK); Government has also submitted the draft OJK law to parliament which, upon approval, will permit 0 continuation o f the bank restructuring program, including improving the health of the the creation o f a unified financial regulatory banking sector and strengthening state bank authority. The Government has also proposed governance; several steps to foster financial sector stability. A key component of this effort-the development of 18 Table2.2. Financialsector measuresinthe White Paper ActionPlans output Date Prepare for the establishment of a Financial Services OJK blueprint and work After OJK law Authority (OJK). plan passed Conduct surveillance on financial institutions, markets, and Financial stability review Regular basis infrastructure as well as foster market discipline. (every semester) Prepare for the bank action plans. Risk managementaction April 2004 plans by public banks Divest IBRA majority shares (after parliament approval) in Budge revenues Nov 20031 Bank Lippo, BIIand Bank Permata. Better banking sector Nov 20031Feb 2004 Strengthen the governance structure of state-owned banks Various outputs Sep 2003- Dec (Bank Mandiri, Bank BNI, Bank BRIand Bank BTN). 2004 Amend Law No.1512002on Money Laundering. Amend Law No.1512002 Done Finalize paper on mutual fund grand strategy. Final concept Dec 2003 Reorganize Bappepam in line with M O Freorganization. Presidential decree Mar 2004 Source: World Bank staffbased on PresidentialinstructionNo.5/2003. a forward-looking blueprint for the Indonesian institutions involved in the safety net has the banking architecture report-has been finalized necessary capacity to undertake its assigned and awaits implementation. functions during the processof suchcoordination. Overall, the Government is broadly on track with TheBankzhgSystem its own implementation schedule for actions in the FSN area. The set of actions proposed are also Measures in the White Paper to improve the fairly comprehensive and address key issues. The banking system include divesting banks under IBRA; strengthening governance of state-owned main concern is one of implementation capacity and transition arrangements. Once the LPS law is banks; and improving banking regulations, supervision, and enforcement. passed, the phase out of the blanket guarantee will have to be done with great care to ensure that market confidence is not adversely affected at any Divest banks under IBRA. The White Paper step of the process. Transition issues also exist for calls for divesting more than 20 percent of BRA'S the OJK. There i s uncertainty regarding the extent share in Bank Niaga, divesting BRA'S majority shares in Bank Lippo, BII, and Bank Permata, and of OJK's supervisory mandate (for example, whether it would include bank supervision). A divesting BRA'Sminority shares six banks. Since clear stand on this issue by the Government would the publication of the White Paper, BRA has helpmarket confidence. disposed of 20 percent of its shares in Bank Niaga and finalized the sale of BII. BRA'Sattempts to Some key issues that need to be addressed in the sell Bank Lippo were not successfuldue to the bids context of establishing the FSN have not been being too low. A re-launch of the sale of Bank touched upon in the White Paper: (i) establish a Lippo and the launch of the sale of Bank Permata formal coordinating mechanism between BI, MOF, are planned in the coming months. BRA LPS, and OJK regarding provision of support to continues to divest its other assets-NPLs, and intervention of banks that may need assistance property, equity, and quasi-equity-broadly in line in future; (ii)explicitly provide prompt corrective with the Government's proposed time frame. action to intervene and close financial institutions without political interference (in the past, Strengthen governance structure of state-owned corrective action has not forced banks to deal banks. The White Paper provides for specific promptly with problems, raise new capital, or actions to improve governance of four state-owned close); (iii)ensure that each of the public banks (Mandiri, BNI, BRI, BTN). In that regard, 19 Internal controls at technical training in banking needs to be established. State Banks such as Improve banking regulations, bank supervision BNI are still weak systems, and enforcement of prudential regulations. Several actions are included in the White Paper to fully comply with 25 Base1 Core Principles and to improve enforcement of prudential regulations. These are important the Government has appointed independent measures that need to be undertaken by Bank commissioners at Mandiri with appropriate Indonesia. By bringingthese measures into greater technical expertise. It has also completed the sale compliance with the Bade Core Principles, further o f 40.5 percent o f BRI's equity for $500 million strengthening of BI's regulatory and supervisory and the bank i s now listed on the Jakarta Stock capacity as well as its enforcement capacity, Exchange. Actions relating to BNI and BTN have especially with regard to state-owned banks, would not yet been completed. be also needed to truly improve confidence in the banking sector. While these are important actions, there i s a need for much greater emphasis on improving the Anti-MoneyLaundertizg governance o f state-owned banks. The recent case Presidential decrees with regard to the o f a large fraud-involving $200 million-that has organization, authority, remuneration systems and come to light at BNI shows that internal controls at staffing o f the Financial Intelligence Unit the bank are still weak and opportunities for (PPATK)have been effected. Law No. 15/2002 on collusion between bank employees and third money laundering has been amended to bring it in parties remain. Media reports have been line with the guidelines o f the FATF. PPATK has speculating as to whether this is a problem unique signed Memoranda of Understanding (MOUs) with to BNI or i s more widespread. The Government several domestic agencies including Bapepam, needs to take urgent action to ensure that Ministry of Finance, Customs, and Tax. confidence in the banking sector i s not adversely Additional actions on witness protection programs, affected. Enforcing accountability both for those guidance to financial institutions on analyzing and directly involved as well as for senior management reporting suspicious transactions, and public will assist in sending the right message to the dissemination o f issues related to anti-money markets and begin to restore confidence. Beyond laundering efforts are inprogress. this short term action, the Government should be seen as proactively implementing steps to Thus far, the actions have largely been inline with significantly upgrade internal controls and standard the schedule outlined in the White Paper. Despite operating procedures both at BNI and other these efforts, Indonesia continues to remain on the majority-state owned banks. These issues gain FATF list of non-cooperative countries and greater urgency in light of recent plans for rapid territories (NCCT) with regard to anti-money increase in lending unveiled by some state-owned laundering." While the legislative measures have banks. been appreciated, the key issue now i s to ensure that the PPATK, as well as the overall financial In addition, a longer-term strategy involving system, effectively implement anti-money greater privatization o f state-owned banks also laundering measures. Being on the FATF NCCT needs to be developed. Finally, there i s an urgent list creates hurdles for international investors as need to upgrade skills in general-and risk they are required to give special attention to management skills in particular-in the banking businesses and transactions with persons, including sector. Strong human resource capacity in the companies and financial institutions in Indonesia. banking sector i s key to its long-sustainability. FATF sanctions would be much more harmful to The institutional framework for providing the economy. Indonesia would therefore need to 20 Many of these issues need to be addressed by the Indonesia's capital Government going forward. With a significant privatization program for state-owned enterprises markets are small and (SOEs) on the agenda, Indonesia will need an active and institutionally strong equity market to absorb forthcoming issues. There i s also an urgent underdeveloped need to develop a sound market for government bonds-as the Government plans to raise more resources from the domestic markets to finance the budget deficit. A thriving bonds market could also focus on sound implementation of its anti-money play a role in domestic financing o f infrastructure laundering framework, especially in light o f its and other long term investments key for increased need to interact with the global financial developments. A vibrant capital market will community in the years ahead and its efforts to reduce the dependence o f the economy on bank enhance its investment climate. financing for these purposes, and thereby reduce the vulnerability of the economy to stresses in the Capzltal`Markets banking sector. The White Paper's action plans to strengthen and develop capital markets include: Strengthen Bapepam's regulatory, supervisory, and enforcement role. Bapepam i s the regulator 0 strengthening financial and operational capacity of securities companies, o f capital markets. The White Paper simply states that Bapepam needs to be reorganized in line with 0 restructuring of the Stock Exchange, strengthening regulation and supervision of MOF reorganization. Beyond this, the mutual funds, Government could focus on: strengthening Bapepam's regulation, supervision, and 0 improving corporate governance, enforcement and bringing them in line with 0 reorganize Bapepam. internationally recognized standards; rationalizing While these are undoubtedly important issues, they and strengthening the securities industry which continue to be focused on the current functions of currently has a large number of relatively small capital markets. Going forward, however, much participants; enhancing market infrastructure, more will be required o f Indonesian capital including trading systems and clearing and markets than has been the case thus far. Therefore, settlement systems; exploring options to strengthen an important priority for the Government should be the ability o f stock exchanges to raise capital for a focus on the future role o f capital markets in their expansion, including consolidation and Indonesia. Indonesia's capital markets are small demutualization; and enhancing and enforcing and underdeveloped, in comparison both to the disclosure norms for listed companies. domestic banking sector as well as capital markets in other countries in the region. Equity markets Improve corporate governance. The White have thus far not been a significant source of Paper measures relate to regulations on audit financing for the corporate sector. Government committees o f public stock companies and bond markets have also only recently begun responsibility o f management for the companies' developing. In addition to macroeconomic and financial reports. Deeper reforms in corporate political instability, high concentration of governance are needed, especially given the link ownership, weak corporate governance, inadequate between corporate governance and the financial supervision and regulation, weak protection of sector. minority shareholder rights, a small institutional investor sector, and competition from international The ownership structure o f companies in Indonesia exchanges have all played a role inthe low level o f i s characterized by concentrated ownership, development of Indonesia's capital markets. family-owned businesses, and controlling shareholders. The business culture i s relationship- 21 based rather than rule-based. Indonesia i s making public companies. Financial reporting should be progress in improving its corporate governance; de-linked from tax reporting, as companies report however, like all countries in East Asia, it needs to income often in a way that avoids paying taxes. intensify its efforts to create business environments for investors that are based on rule of law and that Third, although the concept of independent promote transparency and accountability (Table directors has been introduced, whether these 2.3)."' But while Korea and Malaysia continue to directors act independently from the controlling make significant progress, Indonesia continues to shareholders and exercise effective oversight be ranked below several other countries in the remains an issue. The process for nomination and region. selection o f independent directors needs to be strengthened. Conducting training and promoting In reforming its corporate governance and in awareness among all stakeholders is critical to establishing a rule-based business culture, changing the business culture. Efforts to enhance Indonesia faces many challenges. First, the skills and knowledge of independent board enforcement o f laws and regulations i s weak. members need to be expedited. Improving the roles Corporate officials in the position of trust need to and responsibilities o f the audit committees should be held accountable when they violate the law. be a highpriority. Separationof management from Sanctions should go beyond fines, and the the owners and appointment o f professional incentive system should be changed so that managers needs to be further promoted. violators are truly discouraged and good corporate behavior i s promoted. The amendments to the ZnsuranceandPensions Company law should explicitly refer to the fiduciary duties o f directors and managers for The life insurance and pensions sectors combined violation o f securities laws. control about Rp. 58 trillion o f long-term domestic Second, transparency and reliability o f financial resources, with almost 26 million participants. It i s reports and adequacy o f disclosures remain a major important that the Government takes a strategic challenge. While Indonesian accounting standards view o f these segments of the financial sector and are consistent with international standards, there i s the potential for their contribution to broader a wide gap between those standards and actual development objectives of the Government. The practices. Public perception and confidence in the sectors can prove essential risk management reliability of company financial reports and products for the population, as well as mobilize disclosure remains low. There i s a need for greater significant amounts of long-term domestic disclosure and transparency in annual reports and financing resources. These resources can be financial statements, and for better quality audit of channeled into a variety of uses that support the Table 2.3. Markets ranked b y corporate governance b y CLSA Rankingfrom 1(worst) to 10(best) Institutional Political and mechanisms Country regulations and Enforcement regulatory Adoption Of and corporate environment IGAAP governance score culture 2002 2003 2002 2003 2002 2003 2002 2003 2002 2003 2002 2003 Singapore 8 8.5 I 7.5 5.5 6 9 9 8 8 1.4 1.7 Hong-Kong 8 8 6 6.5 I 6.5 9 9 I I 1.2 1.3 India 8 8 5 6 6 6 6 7.5 6 6.5 5.9 6.6 Taiwan I I 5 5 5 5 I I 6 6 5.8 5.8 Korea 6 I 3 3.5 4 5 I 7 5 6.5 4.7 5.5 Malaysia 9 9 2.5 3.5 3 4 6 I 6 6.5 4.1 5.5 Thailand 7.5 1.5 2 3 3 4 5 6 4 4.5 3.8 4.6 China 4.5 5 3 4 5 5 I 5 3 3 4.4 4.3 Phlippines 6 6.5 2 2 2 2 6 6 4 4 3.6 3.1 Indonesia 4 4.5 1 1.5 5 4 4 5 2 2.5 2.9 3.2 Source: CLSA, EmergingMarkets (2002,2003). 22 long-term development of the economy, such as regulatory and supervisory capacity. Current infrastructure investments. insurance regulations are still weak and incomplete particularly in dealing with issues of bankruptcy Insurance. The insurance sector i s fragmented, and liquidation of insolvent insurers, protection of but only a handful of large insurance companies policyholders rights, and insurance frauds. There i s account for most of the total assets and income also a need for a clear process for discipline, (Table 2.4). The state controls the social insurance sanctions, intervention and liquidation of troubled market and has a sizeable presence in the life companies within the sector. Inaddition, creating insurance market together with the joint ventures. a framework in which policy holders are In the general insurance market, domestic adequately safeguarded i s key to maintaining companies dominate the market. The sector also public confidence in the financial sector. MOF has has a large number of small insurers that are proposed an amendment o f the current insurance undercapitalized and less competitive. Inaddition law to the parliament to address some of these to an uneven distribution o f assets and income issues. However, these amendments are part of an among insurance firms, implementation o f more overall package o f legislation including that for the robust regulatory requirements and, in particular, integrated financial services authority and it i s improved capitalrequirements, i s needed. unclear when parliamentary approval will be obtained. Starting in 2000, the Government has required insurance companies to calculate Risk Based The White Paper includes steps to help restructure Capital (RBC) as a measure of solvency. Under and reform the insurance sector mainly through a the new legislation, companies are required to series o f government regulations and decrees. The maintain a ratio o f assets to liabilities o f at least Government has issued several decrees relating to 120 percent. The requirement i s being regulation and operations of insurance firms in line implemented in stages (5 percent in 2000, 40 with the proposed schedule in the White Paper. A percent in 2001, 75 percent in 2002, 100 percent in decree to begin implementing a risk-based 2003, and 120 percent in 2004) to encourage the approach to supervision has also been issued. industry to rehabilitate itself through Efforts are underway to establish a framework for rationalization and consolidation. So far the policy-holder protection and bring regulation and authority has identified a number of insolvent supervision into line with the IAIS principles. insurers and has imposed a `limited business restriction' on them, which i s to be followed by The actions proposed in the White Paper are revocation of business licenses. important elements of strengthening the insurance industry. However, several issues beyond the The Insurance Directorate within MOF is White Paper need attention: resolving weak and responsible for regulation and supervision o f the insolvent insurance firms expeditiously, industry. The Government i s aware of the need to strengthening regulation and supervision, and modernize and upgrade the insurance sector enhancing the confidence of policy holders through regulatory and supervisory regimes as well as development of a policy holder protection scheme. Table 2.4. Insurance sector profile in2002 (Rp. billion) General Life Reinsurance Social Total No. of insurance company 102 58 4 5 169 Total assets 14,925 20,537 773 25,649 61,884 Equity 8,082 3,963 236 2,861 15,143 Net premium 4,326 8,850 383 3,379 16,939 Investmentreturn 419 894 33 3,485 4,832 Technicalreserves 3,119 15,131 419 4,466 23,134 Net Drofit 848 188 29 1.570 2,636 Source: Asian Development Bank and Investor Magazine, July 2003. 23 Pensions. Indonesia has three large retirement should be a priority. Key steps involved in the funds: ASABRI (pension fund for the police, process are development of an overall framework civilian and military defense personnel), TASPEN for pension provision in Indonesia, actuarial and (pension fund for civil servants), and financial assessments of the various systems, and JAMSOSTEK (provident fund for employees in greater integration o f the policy framework for the private sector and in SOEs). In addition, over institutions in this segment with overall 300 employers, including many state-owned macroeconomic objectives. enterprises, have retirement funds for their employees. As of December 2002, all these Outside the framework o f the White Paper, the retirement funds had combined assets of about Rp. Government i s preparing plans for more 36 trillion. The governance, regulation and comprehensive social insurance, including health supervision, and investment policies o f pension care, unemployment, and workers' accident funds have been poor and not tied to the overall insurance (see also Chapter 5). The current development priorities o f the country. Both proposals for a comprehensive health insurance TASPEN and ASABRI are poorly funded relative require further thought, and extensive consultations to their benefit promises and hence are proving to with stakeholders, including employers' and be increasing drains on the national budget as employees' organization. The universal nature of opposed to being sources of long-term capital.'" the scheme, although theoretically desirable, may ASABRI i s controlled by the Ministry o f Defense, in fact undermine existing arrangements that are TASPEN i s under the Ministry o f Finance, while working well. The Government's idea to levy a six JAMSOSTEK i s under the Ministry of Manpower percent tax on the wage bill to finance the scheme and Transmigration. The first two entities are could, at least in the short run, undermine its goals effectively unsupervised, while JAMSOSTEK and to maximize employment creation. And the the employers' pension funds have reporting proposed management of the funds by a state- obligations to MOF. All pension funds have owned company would, in light o f the experience suffered from lack o f transparency and disclosure, with state-owned pension funds, far from weak management information systems and guarantee that the intended benefits indeed internal corporate governance, and directed materialize. investments under political influence. The vast majority of the assets of these retirements funds are invested in short-term bank deposits-a clearly sub-optimal use o f these funds. A relatively small iUnofficial estimates are that new credit might need to grow proportion of these assets i s invested in the capital by about 25 percentper year. markets and other private securities. " Other countries on the list are Cook Islands, Egypt, Guatemala, Myanmar, Nauru, Nigeria, Philippines, and Ukraine. The White Paper aims at improving the pension iiThe following macro factors (andweighting, inpercent) are fund management. All measures are scheduled to accorded by CLSA in country ranlungs: Clear, transparent be implemented in 2004, and include certification andcomprehensiverules and regulations(10); Committedand for pension fund managers and regulations on effective enforcement of rules and regulations (30); Political contributions, investments, and aspects o f and regulatory environment affecting CG and ability of companies to maximize value without arbitrary restrictions corporate governance. While these are important (20); Adoption of Intemational Generally Accepted steps, the White Paper focuses exclusively on Accounting Principles (20); Institutional mechanisms to employer-sponsored pension funds that are within promote awareness and a culture of good govemance (20); the regulatory purview o f the Ministry o f Finance. The scale for country ranlung i s 1to 10. '"The Asian Development Bank estimates that TASPENwas As in insurance, a strategic view of the pensions inacash-flowdeficit (excessof payouts over contributions)of sector i s needed. A comprehensive approach to the Rp. 13.5 trillion in 2000 while ASABRI was in a cash flow sector including all the various different pension deficit of Rp. 30 billion in the same year. These deficits are plans, a clear articulation o f the role this sector funded out of the Government's general budgetary resources should play in the economy, as well as and are expected to grow dramatically over the comingyears, thereby becoming a part of the fiscal problem for the development and implementation of a set o f government. reforms to put these institutions on a sound footing 24 CHAPTER3: INCREASINGINVESTMENT, EXPORTS EMPLOYMENT AND "Economic growth of 4 percent is not suflicient to while that of Korea, Malaysia, and Thailand all address problems of unemployment, increase exceeded their pre-crisis levels by a significant incomes, and reduce poverty; the key to raising margin (Figure 3.1). Indonesia lost world market economic growth-thus improving employment share inits top 30 non-oil exports inrecent years- opportunities and people's welfare-is to increase from 2.9 percent to 2.7 percent. Within the region, investment and exports" (White Paper). most of the competition came from China, which increased its world market share in Indonesia's top RECENTDEVEL OPMENTS 30 non-oil exports from 10 percent in 1997 to 14 percent in2001 (Figure 3.2). This competition was Trendsziz Investmen4 Exportsand especially strong for plywood, fabrics, digital Empluyment processing, furniture, jerseys, and footwear. Indonesia's investment has been the slowest to Competition from Vietnam i s also risingin specific pick up among the former crisis countries. products, mainly crustaceans, natural rubber, and Investment as a share of GDP is only 20 percent, footwear. 10 percentage points lower than before the crisis. And investment approvals-admittedly not But not all is gloom for Indonesia's exports. First, including approvals in oil and gas, and financial China i s becoming an increasingly important sectors-are sluggish. Domestic investment export market for Indonesia (Chapter 1). Second, approval in January-October of 2003 was Rp.18 Indonesia is gaining in comparative advantage in trillion, some 14 percent lower than last year, and other products-the percentage of products in 65 percent below the same period in 2001. Foreign which Indonesia has a comparative advantageii direct investment approval in the same period was rose from 27 percent of its exports in 1995 to $9.3 billion' or 26 percent higher than last year. almost 33 percent in 2001 (Table 3.1). Even so this level is a fourth of the pre-crisis level. Admittedly, the country's comparative advantage seems to be shifting in the direction of resource- Indonesia's recent export performance has been intensive products rather than in the direction of relatively poor as well. In 2002, the country's technologically-advanced products. Third, export share in GDP was still below the 1997 level, Figure 3.2. Competitionfrom China is rising Figure 3.1. Indonesia's export performancelags (percentage change of China's market share in 1997-2001 its neighbors' on Indonesia's top export products) (Index of 2002 export share of GDP, 1997=100) Peripheral eiecticalunits Sound recordersand reproduce 180 Garments &clothing Footwear 160 Electrical wire andcable 140 Completedigital central proeessing Radio-broadcast receiven for molor 120 Jeneys,puil-oven,twinsets 100 Yarn Printing paper & writing paper 80 Goid,non.monetary 60 Copper ores &concentrates Natural rubber latex 40 Trousen,breechesetc M Under garmenfs,knittedof cotton 0 -5 0 5 10 15 20 Indonesia Korea Malaysia Philippines Thailand Source: staff calculation based on UNCOMTRADEdata. Source: staff calculation 25 Table 3.1. Indonesia's revealed comparative Figure 3.3. Fewer firms are set up advantage (percentage intotal companies) Product 1995 2001 6.0 2000 Fishetc. 3.9 3.3 Coffee, tea etc 4.3 4.1 5.0 Tobacco 0.9 1.5 Cruderubber 15.9 8.9 4.0 Cork and wood 1.1 1.4 3.0 Pulp and waste paper 2.0 3.2 Metalliferousores and metalscrap 4.6 4.8 2.0 Coal, coke andbriquettes 5.2 7.0 Petroleum,petroleumproducts 3.1 1.9 1.0 Gas, naturalandmanufactured 15.8 8.0 0.0 Fixed vegetable oils andfats 5.6 9.7 new down-scaled dosed Animal-vegetable oils-fats 8.1 3.5 Source: staff calculation based on BPS industrial census Fertilizers 2.0 0.9 data. Cork and wood manufactures(excl.furniture) 16.7 9.5 Telecommunications& soundrecording 1.0 1.3 pinch of increased competition from countries like Furnitureandpartsthereof 1.9 2.3 Travel goods, handbags 0.9 1.6 China and Vietnam, and were particularly affected Articles of apparelandclothing 2.4 2.7 by the rise in minimumwages inrecent years."' As Footwear 6.2 4.3 a result, employment in this sector dropped more Out of 63 2-digir SlTCproducts: rapidly than that in manufacturing as a whole No of products with RCA>l 17 21 (Figure 3.4), an trend that continued in 2003." % of products with RCA>l 27 33 Profitability was also down considerably: profit Note: A country's revealed comparative advantage in exports (RCA) in a product captures the extent to which the country margins in manufacturing dropped from 16.4 exports a higher proportion of the product that the averagepercent in 1995-96 to 2.5 percent in 2000-01. country. RCAzl shows that the country has a comparative advantage in a product. The greater the RCA the greater the WhatAffects Investors.7 comparative advantage. Source: Staff calculation based on UNCOMTRADE data Indonesia's investment climate and competitiveness have not received high marks Indonesia's export base i s diversifying: between since the crisis. Indeed, the World Economic 1995 and 2001 the share o f the 3 largest and 10 Forum recently ranked Indonesia's largest exports fell from 28 percent to 24 percent and from 48 percent to 40 percent, respectively. competitiveness at 60 out o f 90 countries, well behind Malaysia (26), Thailand (31) and China (46), but before the Philippines (64). To find out The lack of economic activity and the weak investment climate led more manufacturing firms Figure 3.4. Manufacturing employment is falling to close down and downscale, and fewer firms to (percent growth rate of manufacturing employment) set up shop (Figure 3.3). Labor-intensive sectors such as textile, clothing, and footwear felt the 4.01 Indonesia's competitiveness is shifting to resource basedproducts -4.0' 1999 2000 2001 2002 Source: staff calculation based on BPS industrial census data. 26 Figure 3.5. Macroeconomic instability, policy Figure 3.6. Decentralization has exacerbated the uncertainty and corruption are the mainobstacle problems Macroeconomic instability ` Policy uncertainty Corruption by Iwal government I Corruption by central govemment Policy Tax rates 4 >,.%, . . Cost of financing uncertainty Legal system Local labor regulation National labor regulation Electncity Tax administration Licensing by local government Labor Licensing by central government regula Transportation Telecommunication 1 000 050 100 150 200 250 -0 $0 -0170 -0'60 -050 -040 -0 30 -020 -0 10 -000 Average scorefrom 0 for none to 4 for severe Averagescore from-2 for worsenedto 2 for improved Source: World Bank-ADB PrivateInvestmentClimate Note: Largefirms: morethan 500 workers, mediumfirms: between Survey, 2003 (preliminaryresults). 101-500workers, smallfirms: less than 100workers. Source: World Bank-ADB PrivateInvestmentClimate Survey, 2003 (preliminaryresults). what exactly keeps firms from investing in rules and regulations, and in their application and Indonesia the World Bank and ADB asked enforcement. Corruption, both in the central and investors about their concerns.' Investors worry local governments, also ranks high among most about three issues: macroeconomic investors. Other important obstacles to investment instability, policy uncertainty, and corruption include, power shortages, and local and national (Figure 3.5). The reason that macroeconomic labor regulations. Incontrast to findings in many instability tops the list of concerns i s in part due to other countries, most of these obstacles are felt long memories of investors, but i s also witness to more strongly by larger firms than smaller firms. the damage that large swings in exchange rate, Investors' concerns have been exacerbated by inflation, and interest rate can inflict upon firms. decentralization (Figure 3.6), notably regarding Macroeconomic stability thus remains a critical corruption, policy uncertainty, business licensing. pre-requisite for higher investment. Policy uncertainty, including legal uncertainty, influences THEWHITE PAPER the risks and returns to investment. It has increased as the process of democratization and The White Paper recognizes the role of the decentralization led to many inconsistencies in Government in improving the investment climate. The Government's role, according to the paper, is Macroeconomic to provide an enabling environment for the private sector through good policies and institutions. The stability,policy Government's recognition of weaknesses in the investment climate i s encouraging, and many uncertainty and - measures proposed indeed suppoi the goal of improving investment climate. At the same time, corruption top this section of the White Paper is a bit of a mixed bag. Of the many measures proposed, numerous investors' concerns ones-such as the improvement in licensing, tax and customs administration, and the revamping of infrastructure-indeed support the stated goals. 27 Others, such as measures proposed in trade and in the promotion o f SMEs seem to cater to special The key elements o f the White Paper to increase interests, and could well add to the policy investment, exports, and employment include uncertainty that firms say keeps them form (Table 3.2): investing. M o r e so than for other parts of the improve investment policy and processes by White Paper, setting priorities, and keeping the introducing a new investment law, setting up a proposed measures focused on the goals i s needed. one-stop licensing shop, and setting up a The Government should also heed the advice o f the National Investment and Export Team to private sector-the people that should in the end assess intersectoral problems; do the much-desired investment. The private promote industry and trade by improving sector Committee that monitors the progress and international market access through trade problems has already gone on record with its promotion centers and counter-trade deals, priorities (Box 3.l), the Government i s willing and introducing a new trade law, and changing to listen. A regular dialogue between the business trade policy to reflect changes in community and Government on investment climate competitiveness; issues would indeed be healthy, and the cabinet develop small and medium enterprises; level Investment and Trade Promotion Team- 0 improve tax and customs services (Chapter 1); already set up under the White Paper-could 0 become the vehicle for such a dialogue. Moreover, improve the legal environment by eliminating corruption, improving the commercial court the Team could become the catalyst for reforms improving the capacity and that would improve the investment climate beyond performance, performance of law enforcement officers (see the White Paper, and could forge the consistency Chapter 4); and harmonize regional o f policies affecting investors that they so direly regulations; need. Box 3.1. White Paperprioritiesof the businesscommunity A Monitoring Committee consisting of members of the Indonesian Chamber of Commerce (KADIN), representatives of the Jakarta Japan Club Foundation, AmCham Indonesia, the International Business Chamber, and a number of independent economists, has been set up to monitor the progress in implementing measures in the White Paper of interest to the business community. The Committee stresses that "the mainjob of government i s to create a conducive climate (for investment and trade) through good policies and institutions", and highlights three priorities: Legal reforms. Laws should be introduced only after they have been thought through properly and discussed publicly with important stakeholders outside the government. They should be more facilitative than restrictive. The hierarchy of law should be strictly adhered to. Immediate action should be taken to: (i)eliminate inconsistencies and contradictions between regional and national laws and regulations, presidential decrees, ministerial decrees and interpretations; (ii) improve capacity and performance of law enforcement officers; and (iii) improve the government's inter and intra ministry/department coordination so that passed laws are consistently upheld, applied, and honored in a timely manner (e.g., enforcement of recent tax court decisions). Development of small and medium enterprises. Priority policy measureslaction plans are: (i) improve SMEs' access to funds; (ii) remove the excessive requirement on SMEs of additional collaterallfixed assets outside of the project; and (iii) for breakthrough measures to encourage banks to extend credits to SMEs by implementing look land certification processing, strengthening credit guarantor and insurance schemes, and expanding linkage program between commercial banks, rural banks and micro finance institutions to reach SMEs located in remote areas. Skill increase and empowerment of the poor. The Committee supports the policy of poverty eradication outlined by the GO1 to help. Concrete actions could be made to put in place education services and health infrastructure and services that are managed and paid for by the government through the normal budgetary process without additional tax levies. Another important action is to simplify the land certification program, including national registration. This will benefit all levels of society by providing legal security to what is the most important asset of most families. Source: Pressreleaseof the Private Sector Monitoring Committee, November 2003. 28 Table 3.2. Mainpolicy measures to improvethe investmentclimateand promoteindustry and trade Policy measures Action plans Target date Investment climate: Providelegalcertaintyto businesses Revisethe negativeinvestmentlist December 2003 (see also legalreforms) Complete andpresent a draft law on investment December 2003 Simplify the licensingprocess Set up a one-stopshop October 2003 Eliminateobstaclesto investment Set up a NationalInvestmentandExport Team October 2003 andexports Industry and trade: Increaseexports throughincreased Increase non-oil exports to non-traditional markets On-going promotionandmarket penetration through counter-trade as long as it i s in line with the budget Restructurebusiness support Submit a trade law to Parliament November2003 agencies Fulfill the agriculturalneeds of Increase the output and quality of agricultural On-going domestic industry with domestic commodities, and completely supply agriculture input production needs (cornandsoybeans) Simplify proceduresfor exports and Harmonize import tariffs for commodities consistent On-going imports with changingcompetitiveness Small and medium enterprises: Increasethe access of smalland Increase land certification program gradually to On-going mediumenterprises and increase access to bank credit cooperatives to productiveresources Source: World Bank staff basedon PresidentialinstructionNo.5/2003. build and rehabilitate infrastructure to ensure services in electricity, transportation, energy, complete a new unified law on investment telecommunications, and water resources; currently being prepared. The new law will improve employment prospects by introducing replace both the 1968 Domestic Capital Investment new labor regulations; law and the 1967 Foreign Investment law. It will provide for equal treatment of domestic and In addition to these measures, the third part of the foreign investors, as well as a range of incentives White Paper also includes measures to improve such as tax holidays. The law will also regulate governance (Chapter 4) and alleviate poverty investment in all sectors, with the Investment (Chapter 5). Coordinating Board (BKPM) serving as a one-stop shop for prospective investors. The draft law i s a This is an ambitious and comprehensive agenda. It step forward in consolidating the framework for covers important measures that will address the investment. Although the principles behind policy uncertainty concern of investors, including several key issues are generally in line with best in areas such as tax and customs administration practice, they are still vague and details of the reforms, legal reforms, and harmonization in law's actual implementation are relegated to regulations across levels of governments. Some supporting regulations and decrees. As such, the measures remain vague, and would need to be well law will contribute little to restoring investors definedin their substance and well implemented to confidence unless its substance is further spelled have a meaningful impact. out. The option currently included in the draft law of providing tax incentives needs to be reassessed ZmprovzngZnvestmentPoLcy andApprovah as international experience has shown that they New investment law. A key policy in the White rarely work to attract investment, and end up Paper for improving the investment climate i s to subsidizing foreign treasuries rather than firms.vi 29 Figure 3.7. Time and cost of startinga businessinIndonesia m:: Time. days Cost, % of income per capita 200 T 16 150 (right axis) Cost 100 50 -. I1 I I * ` ) Time (left axis) T` 42 0 m a 1 1 I I 1 1 I T O 1 2 3 4 5 Procedure 6 7 8 9 10 11 1. Obtain the standard.form of the company deed 7. Deposit capital in abank 2. Notarize deeds 8. Apply for publication 3. Certificate of criminal record 9. Pay registration fee at Treasury 4. Certificate of domicile 10. Register at Ministry of Justice 5. Obtain NWPW number (taxes) 11. Social security 6. Apply for the business trading license Source: Doing Business in 2004, Indonesia Country Profile, http://www.worldbank.org/doingbusiness. One-stop licensing office. The White Paper the process of registering and implementing their promises to simplify the licensing process by project. vii According to laws and regulations, setting up a one-stop licensing office at BKPM. If starting a business in Indonesia entails 11 effectively implemented, this could greatly ease procedures and takes 168 days, costs 14.5 percent the licensing and business processing problems average income, and requires a minimumcapital of faced by investors. A key objective should not be three times average income (Figure 3.7). Although only to simplify the process, but also to reduce the the "official" cost of starting a business i s not high number o f licenses and permits, and the number o f compared to the rest o f East Asia, it almost takes procedures needed to obtain them. triple the time to do so. Moreover, each procedure i s a point of contact, and an opportunity to extract Currently, investors can easily secure an "in a bribe. The biggest problem i s to register at the principle" approval for an investment license from Ministry of Justice-for ratification of the deed of Indonesian embassies, BKPM or the Regional establishment and a registration certificate. The Investment Coordinating Board (BKPMD) in the Ministry of Justice approves or rejects the provinces. The delays occur when investors begin application within 60 working days, but there i s no automatic approval even after that. The use o f A big hurdle is the 60 notaries to prepare for company registration duplicates the due diligence undertaken by the Ministry's internal legal assessment on company days it takes the formation. In many countries, business registration i s an administrative process not a legal one, and it Ministry of Justice to i s a registration system, not an approval system. After registering the business, many steps remain register a firm before a project can be implemented. The investor would apply to BKPM or BKPMD to obtain a limited importer license; a customs approval letter 30 for capital goods and a customs approval letter for PromotzngZndustry andTrade raw materials after verification of the list of Indonesia i s a very open economy and in the past proposed imported capital goods, machinery, has greatly benefited from its export-oriented equipment and raw materials requested for exemption from import duties; a foreign manpower growth strategy. As observed before, Indonesia's competitiveness in some of its traditional exports plan approval for the required local training; and may be declining. So far, the government has an expatriate work permit. Inaddition, the investor responded to these pressures by resorting to ad hoc would need to obtain from the local government a measures such as import licenses in key garment location permit that gives the right to the investor and agricultural products. The White Paper i s not to use the land for specified purposes; a land title and a building construction permit; and a nuisance encouraging in this respect: the proposed measures seems to express a desire to continue this same ad act permit for environmentalpurposes. hoc protectionist trend, rather than take a more strategic view on Indonesia's trade policy. The Government i s drafting a Presidential Instruction on BKPM One Stop Service (OSS)that The measures proposed to promote industry and would allow it to authorize approvals of new projects and expansions, setting up o f foreign trade include (i)increased reliance on counter- trade deals as the basis for export promotion, (ii)a companies representative office, and issuance of move towards self-sufficiency in key agriculture six types of licenses (including hiring of foreign commodities, and (iii) an attempt at increasing workers, importers license, expansion license and protection as a way o f shielding against shifts in facility to liberalizeheduce import fees o f raw comparative advantage. But the White Paper materials and other fiscal facilities). This i s an addresses important elements too, including important step towards removing or consolidating some o f the hurdles involved. At the same time, an speeding up tax rebates which are especially effective OSS will necessarily have to work important to exporters. Submission of a trade law to Parliament i s timely, but it needs to be brought closely with all involved authorities. In the Philippines, where a One Stop Action Center was inlinewithinternational bestpractice. established in 1987, investors continued to First, the White Paper proposes to use counter- complain about cumbersome procedures and trade deals to increase non-oil exports to non- delays; for some administrative requirements, a traditional markets. double licensing procedure was in effect imposed, In 2003, the Ministry of Industry and Trade has arranged counter-trade with the investors having to apply to both the One deals with Russia ($193 million) exchanging raw Stop Action Center and the licensing body. The true strength o f an OSS lies in identifying materials (mainly palm oil) for defense equipment; and with Thailand ($21 million) exchanging heavy shortcomings in the administrative implementation metal products (train cars) for raw materials import of a country's investment policy and in implementing policy reforms, rather than short- (mainly rice). A counter-trade deal with Libya ($540 million) is being negotiated. Counter-trade term, ad hoc solutions to problems investors face. deals are sometimes used by less developed countries to relieve overcapacity in some industries Beyond the investment law and processes, or to alleviate liquidity constraints; but they Government must clarify the responsibilities o f the become quickly counter-productive. They are regions. Law 22/1999 which entrusts local opportunistic, promote rent-seeking behavior, and authorities the responsibility for facilitating and cannot support a sustainable and efficient export approving investment. Many regional investment boards have claimed full responsibility under this base. Moreover, government involvement in law to process investment applications, but other counter-trade financing may cause problems with regulations say BPKM continues to play a role. fiscal management. The Russia deal, for instance, was pre-financed by BULOG, the state logistics Without clarity on who does what, the licenses agency. But when Government wanted to issued may not convince banks and other financial institutions to put money into an investment. reimburse the agency, it was heavily criticized by Parliament for having spent without authorization. 31 Counter-trade is justification for such trade interventions brought forward by the Ministry of Industry and Trade is the need to combat smuggling, but it seems rather counter-productive odd to assume that smugglers would actually register. Moreover, import licenses are likely to exacerbatesmuggling by increasing the differential between domestic and internationalprices. Rather Given the reputational risks involved in counter- than protection, the Government could opt for trade, this seems hardly the way to go for measures that accelerate the reallocation of labor Government inpromoting industry and trade. from declining industries to growing ones. Second, the White Paper suggests to "fulfill HarmonrhhgRegionaZReguZafionx agricultural needs of domestic industry with Since decentralization took off in 2001, regional domestic production, by completely supplying agriculture input needs in corn and soybeans." taxes have become a menace for businesses. The This could mean protecting these two commodities lack of proper revenue sources has provided strong in order to become self sufficient in their incentives to introduce new forms of taxation and production. But there is no rationale for this retribusi. Many of these restrict or tax trade within or between kabupaten and provinces as they are policy. Corn and soybeans currently feature easy to implement (by positioning officials at key relatively open borders with zero tariff. Although Indonesia i s a net importer of both commodities, strategic locations, such as city boundaries, weigh stations, ports, or bridges). For example, they compete successfully with imports and do not seem to require protection. Furthermore, the Kabupaten Bima imposes a tax on virtually every interests of the agricultural sector are not commodity or product sent beyond the district uniformly advanced by the introduction of higher borders. Similarly, Lampung Province imposes a tariffs or any kind of protection that would raise "license fee" on 180 commodities exported from the province. These taxes and restrictions interfere their prices within the country. As both commodities are used as inputs into livestock in domestic trade and undermine internal market feeding, this will raise the cost of those livestock efficiency. This makes them illegal according to feeds, most significantly in the large poultry law 3412000 on regional taxes, but supervision industry. The measure would thus undermine remains weak. competitiveness in an industry with higher value added than crops. Moreover, an increase in the The policy measure in the White Paper that deals price of soybean would also hurt the poor for with harmonization of regional regulations would need to be forcefully implemented. Although Law whom soybeans (tempe and tuhu) are the main source of protein. 34/00 already allows for the central government to conduct reviews of newly introduced local taxes Third, the White Paper suggests to "harmonize and annul any that are found to be in conflict with higher regulations or statues, such reviews must be import tariffs in key commodities, including agriculture products, in line with changing completed within 30 days of the central competitiveness." While it is not clear what this government receiving a copy of the regional ruling measure would entail, recently there has been a in question. This stipulation was clearly intended tendency towards creeping protectionism. to speed up the process, but central government has been unable to keep pace with the thousands of Indonesia has a very open trade regime, with an average tariff around 7 percent. A host of new new regulations. To ensure no local taxes and fees that damage the investment climate are introduced, restrictive import-licensing arrangements and the current 30-day approval mechanism for local export bans and licenses were introduced in the past two years, mainly by the Ministry of Industry perdus could be replaced with a closed list of allowable revenue instruments to local and Trade, Such measures are more distortive and less transparent than tariffs, the latter being the governments; such list would need to include responsibility of the Ministry of Finance. One instruments that can substantially increase revenue 32 at the local level, such as the property tax. At the The tug-of-war between labor unions and same time, the capacity o f the central government employers on the two new labor bills-the to review local regulations needs to be Manpower Bill and the Labor Dispute Settlement strengthened. Bill-may have also contributed to perceptions of deteriorating relations. Strikes are still more Emp&yment common in Indonesia than they are in most other Labor cost, labor productivity, and good labor countries inthe region, and have led to increases in relations are crucial for the competitiveness of production days lost, especially in foreign-owned firms. The recent increases in minimumwages in firms-a fact that i s likely to reduce Indonesia's Indonesia have tended to exceed inflation by a attractiveness as a destination for foreign investors significant margin. InJakarta, minimumwages for (Figure 3.lo). industrial workers more than tripled during 1997- 2002, from Rp. 172,500 per month to Rp. 632,000; With these developments in the Indonesia's labor as a result, real minimum wages were 50 percent market over the past few years, the need for higher than their pre-crisis level. But Indonesia's coherent labor policies becomes crucial for the minimumwages are still inline with those of other investment climate. This i s well recognized by the countries in the region, although both Vietnam and government and i s strongly reflected in the White China have more competitive wages. The problem Paper. Essentially, the White Paper aims to instill i s that the increase in labor productivity has not investor confidence by setting firm deadlines for matched the increase in real wages (Figure 3.8). the completion of two fundamental measures Labor productivity remains relatively low governing labor issues: the Law on Dispute compared to other countries. In textiles, garments Settlement in Industrial Relations that should be and electronics, value added per labor in 2001 was passed by the DPR in December 2003; and much lower in Indonesia than in India and China, implementing regulations of the Manpower Law and for every dollar spent on a worker, China and No.13/2003 that should be finalized by July 2004. India were getting much higher value added than The key to these measures i s to maintain a balance Indonesia (Figure 3.9). between protecting labor and maintaining flexibility in working practices so that businesses At the same time, labor relations are increasingly can remain competitive. The Government will perceived as difficult. The sheer number o f unions need to take great care in crafting these (65 federal unions, 140 labor unions, and 11,000 regulations, and will need to continue consultation enterprise-based unions) has also made it difficult with the unions and the business community. to establish coherent labor relations, as unions are frequently in disagreement among themselves. Figure 3.9. Comparison of value added by labor inselectedsectors,2000-2001 Figure 3.8. Productivity has not matched (value addedper labor cost) increase inreal wages 30 annual growth rate (percent) Index: Indonesia=l I real wages 1 India Electronics Textiles Garments -40' 1994 1995 1996 1997 1998 1999 2000 2001 2002 I 1 2 3 4 5 Source: BPS, Sakemas. Source: World Bank Private InvestmentClimate Survey for Chinaand India,2002. 33 Industrial dispute settlement bill. The training, labor protection, and industrial relations. completion o f the Industrial Dispute Settlement The Government plans to complete 27 Ministerial Bill is key to resolving labor tensions and thus decrees by December 2003, and 9 government helping improve the uncertainty in labor relations. regulations and 6 Presidential decrees by mid- Currently, the draft Bill proposes to use a mix o f 2004. arbitration and labor courts to settle disputes. Under this system, labor disputes should be first From an investment perspective, the completion o f addressed in bi-partite committees between the Manpower law i s good news, as it i s based on a employer and labor representatives. If this fails, consensus between business and the majority of both sides can use a mediator (government trade unions. But some regulations have the official), a conciliator (private person), or an potential to significantly increase the cost of doing arbiter (private person) to come up with a solution. business in Indonesia, and implementing Decisions made by the first two are non-binding, regulations need to be carefully prepared. First, while decisions by the arbiter are binding. If no outsourcing work will become more difficult for a agreement i s reached under a mediator or a firm, as it can only outsource work strictly outside court. conciliator, the dispute i s delegated to a labor the firm's core business. This limits the firm's viii From an investment perspective, this capability to cut labor costs. On the other side, `obligatory mediation' approach should help labor unions argue that the increased use of reduce cases fought in labor courts and outsourced workers in recent years has weakened consequently bring down costs. But there are still regular workers' position. Second, fixed term reservations on the side of labor, which objects to contracts will be limited to temporary and seasonal the fact that decisions made by an arbiter are jobs and can only be granted for a maximum o f binding, arguing that the option to go to labor three years, after which the worker receives a courts should still be open. There are also doubts permanent status. While this clearly limits the as to whether the new labor courts will have firm's ability to hire cheaper labor on a longer- sufficient capacities to do the job. term basis, the new arrangement favors unions' bargaining power. Nevertheless, the worldwide Manpower law. The new Manpower Law trend to outsourcing means that Indonesia could addresses a comprehensive and integrated range o f face serious competitiveness effects if domestic issues, covering important areas such as legislation i s interpreted too stringently in this employment arrangements (contract work, regard. Third, formation of tri-partite wage outsourcing, worker placements by professional councils at the national, provincial and district employment agencies), retrenchment, severance level. Those councils (representing government, pay and minimum wages, equal opportunities, job employers, and unions) will provide inputs and Figure 3.10. Strikes are frequent and many productiondays are lost Days of strikes (annual average 2000-2001) Productiondays lost from strikes andlabordisputes L 111, Thailand 16 _-J Phlhppine 14- 12- Malaysia 2 10- Korea iL 2 17 0 .China o 5 10 15 20 25 30 all firm domesticfirms foreign firms Source: Laborsta,ILO. Source: World Bank-ADB Private Investment Climate Survey, 2003. 34 recommendations in formulating wage policies, sector, which has seen explosive growth in mobile including minimum wages. The New Manpower phone use since the market was opened, but Law allows Governors to set the minimum wage, Indonesia's teledensity lags well behind that of its with inputs from provincial wage councils and neighbors. district headdcity mayors. Minimum wages are derived from estimations on Minimum Living In seeking to address these challenges through Needs (KHM) and Adequate Living Needs (KHL). mobilizing increased investment, the Government The Ministerial Decree on setting KHLexpected in i s forced to confront the sensitive issue of tariffs. December 2003 will help control regional Tariffs in many sectors are well below what is divergences in estimating the KHM and KHL, as needed to support new investment. In some provinces and districts will have to adopt sectors, the Government has shown strong political guidelines from the central government. The resolve by pushing ahead with significant increase Presidential Decree on tri-partite wage councils, despite strong public opposition. The average expected to be issued inJuly 2004, will help ensure electric power tariff has been raised from below $2 a balanced approach to minimumwage setting. cents per KWh in 1998 to close to its pre-crisis level of around $6.7 cents per KWh. But further Infrastructure tariff increases will likely be necessary to finance The overall quality of infrastructure in Indonesia the massive investments required to serve a has deteriorated since the crisis (Figure 3.11), as projected doubling of demand by 2010. Concerns public spending had to be reduced sharply in real about social unrest, and the approaching elections, terms, and many committed and planned private led to postponement or restrictions in tariff infrastructure projects were suspended. Indonesia increases in several sectors, including power, faces major challenges in its infrastructure sectors water, phone, and rail transport. Even with firm as it seeks to consolidate and accelerate its still resolve on tariffs and cost recovery, it will take fragile economic recovery, improve its time to accelerate the flow of new investment to international competitiveness, and increase access needed levels. Public budgets are tightly to basic public services. Roads in and around constrained, local governments are slowly major cities are heavily congested, while many adjusting to their new responsibilities after inter-urban and rural roads are in poor and decentralization, and private investors are still deteriorating condition. The prospect of imminent wary of the situation. power shortages hangs over Java and many outer island regions are now suffering regular outages. Against this background, several measures are set The picture i s brighter in the telecommunications out in the White Paper to improve infrastructure, but it will be challenging to implement them within Figure 3.11. Perceptions of infrastructure quality Overall infrastructure quality Quality of electricity supply Philippines(74) Sri Ldnka (73) Vietnam (71) Vietnam(72) Indonesia (W Philippines(70) China (52) Indonesia (69) Thailand (29) China (54) S n Ldnka (26) Thailand(37) Taiwan(23) Taiwan(36) Malaysia(16) Malaysia(29) Singapore(4) Singapore (15) 7 0 1 2 3 4 5 6 7 0 1 2 3 4 5 6 7 Note: Ranking l=worst; 7=best; Numbersin countries'inparenthesisis country rankingout of 80 countries. Source: 2002-2002 GlobalCompetitivenessReport. 35 the timeframe set. They consist largely of The intent of the announced law on micro, small, investment projects, but without clarification on and medium enterprises i s for now unclear. The how they will be financed, how their financing will law could provide more legal certainty for these fit with fiscal consolidation, and what enterprises, if they are not yet covered by the accompanying policies will be implemented (such company law or the civil code. On the other hand, as tariff changes). Inroads, many issues now have such a law may add to the administrative burden to be addressed at the local government level. on this very dynamic part o f the economy. Worse, Their capacity to handle expanded road sector the law could result in preferential treatment and responsibilities needs to be strengthened. In credit quota's for these enterprises-much like in power, where the government has made the law o f cooperatives which i s now under commendable efforts over the past few years at revision. Clarifying the intent o f the measure i s resolving key issues (by passing a modem therefore a priority for Government. electricity law, preparing implementing regulations, and raising tariffs substantially), the White Paper rightly focuses on the implementation o f Law 20/2002 as outlined in MEMR's blueprint. However, one large project approved in October accounts for At the same time, the action plan centers around a third of the total. Oil refinery projects in Nusa Tenggara investment projects rather than needed policy "Baratcountry's revealed comparative advantage in exports and Aceh, whose approved values are $2.8 billion. actions, such as higher tariffs or improved public A (RCA) in a certain product captures the extent to which the management. A financial restructuring plan for country exports a higher proportion of the product than the PLN i s also needed. In telecom, the establishment average country, and i s measured as the ratio of the share of o f a regulatory body stated in the White Paper i s the product in that country's exports to the share of that critical. The specific steps and timetable need to product in overall world exports. Thus the RCA of country j in be spelled out. exports of product ii s defined as: RCAij = (Xij/Xj)/(Xiw/X,), where Xij i s country j ' s exports o f good i,Xj i s total exports of country j, Xi, i s worldwide exports of good i,and X, i s total Devel'opzitg SmaZZandMediumEnterprzjw and worldwide exports. A value of RCA > 1 (4)implies that the Cooperatives share of product iin country j ' s exports i s greater (smaller) than the share of product iin world exports). Inthe White Paper, the Government has positively iiiSuryahadi, Asep, Widyanti, Wenefrida, Perwira, Daniel and steered the policy direction o f developing SMEs by Sumarto, Sudarno (2003), '' Minimum Wage Policy and its improving land certification in order to give better Impact on Employment in the Urban Formal Secotor. Bulletin credit access to small businesses instead o f of Indonesian Economic Studies Vol. 39, No.1 (April 2003), pp.29-50. The authors found that the estimated elasticity of subsidizing various schemes. Many cases show total employment to minimumwage i s statistically significant that small businesses have land but cannot at -0.1 percent, translating roughly to a 1percent reduction in collateralize it for bank loans because obtaining employment for a 1percent increase inminimumwages. certificates i s problematic. Simplifying procedures ivJakarta Post December 3 2003, page 13: 94,000 workers within the land agency, BPN, would also be fired in first 10 months. " These are preliminary results of a survey of about 400 firms needed. The benefit o f land certification has been mainly located inJava. proven to improve credit flow in rural areas. "I The literature on tax incentives generally finds that tax Under the World Bank Land Administration incentives can be costly and are rarely the most important Project (LAP),BPNhas recently managed to issue determinant of investment. For instance, analysis on the investment tax credit in the US shows that investments have two million certificates over a five-year period. As not been significantly higher when a business tax credit was a result, credit flow increased by nearly 30 percent offered (based on a percentage of investment in equipment) among the land owners who were then able to than during periods it was not (Karier, 1994). Similarly, collateralize their certificates, and their land value Fletcher (2002) confirms the general results in the literature. increased by an average o f 65 percent. Compared He finds that while low overall rates of taxation may promote investment, there is no evidence that complicated regimes of to that, the White Paper target o f 41,600 land discriminatory tax incentives are more effective in promoting certificates i s decidedly modest, especially if one investment than simple tax regimes with low uniform rates of considers that only 25 percent o f Indonesia's total taxation. "'Theprocessdescribed land i s registered. i s for foreign investment especially since it involves registration o f a new company, acquiring a tax registration number and expatriate work permits. Approval for domestic investments or P M D N i s relatively straight 36 forward if i t involves an operating entity with the complete documentation for company registration and tax record but in the case of ajoint venture, the foreign partner would still have "' to go through the process of company registration. The labor court consists of one judge nominated by the High Court and two ad-hoc judges nominated by the labor and employer sides. There are plans to install labor courts in every province, with additional labor courts in major industrial areas such as inJabotabek or Batam Island. 37 CHAPTER4: MEETING INDONESIA'S GOVERNANCECHALLENGES The achievements of the past few years in public life have generated resentment, fuelling maintaining macroeconomic stability, restoring perceptions that corruption has become endemic in modest economic growth, and securing political the new system. For the donor community, stability in a difficult international environment corruption has become a triple threat: it continue to be clouded by widespread concerns undermines progress on the country's broad about governance and corruption across Indonesian development objectives, it remains a serious risk to society. The high hopes that the Reformasi the effectiveness of donor programs, and it movement would break the hold of the vested continues to weaken public credibility in interests behind the corruption, cronyism, and development assistance overall, which is still too nepotism of the Soeharto era have not been often portrayed within segments of the community realized. Few have been held to account for the as contributing to the problem. massive theft of public resources that occurred towards the end of the New Order period. There Nevertheless, it i s important to recognize that these are increasing signs that old elites and a set of new remaining governance problems exist within a players, especially at the regional level, are using framework of tremendous political, economic and "money politics" to solidify privileged positions in institutional changes that have marked Indonesia's the new political system. Institutionalreforms that transition to a more open, competitive society and threaten the interests of these elites-in particular that provide new opportunities for improving to strengthen the effectiveness of the justice governance. Constitutional reforms securing direct sector-have been consistently undermined. elections have created a new accountability While corruption captures headlines, the issues framework between public officials and their created by Indonesia's weak governance constituents at all levels of the political system. institutions have wider implications (Figures 4.1 Decentralization is bringingcontrol over resources and 4.2). The "please your boss", upward-looking and the delivery of public goods and services accountability and reward system of Indonesia's closer to the clients, providing new opportunities overly-centralized New Order civil service regime for participation and monitoring to make local lingers on at the expense of citizen participation governments more responsive. The opening of the and accountability for results. A whole new media and surge of new collective organizations mindset is needed, including tools, instruments and within civil society are giving rise to powerful capabilities of modem, responsive government. demands for good governance. The results of these remarkable changes are evident in the new Though it is nearly impossible to compare the level of transparency and competition in actual levels of corruption under the New Order Indonesian public life. and Reformasi regimes-taking into account the impact of decentralization as well-it i s clear that Yet these critical gains in participation, corruption has become less predictable inthis more competition and transparency are not leading to competitive and uncertain environment. concomitant improvements in the overall quality of Moreover, the unfulfilled expectations that governance. Much of the problem lies with the Reformasi would quickly bring a new integrity to weak implementation of many of the major policy and institutional reforms introduced under Corruption has become Reformasi. Bold and ambitious legislation is often undermined by weak and contradictory less predictable under implementing regulations and procedures. Public revelations of corruption and wrong-doing sparked decentralization by an activist media, watchdog groups, and independent auditors are rarely followed through to a satisfactory conclusion in the legal system. 38 Indonesia has achieved transparency without Figure 4.1. Extent of corwensuswithin government accountability; the tremendous gains since the fall o f the New Order have not been matched by genuine government accountability for demonstrable results in restoring integrity to the public sector and reducing corruption. As a result, there i s a risk that this increased transparency will continue to generate frustration and resentment, rather than promote improved governance. The governance agenda in Indonesia needs to focus urgent attention on improving the institutions and mechanisms to implement the ambitious reforms 7 introduced in the past few years and to strengthen 0 2 4 6 8 Index government accountability for achieving +wrse -+kn e demonstrable results from those reforms. Source: IMDWorldCompetitiveness Yearbook, 2003. Figure 4.2. Perceptions o f key elements of "governance" 2002 z" .,J LOW 195 Countries Rule of law HIGH WAIAYSIII .,i LOW 195 Countries ... LOW 195 Countries Note: The dots represent estimates for the 2002 govemance indicator for each country, and the thin vertical lines represent standarad errors aroundthese estimates. Source: "Govemance Matters 111:Govemance Indicator for 1996-2000"by Daniel Kaufmann, Aart Kraay and Massimo Mastruzzi, 2003. 39 Of particular importance in achieving these goals PubkcFznancialManagement are comprehensive reforms in three areas: i)legal reform and the justice sector; ii) public Perhaps the most important measures in the White Paper to reduce corruption and improve administration; and iii) public financial governance are to be found in the section on management. These are the institutions and maintainingmacroeconomic stability. This section mechanisms that implement and enforce not only lays out the targets of fiscal policy, but government policies and that are critical to identifies specific measures to enhance the breaking the bottlenecks that weaken the links efficiency and effectiveness of the mobilization, between participation and transparency on the one allocation, and use of public resources. While such hand and greater accountability and improved measures are vital to promote and sustain governance on the other hand. Though reform macroeconomic stability over the medium-to-long blueprints have been proposed by various term, they might also be considered at the organizations in each area, only in the area of operational center of efforts to reduce corruption financial management i s progress being made on a and improve governance. The misuse or new comprehensive framework of reform. Similar misallocation of public funds for private gain i s efforts are now necessary to break through the part of the basic definition of corruption. bottlenecks in the justice sector and civil service Measures to reduce discretion of individual public reform. officials over the flow of public resources through greater transparency, stronger ex ante control GOVERNANCE THE WHITEPAPER AND functions, and better ex post verification and auditing mechanisms constitute the basic nuts and The Government's White Paper is not intended as a comprehensive governance strategy. Its initial bolts of any anti-corruption strategy. They are also essential for holding public officials more intention was to substitute for the commitments accountable for their performance. normally made in an IMF letter of intent with a strong focus on the macroeconomic policy InIndonesia, there is an additional factor that links framework. However, to the extent that the White Paper seeks to address the problems that hinder public financial management to the issues of corruption and governance: the chronic under- economic growth through a focus on improving the funding of key public institutions. The World investment climate, issues of governance naturally arose. The White Paper, therefore, addresses a set Bank's recent report on corruption (Combating Corruption in Indonesia, 2003) demonstrates how of specific governance concerns that are directly politicians and policy makers create perverse related to the quality of the investment climate. A incentives for such essential institutions as the more comprehensive approach to governance reform in Indonesia would be beyond the scope of military and the police, among other service an IMF graduation program. Moreover, given the providers, by failing to provide them with the resources to do their job. It i s estimated that less political uncertainties of an election year, a more than a third of the military and police expenditures ambitious program would ultimately have are met from official budget allocations. confronted the realities of electoral politics, thus Allocations for operations and maintenance tend to undermining the credibility of a comprehensive be very low and have declined in real terms. governance strategy from the very start. Budget allocations are released late in the year, creating uncertainty and providing little time to Though there are important steps to improve spend them wisely. To cope with the systemic governance across all of the categories of measures under-funding and budgetary uncertainty, it specified in the White Paper, this chapter will became common practice under the New Order for review the White Paper targets and progress to date public agencies to raise their own resources to in the three areas described above as critical to strengthening the framework for accountability in meet the gaps. And such practices have persisted under Reformasi. Among the most common Indonesia: public financial management, legal and survival strategies are shifting recurrent justice sector reform, and public administration. expenditures to the development budget, levying 40 unauthorized charges for services delivered, and LegaZandJusticeSectorReform running enterprises, foundations and other resource mobilization ventures. The practice of permitting The weaknesses of the Indonesian justice sector enterprises to be runby the military and the police have long been seen as the main obstacle to fighting corruption and improving governance in i s a particularly serious problem leading to this country. Public opinion polls show that the allegations of involvement in drug smuggling, majority of Indonesians lack confidence in justice protection and prostitution rackets, and, following sector institutions. External ratings for Indonesia their formal separation, to open conflicts between the police and the military when their business consistently cite problems in the justice sector as a interests clash. These practices blur public-private key component in the country's poor ranking on boundaries, weaken accountability for funds and perceptions of corruption, governance and the quality of the investment climate. Over the past provide a ready excuse for rent-seeking activities. year, these trends have continued and indeed intensified somewhat as the prospect of elections The White Paper brings together a set of ongoing has begun to intensify political competition. Both measures designed to address key weaknesses in local and foreign press have continued to run the public financial management system. First, it stories on a regular basis about alleged widespread commits to modernizing the revenue system abuses of power within the national police and the through revisions of taxation laws, expanding the Attorney General's Office, and about allegations of large tax payers' office, and reforming customs. corruption within the judiciary. Clearly, Second, it addresses the efficiency, effectiveness, accusations of slow progress on legal and justice and transparency of government spending through sector reform are likely to figure prominently in revised procedures on government procurement, the upcoming elections as politicians attempt to reorganization of the Ministry of Finance, capitalize on the perceived gaps between the establishment of a separate treasury and a treasury promise and reality of reforms to bring about a single account, and implementing regulations for new integrity in Indonesian public life following the state finances law. the fall of the New Order. These measures, and the progress to date in implementing them, are discussed in more detail in Chapter 1. The purpose here i s not to repeat that The lack of confidence assessment, but to stress the role that such reforms play in the broader struggle to reduce the in thejustice sector is opportunities to engage incorruption and to lay the foundation for more accountable government. Dewasive While popular perceptions of the fight against corruption tend to be influenced most by high- profile enforcement measures, such as arrests and Against this background, the White Paper prosecutions, the more mundane areas of recognizes the importance of enhancing "legal procurement reform, budget preparation and certainty" as a key component of improving the execution procedures, classification and investment climate. It identifies four reform areas accounting methods, and financial monitoring and audit systems are often where the most important under the broader heading of legal reform: (i) eliminate corruption; (ii) improve the performance steps will be taken to prevent corruption and reveal of the Commercial Court; (iii) harmonize regional abuses. Recent progress in these areas as well as regulations; and (iv) improve the capacity and prospects for further progress in the coming year, performance of law enforcement officers. It as Chapter 1 demonstrates, should be taken into commits the Government to clear targets for account in assessing overall developments in implementing a set of long-delayed measures to combating corruptionand improving governance. establish an institutional framework for investigating and prosecuting corruption cases and for redefining the management of the court system. 41 Table 4.1. Legalandjustice sector reformmeasures inthe White Paper Action Plans outputs Date Apuoint team to select candidates for the Anti-Corruption .. Presidential decree Sept 2003 Commission. (completed) Appoint the members of the Anti-Corruption Commission. Presidential decree Dec 2003 Increase the capability of prosecutors and judges Improved professionalism Nov 2003 responsible for corruption cases through training, internal (completed) directives and policies, and assistanceprograms. Publish blueprint on the role of the Judicial System in Blue print Nov 2003 reducing corruption. (completed) Complete Judicial Commission Law. Law on Judicial After law passed Commission Complete revision of Law No. SA991 on Attorney AmendedLaw After law passed General. Issue revised Law on Bankruptcy. Law After law passed Update blueprint on Commercial Court. Blue print Nov 2003 (completed) Revoke regional regulations that are inconsistent with Ministerial decree Ongoing higher laws/regulations and public interest. Training for investigators, prosecutors, judges. Improved professionalism Ongoing Improved education curriculum for law enforcement Improved professionalism Ongoing officers. Source: World Bank staffbased on PresidentialinstructionNo. 5/2003. Table 4.1 lists the specific actions, outputs and that meaningful institutional reform within the target dates, several o f which have been prominent justice sector may yet be embarked upon. on the agendas of previous CGI meetings. Taken together, these commitments demonstrate a By far the most promising of the measures set out recognition that the poor reputation of the in the White Paper has been the development and Indonesian judiciary i s not just o f relevance to the adoption by the Supreme Court in October 2003 of issue of social cohesiveness in a democratizing Indonesia, but that the lack o f legal certainty that i s an inevitable product o f a weak judiciary and a fragmented political power structure i s a major TheSupreme Court impediment to attracting on a sustained basis the levels of investment required to generate blueprints constitute significant economic growth. More importantly, it sets out clear Government commitments and a timeframe in this area that hold out the prospect an imDortant first steD 42 a series of blueprints for the future development of serious delays in moving forward with the the judiciary (see Box 4.1). The breadth and selection of potential commissioners which raised coverage of the blueprints indicates that the doubts about the Government's commitment to this Supreme Court (or at least significant elements body. However, assuming the timetable within the court) recognizes that the judiciary established by law i s adhered to, commissioners indeed suffers from system-wide weaknesses that for the ACC will be appointed at about the time inturnrequire a systemic and systematic response. this document is released. The challenge and need This is a major and positive development for for immediate action by Government will not stop Indonesia, inasmuch as it constitutes a frank at that point and goes well beyond the target set in recognition of the extent and depth of the problems the White Paper: in the judiciary, which is an essential foundation for moving forward. At the same time, it is clear 0 The success of the ACC will depend on its that the blueprints represent only a first, albeit very public credibility, which will, in turn, be a important, first step along a path that, even if kept function of the quality of individuals selected to and pursued with vigor, will take many years to as commissioners and the transparency of the complete. process by which they are selected. The delay in appointing a selection committee coupled Beyond the Supreme Court blueprints, the focus of with the Government's legal commitment to the White Paper on integrity issues is welcome. Of establish the ACC by the end of December the many facets of this challenge, combating 2003 have created a tight time frame for any corruption is probably the one most Indonesians meaningful public consultation in the selection would agree is most needed. It is also the most process. This must be addressed with some problematic, given the fact that the law urgency to ensure that the ACC does not start enforcement institutions are widely viewed as out under a cloud of public suspicion. being themselves deeply corrupt. The Anti- 0 The ACC cannot operate effectively until the corruption Commission-and its corollary the professional staff has been selected, appointed Anti-Corruption Court-is clearly intended to be and equipped to carry out its investigative and the anchor of a new institutional framework to prosecutorial responsibilities. Although this address this weakness. should have been in place promptly upon appointment of the commissioners, the dilatory The gestation of the Anti-Corruption Commission preparatory steps make this an unlikely (ACC) has been disappointing. There have been prospect. This should be remedied as a matter Box 4.1. The supreme court blueprints The blueprints are the outcome of a collaborative process between members of the Supreme Court and an Indonesian law reform advocacy group to identify areas of weakness in the Indonesian judiciary and map out a reform path for a systematic set of initiatives to address such weaknesses. The blueprints were funded by a Dutch-funded IMFassistanceprogram and the Asia Foundation. The blueprints cover 5 broad areas: (i)reform of the Supreme Court; (ii) the setting up of a Judicial Commission to address the issues of appointments to the Supreme Court and the supervision of the conduct of judges; (iii) reform of personnel management within the judiciary; (iv) reform of the judicial education system; and (v) reform of financial management of thejudiciary. Each blueprint sets out a reform agenda, including time-frames for the carrying out of the various steps identified. Appropriately, these time-frames acknowledge the long-term nature of many of the initiatives. What the blueprints do not elaborate upon are the mechanisms by which the proposed reforms are to be managed. This is a key issue that has to be addressed if the promise o f the blueprints i s to have a realistic prospect of success. I t will be particularly important that the Supreme Court recognize that, while other Indonesian state institutions, as well as the donor community, have important contributions to make to the reform process if they are to succeed, by far the most important effort required will have to come from within thejudiciary itself. 43 of urgent priority for the Government in the ensure that the adequacy of resources available to weeks after the commissioners' appointment. the new Anti-Corruption Court does not becomean An equally important priority for the impediment to its effective functioning. The Government at the very inception of the ACC Government has been engaged in the development will be to ensure it is adequately funded. The of a solid funding mechanism that reflects real and need for this i s clear: under-funding of the legitimate court costs, including salary adjustments existing law enforcement agencies has been a and an institutional overhead depending on case major contributing factor to their failings load (`the Needs Assessment'). Rather than the including, significantly, the corruption that somewhat arbitrary funding mechanism currently pervadesthem. generally in use, that new funding mechanism is A very important function that the ACC will being applied to the new Anti-Corruption Court. A assume when it commences operations is that budget application based on this assessment has of the KPKPN, which oversees the declaration been submitted by the Supreme Court which of assets by public officials. While that agency hopefully will be honored. has suffered from a number of significant problems, it has nevertheless demonstrated a preparedness to challenge a number of high level officials-acts of courage that will need The draft laws on the to be repeated if a credible anti-corruption campaign i s to be pursued. The challenge for AGO do not promise Government i s to ensure that the weaknesses of the successor unit to KPKPN are addressed the badly needed and that credible sanctions for non-compliance with its reporting requirements are established. overhaul An equally important challenge set out in the White Paper will be the establishment of a credible Anti-Corruption Court. Recent experience with The White Paper calls for a revised Attorney the Commercial Court suggests that the new Anti- General's Office Law to be passed. The two drafts Corruption Court will be viewed with considerable before the DPR are limited in their scope (see Box skepticism from its inception. A number of steps 4.2) and neither can be seen as the answer to the can be taken to give the Anti-Corruption Court a many calls for a thorough overhaul of the Attorney real opportunity to perform professionally and with General's Office (AGO). authority. The Indonesian authorities, coordinated by Bappenas and assisted by Indonesian civil The AGO has, within the last year, invited a group society advocacy groups, are engaged in a process of prominent "outsiders" to assist the AGO in to draw up a policy document that identifies these developing reform measures. While this initiative steps. The White Paper calls for this document, i swelcome, there remain concerns about the again called a Blueprint, to be completed by prospects for a meaningful reform agenda to November 2003. It identifies various measures emerge from this process. Given the critical including notably the establishment of a importance of this institution, the reform of the professional and accountable recruitment AGO needs to go beyond the draft law set out in mechanism, provision of proper funding and the the White Paper and should entail the adoption of a setting of conditions of employment (including reform agenda that addresses the serious flaws in career development) that adequately guarantee the organization that were identified in the judicial independence. PricewaterhouseCoopers underconducted institutional audit by the auspices of the Most of these will be matters for the Supreme ADB. The example set by the Supreme Court in Court to address. However, the Government will the development and adoption of the blueprints is have the responsibility to ensure that the budgetary one that would be very appropriate for the AGO to resources of the Supreme Court are sufficient to 44 Box 4.2. Reformof the law onthe Attorney General'sOffice (AGO) Two draft laws have been prepared: (i) version prepared by the AGO, which draft, if adopted, would replace a Law 5/1991; and (ii) a version prepared by the staff of the DPR, which would amend certain provisions of that Law. Among the changes proposed inthese drafts are the following: Both drafts contain provisions describing the AGO as independent. While the AGO version would retain the concept o f the AGO being a "government institution," both eliminate the current provision that the AG reports to the President. Recognition of the value of the AGO being free of political interference is welcome. However, it i s equally important that appropriate accountability mechanisms be established. Neither draft contains much detail in this regard. The AGO version proposes that the Attorney General must be appointed from within the ranks of the AGO. The DPR is silent on this matter. While insider experience i s always an asset, and while reform is best likely to succeed if there i s institutional ownership of the process, the likelihood i s that the thorough-going reform that the AGO needs (as convincingly described in the ADB-financed Price Waterhouse Coopers governance audit carried out in 2000) will be embraced by a leadership nurtured by and within the current system appears problematic. The AGO version also would require the Vice-AG and each Deputy-AG to be appointed from within the ranks of the AGO. This reflects the current law. The DPR version appears not to change this requirement. Both versions propose that the mandatory retirement age of senior prosecutors be extended to 60 and top officials to 65. Given that senior prosecutors are likely to be the most resistant to reform, this provision would appear to complicate further the prospects for reform of the AGO. Neither version makes any reference to the Anti-Corruption Commission. This omission could result in the sort of tensions that have characterized relations between the police and the AGO with respect to the investigationof corruption allegations in recent years. Arguably both drafts could be interpreted as requiring that prosecutors conducting prosecutions for the Anti-Corruption Commission would nevertheless be part of the AGO. Lack of clarity on this issue, and the failure to acknowledge any role of the Anti-Corruption Commission in the prosecution of corruption cases, does not augur well for the Commission. follow. For this to occur, strong leadership from The White Paper also targets the work of the the Government is required. Commercial Court by committing to a revised blueprint for the court and the adoption of the draft The White Paper does not propose any specific Law on Revisions to the Bankruptcy Law, which is initiatives for the national police beyond improving currently with the DPR. Passage of the law would the education curriculum. Nevertheless, this is an send a signal that the Government remains institution that few would argue does not face a committed to the objective of ensuring Indonesia major credibility problem with the citizenry of has a credible bankruptcy regime, which remains Indonesia, notwithstanding the very impressive an issue of strong concern among the business performance of the police inits investigation of the community. However, the problem with the Bali bombings. There are a number of indications bankruptcy regime does not appear to be with the that the police leadership is aware of the need to quality of commercial court decisions. An on- improve its standing with the public. For example, going in-depth study of commercial court decisions in the past year the police have engaged in a by a team involving experienced foreign lawyers dialogue with an NGO umbrella organization indicates that up to 70 percent of the commercial called Indonesia Police Watch. However, a court decisions could be characterized as good law. concrete and comprehensive reform agenda for the However, evident problems in certain high-profile police is still to be developed. A governance audit cases have clearly raised serious credibility along the lines followed for the AGO in 2000 concerns. More importantly, the principal problem and/or the development of a reform agenda in the appears to be more in the area of enforcement, manner carried out by the Supreme Court would be which goes beyondthe capacity of the courts. appropriate steps for the national police to follow. The Commercial Court continues to be the principal pilot of institutional reform of the 45 judiciary. Among the innovations first introduced have dampened the potentially positive impacts of by this Court have been: the appointment of ad these reforms in the near term. It has long been hoc outside judges, the publication of all decisions, recognized that fundamental reforms are required the issuance of dissenting opinions, the option to inthe recruitment and training of civil servants, the comment on decisions through the internet, strict definition and transparency of administrative timelines for court decisions, the issuance procedures, and the structure and pay scales of the guidelines governing the relationship between civil service, yet there has been little progress to judges and the Bar (receivers), a mandatory code date inthese areas. of ethics, and the introduction and application of the concept of disbarment. Nevertheless, it i s clear In the area of public administration, the White that credibility remains an issue for the court as Paper places primary emphasis on increasing the only 31 bankruptcy cases were handled in 2003. transparency of public services through the Again, serious problems with enforcement go a development of a draft Law on Public Service long way towards explaining these credibility Delivery, the publication of public service delivery problems, but it still would be desirable to improve standards, and the move towards e-government. the clarity of the law and to enhance the TabIe 4.2 provides a more detailed list of the effectiveness of bankruptcy proceedings where public administration reforms incorporated in the appropriate. These considerations lie behind the White Paper. draft law, that, responding to commercial court experience over the past years, includes a long set The idea of a single law to provide an overall of definitions, standardizes time lines further, framework for the delivery of all major public boosts commercial court jurisdiction, ties down services i s quite unusual in light of standard appeal, and clarifies restructuring procedures and international practice. According to the Ministry the position of bothcreditors and debtor therein. of Administrative Reform, the purpose of the law i s twofold: (i)to set out the obligations of government to deliver public services to a Only 31 bankruptcy minimum standard in terms of quality, efficiency, and access; and (ii) to establish the right of the cases were handled in citizens to receive such services and the obligation to value and care for public facilities. It is 2003 intended that with these minimum standards, rights, and obligations set out in law, citizens will be able to take complaints to the formal legal system and, in so doing, place pressure on public PubkcAdmzizz,tration Reform service providers at different levels of government The White Paper includes a welcome recognition to deliver. It has even been suggested that such that the goal of increasing investment, exports and transparency will put pressure on government to employment to enhance growth i s dependent, in undertake more comprehensive civil service part, on the quality of public services and, hence, reforms to meet these new standards. Moreover, the performance of public administration. by combining this law with the publication of Indonesia continues to suffer from a legacy of standards for the delivery of all public services and over-centralized service delivery systems and an the spread of e-government systems, the administrative culture that i s driven by top-down government hopes that increasing the transparency commands rather than client-driven demands. of service standards will generate greater Though decentralization and community accountability for public service providers. empowerment offer important new opportunities for service improvement by bringing authority for While greater transparency in this area i s surely public service provision closer to the client, the welcome, this approach to improving public initial confusion resulting from inconsistent administration misses the fundamental problem in decentralization laws and from capacity constraints the Indonesian context discussed earlier, namely the apparent disconnect between transparency and 46 Table 4.2. Public administration reformmeasures inthe White Paper Action Plans outputs Date Propose Draft Law on Public Service to Parliament (DPR) Draft law 2004 Review regulations related to public service delivery; deregulate Ministerial decree 2004 and reduce bureaucratic hurdles Require public service agencies to publish all services rendered, Ministerial decree June 2004 time, and costs needed Speed up the implementation of Inpres No.3/2003 on National Guidances on e- Dec 2004 Policy and Strategy on Development of E-Government and prepare Government supporting tools Finishdeliberationdraft law onFreedomof Information Law Revise Law No. 22/1999, on relations between provincial and Draft Amendments Sep 2004 regional governments Revise Law No. 25/1999 on financial balance formula and Draft Amendments Sep 2004 supervision, consistent with Law No. 17/2003 Revise Law No. 34/2000 on greater discretion and responsibility for Draft Amendments June 2004 regional governments to collect regional taxes and charges, while avoiding- barriers to businessand investment Improve regional government accounting systems in line with Law MoFdecree Oct 2004 ~ No. 17/2003 ~ ~ Source: World Bank staffbasedon PresidentialinstructionNo. Y2003. accountability. Without a credible public government in Yogyakarta has embarked on a complaints mechanism or court system that can reorganization and rightsizing exercise. Other adjudicate and enforce legal decisions, the added regions have taken initiatives aimed at cleaning up transparency promised by these reforms in the corruption (see Box 4.3 regarding Solok). Still White Paper are highly unlikely to have much of others have introduced open and transparent an impact on the performance of Indonesia's processes to recruit some civil servants (Tanah public administration. Indeed it is not the lack of Datar, Kebumen). There i s an increasing call for a transparency that is responsible for poor public pay reform where employment and promotion can service delivery, but an inefficient and corrupt civil be linked to performance and to seniority. service, poor planning and budgeting systems, Nevertheless, top-down decrees (like PP 8/2003), systematic under-funding in key areas, weak which determine a rigid, nation-wide `echelon' institutional capacity, and poor coordination across structure for senior positions in the local different sectors and levels of government. These administrations continue to stifle local level fundamental problems of public administration are not addressed in the White Paper and this constitutes a major weakness of the program. The WhitePaper does A civil service reform could potentially have a much greater impact on the quality of public not address the service delivery than a new Public Service Law, because it i s one of the reforms, which together with the performance budgeting, could promote fundamental problems qualitative change in the operation of regional governments. Voices from the regions demand of public greater freedom to design and implement local civil service reforms to match their newly administration delegated responsibilities over public expenditures and public service delivery. The provincial 47 reforms. There i s also a threat that the ongoing policies and introduce greater transparency and revision of the Decentralization Law (Law reduced discretion on total compensation levels. 22/1999)-a target of the White Paper-is likely to More homework i s needed on a compensation pull senior civil service appointment functions package for the civil service through careful pay back to the central government, thus exacerbating comparator studies and labor market analysis. the mismatch between regional responsibility for Third, rationalizing civil service salaries will likely public service delivery and the lack of regional have no results on corruption unless it is autonomy over the civil service that delivers those accompaniedby the introduction of strong rewards services. and punishments that significantly shift incentives in the civil service. Establishing clear ethical To get started on civil service reform, there are a codes and administering them through an number of necessarymeasures beyondthe scope of independent ethics commission within the civil the White Paper. First, there i s urgent need to service and ensuring that corrupt behavior is establish a proactive leadership for a civil service punished severely will be the most effective check reform process. Establishing the Civil Service on corruption. Fourth, though transition to a rules- Commission, as envisaged under Law 43/1999, based meritocratic civil service will take time, and staffing the Commission with people of opening the top positions in regions to external integrity and providing it broad autonomy to move recruitment and staffing them with men and on a reform agenda, could provide such a vehicle. women of the highest quality will be the fastest Second, there i s a need to disentangle the complex way to change the culture of the civil service. and confusing web of pay and employment Such measures would address some of the more Box 4.3. Integrity pacts inSolok Kabupaten Solok has invented a "Pact of Integrity" to be signed by civil servants to achieve greater accountability for its public spending and its civil servants. The Pact will be implemented from January 2004. The Pact of Integrity in Solok i s an expansion of the compulsory Pacts of Integrity to be signed in all public procurement (Keppres 80/2003). Both public servants and bidders in a procurement process sign a pledge that no bribes, gifts, favors or other advantages will be demanded, accepted or offered. I t i s supported by GTZ's Good Governance Project. Civil society organizations will monitor through scrutiny of relevant documents and decisions. In the first year local CSOs and the Kabupaten administration will get assistance from Transparency International (TI) and Indonesian Procurement Watch (IPW) to monitor and implement the pact. A local government regulation (Perda) on transparency and public participation, planned as one of the entry requirements for the World Bank financed local governance project (ILGRP),provides the legal framework for civil society organizations' access to monitor government decisions. All payments made will be disclosed. Arbitration is used as a conflict resolution mechanism. A pre-announced set of sanctions for any violation of their commitments or undertakingby a bidder or public servant involved will be used to discipline failures. InSolok, the `Pact of Integrity' is extended beyond procurement matters and it includes all civil servants under the jurisdiction of the Kabupaten (currently about 3500). The Pact itself comprises a range of good governance principles such as accountability, transparency, participation, surveillance, efficiency and effectiveness. For their pledge to be "clean and uncorrupt" the public servants will receive a payment incentive. The level of payment will initially be determined by the individual's position level in the career system. The amount i s made transparent in a publicly available chart. The total incentive scheme i s at the level of the accumulated personnel costs related to projects in the development budget. Starting with the budget year 2004 the routine budget and the development budget will be merged and this i s expected to increase the transparency in budget spending and the Pact of integrity can be developed further and more easily monitored in the new budget system. At a later stage it is planned to include the private sector, the police, the judiciary and the local parliament to build an `integrity system'. 48 deep-rooted problems that systematically weaken Indonesia's public administration. A CCOUNTABZLZTYAND THE WHITEPAPER Though this chapter focuses on only three areas covered by the White Paper that could promote greater accountability for improved governance in Indonesia, it must be recognized that one important step towards such accountability has already been taken by the very formulation and publication of the White Paper itself. The White Paper is a mechanism designed to commit the government in a transparent way to a set of policies in what promises to be a challenging environment over the next 18 months. A key test of governance in Indonesia will be whether the government can implement the policies set out in the White Paper and live up to its commitments. One already positive sign i s the extensive monitoring efforts that are being mobilized to hold the Government accountable to these commitments. Beyond the Government's own monitoring team under the Coordinating Minister for the Economy, which has put monthly monitoring reports of the White Paper on the web, independent monitoring efforts are being developed by representatives of the private sector, universities and other research institutes. These efforts are themselves important examples of the development of stronger accountability framework inIndonesia, which will have an impact on governance outcomes. 49 CHAPTER REDUCINGPOVERTY 5: Macroeconomic stability and modest growth have recoveries from some regions inthe East. brought income poverty back to pre-crisis levels. But progress is lagging in other aspects of poverty While the headcount index i s relatively low, many reduction, with basic services are often still failing Indonesian households who are not currently poor for the poor. are vulnerable to falling into poverty. This is due to the clustering of a large share of householdsjust The White Paper reconfirms the Government's above the poverty line: 7.4 percent of Indonesians commitment to develop a comprehensive Poverty fall under the dollar-a-day poverty line whereas Reduction Strategy Paper (PRSP) by mid-next 53.4 percent fall under the two dollars-a-day year, and presents a number of measures that can poverty line. (The national poverty line is create opportunity for the poor, improve their currently approximately $1.55 a day.) human capital, and safeguard the vulnerable. The success of the forthcoming PRSP will depend on whether it will ultimately yield an enhanced Themajority of poverty focus of government policies and programs. To this end, the strategy needs to be lndonesians earn less integrated with existing budgeting and planning procedures and sector strategies. The measures to improve services for the poor included in the than two dollars a day White Paper need to be complimented with those that make decentralization work, and improve The national headcount index masks wide governance. disparities in poverty incidence across the country. While the poverty rates are 15.7 percent and 4 INDONESIA 'SPOVERTY CHALLENGE percent on Java and Bali, the Eastern Islands lag, with poverty rates of 36.8 percent (Figure 5.1). With inflation and the exchange rate under control, The severity of poverty is also more serious in the expenditure poverty dropped back to pre-crisis Eastern Islands, with the depth of poverty at 7.8 levels from 27 percent in 1999 to 16 percent in percent in NTT/NTB (Nusa Tenggara 2002, the latest number currently available (Table Timurmarat) provinces compared to 2.5 percent in 5.1). The reduction in expenditure poverty since Java and Bali. Despite regional disparities, 78 the crisis appears to have benefited almost all percent of Indonesia's expenditure poor live in regions:'indeed all but one province captured inthe Java, Bali, and Sumatra. Addressing poverty in 2002 household survey experienced an Indonesia will not only require efforts of bringing improvement in poverty rates, including strong along the lagging regions but also tackling the poor innon-laggingregions. Table 5.1. Changeinpoverty headcountindexfrom 1996 to 2002 (percentage) Moreover, other dimensions of poverty remain 1996 1999 2002 serious in Indonesia. Some 53 percent of Nationalpoverty lines Indonesians lack access to at least one of basic Gov of Indonesia 17.5 23.4 18.2 services (Figure 5.2), particularly with respect to WorldBank 15.7 27.1 16.0 water and sanitation. Inadequate service delivery InternationalPoverty Lines i s failing the poor and i s itself a cause of poverty and deprivation in Indonesia. This i s also reflected 1dollar a day 7.8 12.0 7.4 in poor MDG outcomes, especially in health. ' 2 dollar a day 50.5 65.1 53.4 Women in particular suffer problems of access to Source: World Bank and BPS Staff estimates. quality services and bear the consequences: for example, Indonesia's maternal mortality rate i s two 50 Figure 5.1. Where are the poor? Headcount Index: H 0.236t00.4 H 0.194to0.236 (5) (6) Source Susenas 2002 0.077to0.194 (5) 1 0 0.041to0.077 (6) 0 NotinSample (3) times higher than the Philippines and five times Tenggara having low levels of service access in higher than Vietnam. Directed efforts to improve general. Overall, Bengkulu, West Kalimantan, the delivery of basic services i s thus a critical facet Central Java, East Java and Nusa Tenggara lag of any effort to reduce multidimensional poverty in behind other provinces with respect to Indonesia. Traditional attempts at targeted income multidimensional poverty measures. transfers or relying only on expanding access to credit will not solve these problems. Regional multidimensional poverty maps show Figure 5.2. Many Indonesians lack access to basic services strong geographic correlations between expenditure poverty measures and other measures households without access to ' of poverty at the provincial level, with Nusa water households without access to sanitation 53percent of children age 12-15not enrolled injunior high school Indonesians lack access children age 7-12 not in primary school b births attended by traditional to at least one of basic healers 0 10 20 30 40 services percent share of households lacking sewices Source: World Bank Staff calculations. 51 ADDRESSZNGTHECHALLENGE.THE WHZTE It will be developed through a participatory PAPER ANDBEYOND approach, providing an opportunity for all Indonesian stakeholders, including the poor The White Paper (Table 5.2) addresses poverty themselves, to have a say inits formulation. through various channels: continued macroeconomic stability, improved investment Indonesia is making progress in developing its climate, strengthened governance and institutions, Poverty Reduction Strategy. In early 2003, and increased financial capability of regions to Indonesia completed its interim PRSP (I-PRSP) deliver the public services they are responsible for. which provided a road-map for completion of the While the White Paper is not intended to represent full strategy. The I-PRSP laid out four thematic the Government's comprehensive program for pillars that would support its full strategy: (i) poverty reduction, it does commit to developing a creating opportunities; (ii)empowerment; (iii) medium-term strategy for poverty reduction. The human capital development and capacity building; White Paper confirms the timeframe to develop the and (iv) social protection. Since then, the Poverty Reduction Strategy, both at the national Government has moved forward in setting up and regional levels, by May 2004. Strong multi-stakeholder task forces, with common terms commitment from the Government is needed to of reference, to address each of these themes. The institutionalize the poverty focus across sector development of the full Poverty Reduction ministries and to ensure effective implementation Strategy by the four task forces was launched by of a new strategy. the Coordinating Minister of People's Welfare in June 2003 in his position as Chair of the of the An EmergzngPovertyRedactionStrategyfor inter-Ministerial Poverty Reduction Committee. Zndonesza The four task forces report to the Core PRS Team In the White Paper, the Government reaffirms its (Tim Inti), which will be responsible for pulling commitment to develop a comprehensive, medium- together the final national PRS. term Poverty Reduction Strategy (PRS) by mid- 2004. The Government will need to ensure effective Such a strategy will address the multidimensionalpoverty issues facing Indonesia. management of the PRS process and a high level of political commitment to complete a useful Table 5.2. Poverty eradication measuresin White Paper Action plans outputs Date Develop povertyeradication strategy Nationaland localPoverty reductionstrategies; and put inplacepovertyeradication Central and local Poverty EradicationCommittee and Financial institutions. consultant to assist small enterprisesaccess the bankingsector. May-04 Increasefinancial capabilityof Improve DAK to assist lagging regions to improve basic regions. services. Jan-04 Increaseopportunities for Large scale land certification in 200 sub-districts and 50,000 entrepreneursand workers. households intransmigration areas. 2004 Increase farmer income by developing small and micro scale Empower the poor. enterprisefor 74,000 farmers. 2004 Increase Kecamatan Development Program, Urban Poverty Program, and Costal Area Developmentprogram. 2004 Put inplace cleanwater and sanitation for 1.5 millionpeople. 2004 Develop village infrastructurein4 districts. 2004 Put in place health services (medicine equipment and health Increaseskills of the poor. infrastructure)in383 districts. 2004 Put in place education services (scholarships and infrastructure) for 8.lmillion students. 2004 SocialSupportfor the vulnerable. Providefood needsfor the poor in 30 provinces. 2004 Source: World Bank staff based on Presidentialinstruction No.5/2003. 52 Poverty Reduction Strategy. A number of (KPKD) to develop subnational Poverty challenges will need to be addressed to reap the Reduction Strategies. But capacity in districts full rewards of a Poverty ReductionStrategy. i s low and basic planning and budgeting processes are not well institutionalized. The Ensure that participation does not come at the PRS Core Team would need to provide cost of substance. In setting up multi- guidance and best practice examples to stakeholder task forces to develop the PRSP, regional governments, drawing on the Indonesia i s beginning what could be a process experience o f pilot regional PRSs. Incentives that i s more participatory than many other and fiscal instruments can also be used to countries. While it is important that encourage regional governments in supporting participation goes beyond those actually on the the objectives and priorities of the national task forces, it i s also important to draw on PRS. strong technical and analytical inputs to the process, including from Bappenas (formally Beyond committing to developing the PRSP, the responsible for addressing cross-cutting issues White Paper details key short-term actions to for all four task forces). reduce poverty, within the framework of the emerging PRSP: (i)opportunity creation; (ii) Build upon existing sectoral strategies. Greater empowerment; (iii)human capital development effort i s required to bridge the gap between the and capacity building; and (iv) social protection. evolving PRS and sector strategies, focusing on how these strategies can be formulated to Oppurfunzty Creafion meet the needs of the poor. Growth has been the primary factor in reducing poverty between 1999 and 2002. If growth Integrate the PRS into the planning and accelerates from 4 percent to 5 percent by 2006, as budgeting process. This means that Bappenas, many as 4 million more people would be pulled the Ministry o f Finance and the sector out of poverty. The quality of growth-who Ministries need to be closely engaged with the benefits from growth-also matters. If income process. Indonesia's PRSP faces a particular distribution had not deteriorated between 1999 and challenge in that currently planning processes 2002, 12 percent of the population would be poor are in a state o f flux. There are uncertainties instead o f 16 percent. Two factors deserve about the operative planning instrument for a particular attention for a pro-poor growth strategy. new incoming Government in 2004. Currently Inrural areas, where most of the poor (78 percent) Bappenas i s developing a medium term plan live, the poor are increasingly reliant on off-farm and a long term plan, and a medium-term income which now constitutes 50 percent o f their expenditure framework i s being developed by total income. In urban areas, poverty i s largely an inter-ministerial group. On the other hand, shaped by lack o f jobs, with the urban the ongoing transition also represents an unemployment rate for men over three times that in opportunity to use the PRS as a framework for rural areas, and the urban unemployment rate for planning and budgeting. women greater than that for men. Measures to stimulate off-farm rural income and create jobs in Provide guidance, capaci9, and incentives to local governments in developing their PRS. 4 millionpeople would Indonesia i s developing its PRS in the context of a broad and evolving decentralization effort. Decentralization i s in itself an important be pulled out of element o f Indonesia's efforts to combat poverty. It i s in this context that the inter- poverty with 5percent ministerial Poverty Reduction Committee (KPK) mandated the establishment o f growth by 2006 subnational Poverty Reduction Committees 53 urban areas thus need to be part of the poverty Paper actions to develop infrastructure for the reduction agenda. poor-including development of village infrastructure and activities with strong The White Paper: While much of the White Paper infrastructure components, such as the Kecamatan focuses on issues of opportunity creation through Development Program (KDP), the Urban Poverty maintaining macroeconomic stability and Eradication Program (UPP) and the provision of improving the investment climate, three activities clean water and sanitation-are welcome. Two are identified to focus on the poor: land issues require further consideration in developing certification and policy; improving village an infrastructure programbeneficial to the poor. infrastructure; and increasing farmer incomes by developing small and micro-scale agribusiness. Figure 5.3. Low land registrationin Indonesia Land certificationand policy. Landconflicts and percent shareof registered land 1 disputes, highly concentrated ownership and tenure o f land, and lack o f legal protection o f poor people's rights over land adversely affect income and opportunities for the poor. Secure tenure increases access to credit." The Government has titled over a million parcels of land since 1997, increased capacity at the National Land Agency, Thailand Maiaysia Philippines indonesia and carried out a comprehensive review o f the policy and legal reforms needed to modernize the Source: World Bank. land system under democratic, pro-poor principles. However, providing appropriate access to forest First, additional resources are required. A land, accommodating communal use o f land in Strategic Expenditure Planning Module developed land titling, and accelerating land titling i s needed. by Bappenas since 1998 for the transport sector First, around 64 percent of Indonesian total land is estimates that a primary road network that classified by the Ministry o f Forestry as forest land maximizes economic benefit would require Rp. 6.5 and i s therefore administered under the Basic trillion per year. This i s well below the Rp. 3.3 Forestry Law of 1967 (UUPK). UUPK precludes trillion spent on roads in 2002 by the central individual land tenure despite the fact there are government. The shortfall i s 15-20 percent for private dwellings, farms, and even cities on this provincial roads and 30 percent for district roads. land. Moreover, some forest land overlaps with land that previously enjoyed traditional land rights Second, expanding and improving the rural road (adat). Second, a large share o f land off-Java i s network i s needed. In particular, village-to-market communal land and private titling o f this land may access roads are critical for the rural poor. work against the poor and increase conflict. Third, Kabupaten roads constitute 72 percent o f classified titling of non-forest land has been slow. Only roads and, when added to the large network o f about 25 percent of the nation's estimated 80 unclassified village roads, they make up 84 percent million land parcels have been registered in the 40 of all roads in Indonesia. But almost half o f the years since land registration began (Figure 5.3). If Kabupaten road network i s in poor or bad the current pace of registration continues, it would condition, and only 19 percent i s in good condition be difficult for land registration to catch up with (Figure 5.4). Moreover, there i s large inequality the growing number of parcels. between the poor and the well off in access to roads o f adequate quality (Figure 5.5). The Road infrastructure and the poor. Improving Government will clearly need to go beyond the road infrastructure to connect the poor with White Paper's commitment to develop village markets and services i s one o f the most effective infrastructure in four Kabupatens in four ways of promoting pro-poor growth. The White provinces. It has set up a Coordinating Team on Rural Infrastructure Development headed by the 54 Figure 5.5. Road accessis not equally distributed Coordinating Minister of Economic Affairs. However, this needs to be reflected in increased Percent 100 1 Percentage of peoplewho live in a spending allocations for rural infrastructure. 80 corrrrunity with asphalt road access Improving farmer incomes through smalVmicro 60 agribusiness. The White Paper appropriately highlights the need for action to increase farmer 40 incomes through small and micro-scale 20 agribusiness. However, it does not specify how the Government proposes to help develop such 0 businesses. The type o f assistance matters. 2 quintile 3 4 5 (rich) Improvements in land tenure security could help households access credit for small-scale Source: Staff estimates based on Susenas. agribusiness activities. Subsidized credit schemes have been conspicuous in their failure to help the rural poor, but pooling loans can improve access to EmpowermentandAccountabzlz2y credit to small poor borrowers. Corruption i s one o f the key issues in Indonesia today, and affects the poor disproportionately. Figure 5.4. Most roads indistricts are of Because of weak information, poor organizational inferior quality capacity, and lack o f skills, the poor are unable to take effective, systemic actions to demand higher levels of accountability. Municipal L Kabupaten The White Paper: The White Paper recognizes Opoor the importance o f empowerment. For that, it Provincial suggests scaling up community driven development programs aimed at enhancing the National voice, participation, and empowerment o f local -1 communities. Measures include expansion of the 0 20 40 60 80 100 Dercent share of roads Kecamatan Development Program (KDP), Source: World Bank,Public Expenditure Review, 2003. including to conflict areas, the Urban Poverty Program(UPP), including in Eastern Indonesia and a Coastal Area Development Program. Farmers would also benefit from stable prices o f agricultural commodities, which reduce risk and Demand-driven community and district These programs have facilitate investment decisions; however, if these development programs. been significant forces for both empowering prices are kept above market prices (e.g., through Indonesian citizens economically and socially, and import tariffs or licensing), they will lead to improving the quality o f local governance. They distortions and hurt poor consumers. can serve as a means for communities to make coherent demands upon and contribute to district- Small entrepreneurs also need skills for level reforminitiatives; used as methods to address diversifying into agribusiness and off-farm multiple dimensions o f poverty simultaneously; employment. The Government could assist by and provide a platform from which citizens and improving agricultural extension services, communities can link with service providers to get including training, and fostering voluntary linkages higher quality and more access to basic services between small and larger businesses. Small like water, health, and education. There i s ample landholdings and lags in productivity increases, as evidence that community-controlled projects are attested by low agricultural growth, means that off- much better maintained than top-down projects farm rural income sources will be increasingly important. 55 that are placed in communities with little promising local-level initiatives that have consultation. demonstrated an ability to reduce corruption and improve rule enforcement for the poor at the local Scaling-up community driven development level. Recent evidence has demonstrated that well- programs, however, will require special attention organized communities in which local leaders had to key factors in order to ensure sustainability and strong grassroots and civil society support were to maximize benefits. First, sustainability and local more successful in pursuing justice through the ownership can be enhanced if local governments court system and in reducing the amount of are required to commit time and resources for corruption associated with financial transfers, community development programs. Initial procurement, and construction activities. experience from KDP has shown that there i s significant interest on the part o f local Improve information flows. Laws 22/1999, governments to do so. Second, there i s a risk that 25/1999, and 28/1999require local governments to marginalized groups will not benefit from give citizens access to information on plans, expansion of C D D programs if insufficient time i s budgets and all other information to permit allocated to socialization and capacity building. adequate citizen oversight, though at present this i s Expansion should go no faster than the often not the reality. Governments must work with communities' ability to internalize the new citizens and civil society to create greater access to approaches. information through use of innovative tools such as websites, one-stop shops, and regional newsletters. Beyond the White Paper: While the White Paper Successful approaches can be codified and stresses community driven programs as the means expanded nationally. to empower the poor, Indonesia's poverty reduction strategy should also address broader Human Capital issues of empowerment and governance that have a Indonesia fares poorly relative to its Asian direct bearing on the poor. neighbors on social development indicators. Create clear national expectations and promote Beyond reflecting deprivation in human district-level reforms. The GO1 can institute development, poor social indicators adversely national campaigns that inform citizens o f their affect Indonesians' ability to take advantage o f rights to quality health and education services, opportunities in the labor market and Indonesia's which will stimulate demand for improved ability to compete. services. In addition the MDGs can be dkaggregated by income group and/or gender, and they can be regionalized to create more appropriate Indonesia's education and realistic targets for different regions. Local governance reform programs promoted by the quality is behind its central government (such as the Government's ILGR program) can work with reform-minded neighbors district governments to create incentives for improved planning, budgeting, and improved implementation o f laws. Rewarding reformist local governments can strengthen the hand o f local champions who want to pursue a reform agenda. Improvements in service provision, particularly in These rewards can include grants, enhanced health and education, are critically needed; but the recognition, more interest from potential investors, focus should be on quality rather than quantity. In and greater popularity for elected representatives. education, whereas gross primary enrollment rate exceeds 100 percent, test scores o f Indonesian Improve the predictability and fairness of rule students are low compared to other countries enforcement. The justice reform agenda i s (Figure 5.6). Moreover, only between 21 and 35 summarized in Chapter 4, but in addition there are percent o f primary school teachers in Sulawesi 56 have the minimum certificate level required; and needs; and remote and poor districts may absenteeism rates for primary school teachers i s experience drug shortages due to delayed delivery. about 20 percent (Box 5.1). Improving outcomes Drug procurement policies thus need to be will require more efficient management, better revisited, and the role of the central government in sectoral policies at the regional level, and ensuring quality of procured drugs needs to be improved accountability measures so that service established. providers have incentives to deliver quality services to their clients. Health equipment and infrastructure. Many poor families do not have access to good basic Figure 5.6. Indonesiais behindits neighborsin medical services, as more and more doctors and science and mathematicsachievements midwives move out o f remote areas and poor districts upon completion o f their contract with Philippines government. Moreover, a very small share of poor Indonesia families have access to hospital care. Targeted Thailand measures would work better for the poor than Malaysia general expansion of health equipment and Japan infrastructure. The central government could set up and fund a central medical corps for Hong Kong deployment in areas experiencing difficulties in Taiwan attracting qualified medical and paramedical Korea personnel, in close collaboration with the Singapore provinces. 0 200 400 600 800 meanscore Scholarships. As donor funding of the Source: Trends in International Mathematics and Science Study Scholarship and Grant Program (SGP) will 1999. terminate soon, the Government has committed to continue supporting this program. It will increase the number of scholarships for all levels o f The White Paper: The White Paper emphasizes students, and will cover marginalized youth the need to increase the skills of the poor, and for (dropouts, unemployed youth). The government's that it suggests putting in place specific health continuation of this program is welcome. services (medicine, equipment, and health Nevertheless, the program can be improved by infrastructure) and education services (scholarships transferring the targeting, implementation, and and infrastructure). While the areas selected are monitoring functions to the local level. More important, the White Paper does not specify what effective targeting can be achieved through the needs to be done in these areas. sub-district and school committees, and independent monitoring can be undertaken at the Medicine. Increasing access to appropriate quality community level to enhance accountability. medicine for the poor i s an important issue, but Moreover, the engagement o f the district and other needs to be addressed in tandem with drug local authorities in the implementation process procurement policy. Post decentralization, district needs to be strengthened; lack of local ownership and municipal governments undertake their own o f the program results in flawed targeting, drug procurement. This allows districts to ensure monitoring evaluation, follow up and procurement of drugs according to local needs, but sustainability.and it raises several concerns: districts may opt to get the cheapest drugs, undermining quality; districts Education infrastructure. Considering the large cannot take advantage o f economies of scale from percentage of schools (especially at the primary pooled procurement; remote and poor districts will level) that urgently needed rehabilitation, the have to pay a higher price for the same drugs government's commitment to support which can lead to under-financing o f real drug infrastructure i s timely. To improve the effectiveness o f block grants to schools, better 57 accountability measures can be introduced. Pilot functions are best undertaken at the national and projects involving communities as managers of provincial level. For example, a central authority school rehabilitation and construction funds have could coordinate the education system's strategic been successful. directions, set and maintain core education standards and performance measurement, and Beyond the White Paper: Decentralization will provide specialized services that may be shared likely affect the quantity and quality o f education across districts. and health, as the responsibility for the delivery of these services was transferred to the districts (see Improve fiscal transfer mechanisms to ensure Chapter 1). Within this new framework, several well planned and implemented programs. areas require attention. District level planning i s complicated by the fact that the central government still finances a lot o f Set clear and well-defined functional district level expenditures in the social sectors. assignments for service delivery. Many Central health expenditures still constitute about 50 functions of different levels of government are not percent of development and 25 percent of routine yet specified or clarified. For example, district expenditures. Such central expenditure financing government i s responsible for hiring and paying of district expenditures should be incorporated into teachers in public schools, but compensation for the budget of the districts-for example through a civil servants i s set centrally, with districts central DAK transfer. The DAK can be used to providing supplementary benefits. This year the achieve outcomes deemed to be a priority at the vlinistry of Education recruited almost 200,000 national level. Box 5.1. The doctor is out... The 2004 World Development Report of the World Bank sponsored absenteeism surveys across countries. The survey results give one indication of the poor quality of service in health and education in Indonesia ". Among the countries surveyed, Indonesia ranks in the middle in terms of service-provider absence in education, and toward the bottom in health. The absenteeism rate among doctors in health clinics i s an astounding 42 percent. Ineducation, the average first-grade teacher attends school less than 3 hours a day, compared with 4.7 hours or more in each of the other (poorer) countries. What causes staff absence? In primary schools: Teachers are more likely to be absent if (i) they are contract teachers (contract teachers are not civil servants and earn barely more than a third the salary of their civil service counterparts); or (ii) they work in schools with poor infrastructure; or (iii) they work in districts that do not have an award program for recognizing high-performing teachers. In puskesmas (clinics): Medical staff are more likely to be absent if (i) they originally come from another province and have not requested this posting; or (ii) the facility has poor infrastructure, i s remote, and i s located in a district with less frequent inspections. 1/ The Indonesia survey was fielded by SMERU and relied on unannouncedvisits to 137 primary schools (100 of which were run by the government) and 100puskemas, selectedrandomly from 10 randomly selectedkabupatens and kotas. Each facility was visitedtwice-once inNovember 2002, and a secondtime inMarch2003. Source: World Bank andSMERU (preliminaryresults) contract teachers to be deployed in districts. The assignment of functions and roles should be guided Strengthen monitoring of health and education by considerations of economies of scale, optimal services. With decentralization, many of the market size, and the need to balance institutional monitoring systems have deteriorated. responsibilities borne by levels o f governments Districts are often not reporting basic data on with resources available to them. Moreover, some service delivery to the central government. 58 Without access to information, it i s impossible to national poverty line) and $2 per day. The poor effectively implement health and education policy are vulnerable to different shocks, most that addresses the needs o f the districts and pursues importantly to increases in rice prices (their main national priorities. The information system needs staple), catastrophic illness o f household members, to be revived, although it should be different from and crop failure (Figure 5.7). In addition, an the pre-decentralization system-if performance- important source o f vulnerability i s conflict and based budgeting becomes a tool in defining central related insecurity in many regions. Gender allocations to districts, there will be a strong vulnerability i s also a key issue, as women on incentive for districts to overstate performance. average earn less than men and have more difficulty in securing good jobs, regardless of Establish service standards. Efforts are sector and level of education. underway to determine minimum service Reducing vulnerability of households to poverty standards. In education, a list o f such standards will mean lifting more people further above the (covering issues relating to organization, expected poverty line through growth, mitigating the sources learning by students, infrastructure, teaching of vulnerability such as conflict and natural methods, staffing, financing and community disasters, and enhancing informal and formal participation) has been drafted and an accreditation coping mechanisms for households, including board to help schools achieve the minimum through well targeted safety net programs. standards i s planned. In health, a ministerial decree has been issued, setting minimum service The White Paper: Raskin. The White Paper standards for 25 areas and defining 7 additional commits to reduce vulnerability by continuing areas for which the districts are required to deliver delivery o f the Raskin rice subsidy program. This services according to their needs (covering i s a reformed version o f the emergency targeted immunization services, nutrition services, rice subsidy program (OPK) introduced in August prevention of communicable diseases, curative 1998 to protect food insecure low-income services, and other). In refining these minimum households and mitigate the impact of the financial standards, key principles can be used: (i)they crisis. The program, totaling around Rp. 4.8 should be firmly guided by the government's trillion in 2003, i s one of the main social protection overall budget constraint; (ii) if standards are to be transfer schemes currently implemented by the national minimum standards, the resource base of Government. The program i s set up to deliver 20 the poorest district needs to be sufficient to reach kilograms o f rice per household per month at a the standards, or additional resources need to be provided to the poorest districts to meet the Figure 5.7. The poor are vulnerable minimumstandards; alternatively they could be set to adverse shocks by provinces as dictated by the current law; (iii) minimumservice standards should be standards on 60% 1 services (and not on inputs or outcomes); and (iv) while minimumservice standards are potentially a good method of holding districts accountable for delivering on basic services, too much detail in these standards may undermine decentralization as it removes potential efficiency gains that districts could achieve by adjusting their education or EmploymentNo Staple Increase Death Crop failure Lower Available Price of Profits health service delivery to local circumstances. Rice Source: Local Level InstitutionsStudy, The World Bank, 2002. SociaZProtection Households in Indonesia are extremely vulnerable to falling into poverty: more than half of the subsidized price o f Rp. 1,000 per kilogram. As the population lives under US$2 per day, and more average rice consumption o f poor households i s than a third live on incomes between $1.55 (the around 43 kg per month, the subsidy i s not substantial, even among poor households. 59 Evaluation of the Raskin program shows the following: The consequence of poor targeting i s that, of the Rp.4.83 trillion allocated to BULOG in 2003, over 0 64 percent of all the poor receive Raskin rice half went as a subsidy to the non-poor, almost a (up from 57 percent under OPK), making the third was absorbed by BULOG in operating costs Raskin the social protection program with the and profits, and only 18 percent went to the poor largest coverage of poor. (Box 5.2). 0 35 percent of the non-poor also receive Raskin To improve the efficiency of targeting and reduce rice (through leakage); thus, 74 percent of the cost of the program, several measures can be those receiving the subsidy are not poor. considered. First, geographical targeting and self- targeting for example, by selling lower-quality rice 0 Smaller quantities are often distributed among through the program, could be introduced. Using a larger number of recipients. '"... This partly lower quality rice would also allow expansion of explains the wide coverage. Instead of the the program at lower cost. Second, the Box 5.2. Expensive subsidized rice The RASKIN program, operated by BULOG, provides subsidizedrice to poor families but at a substantial cost. In 2003 BULOG received a budget of Rp. 4.83 trillion to distribute 2.06 million tons of rice to 8.59 million households. Assuming BULOG paid the floor price of Rp. 2790/kg for the rice it purchased (in practice the market price was below this) and sold it to households at Rp. 1000/kg, then the subsidy to households was Rp. 3.69 trillion. Analysis of the 2002 Susenas indicates that only 26 percentof the Raskinrecipients are poor. This implies only 0.96 Rp. trillion, or 18percentof the Raskin's budget, is provided as a subsidy to the poor, with Rp. 2.73 trillion going to the non-poor. The remaining Rp. 1.56 trillion or 30 percent of the RASKIN budget is retainedby BULOG to cover their operatingcosts. Distribution of BULOG budget Subsidyreceivedby e poor OperatlngCosts and 18% BULOG Profit 30% 52% Source: Bulog "RencanaAlokasi OperasiPasar Khusus Beras, 2003-2004" except for marketprice (0. Fourth, the contracting arrangements and delivery costs associated with this program need to be carefully reviewed inlight of the significant budget 74percent of those being provided to Bulog as the contracted marketingagency to deliver this program. receiving Raskin are Beyond the White Paper: Developing a social not poor protection system tailored to meet the risks and vulnerabilities of the poor. Beyond the White But this alone is not the solution. Under the Paper, the Government needs to improve its current decentralized setting, there are two main effectiveness in helping the poor cope with shocks. challenges: (i) the ability of the central government Often the poor end up relying on coping to reach poor districts; and (ii) the ability of local mechanisms which undermine their long run government to reach their own poor, through pro- ability to escape from poverty. Improving the poor budgeting, policies and programs. effectiveness of government intervention in helping the poor requires mechanisms for better Fiscal instruments such as the equalizing grant risk management of economy-wide shocks and (DAU) and the special grant (DAK) will be effective reduction of the specific risks faced by important to the success of the central government the poor. Often the government does not intargeting and reaching poor districts. But much sufficiently support the poor to access markets that attention will be needed in improving the ability of could help them to overcome shocks. For example, local governments to reach their own poor. widespread extraction from female migrant Incentive mechanisms and capacity building will laborers reduces their ability to overcome poverty be required to establish systems for pro-poor intheir families. budgeting, spending, policies, and programs at the district level. Decentralization, as well as the To address vulnerability, a social protection system development of regional poverty reduction i s needed to reduce and mitigate risks on the one strategies, provide an opportunity and a challenge hand, and lessen the impact of shocks on the other. to improve the targeting of public spending and The Government has recently proposed a make progress inthis regard comprehensive social security system that would cover health insurance, work accident insurance, and unemployment insurance, as well as old age pension, public pension and life insurance. This The Govemment will imminently issue its MDG Report (not system would replace existing institutions such as available at the time this report went to print). Jamsostek, ASKES, and the health card. The goal l1 SMERU (2002) "An Impact Evaluation of Systematic Land i s to reach universal coverage, but the reforms Tilting under the Land Administration Project", SMERU Research report, Jakarta. would be phased over decades. A draft bill is still LIIThere i s a tendency at the village level to spread benefits under development. While such a system could widely based on cultural belief that all should benefit equally potentially play an important role in providing form the government's assistance. Olken (2003) estimates greater access to risk management tools for the that around 18 percent of the distributed rice was missing. He poor, it needs to be carefully thought through to reports that while some villages stole rice, some spread the rice to a larger number of recipients. He estimates that the avoid potential pitfalls. Wide consultation and welfare losses from corruption may have been large enough to discussion before embarking on such a venture will offset the potential welfare gains from the redistributive intent be critical in this regard. o f the program. Improving targeted pro-poor spending through decentralization. The Government also needs to ensure that the social protection programs are reaching the poor. Regional targeting is a convenient planning tool to improve targeting of social protection and public expenditure programs. 61 Table 1. Selected Social Indicators, 1990-2002 1990 1993 1996 1999 2000 2001 2002 Demography Population (million) 179.5 189.1 198.3 206.5 205.8 213.5 212.0 la Population ages 0 - 14 yr old (%) 36.5 34.9 32.0 31.7 32.6 32.2 29.8 Population ages 15 - 64 yr old (%) 59.6 61.3 63.8 64.0 63.0 63.6 65.6 Population ages 65t yr old (96) 3.9 3.8 4.2 4.3 4.4 4.1 4.7 Population growth rate(9%) 2.0 1.7 1.6 1.6 1.5 1.4 1.3 Population density (perKm2) 95 99 103 107 109 111 112 Urban population, % urban to total 30.9 34.0 37.1 39.4 42.1 44.0 44.4 Genderratio, male to 100fernales 99.5 99.5 99.1 99.1 99.8 99.1 99.7 Dependencyratio (%) 67.8 63.4 57.0 56.1 58.8 57.2 52.4 Education Elementaryschoolnet enrollment ratio, % of relevant aged group 83.2 91.5 94.8 92.7 94.9 92.9 92.6 Junior high schoolnet enrollmentratio, % of relevant aged group 40.5 48.6 59.2 60.8 60.5 60.9 Senior high school net enrollmentratio, % of relevant aged group 38.5 39.8 37.1 39.7 Population > 10yr oldnot completedprimary school (%) 37.5 41.8 40.1 35.4 34.0 34.4 31.3 Population > 10yr old finished primary andJunior high school (%) 48.8 46.3 45.0 47.0 47.7 47.6 49.2 Population > 10 yr old finished high schooland college(%) 13.7 11.9 14.9 17.6 18.3 18.0 19.5 Adult literacy rate 81.5 83.3 85.3 88.4 89.9 89.3 90.7 Health Life expectancyrate 62.5 62.7 63.2 65.5 68.0 Fertilityrate, births per woman 3.1 2.9 2.8 2.6 2.5 Infantmortalityrate,per 1000live births 63.5 58.1 56.0 46.0 44.0 4.1 Mortalityrate of children < 5 yr old,per 1000 86.4 78.1 70.4 59.6 44.7 Children< 5 yr old that have good nutrition(%) 54.2 55.5 63.9 69.7 71.1 69.1 Children< 5 yr old that hadbeenimmunized (%) 69.3 76.3 88.2 89.9 90.1 Number of medicaldoctor per 100,000 population 10.4 10.7 10.8 13.2 12.6 Housing and Sanitation Householdwith access to piped water (%) 12.9 14.7 16.7 18.6 18.6 18.3 18.3 Householdwith access to own septic tank (%) 17.9 22.0 26.1 30.4 28.5 38.5 39.7 Householdwith electricity (%) 46.8 55.3 72.2 83.7 86.3 86.3 84.7 Labor force Employed (%) 55.9 55.1 55.5 62.9 63.6 63.0 61.2 Lookingfor work (%) 1.4 1.6 2.9 4.3 4.1 3.7 4.0 Labor force participation (%) 57.3 58.0 58.3 67.2 67.8 68.6 67.8 Unemploymentrate (%) /b 3.2 4.3 4.9 6.4 6.1 8.0 9.1 Working children in 10-14year old group (%) 9.5 10.8 7.9 6.9 4.6 4.5 4.0 Poverty and ineauality Number of peopleunderpoverty line (million) IC 27.2 25.9 34.5 48.4 37.3 37.1 38.4 Population underpovertyline (%) /c 15.1 13.7 17.7 23.5 19.0 18.4 18.2 Expenditure share of the lowest40%, (%) 21.3 14.6 20.2 21.3 22.2 22.0 21.5 Expenditureshare of the middle 40%, (%) 36.8 41.6 35.0 37.0 37.9 37.5 38.2 Expenditure share of the highest20%, (%) 41.9 43.9 44.7 41.6 39.9 40.6 40.3 Gini Coefficient 0.32 0.34 0.36 0.32 0.33 0.32 0.34 /a Basedon population projections 1990-2000 /b Since2001 Sakemas follows a "relaxed" L O concept of openunemployment. /c Since 1996using Susenas 1998 definition of the poverty line (the "new" definition). ..:Data are not available Source: Central Bureau of Statistics Table 3. Povertv Line and Number of People Below the Povertv Line Year 1976-1996 PovertyLine Numberof Percentageof Year (Rp/capita/month) PeopleBelow the Poverty Line PopulationBelow the PovertyLine (million ) Urban Rural Urban Rural Urban+Rural Urban Rural Urban+Rural 1976 4,522 2,849 10.0 44.2 54.2 38.8 40.4 40.1 1978 4,969 2,981 8.3 38.9 47.2 30.8 33.4 33.3 1980 6,83 1 4,449 9.5 32.8 42.3 29.0 28.4 28.6 1981 9,777 5,877 9.3 31.3 40.6 28.1 26.5 26.9 1984 13,731 7,746 9.3 25.7 35.0 23.1 21.2 21.6 1987 17,381 10,294 9.7 20.3 30.0 20.1 16.1 17.4 1990 20,614 13,295 9.4 17.8 27.2 16.8 14.3 15.1 1993 27,905 18,244 8.7 17.2 25.9 13.5 13.8 13.7 1996 38,246 27,413 7.2 15.3 22.5 9.7 12.3 11.3 Year 1996-2002 /a PovertyLine Numberof Percentageof Year (Rplcapitatmonth) PeopleBelow the PovertyLine PopulationBelow the PovertyLine (in million ) Urban Rural Urban Rural Urban+Rural Urban Rural Urban+Rural 1996 42,032 31,366 9.6 24.9 34.5 13.6 19.9 17.7 1998Ib 96,959 72,780 17.6 31.9 49.5 21.9 25.7 24.2 1999IC 92,409 74,272 15.7 32.7 48.4 19.5 26.1 23.5 2000/c 91,632 73,648 12.1 25.2 37.3 14.6 22.1 19.0 2001/c 100,011 80,382 8.6 29.3 37.9 9.8 24.8 18.4 2002lc 130,499 96,512 13.3 25.1 38.4 14.5 21.1 18.2 /a Using BPS 1998 definition of the povertyline (the "new" definition). Ib Basedon Susenas of December 1998. IC RegularSusenas. Basedon Source: CentralBureauof Statistics. Table 4. Populationand Population Growth Rates by Province, 1971-2002 Region Population (thousandperson)/a 1971/b 1980 1990 1995 2000 2002 /C 1971-19801980-19901990-2000 Java 76.086 91.270 107,581 114,980 121,293 124,332 - - - 2.0 1.7 1.2 DKIJakarta 4,579 6,503 8,259 9,144 8,361 8,382 4.0 2.4 0.1 West Java 21,624 27,454 35,384 39,340 35,724 37,157 2.7 2.6 0.1 Banten 8,098 8,619 Central Java 21,877 25,373 28,521 29,691 31,223 31,786 1.7 1.2 0.9 DIYogjakarta 2,489 2,751 2,913 2,917 3,121 3,163 1.1 0.6 0.7 East Java 25,517 29,189 32,504 33,889 34,766 35,225 1.5 1.1 0.7 Sumatra 20.809 28,017 36.507 40.984 43.269 44.846 - - - 3.4 2.7 1.7 Bangka BelitungIslands 900 917 Lampung 2,777 4,625 6,018 6,680 6,731 6,889 5.8 2.7 1.1 Bengkulu 519 768 1,179 1,418 1,564 1,656 4.5 4.4 2.9 South Sumatra 3,441 4,630 6,313 7,239 6,899 7,226 3.4 3.1 0.9 Riau 1,642 2,169 3,304 3,923 4,948 5,383 3.1 4.3 4.1 Jambi 1,006 1,446 2,021 2,383 2,407 2,494 4.1 3.4 1.8 West Sumatra 2,793 3,407 4,000 4,334 4,249 4,298 2.2 1.6 0.6 North Sumatra 6,622 8,361 10,256 11,144 11,642 11,942 2.6 2.1 1.3 Aceh 2,009 2,611 3,416 3,863 3,929 4,041 3.0 2.7 1.4 Kalimantan 5.155 6.723 9.100 10,520 11.307 11.821 - - - 3.0 3.1 2.2 West Kalimantan 2,020 2,486 3,229 3,650 4,016 4,198 2.3 2.6 2.2 Central Kalimantan 702 954 1,396 1,636 1,855 1,966 3.5 3.9 2.9 South Kalimantan 1,699 2,065 2,598 2,904 2,984 3,068 2.2 2.3 1.4 East Kalimantan 734 1,218 1,877 2,330 2,452 2,589 5.8 4.4 2.7 Sulawesi 8.528 10.409 12.521 13,775 14.881 15.417 - - - 2.2 1.9 1.7 Central Sulawesi 914 1,290 1,711 1,946 2,176 2,287 3.9 2.9 2.4 North Sulawesi 1,719 2,115 2,478 2,655 2,001 2,052 2.3 1.6 -2.1 South Sulawesi 5,181 6,062 6,982 7,578 8,051 8,284 1.8 1.4 1.4 Southeast Sulawesi 714 942 1,350 1,596 1,820 1,935 3.1 3.7 3.0 Gorontalo 833 859 Other Islands 8.630 11,072 13.672 15.035 15.091 15.587 - - - 2.8 2.1 1.o Bali 2,120 2,470 2,778 2,900 3,150 3,230 1.7 1.2 1.3 West NusaTenggara 2,203 2,725 3,370 3,655 4,009 4,152 2.4 2.1 1.8 East NusaTenggara 2,295 2,737 3,269 3,588 3,823 3,945 2.0 1.8 1.6 Maluku 1,089 1,411 1,858 2,095 1,163 1,165 2.9 2.8 -4.6 NorthMaluku 732 739 Irian Jaya 923 1,174 1,649 1,954 2,214 2,356 2.7 3.5 3.0 Indonesia 119,208 -146.935 178,631 195,294 205.841 212,003 - - - 2.4 2.0 1.4 /a Basedon Population Census 1971, 1980, 1990, 1995and 2000. /b Includes adjustment for the exclusion of rural Irian Jaya. /c Projections. ..: Dataare not available. Source: Central Bureau of Statistics. Table 5. Labor Force Participation bv Province (%), 1996-2002 Region 1996 1997 1998 1999 2000 2001 2002 - Java 57.7 58.0 65.5 66.7 67.O 67.8 67.1 DKIJakarta 51.2 53.1 58.2 60.2 61.6 63.7 60.8 West Java 52.5 51.7 60.4 61.9 61.9 64.6 63.3 Central Java 62.5 61.4 71.2 72.2 72.7 71.9 71.2 DIYogjakarta 61.3 63.0 67.7 69.6 72.6 70.2 70.2 East Java 60.9 60.8 69.8 69.8 68.9 69.2 68.9 Sumatra 58.2 57.8 68.4 66.9 68.5 69.0 68.0 Lampung 60.6 57.5 71.6 68.5 71.0 72.1 70.3 Bengkulu 65.3 63.4 74.9 74.1 74.9 74.7 70.9 South Sumatra 57.3 57.5 68.4 69.8 69.4 70.9 70.5 Riau 54.5 55.1 63.7 61.5 63.4 65.2 62.7 Jambi 56.9 55.0 66.8 65.9 65.6 67.7 68.0 West Sumatra 55.7 56.7 66.4 64.8 66.0 67.3 65.4 North Sumatra 58.3 58.5 68.4 69.0 70.1 70.5 70.0 Aceh 57.0 58.5 66.7 61.7 66.4 64.2 61.8 Kalimantan 62.1 61.3 69.5 69.4 70.9 69.9 70.3 West Kalimantan 61.7 61.4 69.0 69.6 72.3 70.3 71.9 Central Kalimantan 65.1 64.1 69.4 70.2 70.8 70.1 69.5 South Kalimantan 64.5 65.5 72.9 73.0 72.6 72.5 74.2 East Kalimantan 57.0 54.4 66.8 64.9 66.8 66.2 63.7 Sulawesi 57.6 57.7 65.2 65.1 62.8 65.8 64.1 Central Sulawesi 55.8 55.5 60.1 61.0 71.6 71.5 71.7 North Sulawesi 61.8 62.3 70.4 70.4 58.8 61.4 60.9 South Sulawesi 54.1 52.5 61.5 60.2 60.3 63.9 62.3 Southeast Sulawesi 58.7 60.7 68.9 68.9 69.6 74.2 69.3 Other Islands Bali 70.1 70.8 76.8 76.4 78.0 79.5 76.9 West Nusa Tenggara 63.5 65.5 70.8 72.1 72.5 74.5 72.4 East Nusa Tenggara 65.4 65.3 74.1 73.4 75.8 76.9 78.5 Maluku 55.0 53.8 64.8 67.3 65.5 65.6 Irian Jaya 63.8 66.6 75.5 76.8 78.0 78.1 76.7 Indonesia 58.3 58.0 - - - - - 66.9 67.2 67.8 68.6 67.8 ..: Data are not available. Source: Central Bureau of Statistics. E 8 E E m h E 8 2j M h .-C - 3U '6 z s 3 E % hi.g -- '6 'B C 2 Table 7. RegionalMinimumWage bv province 1996-2003 (Rupiah thousand/Month) Region 1996 1997 1998 1999 2000 2001 2002 2003 - Java DIUJakarta 156 173 199 231 344 426 591 632 West Java 156 173 199 230 230 245 281 320 Banten 475 Central Java 102 113 130 153 185 245 315 340 DIYogjakarta 96 107 123 130 194 238 322 360 East Java 120 133 153 182 202 220 245 282 Sumatra Lampung 114 126 145 160 nla 240 310 350 Bengkulu 116 128 147 150 173 240 295 330 South Sumatra 116 128 147 170 196 255 332 404 Riau 138 152 174 218 425 329 394 438 Jambi 108 120 138 150 173 285 304 390 West Sumatra 108 119 137 160 200 250 385 435 North Sumatra 138 151 174 210 250 341 464 505 Aceh 116 128 147 171 265 300 330 425 Kalimantan West Kalimantan 114 127 146 175 228 305 380 400 Central Kalimantan 125 138 159 195 nla 362 362 425 South Kalimantan 114 125 144 166 200 295 378 425 East Kalimantan 138 153 176 194 233 300 500 540 Sulawesi Central Sulawesi 96 107 123 150 203 245 350 410 North Sulawesi 108 118 136 155 186 372 438 495 South Sulawesi 102 113 130 148 200 300 375 415 Southeast Sulawesi 110 121 139 160 210 275 325 390 Gorontalo 410 Other Islands Bali 128 142 163 187 190 310 341 341 West Nusa Tenggara 98 108 124 145 180 240 320 375 East Nusa Tenggara 96 107 123 143 184 275 330 350 Maluku 123 136 156 180 180 230 499 370 North Maluku 322 Papua 155 170 196 225 315 400 530 600 ..:Data are not available. Source: Ministry of Manpower (from various decrees). Table 8. GrossDomesticProduct bv Industrial Origin at Current Market Prices,1997-2003 (Rp. Billion) 1997 1998 1999 2000 2001* 2002** 2003** Q1 Q2 Q3 1.Agriculture, Forestry & Fishery 101.009 172,828 215,687 217,898 246,298 281,325 76,693 74,437 77,305 a. FarmFoodCrops 52,189 91,346 116,222 112,661 126,065 141,137 45,381 37,935 37,402 b. Non-FoodCrops 16,447 33,290 35,967 33,745 37,491 41,919 7,441 11,830 14,202 c. Livestock& ItsProducts 11,688 15,744 23,761 27,035 30,438 34,809 9,072 9,028 8,946 d. Foresuy 9,807 11,700 13,804 14,948 15,649 16,849 4,413 4,824 5,260 e. Fishery 10,878 20,748 25,933 29,510 36,655 46,610 10,387 10,820 11,496 2. Miningand Quarrying 55,562 120,329 109,925 175,263 191,762 191,827 43,515 39,980 43,832 a. Oil and GasMining 34,037 74,884 72,425 129,221 131,878 131,657 28,015 23,723 25,517 b. Non-Oil-GasMining 11,192 35,460 27,696 34,496 45,692 43,480 10,929 11,589 13,452 c. Quarrying 10,333 9,985 9,804 11,546 14,193 16,690 4,572 4,668 4,863 3. Manufacturing 168,178 238,897 285,874 314,918 362,031 402,601 104,860 104,493 106,923 a. Oil and Gas Industry 15,622 33,172 35,128 54,280 56,137 56,679 12,773 11,412 11,711 (1) Oil and GasRefinery 8,116 15,092 16,321 22,603 26,478 32,389 7,138 6,975 7,156 (2) LiquefiedNaturalGas (LNG) 7,506 18,080 18,807 31,677 29,659 24,289 5,635 4,437 4,555 b. NonOil and Gas Industry 152,556 205,725 250,746 260,639 305,894 345,923 92,087 93,081 95,212 (1) Food,Beverages& Tabacco 69,560 117,821 152,907 143,063 162,907 182,286 46,916 47,181 48,136 (2) Textile, Leather Products& Footwear 16,866 16,951 17,410 21,044 24,197 26,565 6,760 6,790 6,881 (3) WoodProducts&Other WoodProducts 8,744 10,543 9,394 10,035 10,618 11,196 2,886 3,060 3,222 (4) Paper & Printing 6,000 8,539 9,265 1,085 7,298 8,182 2,304 2,310 2,371 (5) Fertilizers,Chemicals & RubberProducts 17,544 24,129 32,247 38,509 48,573 59,675 17,490 18,540 19,142 (6) Cement& NonMetallic Mineral Products 5,082 5,306 5,896 1,554 10,400 13,448 3,717 3,743 3,608 (7) Iron& Basic Steels 5,773 6,614 8,092 9,820 10,509 10,807 2,817 2,598 2,729 (8) TransportEquipment,Machinery& Apparatus 22,038 15,133 14,859 22,846 30,476 32,667 8,891 8,557 8,814 (9) Other ManufacturingProducts 949 690 677 681 915 1,095 306 302 308 4. Electricity, gas, and water 7,832 11,283 13,429 16,519 21,184 29,101 8,307 8,867 9,489 a. Electricity 6,453 9,325 11,201 13,797 17,773 25,034 7,145 7,668 8,202 b. Gas 291 312 353 462 621 827 248 251 280 c. Water Supply 1,089 1,645 1,874 2,260 2,790 3,240 914 948 1,008 5. Construction 46,679 61,762 67,616 76,573 85,263 92,366 25,194 26,069 26,579 6. Trade, hotel, and restaurant 99,582 146,740 175,835 199,110 234,263 258,869 68,901 71,031 75,981 a. Wholesale &Retail Trade 77,543 116,689 140,589 159,385 187,996 205,792 54,750 56,488 61,259 b.Hotel 3,887 5,366 5,923 6,762 7,687 8,634 2,256 2,282 2,287 c. Restaurant 18,151 24,686 29,324 32,964 38,580 44,44? 11,894 12,261 12,435 7. Transportation & Communication 38,531 51,937 55,190 62,306 75,796 97,343 27,118 28,368 29,415 a.Transport 31,498 41,837 42,736 41,911 59,463 72,234 20,068 20,998 21,564 (1) RailRoadTransport 308 504 622 709 777 959 266 298 301 (2) RoadTransport 18,240 22,461 20,595 21,637 29,015 36,175 10,228 10,932 10,768 (3) SeaTransport 3,030 4,284 5,321 6,913 8,094 10,625 3,123 3,199 3,287 (4) River,LakeTransportandFerry 1,974 2,597 2,752 3,396 3,963 4,844 1,336 1,346 1,408 (5) Air Transport 2,543 3,664 3,673 4,288 5,370 5,923 1,652 1,624 1,922 (6) TransportServices 5,402 8,326 9,773 10,968 12,244 13,708 3,462 3,600 3,878 b.Communication 7,033 10,100 12,454 14,394 16,333 25,109 7,050 7,370 7,851 8. Financial, Rentalsand BusinessServices 54,360 69,892 71,220 80,460 91,438 105,622 28,174 28,172 28,840 a. Bank 20,297 25,823 24,426 28,555 33,061 39,833 10,746 10,635 11,052 b. NonBankFinancialInstitutions 4,534 5,405 6,139 7,143 8,437 9,319 2,473 2,482 2,496 c. FinancialSupportingServices 374 482 524 619 734 797 202 205 213 d.BuildingRent 17,715 23,140 24,397 26,939 29,585 33,174 8,715 8,764 8,860 e. BusinessServices 11,440 15,041 15,735 17,204 19,622 22,492 6,038 6,086 6,219 9. Services 55,962 82,087 104,955 121,871 141,362 150,957 40,141 42,525 46,391 a. GeneralGovernment 32,128 40,641 56,745 69,460 81,851 83,293 22,041 23,908 26,973 (I) GovernmentAdminisnationandDefense 23,004 28,449 38,493 44,499 51,818 52,509 13,763 14,944 16,859 (2) Other Government Services 9,124 12,192 18,252 24,961 30,033 30,785 8,278 8,965 10,114 b. Private 23,834 41,446 48,210 52,411 59311 67,664 18,101 18,617 19,419 (1)Social CommunityServices 4,164 5,951 7,161 8,253 9,975 11,761 3,199 3,278 3,662 (2) RecreationalandEntertainmentServices 1,373 2,084 2,167 2,416 2,682 2,960 735 145 777 (3) PersonalandHouseholdServices 18,297 33,412 38,883 41,743 46,855 52,943 14,166 14,594 14,979 GDP 627,695 955,753 1,099,732 1,264,919 1,449,398 1,610,012 422,904 423,942 444,757 GDPnon-oil 578,037 847,697 992,179 1,081,418 1,261,383 1,421,676 382,116 388,807 407,528 * Preliminaryfigures, ** Very preliminaryfigures. : : Source:CentralBureauof Statistics. Table 9.Gross DomesticProductbv IndustrialOriginat CurrentMarketPrices,shareof GDP. 1997-2003 (Percent of total) 1997 1998 1999 2000 2001' 2002** 2003** Q1 Q2 4 3 1.Agriculture. Forestrv & Fisherv 16.1 18.1 19.6 17.2 17.0 17.5 18.1 17.6 17.4 a. FarmFoodCrops 8.3 9.6 10.6 8.9 8.7 8.8 10.7 8.9 8.4 b. Non-FoodCrops 2.6 3.5 3.3 2.7 2.6 2.6 1.8 2.8 3.2 c. Livestock& Its Products 1.9 1.6 2.2 2.1 2.1 2.2 2.1 2.1 2.0 d. Forestry 1.6 1.2 1.3 1.2 1.1 1.o 1.0 1.1 1.2 e. Fishery 1.7 2.2 2.4 2.3 2.5 2.9 2.5 2.6 2.6 2. Mining and Quarrying 8.9 12.6 10.0 13.9 13.2 11.9 10.3 9.4 9.9 a. Oil and Gas Mining 5.4 7.8 6.6 10.2 9.1 8.2 6.6 5.6 5.7 b. Non-Oil-GasMining 1.8 3.7 2.5 2.7 3.2 2.7 2.6 2.7 3.0 c. Quarrying 1.6 1.o 0.9 0.9 1.0 1.o 1.1 1.1 1.1 3. Manufacturing 26.8 25.0 26.0 24.9 25.0 25.0 24.8 24.6 24.0 a. Oil and Gas Industry 2.5 3.5 3.2 4.3 3.9 3.5 3.0 2.7 2.6 (1) Oil andGas Refinery 1.3 1.6 1.5 1.8 1.8 2.0 1.7 1.6 1.6 (2) LiquefiedNaturalGas (LNG) 1.2 1.9 1.7 2.5 2.0 1.5 1.3 1.o 1.o b. NonOil and Gas Industry 24.3 21.5 22.8 20.6 21.1 21.5 21.8 22.0 21.4 (1) Food,Beverages& Tabacco 11.1 12.3 13.9 11.3 11.2 11.3 11.1 11.1 10.8 (2) Textile, Leather Products & Footwear 2.7 1.8 1.6 1.7 1.7 1.6 1.6 1.6 1.5 (3) WoodProducts& Other WoodProducts 1.4 1.1 0.9 0.8 0.7 0.7 0.7 0.7 0.7 (4) Paper & Printing 1.0 0.9 0.8 0.6 0.5 0.5 0.5 0.5 0.5 (5) Fertilizers, Chemicals& RubberProducts 2.8 2.5 2.9 3.0 3.4 3.7 4.1 4.4 4.3 (6) Cement & NonMetallic Mineral Products 0.8 0.6 0.5 0.6 0.7 0.8 0.9 0.9 0.8 (7) Iron& Basic Steels 0.9 0.7 0.7 0.8 0.7 0.7 0.7 0.6 0.6 (8) TransportEquipment,Machinery& Apparatus 3.5 1.6 1.4 1.8 2.1 2.0 2.1 2.0 2.0 (9) Other ManufacturingProducts 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 4. Electricity, gas, and water 1.2 1.2 1.2 1.3 1.5 1.8 2.0 2.1 2.1 a. Electricity 1.o 1.o 1.o 1.1 1.2 1.6 1.7 1.8 1.8 b. Gas 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 c. Water Supply 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 5. Construction 7.4 6.5 6.1 6.1 5.9 5.7 6.0 6.1 6.0 6. Trade, hotel, and restaurant 15.9 15.4 16.0 15.7 16.2 16.1 16.3 16.8 17.1 a.Wholesale&Retail Trade 12.4 12.2 12.8 12.6 13.0 12.8 12.9 13.3 13.8 b. Hotel 0.6 0.6 0.5 0.5 0.5 0.5 0.5 0.5 0.5 c. Restaurant 2.9 2.6 2.7 2.6 2.7 2.8 2.8 2.9 2.8 7. Transportation & Communication 6.1 5.4 5.0 4.9 5.2 6.0 6.4 6.7 6.6 a. Transport 5.0 4.4 3.9 3.8 4.1 4.5 4.7 5.0 4.8 (1)RailRoadTransport 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 (2) RoadTransport 2.9 2.4 1.9 1.7 2.0 2.2 2.4 2.6 2.4 (3) SeaTransport 0.5 0.4 0.5 0.5 0.6 0.7 0.7 0.8 0.7 (4) River,LakeTransportand Ferry 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 (5) Air Transport 0.4 0.4 0.3 0.3 0.4 0.4 0.4 0.4 0.4 (6) TransportServices 0.9 0.9 0.9 0.9 0.8 0.9 0.8 0.8 0.9 b. Communication 1.1 1.1 1.1 1.1 1.1 1.6 1.7 1.7 1.8 8. Financial, Rentals and BusinessServices 8.7 7.3 6.5 6.4 6.3 6.6 6.7 6.6 6.5 a. Bank 3.2 2.7 2.2 2.3 2.3 2.5 2.5 2.5 2.5 b.NonBankFinancialInstitutions 0.7 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 c. FinancialSupportingServices 0.1 0.1 0.0 0.0 0.1 0.0 0.0 0.0 0.0 d. Building Rent 2.8 2.4 2.2 2.1 2.0 2.1 2.1 2.1 2.0 e.BusinessServices 1.8 1.6 1.4 1.4 1.4 1.4 1.4 1.4 1.4 9. Services 8.9 8.6 9.5 9.6 9.8 9.4 9.5 10.0 10.4 a. GeneralGovernment 5.1 4.3 5.2 5.5 5.6 5.2 5.2 5.6 6.1 (1) GovernmentAdministrationandDefense 3.7 3.0 3.5 3.5 3.6 3.3 3.3 3.5 3.8 (2) Other Government Services 1.5 1.3 1.7 2.0 2.1 1.9 2.0 2.1 2.3 b. Private 3.8 4.3 4.4 4.1 4.1 4.2 4.3 4.4 4.4 (1) SocialCommunity Services 0.7 0.6 0.7 0.7 0.7 0.7 0.8 0.8 0.8 (2) Recreationaland Entertainment Services 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 (3) PersonalandHouseholdServices 2.9 3.5 3.5 3.3 3.2 3.3 3.3 3.4 3.4 GDP 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 GDP non-oil 92.1 88.7 90.2 85.5 87.0 88.3 90.4 91.7 91.6 * Preliminaryfigures, ** :Very preliminaryfigures. : Source:CentralBureauof Statistics. Table 10. Gross Domestic Product by IndustrialOrigin at Constant 1993Prices, 1997-2003 (Rp. Billion) 1997 1998 1999 2000 2001* 2002** 2003** 41 4 2 4 3 1.Agriculture, Forestry& Fishery 64,468 63,609 64,985 66,088 66,858 68,018 17,539 18,047 18,860 a. Farm FoodCrops 32,688 33,350 34,012 34,312 34,260 34,442 10,222 9,240 9,157 b. Non-Food Crops 10,497 10,502 10,702 10,871 10,979 11,328 1,833 3,162 3,858 c. Livestock & Its Products 7,483 6,440 6,837 7,052 7,313 7,537 1,920 1,899 1,902 d. Forestry 7,190 6,581 6,288 6,364 6,523 6,651 1,598 1,686 1,771 e. Fishery 6,610 6,737 7,146 7,489 7,783 8,060 1,966 2,060 2,173 2. Mining and Quarrying 38,538 37,474 36,866 38,730 38,895 39,768 9,857 10,160 10,551 a. Oil andGas Mining 23,920 23,340 22,137 22,658 21,537 21,574 5,147 5,162 5,453 b. Non-Oil-Gas Mining 7,646 9,678 10,358 11,459 12,503 13,082 3,399 3,667 3,723 c. Quanying 6,973 4,456 4,371 4,613 4,855 5,111 1,311 1,331 1,375 3. Manufacturing 107,630 95,321 99,058 105,102 109,290 113,672 28,545 28,801 29,569 a. Oil and Gas Industry 10,650 11,042 11,797 11,600 11,197 11,434 2,616 2,521 2,637 (1) Oil and Gas Refinery 5,926 6,310 6,607 6,843 6,958 6,917 1,476 1,464 1,491 (2) LiquefiedNatural Gas (LNG) 4,725 4,732 5,191 4,757 4,238 4,517 1,141 1,058 1,146 b. Non Oil and Gas Industry 96,979 84,278 87,261 93,503 98,094 102,238 25,928 26,280 26,932 (1) Food, Beverages& Tabacco 48,949 48,837 51,106 52,338 54,260 55,723 13,747 13,953 14,307 (2) Textile, Leather Products & Footwear 8,411 7,161 7,770 8,611 8,801 9,354 2,355 2,375 2,410 (3) Wood Products & Other Wood Products 5,710 4,254 3,678 3,925 3,856 3,845 968 1,008 1,049 (4) Paper & Printing 3,955 3,795 3,882 4,110 3,708 3,921 1,067 1,069 1,088 (5) Fertilizers, Chemicals & Rubber Products 11,908 10,002 11,029 12,181 13,362 14,544 3,974 4,119 4,228 (6) Cement & NonMetallic MineralProducts 3,273 2,299 2,419 2,573 2,882 3,205 829 829 830 (7) Iron & Basic Steels 3,148 2,301 2,296 2,597 2,566 2,652 651 622 644 (8) Transport Equipment, Machinery & Apparatus 11,073 5,277 4,735 6,766 8,184 8,445 2,187 2,156 2,226 (9) Other Manufacturing Products 552 353 347 402 474 548 151 149 151 4. Electricity,gas, and water 5,480 5,646 6,113 6,649 7,078 7,515 1,893 1,948 2,022 a. Electricity 4,463 4,608 5,013 5,459 5,818 6,164 1,532 1,587 1,646 b. Gas 270 225 227 271 297 343 97 95 102 c. Water Supply 747 813 873 920 963 1,008 264 266 273 5. Construction 35,346 22,465 22,036 23,247 24,259 25,255 6,447 6,569 6,767 6. Trade, hotel, and restaurant 73,524 60,131 60,094 63,449 66,888 69,303 17,644 17,874 18,320 a. Wholesale & Retail Trade 58,842 47,846 47,575 50,284 53,055 54,827 13,983 14,157 14,586 b. Hotel 2,729 2,486 2,593 2,669 2,760 2,796 694 707 709 c. Restaurant 11,952 9,799 9,926 10,495 11,073 11,679 2,967 3,010 3,026 7. Transportation & Communication 31,782 26,975 26,772 29,284 31,207 33,650 8,747 8,945 9,348 a. Transport 25,609 20,504 19,738 21,431 22,320 23,364 5,997 6,070 6,286 (1) RailRoadTransport 304 327 364 389 360 337 76 80 85 (2) RoadTransport 14,730 10,988 10,001 10,922 11,058 11,632 3,032 3,063 3,096 (3) SeaTransport 2,624 2,541 2,776 3,033 3,342 )3,529 871 892 920 (4) River, Lake Transport andFerry 1,665 1,521 1,510 1,613 1,669 1,725 440 443 448 (5) Air Transport 1,919 1,209 1,063 1,160 1,339 1,457 404 397 471 (6) Transport Services 4,366 3,918 4,023 4,313 4,552 4,684 1,175 1,196 1,267 b. Communication 6,173 6,471 7,035 7,854 8,887 10,285 2,750 2,875 3,062 8. Financial, Rentals and BusinessServices 38,543 28,279 26,245 27,383 28,389 29,963 7,781 7,816 7,878 a. Bank 16,195 10,058 8,686 9,151 9,656 10,297 2,717 2,730 2,753 b. NonBank Financial Institutions 3,499 2,897 2,949 3,043 3,173 3,284 835 839 844 c. Financial SupportingServices 262 218 226 236 243 251 61 62 64 d. Building Rent 11,826 9,476 8,906 9,188 9,418 9,947 2,567 2,574 2,591 e. BusinessServices 6,761 5,630 5,477 5,765 5,900 6,184 1,601 1,612 1,627 9. Services 37,935 36,475 37,184 38,001 38,827 39,597 10,009 10,098 10,177 a. General Government 23,617 21,888 22,251 22,555 22,795 22,887 5,736 5,758 5,787 (1) Government Administration and Defense 17,833 16,320 16,465 16,682 16,819 16,882 4,224 4,239 4,263 (2) Other Government Services 5,784 5,567 5,785 5,873 5,976 6,005 1,512 1,519 1,524 b. Private 14,318 14,588 14,933 15,446 16,032 16,710 4,273 4,340 4,389 (1) Social Community Services 2,767 2,512 2,638 2,751 2,880 3,031 781 792 803 (2) Recreational andEntertainment Services 788 693 647 684 707 742 182 183 190 (3) Personaland Household Services 10,764 11,383 11,648 12,012 12,444 12,936 3,311 3,365 3,397 GDP 433,246 376,375 379,352 397,934 411,691 426,741 108,461 110,259 113,492 GDPnon-oil 398,676 341,993 345,418 363,676 378,957 393,732 100,698 102,575 105,402 Table 11.Gross DomesticProductbv IndustrialOrigin at Constant1993 Prices,Growth Rates, 1997-2003 (Year-on-YearGrowthRate,Percent) 1997 1998 1999 2000 2001* 2002** 2003** Q1 4 2 43 1.Agriculture,Forestrv& Fisherv 1.0 -1.3 1.L -.e 1.9 1.0 1.7 4.9 2.1 0.8 a. FarmFood Crops -2.8 2.0 2.0 1.5 -0.8 0.5 5.3 0.1 2.6 b.Non-FoodCrops 1.4 0.0 1.9 0.2 2.4 3.2 6.5 9.1 -5.3 c. Livestock & Its Products 4.9 -13.9 6.2 3.3 3.6 3.1 2.0 1.2 0.9 d. Forestry 11.6 -8.5 -4.4 1.6 2.1 2.0 2.0 -1.3 2.3 e. Fishery 5.8 1.9 6.1 5.0 3.7 3.6 6.9 5.1 3.5 2. Miningand Quarrying 2.1 -2.8 -1.6 5.5 0.0 2.2 -1.3 5.1 7.4 a. Oil and Gas Mining -0.6 -2.4 -5.2 2.4 -4.9 0.2 -8.3 -3.8 4.1 b. Non-Oil-Gas Mining 5.2 26.6 7.0 12.2 7.6 4.6 8.5 20.7 13.1 c. Quarrying 8.8 -36.1 -1.9 5.7 5.1 5.3 5.9 5.9 6.5 3. Manufacturing 5.3 -11.4 3.9 6.0 4.1 4.0 2.1 2.5 2.4 a. Oil and Gas Industry -2.0 3.7 6.8 -1.7 -3.5 2.1 -8.5 -8.4 -8.5 (1)Oil andGas Refinery -5.8 6.5 4.7 3.6 1.7 -0.6 -11.8 -14.3 -16.6 (2) Liquefied Natural Gas (LNG) 3.3 0.2 9.7 -8.4 -10.9 6.6 -4.0 1.3 4.8 b.Non Oil and Gas Industry 6.1 -13.1 3.5 7.0 5.0 4.2 3.3 3.7 3.6 (1) Food, Beverages & Tabacco 12.3 -0.2 4.6 3.6 2.5 2.7 -1.4 0.3 1.4 (2) Textile, Leather Products & Footwear -3.8 -14.9 8.5 8.0 4.9 6.3 5.4 2.5 2.1 (3) Wood Products & Other Wood Products -2.9 -25.5 -13.5 6.9 -1.9 -0.3 4.0 4.8 7.0 (4) Paper &Printing 8.4 -4.0 2.3 2.6 -6.9 5.8 13.6 10.6 8.3 (5) Fertilizers, Chemicals & Rubber Products 3.5 -16.0 10.3 7.1 13.1 8.8 14.8 16.7 13.2 (6) Cement & NonMetallic MineralProducts 3.5 -29.8 5.2 5.5 13.0 11.2 11.3 7.9 1.5 (7) Iron&Basic Steels -0.5 -26.9 -0.2 13.1 -1.2 3.4 -0.5 -5.8 -4.7 (8) Transport Equipment, Machinery & Apparatus -1.1 -52.3 -10.3 43.5 20.4 3.2 6.2 3.2 2.5 (9) Other Manufacturing Products 6.8 -36.0 -1.5 12.8 21.0 15.6 18.1 11.3 6.4 4. Electricity,gas, andwater 12.4 3.0 8.3 7.6 7.7 6.2 5.7 5.9 6.1 a. Electricity 12.1 3.2 8.8 7.6 7.8 5.9 4.5 5.5 6.3 b. Gas 22.5 -16.5 0.6 18.3 11.0 15.3 21.9 9.8 13.9 c. Water Supply 10.9 8.9 7.4 4.4 5.5 4.7 7.6 7.1 6.5 5. Construction 7.4 -36.4 -1.9 5.6 4.2 4.1 5.3 5.8 6.2 6. Trade, hotel,and restaurant 5.8 -18.2 -0.1 5.7 5.3 3.6 3.9 4.0 3.8 a. Wholesale &Retail Trade 6.0 -18.7 -0.6 5.8 5.4 3.3 4.1 4.1 4.4 b. Hotel 3.0 -8.9 4.3 2.9 3.4 1.3 0.1 2.2 -1.1 c. Restaurant 5.7 -18.0 1.3 5.7 5.5 5.5 4.0 4.0 2.1 7. Transportation& Communication 7.0 .15.1 -0.8 8.6 7.3 7.8 6.4 7.7 11.0 a. Transport 4.8 -19.9 -3.7 7.3 5.4 4.7 4.3 4.5 8.1 (1) Rail Road Transport 5.5 7.6 11.2 2.1 -2.9 -6.5 -8.7 -4.9 1.3 (2) Road Transport 7.1 -25.4 -9.0 4.8 5.5 5.2 5.8 6.3 6.5 (3) Sea Transport -2.6 -3.2 9.2 13.9 5.7 5.6 -0.1 0.6 6.8 (4) River, Lake Transport and Ferry 1.3 -8.6 -0.7 5.7 4.5 3.4 3.4 3.3 3.9 (5) Air Transport 1.3 -37.0 -12.1 14.0 10.5 8.8 13.5 10.1 29.5 (6) Transport Services 4.7 -10.3 2.7 8.1 4.7 2.9 2.1 2.5 8.1 b. Communication 17.4 4.8 8.7 12.2 12.6 15.7 11.5 15.0 17.5 8. Financial,RentalsandBusinessServices 5.9 -26.6 -7.2 4.6 3.4 5.5 6.1 5.1 4.9 a. Bank 5.1 -37.9 -13.6 5.5 5.3 6.6 7.9 6.5 6.8 b.NonBank FinancialInstitutions 8.5 -17.2 1.8 3.9 3.5 3.5 2.6 2.3 2.7 c. FinancialSupporting Services 6.1 -16.6 3.7 3.9 3.2 3.5 -2.5 -1.5 0.6 d. Building Rent 5.0 -19.9 -6.0 3.5 2.2 5.6 5.2 4.7 4.0 e. BusinessServices 8.5 -16.7 -2.7 5.3 2.3 4.8 6.8 5.3 4.4 9. Services 3.6 -3.8 1.9 2.3 2.0 2.0 2.0 2.3 2.5 a. General Government 1.2 -7.3 1.7 1.4 1.1 0.4 0.3 0.9 1.1 (1) Government Administration andDefense 0.9 -8.5 0.9 1.3 0.8 0.4 0.1 0.5 1.o (2) Other Government Services 2.1 -3.7 3.9 1.5 1.7 0.5 0.7 2.3 1.2 b. Private 7.9 1.9 2.4 3.8 3.5 4.2 4.3 4.1 4.5 (1) Social Community Services 8.0 -9.2 5.0 4.6 4.4 5.2 6.0 5.7 4.8 (2) Recreational andEntertainmentServices -1.3 -12.1 -6.6 5.8 3.3 5.0 -0.2 -1.7 0.1 (3) Personal andHousehold Services 8.6 5.7 2.3 3.5 3.2 4.0 4.2 4.1 4.6 GDP 4.7 -13.1 0.8 4.9 3.4 3.7 3.4 3.7 3.9 GDPnon-oil 5.2 -14.2 1.0 5.3 4.2 3.9 4.4 4.5 4.3 *:Preliminaryfigures, ** Very preliminary figures. : Source: CentralBureau of Statistics. Table 12. Gross Domestic Productby ExpenditureCategory at Current Market Prices, 1997-2003 (Rp.Billion) 1997 1998 1999 2000 2001* 2002** 2003** 1. Privateconsumption 387,171 647,824 813,183 850,819 975,731 1,137,763 304,756 310,954 319,992 2. Govemmentconsumption 42,952 54,416 72,631 90,780 113,416 132,219 33,005 37,699 42,811 3. Gross fixed investment 177,686 243,043 240,322 275,881 316,179 325,334 85,437 86,862 88,778 4. Changes instock 21,615 -82,716 -105,063 -72,236 -63,282 -95,614 -22,242 -44,553 -40,276 5. Exportsof goods and nonfactorservices 174,871 506,245 390,560 542,992 612,482 569,942 136,882 135,199 136,353 6. Less: Importsof goods and nonfactor services 176,600 413,058 301,654 423,318 505,128 459,631 114,934 102,220 102,902 GrossDomestic Product 627.695 955,754 1.109.980 1,264.919 1,449,398 1.610,012 422.904 423.942 444,757 Table 13. Gross Domestic Productbv Expenditure Category at Current Prices, share of GDP, 1997-2003 (Percent of total) 1997 1998 1999 2000 2001* 2002** 2003** Q1 4 2 43 1. Privateconsumption 61.7 67.8 73.3 67.3 67.3 70.7 72.1 73.3 71.9 2. Govemmentconsumption 6.8 5.7 6.5 7.2 7.8 8.2 7.8 8.9 9.6 3. Gross fixed investment 28.3 25.4 21.7 21.8 21.8 20.2 20.2 20.5 20.0 4. Changes in stock 3.4 -8.7 -9.5 -5.7 -4.4 -5.9 -5.3 -10.5 -9.1 5. Exportsof goods and nonfactor services 27.9 53.0 35.2 42.9 42.3 35.4 32.4 31.9 30.7 6. Less: Importsof goods and nonfactor services 28.1 43.2 27.2 33.5 34.9 28.5 27.2 24.1 23.1 Gross Domestic Product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 * :Preliminaryfigures, ** :Very preliminary figures. Source: Central Bureau of Statistics. Table 14. Gross DomesticProductbv ExDenditureCateeorvat Constant 1993Prices. 1997-2003 (Rp.Billion) 1997 1998 1999 2000 2001* 2002** 2003** Q1 4 2 Q3 1. Private consumption 277,116 260,023 272,070 276,377 288,510 302,139 76,885 78,008 79,186 2. Government consumption 31,701 26,828 27,014 28,768 31,352 35,362 8,462 9,256 9,839 3. Gross fixed investment 139,726 93,605 75,468 89,389 96,244 96,058 24,090 23,761 24,343 4. Changes in stock 3,342 -6,387 -8,572 -13,794 -15,908 -25,741 -5,444 -7,072 -6,132 5. Exports of goods and nonfactor services 121,158 134,707 92,124 116,194 118,377 116,907 29,041 29,465 30,257 6. Less: Imports of goods and nonfactor services 139,796 132,401 78,546 98,917 106,884 97,985 24,573 23,159 24,000 GrossDomesticProduct 433,246 376,375 379,558 398.017 411.691 426.741 108.461 110.259 113.492 Table 15. GrossDomesticProductbv ExDenditureCateeorvat Constant 1993Prices. Growth Rates, 1997-2003 (Year-on-YearGrowthRate,Percent) 1997 1998 1999 2000 2001* 2002** 2003** 1. Privateconsumption 7.8 -6.2 4.6 1.6 4.4 4.7 2.6 3.9 4.1 2. Government consumption 0.1 -15.4 0.7 6.5 9.0 12.8 6.3 10.7 9.6 3. Gross fixed investment 8.6 -33.0 -19.4 18.4 7.7 -0.2 5.5 1.6 0.0 4. Exports of goods and nonfactor services 7.8 11.2 -31.6 26.1 1.9 -1.2 0.7 0.2 0.7 5. Less: Imports of goods and nonfactor services 14.7 -5.3 -40.7 25.9 8.1 -8.3 9.4 -2.2 -5.7 GrossDomesticProduct - 4.7 -13.1 - - - 0.8 4.9 3.4 3.7 - - 3.9 3.4 3.7 * : Preliminary figures, ** :Very preliminary figures. Source: Central Bureauof Statistics. o w I l m -2 & 9 I N w 2"$16 3 33 0 \ o m 3 3 3 2 4 . 5\ 3 Table 17. Balance of Payments, 1996-2002 (US$ Million) Items 1996 1997 1998 1999 2000 2001 2002 1 Nonoil/gas, merchandise. (net) -1,849 3,129 13,864 14,355 15,963 15,844 17,317 a. Export, fob 38,021 44,576 42,95 1 40,987 50,341 44,805 46,307 b. Import,fob -39,870 -41,447 -29,087 -26,632 -34,378 -28,961 -28,990 2 Oil, merchandise. (net) 3,122 2,266 1,518 1,975 2,197 1,533 205 a. Export, fob 7,222 6,771 4,141 5,680 7,954 6,921 6,549 b. Import,fob -4,100 -4,505 -2,623 -3,705 -5,757 -5,388 -6,344 3 Gas, merchandise. (net) 5,896 4,679 3,047 4,314 6,881 5,318 5,993 a. Export, fob 4,945 4,950 3,279 4,576 7,113 5,638 6,312 b. Import,fob -270 -271 -232 -262 -232 -320 -319 4 Current account -7,801 -5,001 4,097 5,783 7,998 6,900 7,825 a. Exports, fob 50,188 56,297 50,371 51,243 65,408 57,364 59,168 b. Imports, fob -44,240 -46,223 -31,942 -30,599 -40,367 -34,669 -35,653 c. Services, net -13,749 -15,075 -14,332 -14,861 -17,043 -15,795 -15,690 5 Official Capital -522 2,880 9,971 5,353 3,217 636 -1,240 a. Inflows 5,693 7,594 7,414 6,560 3,862 2,482 1,595 IGGI 5,093 7,594 5,897 6,560 3,862 2,482 1,546 Program aid 0 3,036 1,821 3,870 1,360 507 773 Project aid 4,928 4,466 3,916 2,417 2,426 1,975 1,527 ODA 3,274 2,601 1,718 1,686 2,193 1,532 1,254 Non-ODA 1,654 1,865 2,198 731 233 443 272 Commercial loan 600 0 1,517 0 0 0 49 b. Amortization -6,215 -4,714 -3,765 -4,070 -4,272 -4,704 -5,467 c. Exceptional financing 0 3,036 6,322 2,863 3,627 2,858 2,632 - LMFPurchases 0 0 5,761 1,373 1,124 397 1,415 - IMFRepurchases 0 0 0 0 0 -1,772 -2,420 - Rescheduling 0 3,036 561 1,490 2,503 2,858 3,637 6 Private Capital 11,511 -338 -13,846 -9,923 -9,992 -8,253 -191 a. Foreign direct investment /a 6,194 4,677 -356 -2,745 -4,549 -5,877 145 b. Others 5,317 -5,015 -13,490 -7,178 -5,443 -2,376 -1,057 7 Capital account (5+6) 10,989 2,542 -3,875 -4,570 -6,775 -7,617 -1,431 8 T O T A L ( 4 + 7 ) 3,188 -2,459 222 1,213 1,223 -717 6,394 9 Errors & omissions, net -(8+10) 1,263 -1,986 2,122 2,079 3,820 2,095 -2,373 10 Monetary movements /b -4.45 1 4,445 -7,254 -3,292 -5,043 1,378 -4,02 1 /a Since 2002 foreign direct investment includes a part of privatization and banking restructuring. /b Since 1998Monetary Movement is based on Gross Foreign Assets (GFA) replacing Official Reserves. Since 2000, basedon change reserve assets replacing GFA. Negative represents surplus and positive represents deficit. Source: Bank Indonesia. Table 18. Selected Non-oil Exports, 1996-2003 (US$Million) 1996 1997 1998 1999 2000 2001 2002 2003 1 Plywood 3,543 3,477 2,327 2,254 1,995 1,655 1,507 808 2 Rubber 1,893 1,505 1,010 855 881 814 1,000 831 3 Garments 3,182 4,181 3,817 3,771 4,581 4,134 3,742 2,443 4 SawnTimber 136 112 78 80 15 88 115 66 5 Textiles 2,680 3,390 3,461 3,086 3,540 3,040 3,009 1,169 6 Coffee 598 583 607 474 334 186 211 144 7 Lobster, Shrimps andPrawn 993 1,046 1,087 968 1,068 975 855 555 8 Handicraft 525 1,027 2,089 612 617 585 534 324 9 Iron Steel 608 660 990 172 805 744 750 435 10 PalmOil and Kernel 1,017 1,662 816 1,170 1,195 1,222 2,038 1,518 11 Aluminum 320 280 200 135 248 188 226 111 12 Copper 1,397 1,548 1,749 1,077 1,725 1,881 1,177 1,200 13 Tin 310 277 260 242 234 237 274 170 14 Pulp and Paper 1,369 1,953 2,469 2,646 3,042 2,555 2,369 1,592 15 Pepper 99 165 196 189 232 107 78 42 16 Foodstuffs 746 881 923 904 718 163 818 505 17 Tea 106 150 169 102 115 97 108 57 18 Fertilizer 255 341 160 171 192 114 112 101 19 Glass andGlasswear 211 272 269 279 349 292 302 179 20 Electrical Appliances 3,592 3,261 2,813 3,401 6,369 5,846 6,391 3,331 21 Tuna 64 52 681 639 604 594 658 363 22 Cement 18 37 87 143 140 162 104 51 23 Tobacco 82 124 139 108 80 95 73 44 24 CopraCakes 106 86 50 46 51 44 64 34 25 Nickel 374 233 165 219 360 299 52 105 Others 12,791 15,825 15,246 15,160 18,805 16,517 11,746 15,240 Total Non-oilExports /a 37,014 43,133 41,859 39,510 48,354 43,231 44,921 32,021 /a Exclude exports from Batam. Source: Bank Indonesia. Table 19. Value of Exports by Principal Country of Destination, 1996-2003 (US$Million) 1996 1997 1998 1999 2000 2001 2002 2003 Jan-J~l ASEAN 7,397 8,019 7,596 7,402 9,625 8,446 8,439 4,952 olw Malaysia 1,110 1,357 1,358 1,336 1,972 1,779 2,030 1,307 Thailand 823 848 943 813 1,026 1,064 1,227 836 Philippines 688 794 707 695 843 815 778 535 Singapore 4,565 5,468 5,718 4,901 6,523 5,364 5,349 3,077 Brunei 27 39 35 27 25 23 32 17 Vietnam 337 390 351 332 361 322 393 257 Cambodia 80 70 65 69 52 72 69 49 Laos 1 1 2 2 1 1 1 0 Myanmar 78 150 167 74 65 69 54 30 China 2,057 2,229 1,832 2,009 2,768 2,201 2,903 2,011 HongKong 1,625 1,785 1,865 1,330 1,555 1,290 1,242 699 Japan 12,885 12,485 9,116 10,397 14,415 13,010 12,045 7,923 Africa 619 777 904 995 1,114 1,081 1,092 708 USA 6,795 7,148 7,03 1 6,897 8,475 7,749 7,559 4,450 Canada 369 400 412 353 404 390 378 241 Australia and Oceania 589 783 910 1,020 1,040 993 1,318 713 Europe 7,482 9,112 8,273 7,369 9,165 8,379 8,403 5,219 EuropeanUnion 6,795 8,408 7,474 6,744 8,451 7,449 7,306 4,556 o/w United Kingdom 1,193 1,238 1,143 1,176 1,508 1,383 1,252 670 Netherlands 1,667 1,842 1,512 1,543 1,837 1,498 1,618 810 Germany 1,415 1,502 1,458 1,217 1,367 1,232 465 0 Belgium & Luxemburg 780 796 876 697 857 782 794 570 France 589 499 547 503 718 663 649 372 Denmark 141 146 143 142 135 109 103 64 Ireland 38 55 48 42 68 67 55 34 Italy 744 826 859 656 718 622 720 514 Greece 86 89 108 78 99 94 88 51 Portugal 46 42 37 40 50 76 52 29 Spain 813 888 869 742 932 904 996 698 Total 49,815 53,444 48,848 48,665 62,124 56,321 57,159 35,724 Source: Central Bureauof Statistics. Table 20. Value of ImDorts bv PrinciDal Country of Origin, 1996-2003 (US$ Million) 1996 1997 1998 1999 2000 2001 2002 2003 Jan-Jul ASEAN 2,814 3,743 2,646 2,977 3,563 3,199 3,804 2,812 o/w Malaysia 816 865 627 589 1,129 1,005 1,037 573 Thailand 1,081 867 842 933 1,109 986 1,191 914 Phi1ippines 90 127 65 55 115 94 114 99 Singapore 2,856 3,411 2,543 2,448 3,789 3,147 4,100 2,411 Brunei 238 7 0 38 16 37 34 75 Vietnam 204 117 421 590 303 171 259 327 Cambodia 650 0 2 1 1 0 1 1 Laos 0 1 0 0 1 0 0 0 Myanmar 34 19 9 19 22 21 31 9 China 1,577 1,518 906 1,242 2,043 1,843 2,427 1,697 HongKong 266 325 264 227 342 257 241 128 Japan 8,555 8,252 4,293 2,912 5,397 4,689 4,409 2,450 Other Asia 3,572 4,839 3,93 1 3,068 3,391 2,083 2,783 2,628 Africa 406 468 399 339 348 369 300 190 USA 5,130 5,441 3,517 2,837 3,390 3,208 2,640 1,621 Canada 804 682 504 417 638 357 412 184 Australia and Oceania 2,539 2,427 1,750 2,219 2,359 1,785 1,526 1,796 Europe 7,237 9,744 6,520 4,061 4,878 3,961 4,197 2,635 olw United Kingdom 1,140 1,084 920 511 557 641 656 265 Netherlands 505 566 338 347 434 344 352 219 Germany 3,010 2,629 2,366 1,398 1,245 1,301 1,224 696 Belgium & Luxemburg 398 340 275 178 278 215 191 113 France 1,037 1,017 568 371 400 397 406 270 Denmark 187 159 50 38 44 58 45 23 Ireland 40 35 25 31 66 42 42 27 Italy 1,169 918 480 276 345 407 402 196 Greece 83 52 19 25 15 18 16 9 Portugal 217 22 2 2 2 2 2 1 Spain 342 370 160 206 185 178 130 66 Total 42.929 41.680 27,337 24,003 33,515 30,962 31,289 18,629 Source: Central Bureauof Statistics. W b W W i 0 8 z o\ d e N Y 0 x t- W m x m N - 2, W a 2 3 L4 s 6 m m ". m t- e m N N z 00" s e N 2 f N m 2 d 3 '? t 0 13 % 2 - Pm Q" 00 'i O P 0 0 0 N .-dM x 0 c Y mw 8 2 v) . 0 8 " 0 c1 " 0 0 4 :: 0 8 :: m 2 m 00 m 2 r- a 2 m \o 2 e, 58 8 . 3 e r . m m 8 N N 0 0 N - 0 0 N wl r-" m m 0 8 N m m 2 CO Q\ 0' . . A - i m m pl m 2 W m 0' e m 0 0 N c\1 8 N - 0 0 N 8 0 N u. u. z 00 u. z u. t- 2 . . . . . - 3 W u. 2 Table 34. PrinciDalAgricultural Productsby Sub-sectors, 1996-2002 (thousandtons) 1996 1997 1998 1999 2000 2001 2002 Food crops Paddy la 51,101 49,377 49,200 50,855 51,899 50,461 51,490 Com 9,307 8,771 10,169 9,204 9,677 9,347 9,654 Cassava 17,002 15,134 14,696 16,459 16,089 17,055 16,913 Sweet potato 2,018 1,847 1,935 1,666 1,828 1,749 1,772 Soya beans (shelled) 1,517 1,357 1,306 1,383 1,018 827 673 Peanuts(shelled) 738 688 692 660 737 710 718 Fishery Saltwater fish 3,383 3,613 3,724 3,788 4,004 Freshwater fish 1,069 967 918 1,075 1,103 Cash crops Dry Rubber 335 310 331 304 336 339 331 Coffee 27 23 24 27 30 27 26 Tea 80 100 157 132 128 131 131 Cane Sugar 2,160 2,167 2,065 1,908 1,896 1,870 2,078 Tobacco 7 8 18 28 15 5 4 Palm oil 2,570 2,981 3,855 4,025 4,094 4,093 4,225 Palmkernel 627 708 778 915 931 938 964 Forestrv /b Log 26,069 29,520 19027 20,620 13,798 10,051 8,136 Sawn Timber 3,565 2,613 2707 2,060 2,790 675 415 Plywood 10,270 6,710 7155 4,612 4,443 2,101 1,202 la Dry husk paddy grain ready for milling. /b Inthousand cubic meters, and in GO1F Y -April to Marchuntilthe year 1999, and April to December inFY 2000. ..: Data are not available Source: Central Bureau of Statistics, Ministry of Agriculture, and Ministry of Forestry Table 35. Production of Maior Crops bv TvDe of Estate, 1996-2002 (thousandtons) 1996 1997 1998 1999 2000 2001 2002* Smallholder Estate Rubber 1,193 1,174 1,243 1,206 1,125 1,210 1,223 Coconuthopra 2,687 2,620 2,690 2,904 2,951 3,023 3,098 Coffee 436 396 470 494 515 527 529 Cacao 304 264 370 305 364 370 375 Tea 34 33 34 35 39 42 39 Tobacco 148 206 102 132 201 224 223 Pepper 52 47 64 61 69 67 67 Palmoil 1,134 1,293 1,348 1,544 1,978 2,181 2,227 Cinnamon 39 37 42 38 45 50 52 Large Estates Rubber 381 378 419 419 376 397 407 Coconut/copra 74 84 88 91 94 96 96 Coffee 23 32 45 38 39 40 40 Tea 135 121 133 126 123 131 128 Sugar \a 582 996 1,034 755 899 919 1,006 Tobacco 3 3.3 2.3 3.0 3.0 3.0 3.0 Palm oil 3,765 4,088 4,292 4,461 5,603 5,788 5,930 \a Including sugarcaneproducedby smallholders. * Preliminary figures Source: Central Bureau of Statistics and Ministry of Agriculture. Table 36. Rice-AreaHarvested,ProductionandYield, 1996-2003 Area Average Paddy Rice Year harvested yield output output /a Growth (thousandha) (tondha) (thousand tons) (thousandtons) (%I 1996 11,570 4.4 51,102 33,216 2.73 1997 11,141 4.4 49,377 32,095 -3.37 1998 11,716 4.2 49,237 32,004 -0.28 1999 11,963 4.3 50,866 33,063 3.31 2000 11,793 4.4 51,899 33,734 2.03 2001 11,499 4.4 50,460 32,799 -2.77 2002 11,521 4.5 51,490 33,468 2.04 2003 /b 11,476 4.5 51,829 33,689 2.71 /a Estimated on the basis of a conversion factor of 0.68 from paddy into rice for the years prior to 1989, and 0.65 for the years 1989 and after. /b Projection. Source: Central Bureau of Statistics. 0 m 0 N 0 N 0 - Y - @ Y@ 8 B m 0 0 N 8 0 N 3 0 0 N 0 :: 0 Q\ u. 2 00 m 0' r- m z a Q\ 2 F ,. 0 I Y U 2 2 3 m ". m 2 Q\ N Q 3 P W N i-, s 3 W i 0 W Q\ -?* 3 3 In 3 0 N 3 i- d 0 0 i- i-" m E: * 2 W r; 0 m 0N 32 00 5 3 x c 3 9a 0 d 8 m h 0 m N 0 Y N 6 d . Le W m I- 0 O" 0 3 N N s 3 3 N m" 00 i N 0 m 0 N 00, 3 00 0 3 0 0 2 N W" I- m m 0 m 2 t N I- 00 m W 2 0 0- % a I- 2 4 W" W W m 2 st m W z .e B -a0 Le L i 3 e! 8G 8 58 2 c, N 0 9 0 3 N 3 4 0 Lc! 8 3 3 0 0 r: 0 m N m m 2 2 N W m 2 2 vr P m 3 2 d Q m 2 e E 8 h m M E u ee, M .3 * m O .3 $ ir E 0 3 e, M -0 B8 w r \ 0 3 v *98E e, s 3 & 0 N 0 m N N 0 0 N ?4 0 i 8 z N P 0 0 0 2 P I m N Q\ 2 r: Q\ 2 N W m 2 x13 ................ W : z Q\ 0 2 m P 5. 2 W m m i o m Q\ 2 3 B r/l 0 LA e, w e 8 3 0 8 8 8 m 2 m 00 2 m P 2 m W 2 a m B .-c 04 .-C e8 2 E 9 LI VI M 3m .. .. . . w 0 N : w - m w w 0 0 N w 0 - 9 9 9 0 9 6 N m r - m m m moom m m o * - 0 E h i + \3 % : o d r j oo m N b " 0 2 'md o Kmhi a 8 r- c\ 2 w m 2 2 E h 2 Y Y 4