The Indonesian Economy: Problems and Prospects

• Date: 01 July 1991
• Author: Iwan J. Azis,Mari Pangestu,Hadi Soesastro,Moh. Arsjad Anwar
• Published date: 01 July 1991
• DOI: http://doi.org/10.1111/j.1467-8381.1991.tb00058.x

[Asian

Economic

Journal

1991,

Vol.

5

No.

21

100

The Indonesian Economy: Problems and

Prospects

Moh. Arsjad Anwar

lwan

J.

&is,

Mari Pangestu,

Hadi

Soesastro

Universiry

of

Indonesia

I.

Introduction

The decade of

the

1990’s

will be a crucial turning point for the

development of the Indonesian economy. After recent economic

deregulation which has borne spectacular results to date, the daunting

medium and long term task

of

maintaining a sustainable growth lies ahead

with the very real constraints of infrastructure bottlenecks, employment

absorption and environmental constraints. The challenges of the

1990s

mean that a reassessment

of

the growth and development of Indonesia

to

date and the search for relevant policies to sustain the growth and

development will be needed.

The aim of this paper is to take a prospective look at

the

Indonesian

economy in the

1990s.

Looking ahead must be done in the light of recent

changes. In

the

next section, we provide an analysis of recent development

and trends

in

the Indonesian economy. In the third part, we analyze

the

problems and prospects that lie ahead in several areas: growth in trade,

employment and income distribution, growth constraints, etc. It should be

pointed out that due to the scope

of

the paper, not all the important issues

facing the Indonesian economy in the

1990s

will be dealt with in depth. In

the final part, we offer some conclusions and recommendations.

11.

The

Indonesian Economy In the

1980s:

A

Remarkable Turnaround

II.

I

External

Shock

and

Adjustment Policies

After a period of moderately high growth propelled by oil revenues,

Indonesia was adversely affected by external shocks in the

1980s.

First there

was the world wide economic recession in the early

1980s.

This was followed

THE

INDONESIAN ECONOMY

101

MAIN CONTENTS

Remove interest rate control

for State Banks

*

Reduce liquidity credit

*

Remove credit ceilings

Removal

of

ceiling

on

Central

Bank Swap

*

Open up licenses for new

banks, including joint ventures

Lending limits regulation

Reserve requirement lowered

*

Deregulation

of

capital

*

*

Foreigners can buy

stock

markets

Reduce

govt.

role

in stock

exch.

by the fall in the real price

of

oil

by

60%

over the 1983-89 period which

caused major adjustment problems for

the

oil dependent economy.

In

1981/82 oil accounted for 82%

of

exports and 71%

of

government revenues.

Finally in 1985-87 there was the sharp appreciation

of

non-dollar currencies

which caused a sharp rise in the debt service of Indonesia as a large part of

its debt is denominated in the appreciating currencies (mainly yen).

In response to the external shocks in the 1980s Indonesia has undertaken

adjustment measures which have been touted as exemplary by bodies such

as the World Bank. The adjustment policies began in 1983, while further

substantive economic reforms came about after the rapid decline in the

price

of

oil in 1986.

The various economic reforms undertaken

in

various sectors are

summarized in Table

1.

In the aftermath

of

world .economic recession and

the fall in oil prices

in

the early 1980s, the government responded quickly

in

terms

of

exchange rate management and fiscal austerity measures.

In

March 1983, the Rupiah was devalued by

50%.

Aside from balance

of

payments and perhaps budgetary reasons’,

the

devaluation was also aimed

at increasing non-oil exports. However, since devaluation

was

not

EFFECTS

Rise in deposit rates

Some

fall

in

intermediation

*

RER is maintained

to

date

costs

But

liquidity credits in fact

increased

Opening up

of

many banks

and joint ventures

Intense competition between

banks

*

Rising interest rates and

falling spreads initially

Table

1

Summary

of

Reform

Measures

REFORM

~~ ~

FINANCIAL

1983

June

1

Banking

Deregulation

1986,

October

1988,

October

27

(PAKTO)

1987,

December

(PAKDES)

ASU

N

ECONOMICJOURNAL

Table

1 (Confinued)

102

REFORM

1988, December

(PAKDES)

FISCAL:

1984, April Tax

Reform

TRADE AND

SHIPPING:

1985,

March Tariff

Rationalization

1985, April Customs

Reform (INPRES

NO. 4)

1986, May

(PAKEM)

1986, October

1987, January

1987,

July

Simplification

of

Textile Quota

MAIN CONTENTS

*

Further capital markets

*

Deregulation in insurance ind.

Rationalization

of

financial

deregulation.

services sector

*

Remove withholding

tax

and

*

Rationaliz.

of

income and

introduce VAT

sales tax

*

Range reduction from

0-225%

*

Number

of

Tariff Levels

reduced

from

25

to

I1

to

0-60%

*

*

Appointment

of

Private

*

Removal of restrictions on

Removal

of

Customs Dept. in

goods clearance

Surveyor

SGS

choice

of

international carrier

Duty drawback and bypass

Arms-length transactions and

monopoly

computerized processing

*

Some change from import

licensing

to

general imports

'

Phasing down

of

NTB with

some increase in tariff

to

offset

Reduction in tariff needed in

prod.

*

Some change from import

licensing

to

general imports

*

Transparency

of

allocation

*

Some allocation

to

newcomers

and small scale

EFFECTS

Sharp increase in capital

markets activity and index

Many major co. going public

Increased government

revenues

*

Some reduction in protection

Reduced subst. average time

of

imports and exports

clearance

*

Important psychological effcc

Improve duty drawback

process and important factor

to

increase exports

Improved investment climate

*

Increased investments,

especially export oriented

Some improvements althougt

now some complaints