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Indonesia’s Economy
Economy grows in the middle of crisis in developed countries
Faisal Basri, A. Prasetyantoko and Gatot Arya Putra, October 2012
• Still survive from economic crisis in developed countries because of the relative dominance of
its domestic demand and continuing its current account surplus. But average economic growth
after 1997 crisis is not as high as average economic growth before 1997, while widening income
disparities tends to grow higher compared to periods before the crisis struck at 1997.
• Domestic demand tends to decline because the purchasing power of labor is declining and income
disparity is widening, besides that current account surplus tends to narrow because the demand of
commodities from developed countries are slowing down so there must be serious impact to the
producers of Indonesia’s main export commodities. In turn they have to reduce their production and
many of them are having debt problems that potentially create another wave of mass bankruptcy.
• Indonesia economy needs to stabilize and diversify its economy as soon as possible in order to
anticipate the slowing economic growth in developed countries by increasing its domestic demand
through industrial policies especially green industrial policy - including environmentally friendly
downstream industries, higher government spending and managing real effective exchange rates
to support domestic demand.
Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
On Indonesia’s Economy
CONTENTS
1.
2.
3.
4.
5.
General Macroeconomic Overview................................................................................ 3
1.1 Important indicator of Macroeconomy in The Past................................................. 3
1.2 Current Macroeconomy Problems ......................................................................... 5
1.3 Feasible Future Development .................................................................................10
Income Distribution, Consumption Demand and Sustainable Development ................... 15
2.1 The Development of Income Distribution In The Past ............................................. 15
2.2 The Current Debate On The Policy To Amend Income Distribution......................... 17
2.3 Future Development.............................................................................................. 19
World Market Strategy and Protection from External Shocks......................................... 20
3.1 Past Integration Into The World Market................................................................. 20
3.2 Present Debate About The Integration In The World Market.................................. 23
3.3 Feasible Future Development ................................................................................ 26
Green New Deal and Ecological Problems ..................................................................... 32
4.1 Brief Description on The Ecological Problems......................................................... 32
4.2 Current Debate to Solve Ecological Problems ........................................................ 34
4.3 Strategy and The Precicion of General Industrial Policy .......................................... 36
4.4 Highly Feasible Future Development ...................................................................... 39
General Evaluation ....................................................................................................... 40
REFERENCES.......................................................................................................................... 62
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Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
On Indonesia’s Economy
Economy of Tomorrow: Indonesia
1. General Macroeconomic Overview
1.1. Important indicator of Macroeconomy in The Past
The economy has been trapped in the low economic growth that causes permanent output loss
after the economy crisis in 1997 (Graph 1). From 1997 until 2012, the Indonesian economic growth has
been confirmed to be below itsaverage potential. This low growth compared to its potential, as predicted
by Cerra and Saxena (March 2003), has proven that the Asian countries hit by crisis indeed suffer from
permanent loss of the economic growth. A different situation has occurred in Sweden; a country that can
reach economic growth exceeding its potential after crisis. In other word, Sweden does not suffer from
permanent output loss.
The Indonesian GDP (Gross Domestic Product) growth after crisis has behaved resembling the
Hamilton Recession Model, where economic output loss happens permanently and not temporarily as
referred by the Friedmen Recession Model, where the economic growth after crisis can exceed one before
crisis. The economic recovery stages have never been marked by higher economic growth than one before
crisis, even if the GDP and GDP per capita can grow positively afterwards (Table 1).
Graph 1. Real Gross Domestic Product per Capita, Actual vs Potential
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On Indonesia’s Economy
Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
This situation can happendue to the austerity recipe implemented by IMF and approved by Indonesian
government and legislatives, which later on has influenced Indonesian fiscal policy followed by permanent
output loss. Other Asian countries that implement IMF austerity recipe have alsosufferred from permanent
output loss (see Cerra dan Saxena, 2003). Austerity is proven to always be followed by country with
negative economic growth and then relatively low economic growth compared to its potential growth.
The long term high economic growth is difficult to be materialized because the austerity recipe
cannot create high economic growth and does not focus on the economic recovery through strengthening
industrial and technology sectors. The economic growth counts only on the weakening currency (Rupiah)
exchange rate without the supports of fiscal and monetary policies. Besides, to sustain long term growth,
supply side recovery including infrastructure and technology advancement to push higher economic growth
is needed. A research by Bosworth and Collins (1996) has shown that from 1960 to 1994, Indonesia had
the second lowest TFP (Total Factor Productivity) after Philippines in East Asia and South-East Asia.
During the research period of 1984 to 1994, Indonesian TFP had improved to be better than only
the Philippines’. Both countries had TFP growth below one. Without including Philippines into his research,
Sarel (1995) had also conducted research measuring TFP from 1975 to 1990 with result shows that Indonesia
had the lowest TFP growth.
That relatively low economic growth has counted on consumption growth (Table 4). Within the last
10 years, consumption has become the main power of Indonesian economic growth. Consumption has
played an important role for Indonesian economic growth because its contribution has reached 65 percent
of GDP. Ten years ago the consumption ratio to GDP was 68 percent (year 2000 and 2001). This decline
has shown that economic transformation gradually occurs. In the context of private consumption before
2003, the contribution of food to household expenditure was higher than non-food (Table 5). But after
2003, the condition has shifted referring that the slope curve of non-food to the household expenditure
has been bigger than slope curve of food.
Besides consumption, economic growth within the last 10 years has been pushed by the strengthening
GFCF (Gross Fixed Capital Formation) growth (Table 4). It has kept showing solid growth from time to
time, so that the ratio of GFCF to GDP within the last 10 years has consistently increased from 19 percent
to 24 percent. This ratio shows that Indonesian economic structure has experienced positive shift. The
strengthening tendency even has not been affected by the crisis in United States of America (USA) and
European Union (EU); a very relieving situation. Nevertheless, the main contributor of GFCF has taken form
of building establishment with average contribution of 74 percent within the last 10 years. The contribution
of machinery to GFCF has been relatively low, yet has shown improvement from the ratio of 10 percent to
14 percent, but they havebeen mostly imported machinery.
Therefore, the Rupiah exchange rate policy has become very important to safeguard the improvement
of machinery role in GFCF. The role of domestic machinery in GFCF still has been very small because it has
only reached below 5 percent of the whole GFCF formation. The domestic machinery industry has not
been able to fulfill the demand of GFCF. This is a particular challenge to Indonesian economy; how to
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Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
On Indonesia’s Economy
make the contribution of domestic machinery reach similar level with imported machinery, so that the risk
diversification of strengthening exchange rate can be neutralized. No industrial policy supporting domestic
machinery within the last twenty years has also caused this situation. The ratio of building in GFCF to GDP
within the last 10 years has kept increasing consistently from 15 percent to 17.5 percent. Meanwhile the
machinery ratio of machinery in GFCF to GDP has been very low yet improving from 1.9 percent to 3.4
percent.
Besides the increasing contribution of GFCF to GDP, export netto to GDP has also shown positive
contribution with positive increasing contribution trend. Within the last 10 years, the export netto
contribution to GDP has reached 10 percent per year in average. Therefore it can be concluded that the
crisis in USA in 2008 has had no negative impact to Indonesian economy because so far the external shock
can be tackled by the export and import structure. This shows that Indonesian export is more diversified in
terms of both products and importing countries. Another positive side lies in the non-consumptive import
structure.
Since the crisis in 1997, the State Budget (Anggaran Pendapatan dan Belanja Negara, abbreviated
as APBN) has been trapped in the IMF monetarist strategy which is not only reducing demand side, but
also anti-cyclical and not empowering the supply side. Although at the end the IMF has approved deficit
financing and social security program, but the APBN capacity to function as fine tuning has weakened and
the APBN so far still focuses on the routine spending rather than investment. The absorption capacity of
APBN also has become weaker. And bad buereaucracy was concerned to cause social security program
unable to reach the targeted objectives. The APBN deficit so far has been limited by the Law not to pass the
3 percent ratio to GDP. Moreoever, the government program has tried to reach zero percent budget deficits
in 2005, which gives expectation to compress development spending that is supposed to be beneficial to
improve supply side of economy.
From 2000 to 2010, the highest government income ratio to GDP has reached 20 percent in 2008;
on the other hand the lowest was 15 percent in 2000, 2009 and 2010. Meanwhile, the highest government
spending ratio to GDP has reached 21 percent in 2001 and the lowest was 16 percent in 2000 and 2010.
Deficit of APBN to GDP has happened during the period 2000 to 20010 with its lowest point of 0.1 percent
in 2008 and the highest point of 2.5 percent in 2001 (see table 7). The decreasing ratio of APBN defcit
to GDP can be seen from the decreasing average APBN deficit to GDP from 2000 to 2005 of 1.4 percent
compared to average APBN deficit to GDP from 2006 to 2010 of 0.9 percent. On the other hand, inflation
has shown declining tendency, where the inflation rate in 2008, 2009, 2010 and 2011 wasrespectively 9.7
percent, 4.9 percent, 5.1 percent and 5.7 percent (Table 2 and 3).
1.2. Current Macroeconomy Problems
The main problem of the Indonesian economy so far is the permanent output loss of the economy
since the crisis in 1997 followed by deceleration of GDP per capita growth within the last 5 years (Table 1).
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On Indonesia’s Economy
Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
Even within the first quarter of year 2012, Indonesian economy has grown for 6.3 percent, which means
a decrease from the economic growth in 2011 of 6.5 percent. Meanwhile, deficit has also occurred on the
current account within first quarter of year 2012. The growth of manufacture sector for the last couple of
years has always been below the Indonesian economic growth. Meanwhile, the orientation of plantation,
mining and agricultural sectors still lies on the land expansion rather thanon productivity increase and/or
industrial expansion.
In addition to that, in the middle of current world economic crisis threat, the effort of Indonesia
to pump domestic demand also faces threats from the lower consumption ratio to GDP. The ratio has
declined from 0.68 in 2000 to 0.65 in 2010 (Table 4). A ratio composition shift has occurred, where the
ratio of household consumption to GDP has decreased, while on the contrary, the ratio of government
consumtion to GDP has increased. At the end, the netto effect still decreases. In 2000, the ratio of household
consumption to GDP was 0.62, but in 2010 it has decreased to 0.57 (Table 5). Meanwhile, the effort to use
government consumption has also been limited by the relatively low ratio of government consumption to
GDP. Nonetheless, inspite of the relatively small number, an increase has occurred from 6.5 percent (2000)
to 8.4 percent (2010).
Within the period 1987 to 1997, the agricultural area (including plantation) has shrunk for 1.8
percent, while after economic crisis in 1998, it has widened for 19.4 percent. Before the economic crisis
in 1998, agricultural sector had tended to implement intensification strategy; while after the crisis land
exploitation occurred dramatically. In other words, extensification has happened in the agricultural sector.
The improving agricultural and plantation commodity price has affected the land expansion effort. As
the consequence, the forestry area has decreased with declining level of decrease. During 1990 to 2000,
forestry area has shrunk for 16.1 percent, while during 2000 to 2010 it has happened for 5 percent.
The Indonesian forestry area has systematically decreased and the main carbon emission production is
also originated from the forestry destruction. The main source of carbon emission has linked closely to
deforestation, where LUCF including peat land emission has become Indonesian main and biggest carbon
emission source. There is no industrial sector option which serves not only as the main motor of economy
to absorb work force and future added value, but also expected to muffle the expansion of plantation and
mining sectors that are closely related to deforestation and huge carbon emission.
The problem also lies in the industrial sector with unsatisfactory development. Annual growth of
this sector has always been below agricultural sector. In 2005 the ratio of industrial sector growth to
agricultural sector growth was 0.43 and in 2010 the ratio was 0.92. That ratio has increased yet still below
one. Meanwhile, a productivity declining tendency can be found in Indonesia economy where from 2005
to 2008, GDP per capita growth had reached 4 percent per year and then decreased to around 3 percent
per year within the following years (see Table 1).
Inflation has relatively been managed well (see Table 2 and 3). The inflation trend keeps showing
downturn. This indicates that actually the economy stimulus through fiscal and monetary stimulus and
Rupiah exchange rate do not face high inflation. However, macroeconomic policy leading to high economic
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Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
On Indonesia’s Economy
growth still cannot be found and it seems that anti-cyclical policy still cannot be implemented. And neither
can the effort to strengthen supply side like infrastructure development.
The State Budget focuses also on the routine expenditure rather than on investment. This causes
slow infrastructure development. The monetary policy has become more exogenous for economic growth
and job creation because they are under the policy domain of Bank of Indonesia, which legally serves as the
independent central bank. The target of central bank is inflation management within particular limitations
to protect the Rupiah exchange rate. In 2011 and 2012 there is a tendency from Bank of Indonesia to
lower its interest rate level, yet that policy still has not been able to improve Indonesian economic growth
to neutralize permanent output loss. In year 2011 the economic growth has reached only 6.5 percent.
The world economy is still marked by economic weakening as result of the crisis in USA and EU. As
the consequence, Indonesia has to keep diversifying its export market from major importing countries like
USA, EU, Japan and China to South Africa and Latin America. The assessment to expand the export market
has been conducted by the Indonesian Minister of Trade, who has visited Latin America countries in the
early 2012. How far can the export diversification be implemented is still being questioned considering the
market capacity of importing countries are relatively small and they also produce relatively similar products
with Indonesia. Whereas Indonesia has become more dependent to the international market, where not
only export ratio to GDP but also import ratio to GDP have increased. The average ratio of export to GDP
from 2000 to 2004 was 39.5 percent, while from 2005 to 2010 that average ratio has reached 46.5
percent. On the other hand, the average ratio of import to GDP from 2000 to 2004 was 29.8 percent and
for period 2005 to 2010 it has reached 36.9 pecent. Indonesian economy has got more dependent to
export and import.
The impact of world economic crisis that hit USA in 2008 was very influential to the Indonesian
external balance, where the ratio of current account to GDP and the ratio of trade balance to GDP have
undergone rapid decrease. The average ratio of current account to GDP from 2004 to 2007 was 1.5 and
within period 2008 to 2010 was 0.9. Meanwhile, the average ratio of trade balance to GDP from 2004
to 2007 was 7.4, and from 2008 to 2011 it was 4.8. This decrease has most probably been caused by the
tendency of strengthening value of Rupiah, as well as the strengthening real effective Rupiah exchange rate
(Table 24) and the weakening international market. If this surplus decrease trend keeps going on, then the
ratio of current account to GDP has the negative potential in the future, especially if the world trade climate
will not recover soon. In the first quarter of 2012, Indonesian balance of payments has deficit in amount of
US$ 1.034 billion, where the deficit of ongoing transaction is bigger than balance of capital surplus.
Therefore in the future, Indonesia is predicted to increase the balance of capital surplus to cover
the deficit of ongoing balance. If Indonesia cannot increase the role of foreign investment, then it is most
likely that the balance of capital surplus will be filled with portfolio investment and foreign debt. Portfolio
investment will keep increasing in line with the decreasing rate of Bank of Indonesia, yet this investment
has the potential to become capital outflow at any time. The debt of central government to GDP has
decreased from 0.76 in 2001 to 0.26 in 2010 (Table 8). Meanwhile the ratio of gross external debt to GDP
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On Indonesia’s Economy
Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
has decreased from 2.36 (March 2003) to 1.06 (June 2011). Although the debt ratio has decreasing trend,
but the high ratio of gross external debt to GDP above one indicates that Indonesian economy is quite
vulnerable if the debt crisis in developed countries keeps going on. Gross external debt is the combination
of government foreign debt and private national debt. To increase the value added, Indonesia has decided
to ban raw mining materials export starting in 2014 in relations to industrialization process. Starting from
this year, export tax has been applied in amount of 20 percent to tackle the export boost of raw mining
materials. The export tax for mineral products, cocoa and crude palm oil (CPO) is expected to support the
industrialization process. However, the energy supply from coal export tax will not automatically be able to
remove the energy deficit in Indonesia because the energy import during these times takes form of oil fuel
that keeps increasing (Table 35).
The effort of downstream industry still needs capital and technology for the process. If this effort
goes well, then the demand of machinery is predicted to increase even faster. Until now the GFCF is still
dependent on building, where the GFCF ratio of building to GDP keeps increasing and its contribution to
GFCF is also very dominant (Table 6). In 2000 the ratio was 15 percent and in 2010 it had reached 17.8
percent. Meanwhile the GFCF ratio machinery to GDP has been very low and its increase has happened
very slowly. The GFCF ratio of domestic machinery equipment to GDP in 2000 was 0.4 percent and had
increased to 0.6 in 2010. While the GFCF ratio of foreign machinery equipment to GDP in 2000 was 2.2
percent and had increased to 3.2 percent in 2010. Thus, considering the machinery restructurization and
industrialization process that will count on imported machinery, the needs of machinery in short term will
be increased.
Human resource readiness in the industrialization process is also required to be well planned
management to avoid human resource quality limitation. Indonesian government has started to identify
the human resource required by this industrialization process so that human resource scarcity that occurred
in the banking liberalization in the 1980s would not happen anymore. From the side of work force
absorption, the economic crisis in USA and EU in 2008 did not cause negative impact, where the average
total employment growth from 2005 to 2007 was 2.2 percent and has increased to 2.7 percent in period
2008 to 2010. That growth was followed by the decrease of self employed average growth within period
of 2005 to 2007 from 3.8 percent to 1.2 percent. According to Thorbecke’s research, the self employed
group was most severely hit by the economic crisis in 1998. The average of worker’s growth supported by
temporary worker has improved from 0.06 percent (2005 to 2007) to 1.05 percent (2008 to 2010) (Table
11). Moreover, the average of worker’s growth supported by permanent worker has improved from minus
0.9 percent (2005 to 2007) to 4.2 percent (2008 to 2010). In line with that, an increase has also occurred
on the average growth of worker employed by other side from 3.3 percent (2005 to 2007) to 5.2 percent
(2008 to 2010).
The problem lies on the amount of workers supported by permanent worker that has reached
only 3 percent of total work force absorption in 2010 (see Table 12). The worker supported by temporary
worker has reached 19 percent (2010). Meanwhile self assisted worker was 20 percent (2010). This situation
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Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
On Indonesia’s Economy
indicates that worker employed by other side has reached 30 percent of the total work force absorption.
That ratio has relatively been constant for the last couple years. Open unemployment has also decreased
within the last six years (Table 13). The average of open unemployment from 2005 to 2007 was 10.21
percent and had decreased to 7.8 percent from 2008 to 2010. As consideration, Indonesia has not had social
security system for the unemployed. These people are most probably supported by their families. Without
social security system and the support from family, being unemployed is very hard in Indonesia. The highest
unemployment exists in the urbans rather than villages, and from gender comparison, it occurred mostly to
male rather than female (Table 14, 15 and 16). Another problem relates to the lower average wage earned
by female worker compared to male worker (Table 18). The average wage ratio of female worker to male
worker has always been below one, although the ratio has increased from 72.6 percent in 2004 to79.16
percent in 2010. Meanwhile, average wage ratio of either male orfemale workers gets closer to minimum
wage (Table 19). In 2004, the average wage ratio of male worker to minimum wage was 1.73 and had
decreased to 1.42 in 2010. The decrease has also occurred on the average wage ratio of female worker to
minimum wage from 1.26 in 2004 to 1.42 in 2010. This indicates that the worker’s welfare decreasing and
female worker is the most severely hit group.
In the meantime, signs of economic bubbles have not been seen in Indonesia, where growth of
rental cost for office buildings in Jakarta does not show any significant threat. The average increase of office
buildings rental cost in Jakarta from 2008 to 2009 was only 1.73 percent and it has decreased to 0.49
percent within the period 2010 to 2011 (Table 20). Neither has the average selling price of office buildings
in Jakarta shown price increase threat, where the average selling price from 2008 to 2009 was 1.27 percent
and it had decreased to 0.85 percent for period 2010 to 2011 (Table 21). The price of apartment in Jakarta
has not shown significant increase either, where the average apartment selling price from 2008 to 2009
was 1.52 percent and had become 1.09 percent within the period of 2010 to 2011. Nevertheless, Bank of
Indonesia (BI)as the banking regulator has increased the down payment for motorcycle, car and property
consumption with credit facility, as the compensation of its decreasing rate to avoid non-performing loans.
Beside that, BI will also increase the ratio of capital liquidity to 10 percent as set by Basel Accord Three.
In line with that, according to the Law, BI has to immediately release its task as the banking controller
to a Financial Service Authority. With this transition, how more effective will the banking supervision be
is still being questioned, considering this task transition has political rather than economic benefit. In
comparison with other countries, the strength of institution such as Financial Service Authority to Central
Bank is still in debate. How far the Financial Service Authority will allocate banking credit to investment
sector rather than consumption sector remains as a big question. Besides, the position of Financial Service
Authority towards investment bank to conduct traditional banking activities is also not clear yet. Moreover,
the responsibility transition of banking supervision from BI to the Financial Service Authority will also
demand for coordination between both institutions. Anyhow the banking supervision interacts closely with
monetary policy and payment system. Even banking rescue in terms of crisis always involves central bank
as what has happened in USA and EU.
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On Indonesia’s Economy
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1.3. Feasible Future Development
The future of Indonesian economy will be determined greatly by the future world economic condition
and the way how Indonesia anticipates such development. It is seen that the crisis in EU will not end in this
year of 2012 yet. The victory of Socialist Party in France has shown that the austerity program implemented
by EU will still face serious challenges. In the meantime, USA has not been successfully overcome the crisis
condition either, although its economy has started to grow. This situation can be seen from the very low
interest rate set by the Fed. Neither Japan has shown positive signs. Even China and India have also shown
economic growth deceleration.
As a small open economy, the position of Indonesia will definitely be influenced by that world
economic growth deceleration. How long China, India and Indonesia can achieve high economic growth
depends highly on how fast the developed countries can recover. The longer it takes for these developed
countries to recover; it is most likely that the opportunity of economic growth of countries, such as China,
India and Indonesia, decreases slowly.
Based on that tendency, it seems that Indonesia has to implement economic development strategy
relying on the strength of domestic market and sectors immune to the economic crisis. The problem lies in
the inexistence of fiscal and monetary policies, and balance of payment has been and will be oriented to
support domestic demand. The rate of BI orientates only on the general prices stability or inflation.
The fiscal policy is still trapped in the routine expenditure and is not anticyclical either. While the real
effective Rupiah exchange rate tends to be more expensive.
Therefore, the only condition to keep Indonesian economy being competitive is by pressing the
worker’s wage. This can be seen from the average ratio of worker’s wage to average minimum wage that
keeps decreasing and approaching the number one. This indicates that more workers actually receive wage
below minimum wage.
According to World Bank, in 2007 around 60 percent of the work force works in informal sector.
The implication was that more and more workers that actually receive wage below the minimum wage.
Lower welfare of the worker affects Indonesian economy to be difficult to depend on the strengthening
domestic demand in the future although Indonesia will get demography bonus until year 2020. The next
serious question is how strong and how long the domestic market can become the foundation as result of
the weakening international market.
The decreasing growth of GDP per capita within the last couple years has shown that there is a
deceleration in Indonesian economy. The government medium and long term development planning has
not orientated to strengthen domestic demand in the context of anticipating world economic crisis that
will potentially happen in several years ahead. Even the government has two types of long and medium
term strategies, which shows that the government is uncertain of their leadership, namely the long term
development program (2005-2025) and Masterplan of Acceleration and Expansion of Indonesian Economic
Development (MP3EI).
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On Indonesia’s Economy
MP3EI has been sponsored by a group of major entrepreneurs who have close relationship with
the government. It means that the power of vested interest with rent seeker orientation is more dominant
than objective power that looks at the Indonesian economic development challenges in reality. That long
term development program is not a strategy based on common sense, but rather on pseudo ambitions.
For example, MP3EI has the vision to make Indonesia become one of the 10 countries in the world with
the highest GDP in 2025. Considering the MP3EI alone is sponsored by major entrepreneurs, then this plan
does not include the interests of small and medium enterprises that are actually majority in Indonesia (99.9
percent).
The MP3EI has just assumed that Indonesian economic growth increases costantlyfor 6 percent
per year. Another basic problem is that the long term plan does not discuss about the target of people’s
income distribution in 2025 either. Whereas this target setup is important as the basic of domestic demand
development and industrial sector growth in consideration of the more vulnerable world export market
as the result of uncertain recovery of USA and EU economies. In the future, downstream industrialization
process on the mineral and coal sectors will be very helpful for Indonesian economy in terms of increasing
the value chain of added value creation based on industry. Depending on the mineral and raw coal export
to China in the future is also risky considering that China has begun decreasing its economic growth
target gradually. In 2012 the economic growth target is decreased to 7.5 percent, whereas the majority of
Indonesian mining export is to China.
The downstream industrialization strategy in mining sector has the potential to increase domestic
added value besides increasing the export value through product diversification in the future. To anticipate
world economic crisis, which most probably will still occur in the future, Indonesia has to form strategy
based on sectoral strengths that are insensitive to economic crisis, namely agriculture, mining and utility
(electricity, gas and water) sectors. Based on the crisis history in 1997, the sectors that are sensitive to
economic crisis hit Indonesian economy could be identified. Sectorally, agriculture and mining are predicted
to be able to grow in stability for the next couple of years,considering the food and energy demands are
expected to keep increasing in the future.
Based on the economic crisis experience in 1998, this sector could grow consistently (Graph 2
and 4) without being too much affected by the economic crisis. The non-tradeable sectors insensitive to
crisis wereelectricity, gas and water supply sectors (Graph 6). However, other sectors such as manufacture
(Graph 3), service and others will be more sensitive to the economic crisis if world economic crisis hits
Indonesian economy too. Thus, the most optimal strategy to neutralize future crisis to the manufacture
sector is throughdownstream industrialization process on the agricultural (including plantation) and mining
sectors, so that if the crisis occurs, the manufacture sector has become less sensitive. If the manufacture
sector can be protected from the threat of incoming economic crisis, then the Indonesian tradeable sector
will have very high competitiveness in the future. Moreover, until 2020 the dependence ratio will be at the
lowest point.
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On Indonesia’s Economy
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Beside that, Indonesia will have low dependency ratio (young and elderly to working age) until
2020. After year 2020 until 2025, the dependency ratio will climb up again, where within 2020 to 2030
the elderly population will increase in amount of eight million, so that the ratio of elderly to total population
will increase. The opportunity to build industrial sector related to agricultural, mining and power plant
sectors can be supported by more productive structure of population. While the low dependency ratio
will potentially create higher economic growth per capita and bigger amount of people’s saving under
the circumstances that investment is put on work force and human capital. Without proper work force
absorption, the low dependency ratio will not only be a waste, but also potentially create unemployment
and greater social riot by ignoring this demography bonus.
Graph 2.Gross Domestic Product in Agriculture Sector
Graph 3.Gross Domestic Product in Industrial Sector
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Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
On Indonesia’s Economy
Graph 4.Gross Domestic Product in Mining Sector
Graph 5.Gross Domestic Product in Service Sector
Graph 6.Gross Domestic Product in Electricity, Gas, and Water Supply Sectors
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On Indonesia’s Economy
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Graph 7.Gross Domestic Product in Construction Sector
Graph 8.Gross Domestic Product in Trade, Hotel and Restaurant Sectors
Graph 9.Gross Domestic Product in Transportation and Communication Sectors
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On Indonesia’s Economy
Graph 10.Gross Domestic Product in Financial, Ownership and Business Sectors
2. Income Distribution, Consumption Demand and
Sustainable Development
2.1. The Development of income Distribution In The Past
Income distribution in Indonesia for the last couple years has shown decreasing tendency. Moreover,
the Gini coefficient number has even surpassed the safe limit. Indonesian Gini Coefficient for the last seven
years, namely 2005, 2006, 2007, 2008, 2009, 2010 and 2011 wasconsecutively 0.33, 0.36, 0.38, 0.37,
0.37, 0.38 and 0.41. It means that the Gini Coefficient has got worse for 24 percent within the last seven
years. These numbers were collected from the calculation of Central Bureau of Statistics (BadanPusatStatistik
or BPS) that uses data from National Socio-Economic Survey (SurveiSosialEkonomiNasional or Susenas)
with expenditure approach. It means that the real income disparity would be higher than those numbers.
According to the data from BPS, the income disparity in the urbans and villages has worsened yet the
condition in the urbans is relatively much poorer. Consecutively the income disparity in villages for year
2005, 2006, 2006, 2007, 2008, 2009, 2010 and 2011 was 0.27, 0.28, 0.3, 0.3, 0.29, 0.32 dan 0.34. These
numbers indicate that it has got worsened for 25.9 percent within those periods. Meanwhile, the numbers
in the urbans were 0.32, 0.35, 0.37, 0.37, 0.37, 0.38 and 0.42 for the same years, which indicate that the
deterioration has occurred for 31.25 percent.
According to Todaro (2003), if the Gini Coefficient number lies from 0.20 to 0.35, then the income
distribution disparity may still be considered low. On the other hand, the data from World Bank has shown
that Indonesian Gini Coefficient in year 2005, 2007 and 2009 was respectively 39.41 percent, 37.58
percent and 36.76 percent, meaning that the income disparity in Indonesia was no longer low. This World
Bank data has given not only different numbers with data from BPS in terms of Gini Coefficient, but
also different tendency. However, the World Bank data has not differentiated the urbans and villages
in calculating the Gini Coefficient. It can be ensured that World Bank has also used data from Susenas
established by BPS. Besides Susenas, only Indonesia Family Life Survey (IFLS) that can be used to calculate
15
On Indonesia’s Economy
Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
Gini Coefficient number in Indonesia. But the IFLS has only been conducted for year 1993/1994, 1997,
1998 ,2000 and 2007/2008. According to Field’s calculation (2003: 73), Indonesian Gini Coefficient in
year 1993 and 1997 was 0.56. According to data from SUSENAS BPS, Indonesian Gini Coefficient in 1987,
1990, 1993, 1996, 1998, 1999, 2000, 2001, 2002, 2003 and 2004 was respectively 0.34, 0.38, 0.39,
0.40, 0.34, 0.36, 0.32, 0.33, 0.36, 0.34 dan 0.35. These numbers indicate that within these periods, the
income distribution has relatively not got worse. Instead, the economic crisis in 1998 has made the income
distribution increase to 0.32.
The data from BPS has shown that the deteriorated income disparity according to Gini Coefficient
after 2005 to 2011 was in line with the worsened population with 40 percent lowest expenditure within
the period of 2005, 2006, 2007, 2008, 2009, 2010 and 2011 with percentage of income contribution
respectively for 20.22, 21.42, 18.74, 18.72, 21.22, 18.05 and 16.86. With this lowest income contribution
for 40 percent of population below 17 percent, then the actual income disparity in Indonesia is categorized
as medium. SumitroDjojohadikusumo (1994) argues that if 40 percent of the population with lowest
income has income contribution for 12 percent or less than national income, then the income disparity can
be categorized as bad. However, if 40 percent of the poor population has national income between 12 to
17 percent, then the economy is included into middle income disparity category. And if 40 percent of poor
population has national income for 17 percent and above, then the income disparity is categorized as good.
The indication is that the group of population with 40 percent lowest income within this period,besides
being categorized as medium disparity category, it has also faced income contribution decrease for 16.6
percent. In the urbans, this group has even lower income because within this period the contribution has
fallen for 23.9 percent, where in 2005, 2006, 2007, 2008, 2009, 2010 and 2011 each income share to
national income was 21.16 percent, 19.79 percent, 19.08 percent, 18.55 percent, 19.93 percent, 17.57
percent and 16.1 percent.
For the first time, the urban population has been categorized as medium income disparity in 2011.
Meanwhile the village population has faced income decrease in Indonesian economy for 14.6 percent,
where within period of 2005, 2006, 2007, 2008, 2009, 2010 and 2011 the income share percentage to
national income was consecutively 23.41, 23.42, 22, 22.06, 23.3, 20.98 and 19.99. While 20 percent of
population with the highest income has grown their income for 24.24 percent within those years, where in
years 2005, 2006, 2007, 2008, 2009, 2010 and 2011 the income share to national income was respectively
42.09 percent, 41.26 percent, 44.75 percent, 44.86 percent, 41.24 percent, 45.47 percent and 48.41
percent. Within this period,the group of rich people has grown in villages and urbansconsecutively for 25.9
percent and 31.25 percent. The urbans has faced higher tension than the villages because 40 percent of
the poor population has sharp decreasing income share, namely 23.9 percent, and 20 percent of the rich
population has increasing income share for 31.25 percent. In the urbans, for year 2005, 2006, 2007, 2008,
2009, 2010 and 2011, 20 percent of its rich population has income share percentage to national income
respectively 41.6, 43.33, 43.8, 44.45, 43.18, 45.44 and 49.13. Within the year 2005 to 2011, 40 percent
of the middle-income population also has decreasing income share to national income with respective
percentage of 37.69, 37.65, 36.51, 36.43, 37.54, 36.48 and 34.73. While 40 percent of population with
16
Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
On Indonesia’s Economy
middle income in the urbans for period of 2005, 2006, 2007, 2008, 2009, 2010 and 2011 has income
share consecutively 37.24 percent, 36.9 percent, 37.13 percent, 37 percent, 36.89 percent, 36.99 percent
and 34.78 percent. Meanwhile the percentage in the villages was respectively 40.04, 39.04, 37.94, 38.58,
38.58, 38.78 and 37.48.
2.2. The Current Debate On The Policy To Amend income Distribution
The debate related directly to income distribution does not appear in public. Most of the appearing
debates relate to poverty and development gap between Java Island and outside Java. In line with the
increasing international oil price because of the current political and security turmoil in Middle East, such
as Iran and Syria, the debates discuss about subsidy for the poor population in relations to the increased
price for subsidized fuel and national poverty target. Beside that, another debate about the minimum
wage increase relatively and commonly appears on the public news rather than discussion about income
distribution. Until now, the State Budget has never targeted not only the income distribution number,
but also applied particular assumption from income distribution to formulate the income and spending of
Indonesian government. Unsurprisingly, the income shortage resulted by the performance of Indonesian
economic growth has grown from 2005 to 2011, yet the Indonesian government has not shown any
concern upon that condition.
In
formulating
the
National
Mid-Term
Development
Plan
(Rencana
Pembangunan
JangkaMenengahNasional or RPJMN) for period 2009-2014, the Indonesian government has only set four
strategic steps (which commonly called as Four Track Strategies of Pro-Growth, Pro-Poor, Pro-Job and
Pro-Environment). The government considers this policy automatically overcome the income distribution
problem. Implicitly, RPJMN assumes that the income distribution follows the Kutznets Theory, where the
relation between income distribution and national income has an overtuned U-shape form. One of the
visions of the Long Term Development Plan (Rencana Pembangunan JangkaPanjang or RPJP) expected to be
achieved within the period of 2005-2025 is to materialize just development distribution through thoroughly
social gap decrease and poverty alleviation, eventhough the government has never set the target of income
distribution. A prosperous Indonesia is expected to be portrayed from the improvement of people’s welfare
thoroughly, in terms of economic growth acceleration supported by poverty alleviation and decreasing
unemployment rate through human resource quality refinement program, basic infrastructure improvement,
and environment protection and sustainable program without target of income distribution number.
In the context of poverty alleviation, the government has set a poverty target of 8 to 10 percent from
the total population in 2014. In 2011, the target was 12.49 percent and in 2012 the National Development
Planning Agency (BadanPerencanaan Pembangunan Nasional or Bappenas) has set the target of 10.5 to
11.5 percent. Particular policy will be implemented by the government to achieve these targets if the
subsidized fuel price is increased, namely People Direct Temporary Aids (Bantuan Langsung Sementara
Masyarakator BLSM), where 18.5 million Targeted Household (Rumah Tangga Sasaran or RTS) will get
lump-sum aid in amount of Rp. 150.000 per month within the period of nine months, public transportation
17
On Indonesia’s Economy
Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
subsidy in amount of Rp. 5 trillion, rice aids and poor student aid. These policies are implemented without
any guarantee that the income distribution will get better, the poor population and its percentage will be
less considering there was no research conducted by the government to support these policies.
Generally the growth and percentage development of poor population in Indonesia during the
period 1996 to 2011 has fluctuated eventhough the tendencacy decrease during 2000-2005 and 20062011. Within the period of 1996-1999 the amount of poor population has increased for 13.96 million
because of the economic crisis, namely from 34.01 million (17.47 percent) in 1996 to 47.97 million (23.43
percent) in 1999. With perfected poor standard, the amount of poor population in 1998 was 49.50 million
people (24.23 percent). This amount has kept decreasing until 2011 to 30.02 million people or about 12.49
percent of the Indonesian total population. The amount of the poor population was influenced by the Poor
Line, the more population with income below (approached by the expenditure) low limit, then the more
people with poor status. The Poor Line in Indonesia during 2005 to 2011 was consecutively (in Rupiah per
capita per month) were Rp 138.574, Rp 151.997, Rp 166.697, Rp 182.636, Rp200.262, Rp 211.726, andRp
233.740. It is very difficult to imagine that someone can live healthily with this income. Every year the poor
line value always increasesand one in the urbans is always higher than another in the villages. From March
2010 to March 2011, the poor line has increased for 10 percent from Rp 211.726 per capita per month in
March 2010 toRp. 233.740,- per capita per monthin March 2011.From 2005 to 2011, the poor population
percentage was consecutively 16.69, 17.75, 16.58, 15.42, 14.15, 13.33 and 12.49.This does not indicate
good condition because the amount of people with income below two US Dollar (with the Purchasing
Power Parity calculation) still has been above 50 percent from the total Indonesian population (according
to World Bank data), while in 2005 the ratio was 53.8 percent and in 2009 it was 50.56 percent.
In 2011, four provinces with the highest percentage of poor population were consecutively Papua
(31.98 percent), West Papua (31.92 percent), Mollucas (23 percent) andEast Nusa Tenggara (21.23 percent).
While four provinces with the smallest percentage of poor population in 2011 were DKI Jakarta (3.75
percent), Bali (4.20 percent), South Kalimantan (5.25 percent) and Bangka Belitung Islands (5.75 percent).
In 2006, four provinces with the highest percentage of poor population were Papua (41.52 percent), West
Papua (41.34 percent), Mollucas (33.03 percent) andEast Nusa Tenggara (29.34 percent). Meanwhile four
provinces with the smallest percentage of poor population in 2006 were DKI Jakarta (4.57 percent), Bali
(7.08 percent), South Kalimantan (8.32 percent) and Banten (9.79 percent). Therefore there has been
quitea lot of improvement occurred in the provinces with the highest percentage of poor population within
the last couple years, while other provinces with the smallest percentage of poor population have also
improved with not very big difference. The provinces with relatively highest percentage of poor population
remain still.The provinces with smallest percentage of poor population have also amost not changed except
Banten that was replaced by Bangka Belitung Island. It is very interesting to figure out that although
the prvinces in Java relatively have better infrastructure compared to other provinces in outside Java, the
percentage of poor population in West Java, Middle Java, Yogyakarta andEast Jawawere higher compare
to for instance in Kalimantan in 2011. In fact provinces in Kalimantan were the most successful ones to
decreasing the poor population number compared to other provinces.
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Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
On Indonesia’s Economy
In terms of the speed in decreasing poor population percentage,Bangka Belitung province is the
fastest within the period of 2007 to 2011 with decrease rate of 39.7 percent, followed by East Kalimantan
(38.68 percent) and Bali (36.65 percent). In average Indonesia has decreased the poor population for 24.67
percent within that period. Kalimantan was the island with performance of poor population percentage
decrease relatively above Indonesian average, where the decrease in West Kalimantan, South Kalimantanand
Middle Kalimantan was respectively 33.39 percent, 24.54 percent and 30.06 percent. In Kalimantan Island,
only South Kalimantan has almost similar percentage decrease with Indonesian average. The development
model in Kalimantan has relied on plantation and mining sectors, which seems quite successful in decreasing
the poor population percentage and in line with the improved plantation and mining commodity price.
From the data of Indonesia Family Life Survey in 1993, 1997 and 2000, the poverty trap between
generations in Indonesia was 35 percent, which means that every child born from poor family would have
35 percenthigher probability of being poor as an adult compared to child from unpoor family.
The minimum wage seems to face a lot of challenges in Indonesia, starting from gap of minimum
wage and the average wage, minimum wage and minimum economic needs from worker’s family, the weak
compliance enforcement in implementing minimum wage especially for small scale companies and informal
sector. The average ratio of manufacture worker’s wage to the minimum wage has kept decreasing from
1.65 in 2004 to 1.29 in 2010. The average ratio of hotel worker’s wage to minimum wage has decreased
from 1.65 percent in 2004 to 1.29 in 2010, while the average ratio of non-oil mining sector worker’s wage
to minimum wage was relatively constant from 3.57 in 2004 to 4.10 in 2010. Another worker’s welfare
problem relates to the high ratio of worker’s minimum physical needs compared to the minimum wage,
where in 2004 the ratio was 1.08 and in 2008 was 1.13. It indicates that the minimum wage could not
fulfill the physical needs of a worker. Another problem lies on the campaign from entrepreneur association
and Bappenas that the increase of minimum wage causes constraints for the economic development, job
creation and Foreign Direct Investment (Tjandra 2009). Whereas, other research shows that minimum
wage is not the only influence to job creation, but there are other factors, namely business cycle, condition
of work force market, the size of company and sector (Alisjahbanaand Manning 2007). Another research
also shows that a stiff work force market caused by minimum wage regulation has not been a constraint
of economic development since 1998 (Chowdhury et al 2009).
2.3. Future Development
The average ratio of worker’s wage to minimum wage will keep declining in the future. This
decreasing trend has occurred clearly, where in 2004 the ratio was 1.59 and kept decreasing to 1.29 in
2008, 1.31 in 2009 and 1.33 in 2010. It means that in average the workers face welfare deterioration
systematically. The workers’ wage ratio development of manufacture and hotel sectors to minimum wage
is predicted to be smaller in the future. Both ratios have shown decreasing trend since 2004, on the contrary
the economic growth relatively shows increase in the same period. It indicates that higher economic growth
does not result additional welfare for workers in both sectors. It is not impossible that the average ratio
19
On Indonesia’s Economy
Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
of manufacture worker’s wage to minimum wage and average ratio of hotel worker’s wage to minimum
wage will reach the number one or even below one in the following years. While the minimum wage ratio
to minimum physical needs seems to keep being below number one for the next couple years. Non-oil
mining sector worker has better level of welfare in comparison with manufacture and hotel sectors worker,
where the wage ratio to minimum wage has reached 3.57 times in 2004 and 4.1 times in 2010. Even in
2007 it has reached 5.19 times but has decreased to 3.71 times in 2008 and 3.06 times in 2009 due to the
economic crisis in developed countries, especially USA. However, the ratio has increased again to 4.1 times
in 2010, which shows that the demand of non-oil mining products were still high. While the wage ratio
in manufacture sector to minimum wage in 2004 was 1.84 times and has kept decreasing to 1.42 times
in 2010 and previously to 1.37 times in 2009. While the wage ratio in hotel sector to minimum wage has
fallen down faster from 1.65 times in 2004 to 1.29 times in 2010. The workers in manufacture and hotel
sectors will face more difficult living in the future.
According to the education level, the average ratio of uneducated worker to declining minimum
wage has always been below one, where the ratio in 2004 was 0.64 and 0.51 in 2010. While the average
wage ratio of worker with unfinished elementary education to minimum wage in 2004 was 0.78 and in
2010 was 0.68. While the average ratio of worker with finished elementary education to minimum wage
was one in 2004 and has decreased to 0.78 in 2010. Therefore, in the future, the ratio trend of worker with
below elementary education level will not only get worse, but also below minimum wage. In the future,
the average wage of worker with primary education level to minimum wage will tend to be worse as well,
where in 2004 it was 1.3 and in 2010 it was 1.14. Similar trend will occur to the worker with secondary
education level, yet with better ratio compared than the earlier education level, where in 2004 the ratio
was 1.93 and 1.48 in 2010. The average wage ratio of worker with vocational secondary education to
minimum wage will also have decreasing tendency in the future, where in 2004 it was 2.02 to 1.52 in
2010. Worker with three years diploma education will also have declining tendency of average wage ratio
to minimum wage from 3.03 in 2004 to 2.13 in 2010. This tendency will also be faced by the worker with
scholar degree, where in 2005 it was 3.04 and has decreased to 2.84 in 2010. Thus, it can be concluded
that the current ongoing and future development will deteriorate workers’ welfare.
According to gender, there is a decreasing trend in the average wage ratio to minimum wage,
where the ratio for male in year 2004 was 1.73 and in 2010 was 1.42. Meanwhile, the ratio for female in
2004 was 1.26 and in 2010 was 1.13. This indicates that there is decreasing welfare and discrimination for
female worker in terms of wage so far and this tendency seems to keep going on in the future.
3. World Market Strategy and Protection from External Shocks
3.1. Past Integration Into The World Market
The integration of domestic economy to global economy has always been marked by the interaction
between domestic and global factors. For most of the Asian countries, including Indonesia, the reality of
20
Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
On Indonesia’s Economy
crisis 1997/1998 has been an important milestone of the integration process to global market. After the
Asian crisis, most of countries hit by the crisis have conducted series of economic restructurization, which
were characterized as series of step and policy to make domestic economy more open and liberal.
When the global financial crisis occurred in 2007/2008, the countries integrated into global market
have faced significant economic development deceleration. Fortunately, Indonesia was included into country
with low level of integration to the global economy, especially from the trade side, so the impact of global
economic deceleration has not been significant to Indonesia. Nonetheless, the financial liberalization has
caused several risks, especially in relations to the stability problems in financial sector.
From Graph 11 and 12, it can bee seen that the openness level of Indonesian FDI and trade are still
low. There are two important things; first, the openness level of Indonesian FDI and trade are still relatively
low compared to Malaysia, India, South Korean, let alone Hong Kong. These other countries have seemed
very progressively increasing their level of openness in investment and trade after the crisis 1997/19981.
Second, altough there is an increasing tendency, in the moment after the crisis, but after that it tends to
decrease again. So, compared to other countries, Indonesian economic integration to the global market is
still relatively low.
However, in terms of currency exchange rate protection, Asian crisis has really been a momentum
for Indonesia. Before the crisis, the exchange rate has been controllable (pegged-exchange rate system).
In Graph 13 it can be seen that before the crisis, the exchange rate of US Dollar to Rupiah was around Rp.
2.500. But because of great pressure of the exchange rate, which could not been tackled by the Indonesian
monetary authority, namely Bank of Indonesia, since 14 August 1997, the exchange rate system was set by
free floating. It means that the exchange rate is no longer set by the monetary authority, but by the market
mechanism. As the result, the average of exchange rate from 1997 to 1998 was more than Rp. 10.000
per 1 US Dollar. Until now, one of the most important problems in Indonesian economy is exchange rate
management to avoid drastic change.
Although following free floating exchange rate system, Bank of Indonesia still sets a target, so that
if a change outside that target occurs, market operation will be conducted to restore the exchange rate to
the set range. This is important to protect the export-import synamicsfrom exchange rate fluctuation.
The crisis 1997/1998 has also marked the dynamics of Indonesian balance of payments. Briefly
after the crisis, huge foreign capital flight occurred, which caused the lowest level of Rupiah and deficit
in balance of payment. In Graph 14, it can bee seen that the ratio of financial account to GDP has ever
experienced (minus) 10 percent contraction. Eventhough after that,an increasing surplus has happened,
in line with the domestic economic improvement. When the world faced crisisin 2007/2008, Indonesian
economy has benefited, because the foreign capital, especially in form of portfolio, has poured in rapidly
as the result of the financial market fall in developedcountries.
1 Definition used by Asian Development Bank to measure the openness level of FDI is the total percentage of FDI to GDP in each
country. Trade openness is measured by the ratio of export-import in total to GDP. Both show the intensity of investment and
product flow to and from a country.
21
On Indonesia’s Economy
Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
In contrast with the current account, financial account has had huge deficit,.This has been caused
by the Indonesian export value that has boosted in line with the exchange rate leap. Insonesian export
income has multiplied, so that the current account ratio to GDP has increased after crisis. Moreover,
Indonesian export has been based on primary commodity, which price has also boosted. Facing the global
crisis 2007/2008, the export has tended to decrease, so that the proportion of current account has shrunk
in comparison with financial account.
From the contribution of net-investment to domestic economy, it can be seen that investment
portfolio has recovered faster and increased again after the crisis, while net-direct investment has tended
to be slower. The important momentum of net-direct investment increase has happened in 2005-2006, in
relations to the domestic economic performance in the booming phase. The investment has decreasedduring
thecrisis in 2007/2008, although has increased back, especially the portfolio investment.
Generally, after the Asian economic crisis in 1997, Indonesian exportperformance has seemed very
poor. Even when other countries in Asian region have started recovering, Indonesian export has still struggled
towards recovery. It shows that Indonesian export performance has greater complexity problem compared
to export dynamics in other Asian countries. A study conducted by Harvard Kennedy School of Governance
(HKS) together withYayasan(Foundation) Rajawalishows that Indonesian export performance after crisis has
been left behind by other Asian countries2 . Thus, Indonesia is relatively not ready to faceASEAN China Free
Trade Agreement (ACFTA) compared to other neighbouring countries.
Indonesian export has been dominated by manufacture products, which has kept increasing from
time to time, with a little decrease in 2009 due to global crisis. Meanwhile, agricultural and mining products
are relatively more stabile. Nevertheless, this contribution of manufacture product must be observed further,
because mostly are based on natural resources. From Table 30, it can be seenthat the biggest contribution
to the manufacture products export are textile and textile product and electronic, measuring, and optical
products. Yet, besides those two main products, the export of manufacture product is supported by wood
processed product, palm oil,basic mineral and oil products. All of them are processed products based on
natural resources, with relatively low management level. Generally, it can be said that Indonesian export is
still dominated by commodity or commodity-based sector, with relatively low added value for the domestic
economy.
Beside that, the high level of processed product export has implication to the high raw material
import. Graph 17 shows that the merchandise import growth has always surpassed merchandise export
growth. Indonesianindustry and manufacture sector has depended very much onimported raw materials, so
that the increase of exported product automatically followed by increase of raw materialsimport.
Indonesian exportto two main world regions, namely USA and EU, gets lower. While the intraASEAN and Asia trade keeps increasing. That relates to economic regionalism, especially the long planned
ASEAN Economic Community achievement targets, to start applying in 2015. Japan keeps being trade
2 Look at the report with title “From Reformasi to Institutional Transformation: A Strategic Assessment of Indonesia’s Prospects
for Growth, Equity and Democratic Governance”, Indonesia Program Rajawali Foundation Institute for Asia, Ash Center for
Democratic Governance and Innovation, Harvard Kennedy School.
22
Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
On Indonesia’s Economy
partner for Indonesian export products, but the proportion keeps decreasing and replaced by ASEAN,
which has been Indonesian biggest export partner after global crisis. The role of China has got more
important as well, following the ACFTA implementation since January 2010. This condition has also made
Indonesian economy not much influenced by the USA and EU crisis due to their decreasing roles as markets
of Indonesian export products. On the contrary, ASEAN and China has an increasing role.
After the crisis 1997/1998, the country foreign debt has contributed hugely in Indonesian economy.
The rasio of external debt to GDP has ever reached 140 percent in 1998. That was mainly caused by
the leaping exchange rate, so that Indonesian external debt responsibility has also multiplied. However,
following the budget discipline set by the government, in 2010,the total of foreign debt has been low
enough, around 27 percent. That was one of the most important indicators in macro economy stability,
considering that almost all developed countries face huge public debt problems.
Besides the improving debt ratio, macroeconomy stability has also been marked by the significant
increase of foreign exchange reservein comparison with the past Asian crisis time. In 2000, the amount of
Indonesian foreign exchange reserve in foreign currency was only around 25 bilion US Dolar, but in 2010
it has reached the highest point of around 120 billion USDollar. That high amount of foreign exchange
reserve has marked the swift flow of foreign capital into Indonesia. And in terms of global crisis anticipation,
where exchange rate fluctuation has occurred in many countries, since 2009, Indonesia has increased the
SDRs ownership as a more stabile transaction means. Meanwhile, its gold reserve has also kept increasing.
It was conducted to increase the resilience of domestic economy to global crisis that kept happening since
2007/2008.
Because of its growth momentum with macrostability, the rating institution starts raising Indonesian
long-term debt rank to be investment worthy. The global crisis has been a threat, as well as opportunity for
Indonesia to improve the economic performance, especially its macroperformance 3.
3.2. Present Debate About The Integration In The World Market
The Asian financial crisis 1997/1998 has been a pushing factor to implement economic restructurization,
which consists of deregulation, privatization and liberalization policies 4. The restructurization push has
not only originated externally, but also internally, considering during the times before crisis the economic
system was marked by rent-seeking attitudes from some groups of interest close to the ruler. Thus, the
crisis has been marked as momentum to reduce such rent-seeking attitudes, which generally has pushed
Indonesian economy to become more liberal.
The slow restructurization process has caused the slow tendency of domestic economy integration
process to global market. This situationhas seemed advantageous in some ways during the crisis2007/2008.
3 Macroperformance improvement does not automatically indicate microcondition on the fields.
4 Some articles to push liberalization in trade and investment sectors are tied in the agreement between Indonesian government
and International Monetary Fund (IMF), in form of bentuk Letter of Intents (LoI), as the consequence of debt to overcome the
crisis.
23
On Indonesia’s Economy
Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
Economic contraction in developed countries has not distracted the dynamics of domestic economy. On
the contrary, Indonesian economy has tended to be benefited, because foreign investors have considered
Indonesia as investment destination, so that they came to Indonesia. Moreover after the rating institutions
has raised Indonesian debt rating to be included in investment grade level.
Moodys Investor Service has raised Indonesian domestic and foreign debt from Ba2 to Ba1 5. The
reason is that Indonesian economic resilience has increased followed by sustainable macroeconomy balance.
Before that, Fitch Ratings has increased Indonesian debt rating from BB+ toBBB- 6. The investment rating of
developing countries has kept increasing, while the debt prospect of developed countries has kept going
down. So, there seems to be a shift in the world investment map from USA and Europe to Asia 7.
That shift has portrayed the world shifting position in the situation of global imbalances. To face
the crisis in developed countries, Asia is expected to be the consumer of the products of these countries,
especially USA and EU. They really need the role of Asian market as the effort to increaseforeign exchange
income from export increase, so that it can cover the deficit and reduce the dependence to huge public
debts. That is the reason why President Obama has been very active to promote the US free trade cheme
with Pasific countries through Trans Pacific Partnership (TPP) scheme.
For USA, Indonesia has been a very potential market to generate US real sector. Many of US companies
have come to Indonesia in form of Foreign Direct Investment (FDI), in order to utilize the very wide demand
of Indonesian domestic market. Generally, FDI serves the retail, primary industry, and bankingsectors.
Indonesian market in these three sectors is very tempting 8.
Indonesian economic growth has been very much counted on the domestic demand led growth,
which has been supported by government spending and household spending 9.Indonesian domestic market
has been supported by the high population (around 230 million people)and the growth of middle class
with increasing purchasing power parity. According to World Bank (2010), every year there is an addition
of middle class in amount of around 7 million people 10. In 2003 the amount of middle class in Indonesia
was37.7 percent of the total population, while in 2010 it has grown to 134 million people, or around 56.5
percent of total population. Therefore, according to World Bank, more than half of Indonesian population
is categorized as ‘middle class’.
5 Established inJanuary 2012
6 Establiched inDecember 2011
7 See the reports of investment institutions, among othersMorgan Stanley and Goldman Sachs, or reports of multilateral
institutions, such as World Bankand ADB
8 Upon thevisit of President Barrack Obama in Baliduring Asia Pasific Summit, a cooperation contract of 230 Boeing 737 aircraft
purchase with value of around 21.7 billion USD by the domestic airline company, Lion Air.
9 The issue of the importance of domestic demand led growth to Indonesian economycan be seen for instance in the IMF Survey
Magazine, Oktober 2011 edition, and also “Article IV report”, written by Thomas Rambaugh, IMF’s mission chief for Asian
countries.
10 According to definition from World Bank, middle class are citizen with income between 2 to 20 US Dollarper day.There are 4
groups of middle class in Indonesia: 1)citizen with income between US$2 - 4 per day, around 38 percent of total population;2)
citizen with income betweenUS$5 - 6 per day, around 11.7 percent from total population; 3)citizen with income betweenUS$
6 -10 per day, around 5 percent of Indonesian total population; and 4)citizen with income betweenUS$ 10 - 20, or around 1.3
percent from the otal population.
24
Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
On Indonesia’s Economy
Apart from the problem of the wide middle class category, it seems that the community layer with
relatively high purchasing power parity in Indonesia keeps increasing. That is the reason why Indonesia has
become a very interesting market for imported products or as investment destination to produce fast moving
goods
.In 2010, the amount of car sold in a year was around 750 thousand units. Unsurprisingly the
11
biggest car producer in the world, Totoya Motor Corp., has increased its production capacity in Indonesia,
with pretty big investment.
Compared to the neighbouring countries, the middle class growth in Indonesia is very high. Indonesia
is projected to have the highest middle class growth among ASEAN countries in 2014. With the huge amount
of population, and highest level of middleclass growth, Indonesian domestic consumptioncan be ensured
to increase. However, it also has dangerthat if highdomestic consumption does not followed by national
product capacity, then it will absorb huge import instead. As the consequesnce, the ongoing balance of
transactionwill potentiallysuffer from deficit, which will influence the Indonesian macroeconomy stability.
Goldman Sachs differentiates these countries with other developing countries. Both BRIC and the
next-11 can no longer be called as “developing countries”. Goldman Sachs regards them as “the growth
market” or group of growing countries.
Unastonishingly, Indonesia has become one of the most promising destinations for investment.
In the World Investment Report 2012 published byUNCTAD (United Nations Conference on Trade and
Development) shows that China will outperform USA as Foreign Direct Investment(FDI) destination until
2013. And Indonesia will surpass Australia andGermany within the same period. It is clearly seen that
Indonesia is part of dynamic economy in the future.
Although seems optimistic, there are several things need attention. First, the improvement of macro
performance from the perspective of growth indicators, interest rate and inflation are insufficient. The
currently obtained macro stability, besides the emerging opportunity as result of global crisis, must be used
well by the government to push the real sector in Indonesia, so that more people are involved in economy.
As the impact, the problems of unemployment and poverty can be tackled by the good performance of
macreconomy. Macro stability is the pre-requisite, but still insufficient.
Second, the increase of foreign capital wave in form of portfolio investment as the result of
Indonesian improving rating must cautiously be realized, as it has the potential to cause financial sector
instability. It means that the increase must be followed by good policy framework to be able to minimize
the financial sector volatility, which in turn will cause negative impact to macrostability.
Third, the interest of foreign direct investor to Indonesia must be followed by the enhancement of
economic competitiveness. If not, then domestic economic capacity to the entering FDI will be very limited
or only centralized in several sectors or areas, so that the FDI increase will not result equal added value to
various sectors/areas.
11 MagazineThe Economist reports that the selling level of motorcycle in Indonesia in 2010 was around 8 million, while in Thailand
was only 1.7 million, India 11.3 million and China 16 million. Vespa producer from Italy, Piaggio, had left Indonesian market in
the 1980s, because it was considered uninteresting.However, they have re-opened their distributors in Indonesia lately. So has
fast moving goodsproducer from USA, Procter and Gamble (P &G).
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On Indonesia’s Economy
Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
Fourth, the high FDI in industrial sectors based on imported raw materials will push an increase in
raw materials import instead. Moreover, the high level of imported product consumption by the middle
class market will cause deficit risk on the trade balance or current account. With the current account
position is vulnerable to deficit, while the capital account is vulnerable to foreign capital flight,then actually
Indonesian balance of payment is not safe enough towards fluctuation.
3.3. Feasible Future Development
Domestic economic openness followed by enhancement of integration to the global economy has
left two big agenda. First isto increase the domestic economic competitiveness in order to be able to
compete better with foreign actors. Second, there has to be a management of entering foreign capital,
especially through portfolio investment. The policy framework has to be directed to manage stability in
short, medium, and long term.
The experience of involvement in the ACFTA is supposed to be an important lesson for the direction
of future trade and investment policy. Self opening without sufficient preparation is suicidal. The fact of trade
deficit with China marked by the increasing import speed from China portrays bad policy management of
unsynchronized domestic economic readiness to face liberalization and the ignorance to follow free trade
scheme. Future challenge is ASEAN Economic Community (AEC) era starting in 2015.
In 2011, Indonesian balance of payment has generally been noted surplus, yet with tendency of
decreasing value. Eventhough there was an increasing export, but the import growth was bigger. The
classic problems that have been discussed since 5 or even 10 years before, remains as problems nowadays
without meaningful improvement. Infrastructure is the most striking problem, so unsurprisingly the capacity
to support economic dynamics will keep decreasing.
Graph 11. Foreign Direct Investment (FDI) Openness
Source: Asia Regional Integration Center (ADB)
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Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
On Indonesia’s Economy
Graph 12. Trade Openness
Graph 13.Exchange Rate RP per US$
Source: Asia Regional Integration Center (ADB)
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On Indonesia’s Economy
Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
Graph14. Balance of Payments
Source: Asia Regional Integration Center (ADB)
Graph15. Net Investment
Source: Asia Regional Integration Center (ADB)
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Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
On Indonesia’s Economy
Graph16. Value of export by sectors (in thousand of USD)
Source: Central Bureau of Statistics (Badan Pusat Statistik or BPS)
& Bank of Indonesia
Graph17. Merchandise Export Growth ($ value, y-o-y, %)
Source: Asia Regional Integration Center (ADB)
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Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
Graph18. Value of Export by Country of Destination (in thousand of USD)
Source: Central Bureau of Statistics (Badan Pusat Statistik or BPS) & Bank of Indonesia
Graph19. External Debt (% of GDP)
Source: Asia Regional Integration Center (ADB)
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Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
On Indonesia’s Economy
Graph20. Reserve in Foreign Currency (million of USD)
Source: Bank of Indonesia
Graph21. Reserves on Gold and SDRs (million USD)
Source: Bank of Indonesia
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On Indonesia’s Economy
4.
Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
Green New Deal and Ecological Problems
4.1. Brief Description on The Ecological Problems
According the data from World Bank, the industry with most percentage of organic water pollution
producer were textile, foods, other industrious groups, chemical, woods, paper and pulp, paper and metal
with respective percentage of 29.25, 23.11, 19.92, 11.99, 6.30, 4.05, 3.99 and 1.38 in 2006. While in
2003, the percentagesof similar industries were consecutively 30.45, 21.71, 18.12, 13.13, 7.97, 3.79, 3.51
and 1.32, indicating no change. The organic water pollution emission has kept increasing from 721,773.6
kg per day in 1998 to 882,985.4 kg per day in 2006. The organic water pollution emission per worker has
also increased from 0.18 in 1998 to 0.19 in 2006. The last World Bank data was in 2006, yet it is sufficient
to explain the upcoming trends for the next following years. According to data from BPS, in 2009, the
maximum content of Biochemical Oxygent Demand (BOD) in river water in Indonesia below maximum limit
of 2 mg/L only found in Mamasa River in West Sulawesi province (1.25 mg/L), while the others were above
the limit. The maximum content of Chemical Oxygent Demand (COD) in Indonesian river water below set
limit of 10 mg/L were found in Musi River, Bengkulu province (2.43 mg/L) and Jangkok River, West Nusa
Tenggara (2 mg/L) and Mamasa River, West Sulawesi (2.32 mg/L). Meanwhile, the conserved sea area per
total sea area has been increasing yet the percentage was still very low, which was from 0.48 percent in
1990 to 1.94 percent in 2009.
The percentage of conserved land area to the total land area has also increased from 9.9 in 1990 to
14.1 in 2010, while the percentage of forestry to land has decreased from 65.4 or 1,185,450 km2 in 1990
to 52.1 or 944,320 km2 in 2010. The GEF advantage index to biodiversity is 80.96.
The highest CO2 emission was produced by firewood, followed by petroleum and cooking gas.
According to data from BPS, during 2007-2009, CO2emission from gas fuel has increased for 5.46 million
ton or around 177.96 percent, and petroleum has decreased for 10.72 million ton or 51.71 percent,
andcooking firewood has increased for 1.06 million ton or 0.71 percent. In 2009, total CO2emission from
gas fuel was 85,434.4 kilo ton, petroleum 10,010.2 kilo ton, andfirewood 149,958.8 kilo ton. According
to data fromWorld Bank, in 2008 total CO2emission from gas fuel was60.362,487 kilo ton,fluid fuel
148,550.17 kilo ton, andsolid fuel 173.368,426 kilo ton. CO2produced by solid fuel has exponential
growth, which start has rapidly begun in the middle of 1980s. Before 2002, CO2production from solid
fuel has always been below CO2production of fluid and gas fuel, yet in 2002, the CO2production of solid
fuel has surpassed CO2production of gas fuel. In 2008, the CO2production of solid fuel has surpassed
CO2production of fluid fuel, and the rasio of CO2production of fluid fuel to one of gas fuel was 2.46.
According to data from BPS, that rasiowas 3.34.
This data difference was caused by the method of calculation, where World Bank has counted the
fuel usage by the whole economy, while BPS has counted the usage only by the household. Therefore,
the data from World Bank has become more relevant in calculating the development of CO2production
compared to the data from BPS. Nevertheless,World Bank only has data until 2008, while BPS until 2009.
Apart from the data difference between these two institutions, both data show similar tendency, where
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Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
On Indonesia’s Economy
the highest CO2production in Indonesia were consecutivelyfirewood, petroleum and gas, although data
from World Bank shows that these sequencehas occurred only in 2008. Therefore, the energy conversion
steps from fluid to gas fuelwill not be effective to reduce CO2 production in Indonesia, because the fastest
growth of CO2 production was from solid fuel. Data from 1980 to 2008 has shown that the growth of
CO2production by gas fuel in Indonesia was 3.96 timesand by solid fuel was 243.96 times. In line with
that, within that period, the growth of CO2production by fluid fuel was 1.24 times. In percentage, there
has been a change, where each percentage of CO2production of fluid, solid and gas in 1980 to total
CO2production was respectively 69.83, 0.75 and 12.84. In 2008, each percentage has changed to 36.89,
42.7and 14.89. This growth of CO2production has also been followed by the growth of CO2 intensity
(kg per kg of oil equivalent energy use),where in 1980 it was 1.69 and has increased to 2.12 in 2008. It
indicates that the efficiency of CO2production of energy usage in Indonesia has not happened, where
Indonesia has got more trapped by environmental unfriendly energy.
Unastonishingly, the CO2per capita production in Indonesia has also increased from 0.63 metric ton
per capita in 1980 to 1.73 metric ton per capita in 2008. In the context of added value, an improvement
could be found instead, where CO2emission to Indonesian GDP in Purchasing Power Parity (PPP) dollar
value has decreased from 0.88 (kg per GDP in PPP dollar) in 1980 to 0.45 (kg per GDP in PPP dollar) in 2008.
In other words, although an environmental deterioration has occurred in terms of energy intensity, but an
environmental improvement has occurred in terms of value added intensity. The added value generated
has made the CO2 emission become more insensitive.If using the constant dollar value in 2000, then the
usage intensity of CO2emission in generating added value in Indonesia has also not deteriorated, from
1.61 kg per GDP with constant dollar value 2000 in 1980 to 1.64 kg per GDP with constant dollar value
2000 in 2008. The undeteriorating emission production coul also be found from the 0.48 kg emission per
GDP based on PPP with constant dollar value 2005 in 1980 to 0.48 kg emission per GDP based on PPP with
constant dollar value 2005 in 2008.
Based on the sectors, the highest CO2emission produced by electronic and heater sector with
emission production of 145.33 million metric ton (2008), while on the second and third places were
consecutivelyindustry and construction which produced 131.03 million metric ton (2008) and transportation
that produced 75.91 million metric ton (2008). These three sectors have kept showing ongoing positive
growth. According to BPS, the highest CO2emission by motoric vehicle has been produced in 2009 of
85.72 million ton, where from vehicle with gasoline fuel was 51.84 million ton and solar was 33.88 million
ton. Based on provinces, the highest CO2emission by motoric vehicleproduced in DKI Jakarta of 18.50
million ton, while the lowest was in North Mollucas with CO2production of 36.4 thousand ton. The fourth
position based on sectors was held by housing, commercial and public serviceswith emission of 24.2 million
metric ton (2008). Beside the housing sector, commercial and public services have produced 8.9 million
metric ton emission (2008). These last two sectors have experienced decreasing trend, where their highest
trend was respectively in 2000 (32.63 million metric ton) for housing, commercial and public services and
2004 (11.99 million metric ton) for non-housing, commercial and public services sectors.Gas pollution
produced besides CO2 were HFC, PFC, and SF6, but the data from World Bank has just recorded data from
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On Indonesia’s Economy
Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
2000 and 2005, which was in thousand metric tonequal with CO2respectively 1,001 and 1,026.7. Looking
at these two data, then the production of gas besides CO2was relatively stagnant.
In 2005, the amount of SF6 and PFC produced was respectively 898.7 and 128 in thousand metric
ton equal with CO2. From 2000 to 2005 theMetanaemission has increased from 177,166.6 to 208,944.4
(respectively in kilo ton equal with CO2), while the Metanaproduction from energy sectorhas decreased
from 54,892.8 kilo ton equal with CO2to 53,360.4 kilo ton equal with CO2. Within this period, the
Metanaproduced by agricultural sektorhas increased from 78,750.2 kilo ton equal with CO2in 2000 to
96,971.2 kilo ton equal with CO2in 2005. According to data from BPS, in 2010,the CH4emission from
livestock was predicted to reach one million ton and the CH4emission from poultry to reach 32.31 thousand
ton. Thehighest CH4emission from livestock has occurred in 2010 and found in East Java Province (226.27
thousand ton), while thehighest CH4emission from poultry was found in West Java (11.43 thousand ton).
Within the same period, the NO2production was 90,387 thousand metric ton equal with CO2 (2000) and
123,275.1 thousand metric ton equal with CO2 (2005). The NO2production from industrial sector has
increased from 175.8 thousand metric ton equal with CO2 (2000) to 219.6 thousand metric ton equal
with CO2 (2005), while energysektorhas increased from 4,040.8 (2000) to 4,299.5 (2005). The highest
NO2production from agricultural sector has also increased from 60,325.8 (2000) to 88,201 (2005).
According to data from BPS, the limit for SO2is 0.01 ppm/24 hours, while for NO2is 0.05 ppm/24 hours.
In 2010, the measurement result of SO2gas concentration at Kemayoran Station, Jakarta, has shown that
the amount has surpassed the limit in July, August and November. In 2010, the measurement result of
NO2gas concentrationthat surpasses the limit only found inOktober. Meanwhile, the level of PM10 has kept
decreasing from 91.13 microgram per cubic meter in 2005 to 72.35 microgram per cubic meter in 2008.
4.2. Current Debate to Solve Ecological Problems
World Bank Development Indicators database has not provided accurate data about the amount of
carbon emission produced by Indonesia because it has not included the emission data of Land Use Change
and Forestry (LUCF) and peat fire. By using the data from Indonesia Second National Communication Under
the United Nations Framework Convention on Climate Change (UNFCCC), November 2010, which is the
product of Indonesian government, it is mentioned that in 2005 the amount of carbon emission produced
by Indonesia was 1,791,371.89 Gg CO2e, where Indonesia was the third biggest country in the world
afterUSA and China in terms of carbon emission production. It can happen by including carbon emission
produced by the Peat Fire and LUCF, where the source structure of carbon emission producer in 2005 was
energy (369,799.88 Gg CO2e), industrial process(48,733.38 Gg CO2e), agriculture (80,179.31 Gg CO2e),
LUCF (674,828.00 Gg CO2e), peat fire (451,000.00 Gg CO2e), and waste (166,831.32 Gg CO2e). Even
without including carbon emission from LUCF and Peat Fire in its database, the World Bank, together with
PEACE dan DFID,has calculated that the total of Indonesian emission in 2007 has been two times bigger
than what the Indonesian government has calculated, which was 3,014,000 Gg CO2, where the LUCF
contribution was 85 percent or 2,563,000 Gg CO2. Meanwhile, from the research of World Bank in 2008,
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Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
On Indonesia’s Economy
the amount of carbon emission from LUCF was 2,398,000 Gg CO2with details of 53 percentfrom Peat
Fire, 20 percentfrom peat drainage (oxidation), 22 percent from deforestation, and 5 percentfrom palm
oil plantation and woods. Thus, the big difference has actually been resulted by the different method in
calculating LUCF dan peat fire emission. Apart from this difference, constribution of LUCF and peat fire
to the total carbon emission in Indonesia has been huge. According to the Indonesian government, it was
62.85 percent in 2005.
Meanwhile, in Indonesia Second National Communication Under the United Nations Framework
Convention on Climate Change (UNFCCC), November 2010,it was mentioned that in the G20 Summit,
Pittsburgh and COP15 Summit, Copenhagen, in 2009,the President of Indonesiahas ambitiously promised
that Indonesia will voluntarily and independently reduce the carbon emission for 26 percentfrom the scenario
Business AsUsual (BAU) in 2020, while the 41 percent reduction can be done with international aids in
2020. The target of carbon emission reduction is not compulsory for the developing countries because it
has the potential to decrease the economic growth. That target will be achieved by government by setting
requirements inNational Action Plan to Reduce Gas Emission (RencanaAksiNasionaluntukMengurangiEmisi
Gas or abbreviated as RAN-GRK), which are: first, the action plan must not hamper economic growth and
prioritize people’s welfare, especially in relations tothe guaranteed energy and food supply. Second, the
action plan has to support the protection for poor people including environmental conservation in the
context of sustainable development. Third, it consists of emission reduction activities and supports the
activities to strengthen the policy working framework. With these requirements, especially the first one,
where the target to reach emission reduction must not hamper the economic growth, then these targets are
very unrealistic. A developing country like Indonesia is not obligated to reduce the carbon emission because
that step will have negative impact to the economic growth. The Indonesian government is supposed to
calculate already the cost needed to reach carbon emission reduction of 26 percent independently and 41
percent with the international aids in 2020.
The Indonesian government has not established any calculation of the cost needed to reach that
carbon emission reduction target. However, in Bappenas 2009b, it is mentioned that this funding issue can
be overcome through foreign debt if grant is no longer sufficient. A research byCarraro and Massetti (2012)
has reminded all of us that the effort of carbon emission reduction requires a lot of funds.They mentions,
“The cost of following the tax trajectory that hits the 2°C target in 2100 varies depending on the interest
rate we use for discounting. We find costs range between 5.4 percent and 3.2 percent of future discounted
GDP for China and from 2.8 percent to 1.3 percent in the OECD”.
Knowing the cost estimation early is very important to plan how to gain inexpensive source of funding.
That research has given one important input that the cost of carbon emission reduction in China is more
expensive compared to such cost in the OECD countries. If the cost of carbon emission reduction in Indonesia
is assumed to follow the lowest scenario from such cost in China, then Indonesian economic growth has the
potential to decrease for 3.2 percent per year. This is a very expensive price to pay by Indonesian economy,
which so far has not been able to reach double digit economic growth. Despite of the unclear amount of
funding, Indonesian government has already made Indonesian Climate Change Trust Fund (ICCTF), which is
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On Indonesia’s Economy
Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
a financial management system to support and accelerate the implementation of climate change program.
In the early phase, ICCTF takes form of “Innovative Fund”, which is grant from other country. The next
phase is called “Transformation Fund”, which consists of all funding possibilities, namely public-private
partnership, loan and capital market source. Thus, at the beginning, the source of ICCTF funds will befrom
the public funds and later the private one. It means that the cost of targeted carbon emission reduction will
tend to be more expensive because at the end the government will rely on private sector as main source of
fund. Eventhough the government expects private fund in form of Corporate Social Responsibility (CSR), the
next question is whether this CSR fund sufficient to finance the target of carbon emission reduction in 2020,
whereas the CSR fund itself is allocated not only for emission reduction. Looking at its plan phases, ICCTF
itself seems to hardly develop. There are four phases in ICCTF, which are: first, research and development
that will finish in 2009 (involving sectoral ministries); second, demonstration phase that will end in 2010
(involving local government sectoral ministries, private sector, civil society organizations and universities);
third, the early deployment phase that will be finished in 2012; and last phase is commercial deployment
expected to carry on continuously. It means that the commercial deployment phase has to be achieved in
2013. Ironically, the funds needed for every phase have never been planned.
4.3. Strategy and The Precicion of General Industrial Policy
The Indonesian government currently tries to develop an industrial policy by pushing the
downstream industrialization process in mining and plantation sectors. Beside that, the government has
been conductingrestructurization in textile, shoes and sugar industries. The downstream industrialization
process in palm and cacao plantations has been conducted by setting the export tax for maximum 25
percent. The objective is to provide raw materials supply for domestic cooking oil industry and also to
increase the state treasury. The weakness of this policy lies in the export tax setting for product of palm oil
industry that causes unharmonious incentive for palm oil industry to grow even faster.
The downstream industrialization process in mining sector has been started since May 2012, yet
only in form of export tax. The export ban of mining product will only be effective in 2014 if the mining
company does not have any plan to build downstream industry like smelter. Therefore, in short term, the
effect of downstream industrialization process in mining sector will not give any big benefit yet. In other
words, the short term orientation is increasing state treasury and obstacle of raw mining materials for
export. These raw materials are later expected to be raw materials for mining sector downstream industry.
The export ban has been exercised currently is on rattan raw material. This ban is supposedly able to
reduce the rattan encroachment in the forests because so far, the rattan cultivation relatively does not
exist, besides to increase the added value process through domestic rattan industry. Other industrial policy
is the restructurization of machineries in the textile, textile product, foot wear and sugar factories. The
government will allocate 10 percent subsidy if the newly purchased machinery has new technology. With
new technology machinery, the productivity and energy usage will be more efficient. And if the machinery
has local content of 25 percent, then the government will give at minimum 25 percent subsidy.
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Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
On Indonesia’s Economy
In the context of Green House Gas (GHG) emission, the manufacture sector in Indonesia was placed
on the sixthafter the GHG emission produced by Land Use Change and Forestry (674,828 Gg CO2e),
followed by emission related to the peat fire (451,000 GgCO2e), energy (369,799.88 GgCO2e), waste
(166,831.32 GgCO2e) and agriculture (80,179.31 GgCO2e) in 2005. Therefore, industry has not been the
most dominant sector in producing GHG,including in Climate Change Sectoral Roadmap (CCSR) developed
byBappenas, it has been categorized only as Secondary Sector alongside health, transportation, infrastructure
and water sectors. Meanwhile, the priority sectors in that road map have been agriculture, marine (including
seashore and fishery), energy and forestry. This road map was made in order to bridge the National Action
Plan(RencanaAksiNasional)from climate change intoMid-Term Development Plan (Rencana Pembangunan
JangkaMenengahor RJPM). However, Indonesia has developed two policy scenariosfor manufacture industry
to achieve the carbon emission target in 2025, namely:first, Private Scenario (SkenarioSwasta) through
Clean Developemnt Mechanism (Mekanisme Pembangunan Bersih); second, Private Scenario through Clean
Development Mechanism with government aid through disseminationprogram and other international
fund. First Scenario is expected to reduce thecarbon emission (to BAU scenario) for 6.5 percent in 2010,
8.5 percent in 2015, 8.6 percent in 2020 and 8.7 percent in 2025. While Second Scenario is expected to
reduce carbon relative emission to BAU target until 2025 for 12.7 percentin 2010, 14.2 percentin 2015,
13.9 percentin 2020 and 13.6 percentin 2025.
The target of carbon emissionproduction according to BAU in 2010, 2015, 2020 and 2025is
respectively 52,850 Ggram CO2e, 57,296 Ggram CO2e, 62,117 Ggram CO2e,and 67,343 Ggram CO2e.
It means that the carbon emission growth per year is 1.68 percent. This projection has actually been set by
the government with assumption that the carbon emission growth will be equal with industrial growth in
the future. In that calculation, the government has assumed that the industrial growth per year until 2020
is 6.4 percent. It means that the target of carbon emission growth in industrial sector set by the government
is much lower than the target of industrial sector growth or 26.25 percent from industrial sector growth.
Thus, the reduction with First Scenario in 2010, 2015, 2020 and 2025 (respectively in Ggram CO2) is 3,412,
4,875, 5,362, and 5,850, while the Second Scenario (also respectively inGgram CO2) is 6,698, 8,160,
8,648, and 9,135. In the First Scenario, the carbon emission growth per year within the period of 2010 to
2015 is 1.21 percent, while within period of 2015 to 2020 is 1.65 percent. For period 2020 to 2025, the
similar growth percentageis 1.67 percent. In Second Scenario, the percentage of carbon emission growth
per year 2010 to 2015 is 1.29, 2015 to 2020 is 1.76, and 2020 to 2025 is 1.77.
Considering that this year is 2012, it is very interesting to see how far has the target been achieved
in 2010 and 2011 and whether it has been in line with the plan through both First and Second Scenario.
Unfortunately, such data cannot be obtained until now. If the Second Scenario implemented well, then the
carbon emission growth per year within period 2015 to 2025 will be above BAU, which is projected to grow
for 1.68 percent per year. Looking at the growth per year, then the First Scenario has the lowest average
carbon emission growth per year, not only to the average growth per year of BAU Scenario, but also to the
average growth of Second Scenario.Therefore, the low carbon emission target in Second Scenario was not
because of the low carbon emission growth per year, but because of the very low carbon emission target
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On Indonesia’s Economy
Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
set in 2010, which was 46,152 Ggram CO2e, compared to, for example, with the target of BAU of 52,850
Ggram CO2e and First Scenario of 49,438 Ggram CO2ein 2010. Therefore, the most important point in
emission reduction of Second Scenario, which has the highest carbon emission reduction target, depends
very much on the emission target in 2010 and if it was missed, then the next following years’ targets will be
hardly achieved. Ironically, compared to First Scenario, the Second Scenario has got governmental subsidy
in the dissemination programand also the internasionalfunds to implement this Scenario. It is important to
be known that the industrial sector that has not been the priority in the road map of climate change has
seemed to also not getting any foreign funds. For the financing issue that relates investment to foreign
funds, the government has set Climate Change Trust Fund (CCTF) only to be used for priority sector in
theClimate Change Road Map, namely energy, forestry and peat land. In this context, the industrial sector
will only get funds from the government for the dissimination program of CO2emission reduction in the
industrial process. Normatively, the industrialsector is supposedly able to conduct the emission reduction
independently through efficiency and production process, emission reduction, new technology and
transformationraw materials, for instance by using waste like in cement industry.
Based on the data from 2000 to 2005, the GHG growth emission (CO2, CH4, N2O and PFC) from
industrial sector was 2.2 percent per year, where in 2000 the GHG emission in CO2was 43,044 Ggand
in 2005 itwas 48,733 Gg. It indicates that the carbon emission growth in industrial sector within this
periodwas much higher than the carbon emission growth based on all scenarios set for the future. To
reach the scenario target of carbon emission in 2020, as long as the government is able to reduce carbon
emission growth from Land Use Change and Forestry (674,828 GgCO2e), Peat Fire (451,000 GgCO2e),
energy (369,799.88 GgCO2e), waste (166.831.32 GgCO2e), and agriculture (80,179.31 GgCO2e), then the
pressure for industrial sector to reduce its carbon emission is not very high in implementing the downstream
industrialization program of mining sector. This is important to be concerned because now, Indonesia tries
to increase the added value of its industrial sector by obligating the mining companies to increase added
value through industrialization process and by banning them exporting raw materials.
Nevertheless, the downstream industrialization process in mining sector is predicted not adding
carbon emission because based on the datafrom2000 to 2005, there were only two industries that have
consistently contributed to the carbon emission for 60 to 80 percent from the whole carbon emission
produced by industrial sector, namely cement and ammonium industries. The contribution of cement
industry itself has reached around 60 percent of the whole carbon emission produced by industrial sector.
Thus, the seriousness of the government in reducing the carbon emission in cement industry is the most
strategic step to reduce the carbon emission from industrial sector. So far, there has seemed no signal
that the cement industry in Indonesiastarts using waste as raw materials and more energy saving machine
technology because of no government intervention in forms of reward and penalty. If the government
conducts restructuriziation for domestic machinery in cement factorybased on new, more productive
and energy saving technology, then the carbon emission production in Indonesian industrial sector can
be surpressed effectively. One of necessary conditions for the industrialization to run successfully in the
twentieth century is systematic and well coordinated government interventionto push investment in
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Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
On Indonesia’s Economy
manufacture sector and non-fossil energy. The success or failure in manufacture sector development is
not caused by the decreasing state intervention, but rather by the differencein terms of subsidy allocation
principles. Even the late-industrializing countries have not only provided funds, but also targeted its capital
into some particular companies and industries. Subsidy given by the state must be followed by control
on industrial performance (Rodrik). According to the history, this control has succeededonly if the state
has had strong autonomy on its business groups (private and/or State Enterprises i.e BUMN). The level of
state autonomy from any political power ofprivate business groups and their interests depends on: (i) the
development level of manufacture sector and (ii) income distribution.
4.4. Highly Feasible Future Development
Considering that Indonesia is not ‘Annex I Country’, so that it does not have international obligation
to reduce the GHG emission, the target to reduce emission for 26 percent independentyand 41 percent
with international aidsin 2020 is internationally unbinding statement. Therefore, the motivation to reduce
GHG emission is not very strong. Besides, it is difficult for Indonesian government to develop reward and
penalty mechanism with orientation on ecological development, keeping in mind that until now Indonesia
has never had any industrial policy. Even to implement development with added value orientation has been
very difficult for the government.
From the performance of the national industrial sector growth below Indonesian average economic
growth for the last couple years, then how far the national industrial sector can generate sufficient production
surplus to finance the carbon emission reduction effort has still been very serious question until now and
will still be one in the future. The failure example can be seen from the development of downstream
industry based on palm oil so that the orientation of added value from this palm oil effort is only from CPO
production. With the inexistence of productivity per hectare target, then the effort to maximize the income
from CPO production is by expanding the area of plantation. It seems that this tendency will keep going
on for the next couple of following years. It can happen because the incentive system is very advantageous
for producing CPO. Therefore, the courage of Indonesian government to formulate intensive measureable
effort of palm oil derivatives industrial policy will not appear for the next couple of following years, such as
giving incentive for foreign capital investment in this sector that has been done by Malaysia.
However, an existing policy instrument has been used, namely the export tax for CPO and its
derivatives. The effectiveness of this export tax policy harmonization still has to be proven. Other policy is
the biofuel development plan in Indonesia in form of subsidizing the biofuel price (2010) andobligating
Pertamina to buy domestic biofuel production. Based on this plan, the biofuel consumption that has
reached one percent in 2009 is expected to reach 15 percent in 2025 for national transportationsector. If
the LUCF and peat fire sectors cannot be controlled, then it will be difficult for the government to reach
the targets of First and Second Scenario below BAU target because LUCF has carbon emission contribution
of 79.3 percent from the total carbon emission. The percentage detail of each LUCF contribution to total
emission is forestconversion 39.6, peat fire 25.6, CO2 emission and removal from soil 14.1. The emission
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On Indonesia’s Economy
Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
from energy producer is 7.6 percentfrom the total emission and the rest is waste sector emission in form
of7.2 percent from water treatment and discharge and 4.8 percent from manufacture and construction
industries. From these data, it can clearly be seen that the intensification program of palm oil plantation
and palm oil industry and its derivatives will be very effective to muffle carbon emission in the future.
Therefore, the Indonesian government has to courageously set the productivity target from plantation
sector that has the forest conservation potential. Meanwhile, the effort of the government in mining sector
through its downstream industrialization program is clearly ready to be implemented. These efforts to
increase the domestic added value are expected to be able to surpressthe carbon emission production in
the future. These efforts will be more effective in reducing the carbon emission if the government can give
incentive for investment in mining and plantation downstream sectors that use only environmental friendly
technology.
5.
General Evaluation
The public policy space in the past was bigger than nowadays in terms of two things. First, the
free trade regulation was not as tight as it is today. Second, the liberal democracy has emerged after the
reformation processin 1998. These two things have been very influential to the degree of freedom of
Indonesian public policy, whichtends to be lower in the future. The political impasse in the democratic
county has occurred not only in Indonesia, but also in USA, Japan and EU. But, the permanent output loss
in economy has been occurring until now. The prediction even argues that the permanent output loss will
still happen in the long future by ignoring the potential of demography bonus until 2020.
Until now, the Indonesian long term economic development plan has never discussed about
the economic growth target that can neutralize that permanent output loss. The satisfaction has been
materialized through the relatively low economic growth targets, that has resulted fiscal, monetary and
exchange rate policies implemented unoptimally. In line with that, since 2008until now, the world has been
facingongoing capitalism crisis in developed countries like USA and EU. Liberal democratic country like Japan
has even been trapped in a stagnant economic condition in the last ten years. It meansthat the opportunity
for Indonesian economy togenerate high economic growth, which can eliminate the permanent output
loss resulted by the crisis in 1998 through export market orientation, will be more difficult to be conducted,
if the government really wants to implement it some day. The crisis in liberal democratic countries has
seriously threatened the market of Indonesian exported products.
Until now Indonesia has still been able to create surplus in its trade and ongoing transaction balance,
especially the one in the ongoing transaction, but it seems to get lower in the future. It means important
implication on the import financing in the future, like what the New Orderwould have done by depending
on the financing from capital balance. Thus, besides doing export market diversification, Indonesia has
to depend more on its domestic market strength, so that the economic growth will not be influenced
by the weakening world trade. With the expectation that if the world economy recovers, tradablessector
will generate surplus on the ongoing balance again. Mid-term economic policy has to be aimed for the
40
Faisal Basri, A. Prasetyantoko and Gatot Arya Putra
On Indonesia’s Economy
domestic market strengthening. Therefore, domestic economic integration must become main priority. The
cost of goods, capital and service movement within regions in Indonesia must become more inexpensive
compared to similar movement between areas of Indonesia and other country. As maritime country, sea
transportation shall be main priority in Indonesian economic development. Yet, what has happened so far
and will keep happening in the future is the emergence of infrastructure developments, which ignores the
Indonesian economic development paradigmbased on maritime, such as the plan of buildingSundaStrait
Bridge to connect Java and Sumatera Islands. This can also be seen from the low gross fixed capital formation
for sea transportation in Indonesia.
The economic crisis inliberal democratic countries has opened counterhorizon for Washington
Consensus, including the emergence of China with its incredible economic progress. The influence of China’s
success and the diminishing space of public policy now has made Indonesia be more courageous to develop
industrial policies, like what has been done through machinery restructurization of sugar, textile, textile
product and footwear industries. In addition to that, Indonesia has also been bolder to developdownstream
industrialization process in mining sector. Unfortunately, the government’s policy in such process in palm oil
sector has not been as firm as one in mining sector. The downstream industry process in palm oil sectoris
still aimed to support the cooking oil industry and state treasury fulfillment. WhereasHausmann, Hwang
and Rodrik (2005) have proven that a country with low GDP per capita can produce or export products that
actually also produced by other country with higher level of GDP per capita. Rodrik (2006) has proven that
export of China in 1992 has been more associated with products with income level of six times higher than
products supposedly exported based on their level of GDP per capita. It implies that the export of China is
not the result of natural market economic policy, but rather of industrial policy.
Nunn dan Trefler (2004) have proven that countries that provideprotection forindustrial sector with
skilled labour intensive will have higher economic growth compared to countries that protect unskilled
labour intensivesector. The difference of protection instrument explains the difference level of success
among East Asia andLatin America countries in implementing the industrial policy (World Bank 1993). East
Asia countries, as what has been conducted by China now, have combined protection and subsidy, while
the Latin America countries have only used protection instrument. The logic is strategy used by East Asia
countries has resulted more neutral policy yet hugely advantageous for its manufacture sector. This policy
has generated capital accumulation (physical and human resource) in line with the comparative advantage
shift to capital intensive industries. The East Asia countries have used production subsidy, credit subsidy,
fiscal incentive and trade protection policies. The export promotion has been an important instrument for
the success of industrial policy to support economic growth.
Basically, subsidy is a more effective policy instrument rather than import protection. Among types
of subsidy, the export subsidy is more distortive than production subsidy, but the fiscal cost is lower.
Besides, that strategy is supported by some other confirmations. The argumentations that export ubsidy is
better than import tariff are: first, by relying on export promotion, the industry will face the disciplines of
international market,so that they will become more productive and competitive. Second, by subsidizing only
the companies that does export means that the state only subsidizes the really productive companies. Third,
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domestic market might be relatively too small for the company to reach the Marshallian externality phase,
so that it requires the support of export market. Fourth, the learning through export occurs in the country
with left behind technology and towards the company with very low productivity. Export will be able to
correlate positively to the economic growth if the export composition is correct. Therefore, industralization
policy must also anticipate that export composition. It can be found in the researches conducted by Dodaro
(1991), Giles, Giles and McCann (1992), Hansen (1994), Ghatak, Milner and Utkulu (1997), Pineresand
Ferrantino (1997), Xuand Wang (1999), Choudhriand Hakura (2000), Khalafallaand Webb (2001), and
AnandIyigun (2004). Their researches have shown that the export has contributed positively to economic
growth if the exported goods are manufacture goods or skilled labour intensive goods. Those researches
have also proven that export diversification has also contributed positively to economic growth.
Industrial policy is a strategic choice that is expected to lead Indonesian economic growth to become
sustainable not only from added value, but also ecologically. By generating downstream industry from palm
oil and miningproducts, then the pressure to generate added value by expanding the area will get less. If
the pressure of land expansion gets less then the threat to encroach forest will also have less opportunity.
Keeping in mind that LUCF is the biggest carbon emission producer in Indonesia.
Foreign capital is the most important instrument in the industrialization policy. By conducting
research in 29 countries during 1985 to 2000, Alfaro and Charlton (2008) have shown that the FDI wave
has been massive on the sectors that become‘Pick The Winner’. Such sectorsare machinery, computer,
telecommunication andtransportation means. The research of Hu and Jefferson (2002), Du, Harrison and
Jefferson (2008), and Lin, Liu and Zhang (2008) have proven the positive correlation impact of foreign
capital investment by looking at the high level and productivity growth of Chinese companies doing joint
venture. Such researches have also shown the positive impact of foreign capital investment to backward and
forward linkage, and negative horizontal spillover in industry. Unsurprising to seethe palm oil downstream
industry in Malaysia has been more successful compared to one in Indonesia, because Malaysia has been
more active in inviting foreign capital investment to build its factory in Malaysia for that palm oil mainstream
industry.
For oleochemical industry, the foreign capital investment strategy has been used by Malaysia
to make their industrial policy program be successful, for instance, Akzo& Nobel OleochemicalSdnBhd,
CognisOleochemicalsSdnBhd (joint venture companybetweenCognisOleochemicals of Germany and
Golden Hope Plantations Berhad), FPG OleochemicalsSdnBhd (Proctor& Gamble’s joint venture with Felda)
andUniqema (Malaysia) Sdn Bhd. For edible oil products, the entering foreign capital investments are
Unilever and Cargill through Unilever (M) Holdings SdnBhdand Cargill Palm Products Sdn Bhd. For specialty
fats products, the foreign players areLoder BV acquired by IOI Corporation Berhad, which is the main player
of this product, and Cargill Specialty Oil & Fats Sdn Bhd. For palm oil refinery products, the entering foreign
player is Pan-Century, which is subsidiary company of Birla Group India. Thus, the technology advancement
of palm oil downstream industry in Malaysia has been supported by public institution withcessfunds (an
independent institution with orientation on the progress ofpalm oil industry in Malaysia), foreign capital
42
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On Indonesia’s Economy
investment and local capital investment abroad. Keeping in mind that almost all downstream industry players
are the plantation owners, it indicates that foreign players actually also support research and development
efforts conducted by the public institution, namely Malaysian Palm Oil Board (MOPB).
As an effort for mining and agricultural sectors to support industrial sector in Indonesia and reduce
carbon emission of LUCF, the government can give incentive for mining and agricultural (including plantation)
industrial sectors that have the nature of increasing return andpotential to generate spillover of knowledge
for economy. Those incentives can take form of export subsidy that can be implemented until 2015;export
tax elimination for the downstream industry that uses local raw materials;simplify the establishment of
public institution that has the task to conduct research and development for respective industry;and CPO
export tax is supposed to be used for increasing the productivityof palm oil sector and its downstream
products, so that the pressure of land expansion decreases, including for machinery restructurization
program into more productive and energy efficient technology. Thus, it is very accurate to apply machinery
restructurization program on the palm oil and miningdownstream industries. Meanwhile, the funds from
export tax of mining product can be used to increase the productivity of its downstreamindustry, including
the machinery restructurization program. The government must also be proactive in fixing the domestic
economy infrastructure and giving opportunity to education and training sectors to grow even better,
especially to fulfill the work force needs in the downstream industry wished to be developed in line with
the demography bonus until 2020. However, it has to be kept in mind that export subsidy; tariff dan local
content ptotection will not be able to be implemented as they were in the past.
Export subsidycan no longer be conducted until 2015 because of the Agreement on Subsidies and
Countervailing Measures. The local content has been illegal because of WTO regulationupon Agreement
on Trade Related Investment Measures (TRIMS). Thus, as said byRodrik (2004), fiscal instrument is the
only choice left that can be used to generate incentive to industrial sector with benefit to added value,
foreign exchange, job creation, and ecological recovery. Other alternative, each sector can finance itself
to increase productivity and to push forward its downstream industry if the export tax fundcollected by
the government is returned to those respective sectors in terms of machinery, research and development
andexport subsidies. If the business can finance its own export subsidy for the downstream industrial
product after 2015, then Indonesia will still be able to give export subsidy.
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List of Tables
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