COUNTRY PROFILE Indonesia

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1 COUNTRY PROFILE Indonesia Our quarterly Country Report on Indonesia analyses current trends. This annual Country Profile provides political background and economic information The Economist Intelligence Unit 15 Regent Street, London SW1Y 4LR United Kingdom

2 The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The EIU delivers its information in four ways: through subscription products ranging from newsletters to annual reference works; through specific research reports, whether for general release or for particular clients; through electronic publishing; and by organising conferences and roundtables. The firm is a member of The Economist Group. London New York Hong Kong The Economist Intelligence Unit The Economist Intelligence Unit The Economist Intelligence Unit 15 Regent Street The Economist Building 25/F, Dah Sing Financial Centre London 111 West 57th Street 108 Gloucester Road SW1Y 4LR New York Wanchai United Kingdom NY 10019, US Hong Kong Tel: (44.171) Tel: (1.212) Tel: (852) Fax: (44.171) Fax: (1.212) /2 Fax: (852) london@eiu.com newyork@eiu.com hongkong@eiu.com Website: Electronic delivery EIU Electronic New York: Lou Celi or Lisa Hennessey Tel: (1.212) Fax: (1.212) London: Jeremy Eagle Tel: (44.171) Fax: (44.171) This publication is available on the following electronic and other media: Online databases Microfilm FT Profile (UK) NewsEdge Corporation (US) World Microfilms Publications (UK) Tel: (44.171) Tel: (1.781) Tel: (44.171) DIALOG (US) University Microfilms Inc (US) Tel: (1.415) CD-ROM Tel: (1.800) LEXIS-NEXIS (US) The Dialog Corporation (US) Tel: (1.800) SilverPlatter (US) M.A.I.D/Profound (UK) Tel: (44.171) Copyright 1998 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author s and the publisher s ability. However, the EIU does not accept responsibility for any loss arising from reliance on it. ISSN Symbols for tables n/a means not available; means not applicable Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK

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4 Comparative economic indicators, 1997 Gross domestic product $ bn Gross domestic product per head $ '000 China Singapore South Korea Hong Kong Taiwan Taiwan Indonesia South Korea Hong Kong Malaysia Thailand Thailand Malaysia Philippines Singapore Indonesia Philippines China Vietnam Vietnam ,000 Sources: EIU estimates; national sources. 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 Sources: EIU estimates; national sources. Gross domestic product % change, year on year Consumer prices % change, year on year China Indonesia Vietnam Hong Kong Malaysia Thailand Singapore Philippines Taiwan South Korea South Korea Vietnam Hong Kong China Philippines Malaysia Indonesia Singapore Thailand Taiwan Sources: EIU estimates; national sources Sources: EIU estimates; national sources. EIU Country Profile The Economist Intelligence Unit Limited 1998

5 1 November 27th 1998 Contents 3 Basic data 4 Political background 4 Historical background 7 Constitution and institutions 8 Political forces 11 International relations and defence 12 The economy 12 Economic structure 13 Economic policy 18 Economic performance 20 Regional trends 21 Resources 21 Population 22 Education 23 Health 23 Natural resources and the environment 24 Economic infrastructure 24 Transport and communications 26 Energy provision 28 Financial services 32 Other services 33 Production 33 Industry 35 Mining and semi-processing 36 Agriculture, forestry and fishing 39 Construction 39 The external sector 39 Merchandise trade 42 Invisibles and the current account 42 Capital flows and foreign debt 45 Foreign reserves and the exchange rate 46 Appendices 46 Sources of information 48 Reference tables 48 Government finances 49 Money supply and credit 49 Interest rates 49 Gross domestic product 50 Gross domestic product by expenditure 50 Gross domestic product by sector The Economist Intelligence Unit Limited 1998 EIU Country Profile

6 2 51 Prices 51 Wage rates by sector 52 Employed labour force, Population 53 Geographical distribution of population by province 54 Transport statistics 54 National energy statistics 55 Banking statistics 56 Stock-market indicators 56 Manufacturing production 56 Minerals production 57 Agricultural production 57 Houses built by Perumnas 58 Exports 58 Imports 59 Key exports 59 Key exports 60 Imports by main commodity group 60 Main trading partners 61 Balance of payments, IMF estimates 62 Balance of payments, national estimates 62 External debt, World Bank estimates 63 Net official development assistance 63 Foreign reserves 63 Exchange rates EIU Country Profile The Economist Intelligence Unit Limited 1998

7 Indonesia: Basic data 3 Indonesia Basic data Land area Sea area (exclusive zone) Total area Population Main towns 1,919,317 sq km 3,166,163 sq km 5,085,606 sq km 201.4m (mid-1997 estimate) Population in 000, 1990 census Jakarta (capital) 8,228 Medan 1,730 Surabaya 2,484 Semarang 1,251 Bandung 2,058 Palembang 1,144 Climate Weather in Jakarta (altitude 8 metres) Languages Measures Currency Time Fiscal year Public holidays Tropical Hottest months, April-May, o C (average daily minimum and maximum); coldest months, January-February, o C; wettest months, January-February, 300 mm average rainfall Indonesian (Bahasa Indonesia), as well as some 250 other regional languages and dialects. English has increasingly replaced Dutch as the main second language, and is widely spoken in government and business circles Metric system Rupiah (Rp). Exchange rates (1997 averages): Rp2,909:$1. Exchange rate end- November 1998: Rp7,490:$1 Western Zone 7 hours ahead of GMT, Central Zone 8 hours ahead, Eastern Zone 9 hours ahead April 1st-March 31st New Year, January 1st; Independence Day, August 17th; Christmas, December 25th. Other movable holidays: Nyepi, Easter, Miraj, Ascension Day, Waisak, Eid al-fitr, Eid ul-adha, Islamic New Year, Maulud The Economist Intelligence Unit Limited 1998 EIU Country Profile

8 4 Indonesia: Historical background Political background The Republic of Indonesia is formally a constitutional democracy with a strong executive presidency. More than 32 years after coming to power in the wake of a coup, President Suharto, amid mounting economic troubles, resigned office in May 1998 after losing both popular and elite support. He was succeeded by his vice-president, B J Habibie. Mr Habibie has promised to hold parliamentary elections in June 1999, to be followed by a presidential election by the end of the year. He also took some immediate steps to open the political system. However, by late 1998 Mr Habibie s own lack of popular support and his government s apparent inability to tackle the country s massive economic problems were creating pressures for faster political change. Historical background Pre-colonial history European colonisation Nationalism and independence Territorial expansion The territorial extent of the Republic of Indonesia is defined principally by the boundaries of the former Dutch colonial empire in South-east Asia. The territories now comprising the country had never constituted a single political entity before the establishment of Dutch colonial rule, and their pre-colonial history was marked by the rise and fall of a number of important empires and kingdoms. Close commercial and cultural ties existed with India before the 16th century, as a result of which the most important Indonesian empires during this period were based on Hindu and Buddhist beliefs and practices. The cultural influence of this Hindu-Buddhist past remains strong in many parts of Indonesia. The introduction of Islam in the 13th century was followed by the Islamisation of much of the archipelago. European interest in Indonesia arose out of the quest for spices in the 15th and 16th centuries. The founding of the Dutch East India Company (Vereenigde Oostindische Compagnie, VOC) in 1602 set the scene for the gradual establishment of Dutch colonial rule in Indonesia. In 1799 the Dutch state took over the interests of the VOC and embarked on an extended period of territorial conquest, which continued until the early years of the 20th century. In the early 1900s a pan-indonesian nationalism began to emerge within the growing ranks of modern educated urban intellectuals. The Japanese conquest of the Dutch East Indies in 1942 and the subsequent defeat of Japan enabled these nationalists, under the leadership of Sukarno and Mohammad Hatta, to proclaim Indonesia s independence on August 17th This was followed by an extended armed struggle against returning Dutch forces. It was not until late 1949 that the Dutch formally transferred sovereignty over the archipelago, excluding Dutch New Guinea, to Indonesia. Since then Indonesia s territorial boundaries have been extended on three separate occasions. On May 1st 1963 Indonesia was granted sovereignty over Dutch New Guinea (Irian Jaya), which was officially incorporated into the country in September In Indonesia invaded and annexed the former Portuguese colony of East Timor, which in July 1976 was declared to EIU Country Profile The Economist Intelligence Unit Limited 1998

9 Indonesia: Historical background 5 have been formally integrated into the republic. Finally, Indonesia s longstanding claim to sovereignty over the seas separating its many islands was accorded international recognition in April This more than doubled the country s total area and permitted Indonesia in October 1983 to declare the archipelagic seas an exclusive economic zone. The Sukarno period The New Order The Habibie presidency The first 15 years of Indonesia s history as an independent state were marked by political instability and economic decline. The liberal democratic republic established in 1950 was characterised by frequent changes in cabinets, regional revolts and economic mismanagement. The situation deteriorated after 1959, when President Sukarno dissolved the elected House of Representatives and replaced it with a Provisional People s Consultative Assembly. This era of Guided Democracy was a period of political turmoil, during which economic prudence was often subordinated to revolutionary zeal in domestic policymaking. Confrontations with the Netherlands and Malaysia were the prime features of foreign policy. It culminated in September 1965 in an abortive coup d état led by a group of army officers in which the Indonesian Communist Party (Partai Komunis Indonesia, PKI), said to have been supported by Chinese arms and money, was allegedly involved. The September 1965 coup marked the end of the Old Order, as the period of Sukarno s presidency later came to be known. It was crushed by the army with much bloodshed, during which as many as 750,000 alleged members of the PKI and its affiliated organisations were killed. In March 1966 the New Order was established when the executive power of government was transferred to Major- General Suharto. He became acting president in March 1967, and was elected for six further five-year terms, the last of which began with his election by the People s Consultative Assembly (Majelis Permusywaratan Rakyat, MPR) on March 10th, Increasingly vocal opposition to the regime that had been mounting over the previous two years (including during an unprecedentedly violent parliamentary election campaign in May 1997) was given added momentum by the severe economic crisis that gripped Indonesia in late Four days of rioting in Jakarta in mid-may 1998 convinced even Suharto s most loyal supporters that a change was needed. On May 21st, having lost the backing of the military high command and most of his cabinet, the president resigned, to be succeeded by his recently elected vice-president, B J Habibie. After becoming president on May 21st, Mr Habibie had to distance himself from his former mentor, Suharto. His survival depended on his ability to play to the diverse constituencies that forced Suharto to step down. These constituencies included the military high command under the armed forces chief, General Wiranto; the economic policymakers in the cabinet, led by the co-ordinating minister for economic, financial and industrial affairs, Ginanjar Kartasasmita; the various strains of political Islam; the markets, the multilateral financial institutions and the governments of the leading donor countries; and the loose opposition of politicians, students and non-governmental organisations whose pressure helped topple Suharto. All of these constituencies had reasons to distrust Mr Habibie in the light of his closeness to Suharto, his reputation as a profligate spender on high-tech white elephants, built, like his mentor s, by a The Economist Intelligence Unit Limited 1998 EIU Country Profile

10 6 Indonesia: Historical background family business empire on the basis of corruption, collusion and nepotism (korupsi, kolusi dan nepotisme, KKN), his cultivation of modernist Muslims and his interference in military procurements. Mr Habibie made various gestures to secure the support of these groups. He allowed General Wiranto to purge the military of his main rival, General Prabowo Subianto, and Prabowo s allies. He cast himself as an advocate of reform and an opponent of KKN. He gave his backing to a new IMF programme, and disbursements of aid began to flow again. He promised amendments to the political parties law, on the basis of which scores of new parties were formed. Trade unions were no longer required to seek government approval, many political prisoners were released and the new government ratified international labour and human rights covenants. He also set a timetable for a parliamentary election in May or June 1999 and a presidential election in December Despite these gestures Mr Habibie s hold on power was not fully secure. The backing of the various constituencies remained conditional and the new Important recent events 1997 May: Golkar wins a 74% majority, in the parliamentary (DPR) election. July 2nd: The Thai baht is floated. August 14th: The rupiah is floated. October 31st-November 1st: The first IMF agreement is signed and 16 banks are liquidated. December 9th: Rumours that Suharto is seriously ill set off a run on the rupiah January 10th: Despite a second IMF agreement a few days earlier, the government announces a budget that the markets believe is based on unrealistic assumptions about the economy. The rupiah breaks through the Rp10,000:$1 barrier. January 20th: Suharto announces that he will run again for the presidency and hints that his choice for vice-president will be B J Habibie. The rupiah briefly breaks Rp17,000:$1. Early February: Rumours that Suharto favours a currency board system begin to circulate. Mid-February: In a reshuffle of senior military posts, General Wiranto is promoted to commander of the armed forces and Lieutenant-General Prabowo becomes commander of the strategic command, KOSTRAD. Students launch a series of countrywide protests that will continue until May. March 10th: The MPR re-elects Suharto president and confirms B J Habibie as his vice-president. March 14th: Suharto appoints a new cabinet that includes his eldest daughter and one of his closest friends, the timber tycoon Mohamad Hasan. Early May: Following a third IMF agreement the government announces fuel price increases, which set off serious rioting in the North Sumatran city of Medan. May 12th: Four students are shot dead by the military during demonstrations near Trisakti University in Jakarta. May 13th-15th: Riots in Jakarta take at least 500 lives. May 21st: Suharto resigns the presidency, to be succeeded by B J Habibie. July 9th-10th: At an extraordinary congress Habibie forces win control of Golkar. July 23rd: Members of Nahdlatul Ulama announce the formation of the National Awakening Party (Partai Kebangkitan Bangsa, PKB). August 16-17th: In his Independence Day speech President Habibie apologises for irresponsible acts committed by members of the security forces during the May riots and pledges that the socio-political role of the armed forces will be ajdusted. Amien Rais is one of the founders of a new, secular party, the National Mandate Party (Partai Amanat Nasional, PAN). October 3rd-5th: At her party s congress in Bali the leader of the PDI Perjuangan, Megawati Sukarnoputri, announces that she will stand in next year s presidential election. November 10th-13th: A special session of the MPR, held to produce decrees to pave the way for parliamentary and presidential elections in 1999, is marred by the killing of students by members of the armed forces. EIU Country Profile The Economist Intelligence Unit Limited 1998

11 Indonesia: Constitution and institutions 7 president was vulnerable to sudden shifts in support. Despite some populist gestures he had no real control over the social upheavals occurring at the grassroots level. His weakness was demonstrated when the MPR met on November 10th-13th to carry out the first stage of the transitional process by producing the decrees needed to pave the way for the 1999 elections. The session was held under siege conditions, and 16 people were killed, most when the armed forces opened fire on demonstrating students. Regional tensions East Timor Indonesia s ethnic complexity has often given rise to political tensions. These have been manifested in secessionist movements and open violence in several peripheral regions. The most active of these movements during the New Order period have been the Free Aceh (Aceh Merdeka) movement, operating in Aceh in the far north of Sumatra, and the Free Papua Organisation (Organisasi Papua Merdeka, OPM) in Irian Jaya. The armed forces managed to crush these organisations militarily, but their indiscriminate methods won over few hearts and minds. The exposure by official fact-finding teams of massacres and other human rights violations in these areas under the New Order in the months following the resignation of Suharto, seriously damaged the reputation of the armed forces and gave a new stimulus to separatist sentiment in these and other parts of Indonesia. In East Timor, the former Portuguese colony forcibly annexed by Indonesia in , the armed guerrillas of the Revolutionary Front for an Independent East Timor (Frente Revolucionaria de Timor Leste Independente, or Fretilin) have continued to resist the Indonesian occupation. Although Fretilin has been largely neutralised as an armed force, popular resistance to Indonesian rule in East Timor has persisted, spearheaded by a younger generation that has grown up under Indonesian occupation. Few foreign governments recognised Indonesia s annexation of East Timor and the UN continues to regard Portugal as the territory s official administering power. Moreover, from 1975 there have been persistent reports of serious human rights abuses by the Indonesian armed forces. As a result the East Timor issue tarnished the Suharto regime s image abroad. The award of the 1996 Nobel Peace Prize to two East Timorese, Jose Ramos Horta, the exiled spokesman for East Timor resistance movement, and Dom Carlos Filipe Ximenes Belo, the Roman Catholic bishop of the East Timorese capital, Dili, gave further international publicity to the issue. The Habibie government has partially recognised that East Timor is a special case by proposing a degree of autonomy not granted to parts of Indonesia proper, but it continues to draw the line at independence. Constitution and institutions Constitutional changes Indonesia is governed under a constitution drawn up in This constitution is now under review. In preparation for the elections scheduled for 1999, those aspects of it covering political parties, elections and the composition of legislative bodies are being amended. There is, however, also pressure for The Economist Intelligence Unit Limited 1998 EIU Country Profile

12 8 Indonesia: Political forces changes to other key provisions, including those covering relations between central and local government and the powers of the president. The 1945 constitution is based on the five principles embodied in the state ideology, Pancasila of monotheism, humanitarianism, Indonesian unity, representative democracy by consensus and social justice. The constitution provides for six principal organs of state: the People s Consultative Assembly (Majelis Permusyawaratan Rakyat, MPR); the presidency and the vice-presidency; the House of People s Representatives (Dewan Perwakilan Rakyat, DPR); the Supreme Advisory Council (Dewan Pertimbangan Agung); the State Audit Board (Badan Pemeriksa Keuangan); and the Supreme Court (Mahkamah Agung). are under way The most important of these are the DPR, the MPR and the presidency. The DPR has hitherto consisted of 500 members; the majority (currently 425) are elected under a system of proportional representation every five years and the rest are appointed from the ranks of the armed forces, whose members are not permitted to participate in the elections. Amendments under discussion in late 1998 are expected to raise the total number of members of the DPR from 500 to 550; decrease the number of appointed members from the armed forces (from 75 to 55); and change the electoral rules to introduce a mainly district-based, firstpast-the-post system while retaining an element of proportional representation. The MPR is formally the highest authority of state. Its composition was also being reviewed in late Under Suharto the MPR consisted of 1,000 members, comprising the 500 members of the DPR and a further 500 members appointed by the president from the political parties (reflecting their showing in the DPR election) and as representatives of group interests and the provinces. Its membership is expected to be reduced to 700, comprising the 550 members of the DPR, 81 regional representatives and 69 group representatives. The MPR meets in ordinary session every five years, normally in the year after the DPR election, when its principal functions are to sanction the guidelines of state policy and elect the president and vice-president for the next five years. The presidency is the highest executive office of state. It has had wide-ranging legislative powers in that presidential decrees (instruksi presiden, inpres) and presidential decisions (keputusan presiden, keppres) have the same legal force as laws enacted by the DPR. These powers are now under review, as are proposals to limit the president s so far unlimited tenure to two terms. The president also selects a cabinet of ministers, who are not members of the DPR. Draft legislation prepared by these ministers is submitted to the DPR for approval and enactment. Although the DPR also has the right to initiate its own legislation, it never did so during the Suharto years. Political forces A new party-political structure Arguing that the large number of political parties had been the main cause of political instability under the Old Order, the government ordered the merger of the seven remaining political parties in This resulted in the creation of two authorised political parties: the Indonesian Democratic Party (Partai Demokrasi Indonesia, PDI), combining the former nationalist and Christian EIU Country Profile The Economist Intelligence Unit Limited 1998

13 Indonesia: Political forces 9 parties, and the United Development Party (Partai Pertusuan Pembangunan, PPP), combining the former Islamic parties. Golkar, which declined to call itself a political party, was the third political grouping. Formally it represented a coalition of functional groups not affiliated with either party, including civil servants, retired members of the armed forces, women s organisations and professional bodies. On the strength of its support from the state, its links to the bureaucracy and the armed forces and exemption from the restrictive rules on campaigning that applied to the political parties proper, Golkar was by far the most powerful political grouping. It has won around 70% of the vote in parliamentary elections. The opening up of the party political system since the resignation of President Suharto has led to a mushrooming of new parties. By November 1998, before the DPR had amended the political parties law to legalise them, more than 100 parties had come into existence. Only a few of these parties are likely to win many votes. The main contenders in the 1999 DPR election are likely to be: Megawati Sukarnoputri s faction of the PDI, known as PDI Perjuangan (see Main political figures); the National Awakening Party (Partai Kebangkitan Bangsa, PKB), formed in July 1998 by members of the politically moderate traditionalist association of Islamic scholars, Nahdlatul Ulama; the National Mandate Party (Partai Amanat Nasional, PAN), an avowedly secular party set up in August 1998, whose founders include Amien Rais, the former chairman of the modernist Muslim social organisation, Muhammadiyah (see Main political figures); Golkar, which was captured by pro-habibie forces at an extraordinary congress held in July 1998 and has now declared itself to be a political party; and the Moon and Star Party (Partai Bulan Bintang, PBB), the most Islamic of the main parties with ideological ties to the former Masyumi party, which was banned in 1960 for its involvement in secessionist movements in the outer islands. The principal political groups Beyond the political parties and Golkar, the most important political forces under the New Order were the military, the Muslim social organisations that group adherents of the different strains of Islam, a growing class of wellconnected businessmen and a largely amorphous and disparate opposition comprising dissident political and military figures, human rights campaigners, independent labour organisations and student activists. Since the resignation of Suharto and the opening of the political system, the relative positions of these different groups has changed. Since the independence struggle against the Dutch in the late 1940s the armed forces have always regarded themselves as having a role that goes beyond maintaining external and internal security. Underpinning this view is the legallybinding doctrine of dwifungsi, under which the armed forces have a dual security and socio-political role. During the New Order two particularly important extensions of the doctrine gave the armed forces a role in political management. This occurred primarily through their socio-political affairs department, and The Economist Intelligence Unit Limited 1998 EIU Country Profile

14 10 Indonesia: Political forces permitted retired and serving officers to take on civilian roles in the cabinet, parliament, the bureaucracy and other state institutions, including state-owned Main political figures Bacharudin J Habibie: Born in Gorontalo in South Sulawesi in 1937, where he first met Suharto in the early 1950s when the latter was a military commander in the region. After returning to Indonesia in 1974 from a long spell in Germany as an aeronautical engineer, his subsequent career rested largely on the favour of Suharto, who made him minister of state for research and technology in He used this position to advocate the technologist approach (see Economic policy) to economic development. He also became a practitioner of this approach through his control of a variety of high-technology industries. His enthusiasm for these dubious projects, as well as his promotion of Islam as a political force, seemed to rule him out as a serious contender for the presidency. This gave credence to the view that Suharto nominated him to be his vice-president chiefly because he would be no threat to his mentor. Megawati Sukarnoputri: A daughter of the former president, Sukarno, Megawati has been active in politics since 1987 and assumed the leadership of the PDI in December Her efforts to challenge the ruling elite won her popular support that went well beyond her party s natural constituency. Concerned by her growing popularity, the government arranged for her to be toppled by a rebel group within the PDI in mid This manoeuvre only increased her support. Since the fall of Suharto opinion polls have regularly shown her to be the frontrunner among the contenders for the presidency. At the congress of her faction of the PDI (known as PDI Perjuangan) in Bali in October 1998 she declared her candidacy for the presidency. Abdurrahman Wahid: Born in Jombang, East Java, in 1940, Gus Dur, as he is popularly known, is the son and grandson of leaders of Nahdlatul Ulama (NU), a Muslim social organisation which claims 37m members. After six years of study in the Middle East from 1964 to 1970, he began working his way up the NU s leadership ladder, becoming the organisation s chairman in Despite NU s traditionalism, Abdurrahman Wahid is a liberal who has been willing to work with westernised Muslims and secular liberals. Since the resignation of Suharto he has aligned himself with Megawati Sukarnoputri s PDI, both personally and through the Partai Kebangkitan Bangsa (PKB; see Political forces). General Wiranto: As concurrently minister of defence and commander of the armed forces, two positions that have rarely been held by the same person, the 51-year-old General Wiranto may be the most powerful figure in Indonesia. Though regarded as exceptionally able since graduating top of his class at the National Military Academy in 1968, his star really began to rise after a spell as presidential adjutant from 1989 to Between 1994 and February 1998 he moved rapidly up the ranks, becoming in quick succession commander of the Jakarta Military Command, chief of the army strategic command (KOSTRAD), army chief of staff and finally, in February 1998, armed forces commander. Amien Rais: Born in Solo, Central Java in April 1944, Amien Rais has stated his intention to stand for the presidency in He emerged as the de facto leader of the popular opposition to Suharto in the weeks leading to the latter s resignation in May Until then his political base had been the 23m-strong modernist Muslim social organistion, Muhammadiyah, of which he became chairman in 1995, but he has consciously sought to resist the lure of sectarian politics. In August 1998 he co-founded the secular, liberal National Mandate Party (Partai Amanat Nasional, PAN) and stood down as Muhammadiyah chairman. On returning to Indonesia in the mid-1980s after many years of study abroad, in the US and Egypt, he at first seemed willing to work with the regime. By 1997 he had become openly critical of the government. After making forthright criticisms of Suharto family and crony involvement in a misconceived mining project, he was forced to resign from the board of Ikatan Cendiakawan Muslimin Indonesia (Indonesian Association of Muslim Intellectuals, ICMI), of which he had been a founding member. Ginanjar Kartasasmita: Born in Bandung in 1941, Ginanjar leads the Habibie cabinet s economic policymaking team, as co-ordinating minister for economic, financial and industrial affairs. He also served in successive Suharto cabinets from As the leading negotiator with the IMF since March 1998, he has had to temper his economic nationalist instincts. He played a decisive role in the resignation of Suharto in May 1998 as leader of a group of 14 cabinet ministers who threatened to resign if the president did not step down. He is rumoured to be on poor terms with the new president, but his own presidential ambitions have been set back by allegations of corruption during his tenure at the mining and energy ministry in the early 1990s. EIU Country Profile The Economist Intelligence Unit Limited 1998

15 Indonesia: International relations and defence 11 enterprises. This overt political role often merged into a covert one, in which a range of techniques extending from bribery to terror were used to manipulate political organisations and cow activists. Revelations about the armed forces conduct under the New Order, including in its dying days during the Jakarta riots in May 1998, and the more recent shooting of demonstrators during the MPR session of November 1998 have greatly damaged the reputation of the armed forces, but they show little inclination to heed popular calls for a complete end to dwifungsi. are shifting in importance The Muslim community has never exercised power proportional to its size. There are several reasons for this. First, although some 85% of the population nominally adheres to Islam, the core of devoted believers is much smaller. Second, this core community is itself divided, chiefly between its traditionalist, mainly rural and Javanese-based component, which finds expression chiefly through Nahdlatul Ulama, and a modernist wing, whose main support bases are in the urban areas and the outer islands. Third, particularly since the late 1950s Islamic politics has received little encouragement from governments in power, which have suspected that it might undermine the secular basis of the Indonesian state. The coming-to-power of Mr Habibie, a staunch Muslim committed to raising the political, economic and social standing of Indonesian Muslims, has given some Muslim groups hopes of an enhanced role, but his own position seems too weak for these hopes to be realised. Business groups have tended to flourish by having access to state power. During the Suharto years these groups tended to be either ethnic Chinese or relatives of the president. Despite the attacks on corruption, collusion and nepotism, a slogan that was first heard as a rallying cry in opposition to Suharto but which has been taken up by the new political establishment, by late 1998 there were growing complaints about a new cronyism, often involving businessmen who had done well under the New Order. The opposition gained in importance and self-confidence during the 1990s, despite regular crackdowns on its activities. The limitations on party-political activity forced many opponents of the regime to seek expression through non-governmental organisations and other forums such as weekly magazines. The growth of this shadow civil society helps explain the explosion of political parties that took place once the resignation of Suharto gave his opponents an opportunity to channel their views openly. International relations and defence Foreign relations in the New Order The establishment of the New Order government resulted in a transformation of foreign policy. President Sukarno s quest for recognition as a revolutionary leader of the developing world was abandoned and replaced by a more pragmatic and low-key approach. The new goal was to stress stability in Indonesia s international relations to enable the country to concentrate on domestic economic development. While adhering to the principle of non-alignment, Indonesia drew increasingly close to the West. It has enjoyed generally good relations with most Western countries, although they sometimes have come The Economist Intelligence Unit Limited 1998 EIU Country Profile

16 12 Indonesia: Economic structure under strain as a result of Western criticism of Indonesia s occupation of East Timor and the government s record in the field of human and labour rights. Indonesia has been seeking a global role The economic crisis slows the military build-up Until the mid-1980s Indonesia was content to focus its foreign policy within the regional context of the Association of South-East Asian Nations (ASEAN) and to permit its wider foreign policy initiatives to be taken under the auspices of the organisation. Having made much progress towards its primary aim of domestic economic development, the government began to seek a more prominent international role from the second half of the 1980s onwards. It chaired the Non-Aligned Movement from 1992 to 1995 and played a leading part in attempts to develop the Asia-Pacific Economic Co-operation (APEC) forum, hosting its second annual summit in November It has also taken the initiative in attempts to resolve regional disputes, in Cambodia, the Spratly Islands in the South China Sea and the Muslim insurgency in the southern Philippines. The combat capacity of the armed forces was allowed gradually to run down between the mid-1960s and the late 1980s. The government s budget spending on defence was held at modest levels during this period, with most of it falling into the recurrent expenditure category involving personnel costs and routine procurements. Capital spending on defence fell to a low of 2.5% of total development expenditure in the Fourth Five-year Development Plan period (1984/ /89; fiscal years running from April to March). Concern over the increased regional uncertainty resulting from the end of the cold war, which has led to a weakening of the US presence in South-east Asia and the increased militarisation of China and India, prompted a drive to improve Indonesia s defence capacity. The proportion of capital expenditure devoted to defence and security increased to about 5% in the Fifth Five-year Development Plan period (1989/ /94). The recent economic crisis has forced the military to put its expansion plans on hold, however. Preliminary figures show a fall in capital spending on defence and security to 3.9% of development spending in the 1997/98 budget, and the allocation in the 1998/99 budget represents just 2.9% of the total. The economy Economic structure Main economic indicators, 1997 Real GDP growth (%) 4.6 Consumer price inflation (av; %) 7.5 Current-account balance ($ bn) 4.8 Foreign debt ($ bn) a Exchange rate (av; Rp:$) 2,909 Population (m) a Bank Indonesia estimate; end-year. Sources: Central Bureau of Statistics, Indikator Ekonomi; Bank Indonesia, Indonesian Financial Statistics. EIU Country Profile The Economist Intelligence Unit Limited 1998

17 Indonesia: Economic policy 13 A diversified economy with exports providing the main impetus for growth Indonesia has a reasonably well-balanced economy in which all major sectors play an important role. Agriculture (including animal husbandry, fishing and forestry) has historically been the dominant activity, in terms of both employment and output. There is a vast range of mineral resources, the extraction and exploitation of which have proceeded rapidly during the past three decades, enabling the mining sector to make an important contribution to the balance of payments. The manufacturing sector also expanded dramatically during the New Order period, and especially since the mid-1980s. In 1991 the share of manufacturing in GDP exceeded that of agriculture for the first time. The services sectors jointly accounted for approximately 41% of GDP in 1996, and 30% of the working population was engaged in these sectors. Because of the low levels of disposable income domestically, exports have traditionally constituted the primary engine of growth. Before the mid-1970s exports consisted mainly of a small number of primary commodities, including natural rubber, coconut oil and copra, tin and crude oil. The decline in petroleum prices after 1983 resulted in a concerted push towards export-oriented industrialisation, as a result of which semi-processed and manufactured products increasingly came to dominate exports. A determined effort to promote tourism since the mid-1980s has also had a big impact on invisibles export earnings during the past decade. Comparative economic indicators, 1997 Indonesia China India Malaysia Philippines Thailand GDP ($ bn) GDP per head ($) 1, ,544 1,132 2,540 Consumer price inflation (%) a Current-account balance ($ bn) Merchandise exports fob ($ bn) Merchandise imports fob ($ bn) Foreign trade b (% of GDP) a Wholesale price inflation. b Merchandise exports plus merchandise imports. Source: EIU. Economic policy Economic rehabilitation in the 1960s is followed by the establishment of new policy objectives When the New Order was established, the economy was in a desperate state. Production and investment had fallen in many sectors since 1950, and real growth in GDP had averaged only about 2% per year in , less than the growth of the population. Manufacturing accounted for less than 10% of GDP and was characterised by substantial excess capacity caused by uncertainties about prices, supplies and government regulations. In the early 1960s budget deficits amounted to as much as 50% of total government expenditure, export earnings slumped and inflation accelerated to a peak of 640% in A reappraisal of economic objectives took place after the economy was rehabilitated; they were henceforth defined as stability, growth and equity, collectively described as the trilogy of development. The means of attaining these The Economist Intelligence Unit Limited 1998 EIU Country Profile

18 14 Indonesia: Economic policy objectives has been a series of five-year development plans known as Rencana Pembangunan Lima Tahun, or Repelita, designed to establish development priorities and set specific growth targets. The Sixth Five-year Development Plan (Repelita VI, April 1994-March 1999) was intended to achieve an economic growth rate of 6.2% per year to provide adequate employment opportunities for a projected increase of 12.6m in the labour force. The manufacturing sector was to expand by 9.4% per year and its non-oil/gas component by 10.3% per year. The realisation of these targets was estimated to require a total investment of Rp660trn, of which foreign funding was to account for less than 6% in net terms (after adjusting for debt amortisation and net outflows of interest, profits and dividends). Following the introduction of the revised 1993-based national accounts data series, the overall growth target for Repelita VI was raised to 7.1% per year. Preliminary results for the first three years yielded growth rates of 7.5%, 8.2% and 8% respectively. A fundamental conflict over development strategy helped created a range of fatal distortions Since the mid-1970s the government s economic policy has represented a blend of two separate development strategies. The first (espoused by the technocrats ) calls for priority to be given to sustainable economic development through an efficient allocation of resources and the maintenance of macroeconomic balance and international competitiveness. The second (promoted by the technologists ) is more strongly rooted in the tradition of economic nationalism and places greater emphasis on promoting Indonesia s development as a technologically sophisticated industrial power irrespective of the economic costs of achieving this goal. The advantage in this conflict swung back and forth for much of the New Order period. After a period of technocratic ascendancy beginning in the mid-1980s, related in particular to the premium placed on efficient use of resources after the collapse of oil prices, the technologists made a strong comeback in 1993, when a record number of them were appointed to the cabinet. Politically well-connected business groups, using economic nationalist arguments to justify protectionist policies, threw their weight behind this approach. A graphic illustration of this alliance in action was the granting of special tax and tariff privileges in February 1996 to a private company linked to President Suharto s youngest son, Hutomo (Tommy) Mandala Putra, to develop a national car (see Industry). Those special privileges were revoked in early 1998 as part of the IMF s aid programme. The conflict between the technocrats and the technologists-economic nationalists was never definitively resolved in favour of one group or the other. While it lasted, rapid GDP growth obviated the need for a resolution and, if anything, strengthened the hand of the second group. Rapid growth, however, carried its own costs, including the creation and toleration of a range of distortions, which partly explain the crash of Investment became increasingly concentrated in import-dependent manufacturing and in property development. By contrast investment in creating backward linkages in manufacturing and in agriculture was neglected. This misallocation of investment was encouraged by the breakneck and poorly regulated expansion of the banking system after the reform package of October 1988 (see Financial services). EIU Country Profile The Economist Intelligence Unit Limited 1998

19 Indonesia: Economic policy 15 The impact of these changes was to raise total expenditure in the fourth draft budget by 79.3% compared with the April draft. The largest increases were for expenditure on the fuel oil subsidy, up by 269.4%; other expenditure (mainly food subsidies), up by 400.2%; domestic and foreign debt servicing; and rupiah-financed capital spending. Although inflation and the lower rupiah were expected to raise domestic receipts in almost all categories, the total increase of 29.9% still left a deficit of Rp127.8trn ($12.1bn at Rp10,600:$1), equivalent to 48% of total projected spending and to the agreed 8.5% of GDP sanctioned under the IMF agreement of June To fill this gap there was a far larger, near-300% increase in external funds, which was entirely due to a 927% increase in programme aid for balance-of-payments and budget support. Total aid was projected at Rp127.8trn ($12bn at the assumed exchange rate of Rp10,600:$1) compared with Rp32.3trn ($5.4bn at the then assumed exchange rate of Rp6,000:$1) in the April draft. Summary of government finances a (Rp trn unless otherwise indicated) 1997/98 b 1998/99 c % change Revenue Domestic Oil/gas Non-oil/gas Foreign aid Expenditure Recurrent of which: personnel costs debt service Development Balance Memorandum item Public savings d a Fiscal years ending March 31st. b Actual. c Revised budget (approved July 1998). d Domestic revenues minus recurrent expenditure. Source: Ministry of Finance, Data Pokok. The rapid pace of development also translated into widening current-account deficits and large-scale foreign borrowing by corporations and banks, much of it short-term. The need to finance the deficits and to meet debt-servicing obligations distorted the domestic interest-rate structure, with implications for the real economy. Further layers of distortion were introduced by the maintenance after 1996 of an exchange-rate system in which the rupiah was linked to a strengthening dollar, and by the continuing regulation of foreign and domestic trade. These last two factors underlay a slowdown in export growth that began in the mid-1990s. The dollar-rupiah link also created a false sense of security that convinced private entities, which had borrowed abroad, that they did not need to hedge their borrowings. The rush of debtors to cover their unhedged obligations created the conditions for the initial collapse of the rupiah in July-September The Economist Intelligence Unit Limited 1998 EIU Country Profile

20 16 Indonesia: Economic policy Fiscal policy overview: the balanced budget principle Until recently tax reform reduced reliance on foreign aid Reducing barriers to trade met with powerful resistance The New Order government inherited an economy in which fiscal discipline had broken down. Budget deficits amounted to as much as 50% of government expenditure, exacerbating the already latent inflationary pressures. The new government enshrined the balanced-budget principle in law, requiring that public expenditure should not exceed domestic budgetary revenue plus foreign aid flows. The balanced-budget principle has not been unduly restrictive in practice. The definition of foreign aid as a form of revenue rather than a means of financing deficits and the government s use of its balances with Bank Indonesia (the central bank) for off-budget funds have created plenty of leeway. Another element of flexibility was added in the early 1990s when, in pursuit of a more effective countercyclical fiscal policy, the government allowed itself to run surpluses or deficits as long as a broad balance was maintained over a period of, say, five years. For the first time in almost three decades, in fiscal years 1992/93 and 1993/94, there were sizeable budget deficits, which were covered from budgetary reserves built up over the previous two years. This practice, as well as increasing resort to off-budget funds in recent years, helped undermine fiscal stability. (Historical data on government finances are shown in Reference table 1.) Following the $5/barrel drop in OPEC s official oil price in March 1983, the government resolved to proceed with long-delayed tax reforms. This resulted in the simplification of the income tax structure in January A new unified income tax was introduced to replace four existing taxes on different forms of income. Value-added tax (VAT) was introduced in April 1985 to replace the existing sales tax. In April 1986 the government concluded this first round of tax reforms with the introduction of measures to simplify the property tax regime and stamp duty regulations. The resulting boost to domestic tax revenue allowed the contribution to budgetary resources from foreign aid to fall, from 30.3% of total revenue in 1988/89 to 11.5% in 1996/97. The economic crisis has reversed this trend decisively: in 1997/98 foreign aid contributed 18% of budget revenue and in 1998/99 its share is due to rise to 46.1%. Both external and internal trade have traditionally been subject to a variety of levies and controls. A wide range of duties and taxes, quantitative controls, sole trading licences and other restrictions have been imposed on exports and imports. Domestic trade has been similarly regulated: foreign nationals and enterprises have been barred from engaging in retail trade; ethnic Chinese entrepreneurs have been discouraged from trading in rural areas; and exclusive trading privileges for a number of products have been granted to publicly or privately owned monopolies. The sharp deterioration in the balance of payments caused by the decline in oil prices in the mid-1980s, and the consequent need to develop non-oil/gas export revenue, prompted the introduction of a programme of trade policy reforms aimed at reducing the cost of imported inputs for export-oriented industries. This resulted in the steady replacement of non-tariff barriers with a more transparent tariff regime, as well as a gradual reduction in the degree of tariff protection granted to domestic producers. Little was done to relax the export restrictions, however, which remained widespread, but particularly in EIU Country Profile The Economist Intelligence Unit Limited 1998