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Business in Indonesia

New Challenges, Old Problems

M. Chatib Basri and Pierre van der Eng

Publication Year: 2004

This book examines Indonesia's business environment since reformasi began in 1985 -- what stayed the same, what changed, and would could change. Economic recovery has been hesitant. Regime change and political reform have created uncertainties that have deepened reluctance to invest. A raft of government-instigated changes have left their imprint: decentralization, privatization, new company legislation, anti-corruption efforts, nationalization of debt-ridden banks, and firms being forced into receivership. More cautious lending practices by remaining financial institutions have imposed a credit crunch. Increased worker militancy and minimum wage rises have led some international firms to reconsider their presence in Indonesia. Changes in the business environment have caused a redefinition of private enterprise-government relations, inducing firms to re-examine their organization and management. The book includes insights of distinguished and stimulating speakers from business, independent research organizations, and academic institutions in Indonesia, Australia and elsewhere.

Published by: Institute of Southeast Asian Studies

Title Page, Copyright Page

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pp. i-iv

CONTENTS

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pp. v-vi

TABLES

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pp. vii-viii

FIGURES

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pp. ix-x

CONTRIBUTORS

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pp. xi-xii

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ACKNOWLEDGMENTS

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pp. xiii-xiv

This book is the result of the Indonesia Update conference held on 26–27 September 2003 at the Australian National University (ANU). The theme of the conference was ‘Business in the Reformasi Era: New Challenges, Old Problems’. Several organisations and a long list of people deserve our gratitude for making both the conference and the publication of this volume possible. ...

GLOSSARY

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pp. xv-xx

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1 BUSINESS IN INDONESIA: OLD PROBLEMS AND NEW CHALLENGES

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pp. 1-20

Six years ago, Indonesia’s business system was in turmoil. Companies were forced to absorb the consequences of a significant depreciation of the rupiah, accelerating inflation, and restricted access to credit due to growing reluctance of foreign lenders and the near-collapse of the domestic financial system. A change in the political regime and the conditions under which the International Monetary Fund (IMF) provided support to Indonesia during 1998–2003 brought...

PART I - Political and Economic Developments

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pp. 21-43

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2. POLITICAL UPDATE 2003: TERRORISM, NATIONALISM AND DISILLUSIONMENT WITH REFORM

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pp. 23-38

If the international community, especially Australia and the United States, saw terrorism as dominating developments in Indonesia during the year, most Indonesians did not. For the political elite, there were far more important issues: rising corruption; stalled democratic reform; how to maintain the country’s territorial integrity; the battle between the army and police for control of internal security; the impact of political Islam; the consequences of decentralisation...

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3 ECONOMIC UPDATE 2003: AFTER FIVE YEARS OF REFORMASI EKONOMI, WHAT NEXT?

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pp. 39-57

The year 2003 marked the fifth anniversary of reformasi, the movement for political and economic reform that began with the fall of Soeharto in 1998. It also marked kemandirian (independence) from five years of implementing the International Monetary Fund’s (IMF’s) economic policies, with the Indonesian government declaring its decision in July 2003 to exit from the IMF program...

PART II - Overview of the Business Environment

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pp. 59-81

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4 A NEW POLITICAL ECONOMY? POLITICS, ETHNICITY AND BUSINESS IN INDONESIA

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pp. 61-71

Nearly six years after the fall of Soeharto, a casual visitor to Indonesia may well find it unrecognisable. Long ruled by a general, the country is now run by a housewife. Long one of the most centralised countries in Asia, it is now one of the most decentralised, with newly empowered governors and district heads (bupati) in an unseemly rush to set up everything from airlines to Disneylandstyle theme parks. Where once the press was a poodle, it is now a pitbull. How...

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5 INVESTMENT PROSPECTS: A VIEW FROM THE PRIVATE SECTOR

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pp. 72-89

Approaching its second democratic election in the post-Soeharto reformasi era, Indonesia is experiencing a degree of political stability and economic growth that few would have predicted when Soeharto’s 30-year New Order government collapsed in the rubble of the May 1998 riots. Indonesia’s strong currency and vibrant stock and bond markets may well surprise those who do not follow Indonesia regularly or who have not visited the country recently. Those who...

PART III - Foreign Investment and Trade

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pp. 91-113

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6 RECENT TRENDS IN FOREIGN DIRECT INVESTMENT

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pp. 93-107

The recovery in investment – both domestic and foreign – during the post-crisis period has been sluggish, partly explaining the relatively low economic growth rates in Indonesia since 2001. The consequences of this low-growth period have been slow employment creation in the formal/modern sector and rapid expansion in the informal/traditional sector. Higher rates of investment are required to shift Indonesia to a higher growth path. This chapter reviews recent trends in...

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7 EXPORTS BY SMALLAND MEDIUM-SIZED ENTERPRISES IN INDONESIA

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pp. 108-121

Small and medium-sized enterprises (SMEs) continue to receive significant attention from both Indonesian policy-makers and researchers. One explanation can be found in the important role SMEs play in poverty alleviation. The sector accounts for a considerable amount of employment for workers. It has been able to adjust to the financial crisis and maintain employment levels while other sectors of the economy have contracted. However, SMEs are not only associated...

PART IV - Key Issues in the Business Environment

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pp. 123-145

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8 THE EFFECTS OF DECENTRALISATION ON BUSINESS IN INDONESIA

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pp. 125-140

Indonesia has experienced positive economic growth since 1999 and there are signs of an economic recovery. Still, it is too early to conclude that economic growth is back on track, as most of the recovery so far has been generated by an expansion of private consumption of around 4–5 per cent annually. Investment, on the other hand, has experienced negative growth of between zero and –1 per cent. This pattern may be acceptable for a short period of time, but in the...

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9 POLITICAL ECONOMY OF PRIVATISATION OF STATE-OWNED ENTERPRISES IN INDONESIA

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pp. 141-157

Together with fiscal austerity and market liberalisation, the privatisation of state-owned enterprises (SOEs) was one of three pillars of International Monetary Fund (IMF) advice given to governments of less developed countries throughout the 1980s and 1990s (Stiglitz 2002: 53). Privatisation involves the transfer of responsibilities from the public to the private sector. Proponents argue that it lowers costs, improves the quality of goods and services, increases...

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10 CORPORATE OWNERSHIPAND MANAGEMENT IN INDONESIA: DOES IT CHANGE?

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pp. 158-177

It has been argued that the Asian economic crisis of 1997–98 can be attributed to the vulnerability of the corporate sector in Asian countries, especially the poor system of corporate governance that shielded corporations from market discipline (World Bank 1998). A series of papers generated by a research project supported by the World Bank has revealed that East Asian corporations were characterised by high leverage, concentrated ownership, a high level of...

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11 TINKERING AROUND THE EDGES: INADEQUACY OF CORPORATE GOVERNANCE REFORM IN POST-CRISIS INDONESIA

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pp. 178-190

Few would dispute that better corporate governance is important to Indonesia’s recovery from the economic crisis of 1997–98. With a significant number of major banks and corporations still under the control of the Indonesian Bank Restructuring Agency (IBRA), the process of divestment will succeed only if prospective investors are confident that their investments will be managed in their own best interests. Equally, with equity markets weak and bank financing...

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12 UPHOLDING INDONESIAN BANKRUPTCY LEGISLATION

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pp. 191-203

When the Asian economic crisis hit Indonesia in 1997, the Indonesian government initiated commercial sector reform. The need for institutional reform in this sector was widely recognised in Indonesia before the crisis. All Indonesian legal professions, both public and private, had in fact agreed on a course of reform, reflected in the 1997 ‘Legal Diagnostic’.1 The Legal Diagnostic recognised the difficulties posed by wholesale reform and identified commercial law...

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13 THE PRIVATE SECTOR RESPONSE TO PUBLIC SECTOR CORRUPTION

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pp. 204-220

As the supply side of the corruption supply-and-demand equation, the private sector is regarded as a major contributor to public sector corruption. Transparency International’s 2002 Bribe Payers Index found that public officials in the public works and construction industry and in the arms and defence, oil and gas and real estate and property sectors were the most inclined to be involved in bribery (Lyne and Bruns 2002). ...

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14 A CHALLENGE FOR BUSINESS? DEVELOPMENTS IN INDONESIAN TRADE UNIONISM AFTER SOEHARTO

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pp. 221-233

In post-Soeharto Indonesia, ‘militant unionism’ – along with shrinking credit, the uncertain political climate and inconsistencies within the regulatory environment – has been identified as a major reason for foreign capital flight and domestic firm closures (Sadli 2000). Claims about the deleterious effects of worker militancy have been a focus of extensive press coverage as well as seminars, government statements and discussions among business, union and NGO...

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15 LABOUR REGULATION AND THE BUSINESS ENVIRONMENT: TIME TO TAKE STOCK

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pp. 234-249

Extraordinarily rapid change in the regulatory and institutional environment for labour in Indonesia over the past six years has sought to redress the balance in labour policies and process in favour of workers. Many of the changes that occurred were based on the premise that business was too strongly favoured, and labour heavily penalised, in labour policy and its implementation under former President Soeharto. Some were long overdue as a result of the policy freeze...

REFERENCES

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pp. 251-262

INDEX

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pp. 263-275


E-ISBN-13: 9789812305398
Print-ISBN-13: 9789812302489

Page Count: 276
Publication Year: 2004

Edition: 1