Business in Indonesia: New Challenges, Old Problems

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

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 that was due to expire in December that year. Drawing up the balance sheet on Indonesian economic performance is a discouraging job. For five years Indonesia has been mired in economic crisis, its fortunes rising or falling in concert with the rupiah. Although the rupiah strengthened to Rp 8,600/$ in July 2003, the debt/GDP ratio declined from 90 per cent in 2001 to 72 per cent in 2002 and consumption growth remains robust, the economy has not yet fully recovered. Many problems remain in the investment and manufacturing sectors, their causes lying in poor governance, institutional failure and lack of government credibility. Indonesia has been ‘muddling through’ with the economy since 1998. Economic growth of 3–4 per cent annually is far from adequate to create employment opportunities in the formal sector and stimulate growth. Because of the severity of the economic crisis and the shortcomings in institutional reform, a recovery is unlikely in the short term. Other factors such as continuing political uncertainty are also hampering an economic recovery. Despite these obstacles to economic performance, and the threat to global conditions posed by the threat of terrorism, the US invasion of Iraq and severe acute respiratory syndrome (SARS), most of Indonesia’s macroeconomic indicators were positive through to August 2003. MacIntyre and Resosudarmo (2003) argue that macroeconomic improvement and a more viable system of national government partly explain the ability of the Indonesian government to cope with internal and external shocks such as SARS, the war in Iraq and the Marriott Hotel bombing in Jakarta. 39 3 ECONOMIC UPDATE 2003: AFTER FIVE YEARS OF REFORMASI EKONOMI, WHAT NEXT? M. Chatib Basri This chapter will address the progress that has been made since the launch of reformasi ekonomi (economic reform) in 1998. What are the main problems that have been encountered? What will the Indonesian economy look like, postIMF ? How will industry fare? These are the main questions that will be addressed in this chapter. The next section sets the scene for a discussion of the main issues by providing an overview of macroeconomic development. The third section focuses on post-IMF Indonesia, and the fourth critically examines Indonesia’s industrial policy and the future prospects of industry. OVERVIEW OF RECENT ECONOMIC DEVELOPMENTS Indonesia in Comparative Perspective The economic crisis affected the whole of Asia, not just Indonesia. To acquire a better picture of the effects of the economic crisis, a comparative perspective is needed. Most economic indicators point to a recovery in other crisis-affected countries, although at different speeds (Ikhsan 2003). The comparison of real GDP in Indonesia, South Korea, Malaysia and Thailand illustrated in Figure 3.1 shows that Indonesia is the only country in which real GDP in 2002 remained 40 M. CHATIB BASRI 1997 1998 1999 2000 2001 2002 0 20 40 60 80 100 120 140 Indonesia Korea Malaysia Thailand Figure 3.1 GDP in Indonesia, South Korea, Malaysia and Thailand, 1997–2002 (1997 = 100) Source: CEIC Data Company. below the pre-crisis level in 1997, although it was predicted to reach the precrisis level in 2003. Per capita income in Indonesia in 2003 was still well below the pre-crisis level, and is expected to take several more years to recover. The overall pattern of economic recovery has been similar in Indonesia, South Korea, Malaysia and Thailand. Figure 3.2 shows that in all of these countries , real consumption has recovered, and has even surpassed pre-crisis levels. Investment, however, continues to lag behind pre-crisis levels (Figure 3.3). Indonesia is the only one of the four countries whose 2002 exports of goods and services have not recovered to pre-crisis levels. These findings help us to recognise two major problem areas in the Indonesian economy: investment and exports. They are closely associated with the lethargic performance of the manufacturing sector, as will be discussed in detail below. Macroeconomic Review of 2003 The beginning of 2003 was marked by widespread protests in major Indonesian cities over government price hikes. Price increases in electricity (6 per cent), fuel (3...