1

Chapter I Introduction

Background: Indonesia is the largest economy in Southeast Asia and is one of the emerging market economies of the world. Indonesia is also a member of G-20 major economies. It has a market economy in which the government plays a significant role by owning more than 164 state-owned enterprises and administers prices on several basic goods, including fuel, rice, and electricity. In the aftermath of the financial and economic crisis that began in mid-1997, the government took custody of a significant portion of private sector assets through acquisition of nonperforming bank loans and corporate assets through the debt restructuring process. Since 2004, the national economy has recovered and undergone another period of rapid economic growth until now.

Purpose of Study: Better understanding on Indonesian economic progress from 1980s now. The paper can serve as a concept to make new ideas related to how we solve Indonesias problems.

Chapter II Explanation on Related Matters

A. 1980s Efforts to restructure the economy in the 1980s resulted in an expansion of real GDP 6% annually on average. The government began eliminating regulatory obstacles to economic activity. The steps were aimed primarily at the trade and finance sectors and were designed to stimulate employment and growth in the non-oil export sector. The 197984 development plan, called REPELITA (Rencana Pembangunan Lima Tahun) III, emphasized the "development trilogy" of economic growth, equity, and national stability. Top priorities were tourism and communication (15%), agriculture and irrigation (14%), mining and energy (13%), education (10%), and regional and local development (10%). The 198489 five-year plan, called REPELITA IV, emphasized industry (9.5% growth rate), agriculture (3%), petroleum and mining (2.5%), transportation and communications (5.2%), and construction (5%). However, low oil prices caused the government to reduce its goals and to promote private and foreign investment. REPELITA V, 198994 emphasized industry (8.5% growth rate), agriculture (3.6%), petroleum and mining (4.2%), trade (6%), transportation and communications (6.4%), and construction (6%). The development of mining and energy were prioritized, as well as certain areas of manufacturing, forestry, agriculture, transportation, communications, and tourism. Since the late 1980s, Indonesia also has made significant changes to its regulatory framework to encourage economic growth. This growth was financed largely from private investment, both foreign and domestic. U.S. investors dominated the oil and gas sector and undertook some of Indonesia's largest mining projects. In addition, the presence of US banks, manufacturers, and service providers expanded, especially after the industrial and financial sector reforms of the 1980s. Other major foreign investors included India, Japan, the United Kingdom, Singapore, the Netherlands, Qatar, Hong Kong, Taiwan and South Korea. The most important economic development policy before privatization and liberalization was outlined in the 1988 Guidelines of State Policy. This document

introduced transmigration development; a policy aimed at overcoming uneven population distribution in Indonesia. The policy had multiple objectives: to ease the burden of densely populated regions, to upgrade regional development, to expand job opportunities, to support national unity, and to strengthen national defense. Transmigration in densely populated areas such as Java, Bali and West Tenggara aimed to increase population productivity and decrease environmental hazards. Transmigration in sparsely populated regions such as Sumatra, Kalimantan, Sulawesi, Maluku, Irian Jaya (West Papua), and East Timor, aimed to increase productivity of natural resources, as well as increase employment and job opportunities. Declining extent of land ownership by farmers was a major problem in both densely and sparsely populated areas. These activities are overseen by the Coordinator for the Implementation of Transmigration (BAKOPTRANS). Forestry statistics from 1985 showed that some 30 million ha of forestland in sparsely populated areas could be converted to agricultural uses. Agriculture was an important sector for development in the transmigration policy. As new areas opened more employment opportunities were predicted to be available. Productive land use included fisheries, industry, services and industrial forest products.

B. 1990s The sixth five-year development plan (199499), REPELITA VI, forecast an annual average GDP growth rate of 6.2%, and estimated that per capita income would reach $1000 by 1999. The plan focused on the privatization of a number of industries, and the gradual opening up of foreign investment. These goals were met by 1997, but the 1998 breakdown of the economy prompted international aid agencies to step in. High levels of economic growth from 19901997 masked a number of structural weaknesses in Indonesia's economy. Growth came at a high cost in terms of weak and corrupt institutions, severe public indebtedness through mismanagement of the financial sector, the rapid depletion of Indonesias natural resources, and a culture of favors and corruption in the business elite. Corruption particularly gained momentum in this 1990s, reaching to the highest levels of the political hierarchy as Soeharto became the most corrupt leader according to Transparency International's corrupt leaders list. As a result, the legal system was very weak, and there was no effective way to enforce contracts, collect debts, or sue for bankruptcy. Banking practices were much unsophisticated, with collateral-based lending the norm and widespread

violation of prudential regulations, including limits on connected lending. Non-tariff barriers, rent-seeking by state-owned enterprises, domestic subsidies, barriers to domestic trade and export restrictions all created economic distortions. Indonesian monetary crisis was caused by government policies and Thailands economic policy. It started from Thailand in July 1997 because Thailand wants to float their currency against the US$. And then it really happen, Bath and the US$ is associated with one another with a fixed exchange rate. Sudden devaluation of "Bath" raises the pressure on the ASEANs countries currency devaluation and the pressure spread wide in the region. The Asian Financial Crisis that began to affect Indonesia in mid-1997 became an economic and political crisis. Indonesia's initial response was to float the rupiah, raise key domestic interest rates, and tighten fiscal policy. In October 1997, Indonesia and the International Monetary Fund (IMF) reached agreement on an economic reform program aimed at macroeconomic stabilization and elimination of some of the country's most damaging economic policies, such as the National Car Program and the clove monopoly, both involving family members of President Suharto. The rupiah remained weak, however, and President Suharto was forced to resign in May 1998. In August 1998, Indonesia and the IMF agreed on an Extended Fund Facility (EFF) under President B.J Habibie that included significant structural reform targets. President Abdurrahman Wahid took office in October 1999, and Indonesia and the IMF signed another EFF in January 2000. The new program also has a range of economic, structural reform and governance targets. The effects of the financial and economic crisis were severe. By November 1997, rapid currency depreciation had seen public debt reach US$ 60 billion, imposing severe strains on the government's budget. In 1998, real GDP contracted by 13.7%. The economy reached its low point in mid-1999 and real GDP growth for the year was 0.3%. Inflation reached 77% in 1998 but slowed to 2% in 1999. The rupiah, which had been in the Rp 2,600/USD 1 range at the start of August 1997, fell to 11,000 /USD 1 by January 1998, with spot rates around 15,000 for brief periods during the first half of 1998. It returned to 8,000/USD 1 range at the end of 1998 and has generally traded in the Rp 8,00010,000/USD 1 range ever since, with fluctuations that are relatively predictable and gradual.

C. 2000s In late 2005 Indonesia faced a 'mini-crisis' due to international oil prices rises and imports. The currency reached Rp 12,000/USD 1 before stabilizing. The government was forced to cut its massive fuel subsidies, which were planned to cost $14 billion for 2005, in October. This led to a more than doubling in the price of consumer fuels, resulting in double-digit inflation. The situation had stabilized, but the economy continued to struggle with inflation at 17% in 2005. For 2006, Indonesia's economic outlook was more positive. Economic growth accelerated to 5.1% in 2004 and reached 5.6% in 2005. Real per capita income has reached fiscal year 1996/1997 levels. Growth was driven primarily by domestic consumption, which accounts for roughly three-fourths of Indonesia's gross domestic product. The Jakarta Stock Exchange was the best performing market in Asia in 2004 up by 42%. Problems that continue to put a drag on growth include low foreign investment levels, bureaucratic red tape, and very widespread corruption which cause 51.43 trillion Rupiah or 5.6573 billion US Dollar or approximately 1.4% of GDP to be lost on a yearly basis. However, there is very strong optimism with the conclusion of peaceful elections during the year 2004 and the election of the reformist president Susilo Bambang Yudhoyono. The unemployment rate in February 2007 was 9.75%. Despite a slowing global economy, Indonesias economic growth accelerated to a ten-year high of 6.3 percent in 2007. This growth rate was sufficient to reduce poverty from 17.8 to 16.6 percent based on the Governments poverty line and reversed the recent trend towards jobless growth, with unemployment falling to 8.46 percent in February 2008. Unlike many of its more export-dependent neighbors, it has managed to skirt the recession, helped by strong domestic demand (which makes up about two-thirds of the economy) and a government fiscal stimulus package of about 1.4 percent of GDP, announced earlier this year. After India and China, Indonesia is currently the third fastest growing economy in the Group of Twenty (G20) industrialized and developing economies. The $512 billion economy expanded 4.4 percent in the first quarter from a year earlier and last month, the IMF revised its 2009 forecast for the country to 3-4 percent from 2.5 percent. Indonesia enjoyed stronger fundamentals with the authorities implemented wide-ranging economic and financial reforms, including a rapid reduction in public and external debt, strengthening of corporate and banking sector

balance sheets and reducing bank vulnerabilities through higher capitalization and better supervision. As of 28 June 2010, the Indonesia Stock Exchange had 341 listed companies with a combined market capitalization of $269.9 billion. As at November 2010, two thirds of the market capitalization was in the form of foreign funds and only around one percent of the Indonesian population has stock investments. Efforts are further being made to improve the business and investment environment. Within the World Bank's Doing Business Survey, Indonesia raised to 122 out of 178 countries in 2010, from 129 in the previous year. Despite these efforts, the rank is still below regional peers and an unfavorable investment climate persists. For example, potential foreign investors and their executive staff cannot maintain own bank accounts in Indonesia, unless they are tax-paying local residents (paying tax in Indonesia for their worldwide income).

Chapter III Conclusion and Points of Thought

Conclusion: We conclude that Indonesia still needs to improve the efficiency and effectiveness of its resources. If we see the history of economic development in this country, there are a lot of weaknesses, especially in human resources. Even we have a rapid growth and successfully stabilized the economic condition after the big crisis in 1998, we still have a weakness system, majority of state organization corrupted, we dont have strong economic standards and we still dont develop our human resources to have competitiveness in global era.

Points of Thought: Economic Policies We need strong economic policies to protect our local products against products from foreign countries. Nowadays, our government and our parliament always made a policy in a hurry. None of the policies can really protect Indonesian people; otherwise, the policies usually make the people businessman or not, suffer. Human Resources We have a lot of human resources, but they lack of integrity, honesty, bravery, and objectivity. So Indonesia has to develop its human resources well to gain competitive advantage with its people. Because like we know nowadays, a person that doesnt have any capability can be anything, a leader, even if that job is very important for this country. It should be change. Local Business Indonesia must develop its local business to gain from foreign exchange as much as it can. Indonesia cannot sell raw material again in the future, it is need to change. It must sell something that already became useful things.

Good Governance Good governance consists of transparency, participation, and accountability, so every movement that government made will assure its people to have prosperity, not just the minority, but all of the people.

References
Anonym.(http://www.nationsencyclopedia.com/Asia-and-Oceania/IndonesiaECONOMIC-DEVELOPMENT.html). May 11, 2011

Anonym.(http://en.wikipedia.org/wiki/Economy_of_Indonesia). May 11, 2011

Seda, Frans.(http://www.ekonomirakyat.org/edisi_3/artikel_3.htm). May 11, 2011