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Indonesia - ECONOMY




Indonesia - The Economy

Indonesia

BY MANY MEASURES, the Indonesian economy prospered under the New Order of President Suharto after he came to power in 1966; growing industries added the benefits of modern technology to the natural abundance of the tropics, once the mainstay of the colonial economy. In 1965, before the New Order was initiated, the Indonesian economy had virtually no industry and little more total production per capita than when controlled by Dutch colonialists. However, so complete was the economic transformation under the New Order that, by the mid-1980s, the production of steel, aluminum, and cement was far more valuable than the produce of many thousands of hectares of plantations.

Perhaps the New Order's greatest asset was the resolve to alter policies when they no longer worked. For example, throughout the 1970s, tax revenues earned from oil helped fund growing government investment. In the mid-1980s, these revenues declined dramatically due to the glut on the world oil market. This decline in tax revenues as a base for economic development led, by the early 1990s, to an overhauling of the government's strategy to foster rapid industrial growth. The new strategy permitted a larger role for private businesses and featured greatly simplified government regulations.

Under Suharto's leadership, the nation seemed mesmerized by the prospects of modern technology. When tax revenues grew rapidly with oil price increases engineered by the Organization of the Petroleum Exporting Countries (OPEC) in the 1970s, the government pursued ambitious investments in heavy industries such as steel and advanced technologies such as aeronautics. Petroleum exports and the increasing exploitation of other natural resources funded imports of machinery and raw materials vital to rapid industrialization. Timber from Indonesia's vast rain forests, copper and nickel from remote mining sites, and traditional agricultural products such as rubber and coffee also contributed to buoyant export earnings.

Government agricultural programs brought the benefits of modern agricultural technology to millions of peasant farmers. The Green Revolution, based on the use of high-yielding seed varieties with modern inputs of fertilizers and pesticides, transformed subsistence rice farmers into productive commercial suppliers. Furthermore, new programs in the 1980s extended the benefits of modern agricultural techniques to other food and cash crops. This revolution created challenges in the early 1990s, however, as the greater diversity of crops other than rice and more varied conditions of cultivation made the task of increasing agricultural output more complex.

The New Order economic ideology was a departure from the former regime's brand of socialism, which was labelled by Sukarno, president from 1945 to 1967, as "socialism � la Indonesia." Under Sukarno's leadership, the government gained complete control over most private markets, including foreign trade and bank credit. The old regime was not limited by available resources: if ambitious government expenditures could not be funded by taxes, the government turned to the central bank for credit. Large budget deficits and intrusive economic controls led to mounting inflation and a stagnant economy.

Suharto learned from the mistakes of his predecessor. The hallmark of the New Order was fiscal and monetary conservatism. Budgets were balanced and growth in the money supply was restricted to contain inflation. Still, the forces that had pushed Sukarno toward socialism remained. After several centuries of Dutch rule, no indigenous group of industrialists had the resources to move the nation toward a modern economy. The most likely candidates, the ethnic Chinese minority, were still resented by the far more numerous and less well-off pribumi Indonesians. Whereas the Chinese minority had prospered in commerce and small-scale industry during the colonial era, pribumi Indonesians were primarily smallscale peasant farmers whose activities were limited by Dutch colonial policy. As a result, after independence Indonesians were ambivalent toward foreign investors because they symbolized foreign colonial domination.

The New Order steered a course that might be labelled "capitalism � la Indonesia." The government itself assumed the role of industrialist by direct state investment, increasing regulations and offering special protection for favored industries. Although never so intrusive or so poorly funded as Sukarno's programs, this strategy became increasingly plagued by inefficiency and corruption. In addition, the modern capital-intensive industries favored by government supports offered few employment opportunities to the growing labor force. In spite of abundant and cheap labor, Indonesia's exports were still dominated by natural resources and agricultural products. These exports provided less employment and were subject to larger price swings than the manufactured exports that had led economic development in many neighboring Asian nations.

The collapse of the oil market in the mid-1980s underscored the economy's weaknesses and forced the government to take stock of its economic policies. From the mid-1980s to the early 1990s, a wave of reforms to promote manufactured exports significantly reduced the role of government in all sectors of the economy. Private businesses seemed prepared to take up the slack. From a period of slow growth in the early 1980s, when annual gross domestic product (GDP) growth had dropped to 2 percent in 1982 compared with an annual average of 8 percent from 1970 to 1981, the economy rebounded to a GDP growth of 7 percent in 1990. Manufactured exports grew from less than US$1 billion in 1982 to more than US$9 billion in 1990. Still, the new orientation was a long way from laissez-faire, or, as Indonesians prefer, "freefight ," capitalism. Important government restrictions, such as a ban on timber exports, continued to affect private businesses. Several major state-owned firms, labelled strategic industries, were protected from any threat of privatization.

Ironically, the most visible beneficiaries of the growing economy during the 1970s and 1980s were the Chinese minority and members of Suharto's own family, whose business interests multiplied with lucrative government contracts. Although available evidence on income distribution suggested that income inequality declined during this period, the extreme wealth of the privileged few remained a symbol of inequity and a sensitive public issue in the early 1990s.

The vast majority of the population still lived in rural areas and earned a living from agriculture or from the informal sector of petty trade and other low-skilled services. The average Indonesian had only marginal contact with the modern industrial sector, through employment in the growing food market or occasional migration to urban areas for work. In the past, government largesse with oil tax revenues had strengthened these links by employing more civil servants and financing rural programs to assist pribumi farmers and small businesses. In the early 1990s, however, even though the government remained committed to improving the economic opportunities for pribumi Indonesians, the new policies relied more on a vigorous private economy to help spread the benefits of economic development.

Indonesia

Indonesia - The Economy - ROLE OF GOVERNMENT

Indonesia

In the early years of nation building, from 1950 to 1957, a variety of moderate policies were pursued to support the pribumi through subsidized credit from the state-owned Bank Rakyat, or People's Bank, and through limiting certain markets to pribumi business. The nation's first five-year development plan (1956-60) proposed a realistic level of government investment in public infrastructure, but offered little regulation or overall guidance to the private sector. This plan was superseded by dramatic developments in the political and economic sphere, including the 1957 takeover of Dutch enterprises initiated by workers, which led ultimately to state control of this important segment of the economy. About 300 Dutch plantations and 300 firms in other areas such as mining, trade, finance, and utilities ultimately came under the control of the Indonesian government. Dutch management was replaced by Indonesian civil servants or military officers, most of whom had little managerial experience.

The de facto expansion of the state was sustained by a general policy shift to justify greater state intervention in the economy. Sukarno's Guided Economy was initiated in a new eight-year development plan begun in 1959, which entailed a twelvefold increase in government project expenditure from the previous plan, without clear sources of finance. By the mid-1960s, central bank credit to the government accounted for half of government expenditures. This deficit spending led in turn to mounting inflation, which peaked at 1,500 percent between June 1965 and June 1966. At the same time, foreign debt mounted, both from the West and increasingly from the Soviet Union. In spite of a highly visible public building campaign, the economy stagnated and by 1966 per capita production was below the 1958 level.

Following the downfall of Sukarno, the New Order regime under Suharto pursued, with financial assistance from the International Monetary Fund (IMF), a variety of emergency stabilization measures to put the economy back on course. During the 1960s, a team of economists from the Faculty of Economics at the University of Indonesia became influential presidential advisers. Because three of the five-member team had received doctorates from the University of California at Berkeley, the group was sometimes referred to as the "Berkeley Mafia." Chief among the Berkeley group's recommended reforms was a balanced budget, although foreign assistance and foreign borrowing were included as sources of revenue. Furthermore, in a break from the socialist tenor of Sukarno's Guided Economy, Suharto's New Order heralded a return to private market development.

The New Order remained committed to a stable economic environment encouraged by responsible fiscal and monetary policy, but concerns over foreign economic dominance, the limited national industrial base, and the need for pribumi economic development mandated increased government regulation during the 1970s. In spite of these increasing government controls, the economy continued to prosper throughout the 1970s, with GDP growing an average 8 percent annually.

By the early 1980s, a precipitous drop in growth pointed to limits in the industrialization strategy, and a new generation of reformers advocated a more limited role for the government. Entrenched beneficiaries of protected markets and enlarged bureaucracies resisted these reforms, but when the oil market collapsed in 1986, the balance was tipped in favor of the "freefight " advocates.

The Politics of Economic Reform

Two main forces of influence within the New Order government battled to shape economic policy: the technocrats--who favored market reforms and a limited role for the government in the economy--and economic nationalists--who argued that trade protection and direct government investment and regulation were necessary to contain foreign influence while mobilizing sufficient resources to modernize the economy. The technocrats were led by the original members of the "Berkeley Mafia," who had gained cabinet posts in the late 1960s. Among the most influential technocrats were Ali Wardhana, initially the minister of finance in 1967 and coordinating minister of economics, finance, and industry from 1983 to 1988, and Widjojo Nitisastro, who headed the National Development Planning Board (Bappenas--for this and other acronyms, see table A), from 1967 to 1983. Although retired by 1988, both men remained influential behind-the-scenes advisers in the early 1990s. Under the tutelage of Professor Sumitro Djojohadikusumo, a prominent intellectual and cabinet member in the 1950s who founded the University of Indonesia Faculty of Economics during the 1960s, these Western-trained economists were the voice of economic liberalism. The economic nationalists included prominent officials in the Department of Industry, headed by Hartarto; offices under the minister of state for research and technology, Bacharuddin J. Habibie; and the Investment Coordinating Board (BKPM). The balance of power between the economic technocrats and the economic nationalists was mediated by Suharto, who skillfully channeled the energies of both groups into separate arenas.

After the New Order successfully countered the rampant inflation and financial collapse of the Sukarno era, the technocrats gained credibility and influence in the domain of financial and fiscal policy. As oil revenues grew in the 1970s, those government agencies responsible for trade and industrial policy sought to extend Indonesia's domestic industrial base by investing in basic industries, such as steel and concrete, and by erecting trade barriers to protect domestic producers from excessive foreign competition. Government regulations proliferated, and oil taxes fueled investment in development projects and state enterprises.

The private sector became dominated by large conglomerate corporations, often Chinese minority-owned, which had sufficient wealth and know-how to assist the government in large-scale modernization projects. Australian economist Richard Robison estimated that Chinese Indonesian capital accounted for 75 percent of private-sector investment in the 1970s. The two most prominent conglomerates, the Astra Group and the Liem Group, had substantial holdings in dozens of private firms ranging from automobile assembly to banking. The growth of these conglomerates usually hinged on close ties to government. In exchange for monopoly privileges on production and imports of key industrial products, conglomerates would undertake large-scale investment projects to help implement government industrialization goals. Political patronage became a vital component of business success in the early 1980s as government restrictions were extended to curtail imports when oil revenues began to decline.

By the mid-1980s, about 1,500 items representing 35 percent of the value of imports were imported either by licensed importers or controlled through a quota system. Such nontariff barriers affected virtually all manufactured imports, but were particularly extensive for textiles, paper and paper products, and chemical products. As a result of restrictions on imports, firms in these sectors were effectively protected from foreign competition or able to sell their products at a higher cost. Firms that obtained import licenses were also highly profitable, but costs were borne by the entire economy because imports were often key inputs for many manufacturers. Popular resentment grew as the gains from these restrictions enriched a privileged minority. To the long-standing public sensitivity toward the prominence of the Chinese minority was added dismay that members of Suharto's family were profiting from access to import monopolies.

Suharto's six children were the most visible beneficiaries of close government connections. Each child was connected with one or more conglomerates with diverse interests, and like their Chinese minority counterparts, they based their business success at least partly on lucrative government contracts. For example, son Bambang Trihatmodjo's Bimantara Citra Group, reportedly the largest family conglomerate by the 1990s and Indonesia's fifth largest company in 1992, got its start in the early 1980s selling allocations of overseas oil to the National Oil and Natural Gas Mining Company (Pertamina)--the government oil monopoly and the nation's largest company. Lower value middle East oil was thus used for domestic refining and consumption while higher-grade Indonesian oil was used for export, primarily to Japan.

Two vital industries symbolized the intricate relationship between government and business: steel and plastics. In the first case, the founder of the Liem Group, Liem Sioe Liong, agreed in 1984 to invest US$800 million to expand a government enterprise, Krakatau Steel, in Cilegon, Jawa Barat Province, to add production of cold-rolled sheet steel. In return, a company owned partly by Liem received a monopoly for the imports of cold-rolled steel. Once domestic production was underway, Liem's imports were restricted to assure demand for the Krakatau product. The World Bank estimated that the scheme added 25 to 45 percent to the cost of steel sheets in Indonesia, thereby raising costs of a wide range of industrial products that used this material. In the second case, the importation of plastic raw materials was monopolized through government license by Panca Holding Limited, on whose board of directors sat Suharto's son, Bambang, and his brother, Sigit Harjojudanto. As a result, in 1986 the company earned US$30 million on US$320 million worth of plastics imports, adding 15 to 20 percent to the price of these materials for Indonesian users.

When oil prices plummeted in 1986, the growing dissatisfaction with the direction of trade and industrial policy became more vocal among small private businesses excluded from the benefits. A number of smaller businesses organized the Chamber of Commerce and Industry in Indonesia (Kadin). These businesses became open critics of the "high-cost" economy of monopoly privilege, and in 1987 Kadin became the officially sanctioned channel of communication between business and government. Other influential groups began to pressure the government for trade reforms, including international lenders on whom Indonesia relied to assist the government with balance of payments difficulties resulting from the decline in oil revenues.

Several major reforms were underway before the 1986 oil crisis, but without direct affect on trade restrictions, which although valued by influential beneficiaries, had become costly to many businesses. Major trade deregulation began in 1986, but left the largest import monopolies untouched until 1988, a gradual approach to reform that influential technocrat Ali Wardhana attributed to the limitations of the government bureaucracy. He hinted at a broader political motive, however, in acknowledging that piecemeal reforms had the advantage of progressively winning a new constituency for further reform. The financial sector was the first sector to be reformed in the 1980s, as it was in the mid-1960s, when the New Order government faced the excesses of the previous regime.

Financial Reform

The president's technocratic advisers on financial policy, who had unsuccessfully resisted growing government regulations during the 1970s, spearheaded the return to market-led development in the 1980s. The financial sector is often the most heavily regulated sector in developing countries; by controlling the activities of relatively few financial institutions, governments can determine the direction and cost of investment in all sectors of the economy. From the 1950s to the early 1980s, the Indonesian government frequently resorted to controls on bank lending and special credit programs at subsidized interest rates to promote favored groups. Toward the end of this period, the large state banks that administered government programs were often criticized as corrupt and inefficient. Sweeping reforms began in 1983 to transform Indonesia's government-controlled financial sector into a competitive source of credit at market-determined interest rates, with a much greater role for private banks and a growing stock exchange. By the early 1990s, critics were more likely to complain that deregulation had gone too far, introducing excessive risk taking among highly competitive private banks.

Like many developing countries, the Indonesian financial sector historically was dominated by commercial banks rather than by bond and equity markets, which require a mature system of accounting and financial information. Several established Dutch banks were nationalized during the 1950s, including de Javasche Bank, or Bank of Java, which became the central bank, Bank Indonesia, in 1953. Under Sukarno's Guided Economy, the five state banks were merged into a single conglomerate, and private banking virtually ceased. One of the first acts of the New Order was to revive the legal foundation for commercial banking, restoring separate state banks and permitting the reestablishment of private commercial banks and a limited number of foreign banks.

During the 1970s, state banks benefited from supportive government policies, such as the requirement that the growing state enterprise sector bank solely with state banks. State banks were viewed as agents of development rather than profitable enterprises, and most state bank lending was in fulfillment of governmentmandated and subsidized programs designed to promote various economic activities, including state enterprises and small-scale pribumi businesses. State bank lending was subsidized through Bank Indonesia, which extended "liquidity credits" at very low interest rates to finance various programs. By 1983 such liquidity credits represented over 50 percent of total state bank credit. Total state bank lending in turn represented about 75 percent of all commercial bank lending. The nonstate banks--which by 1983 numbered seventy domestic banks and eleven foreign or joint-venture banks--had been curtailed during the 1970s by licensing restrictions, even though they offered competitive interest rates on deposits and service superior to that offered by the large bureaucratic state banks. Bank Indonesia also imposed credit quotas on all banks to reduce inflationary pressures generated by the oil boom.

The first major economic reform of the 1980s permitted a greater degree of competition between state and private banks. In June 1983, credit quotas were lifted and state banks were permitted to offer market-determined interest rates on deposits. Many of the subsidized lending programs were phased out, although certain priority lending continued to receive subsidized refinancing from Bank Indonesia. Also, important restrictions remained, including the requirement that state enterprises bank at state banks and limitations on the number of private banks. By 1988 state banks still accounted for almost 70 percent of total bank credit, and liquidity credit still accounted for about 33 percent of total state bank credit.

In October 1988, further financial deregulation essentially eliminated the remaining restrictions on bank competition. Limitations on licenses for private and foreign joint-venture banks were lifted. By 1990 there were ninety-one private banks--an increase of twenty-eight in a single year--and twelve new foreign joint-venture banks, bringing the total foreign and joint-venture banks to twenty-three. State enterprises were permitted to hold up to 50 percent of their total deposits in private banks. Later, in January 1990, many of the remaining subsidized credit programs were eliminated.

The extensive bank deregulations promoted a rapid growth in rupiah-denominated bank deposits, reaching 35 percent per year when controlled for inflation in the two years following the October 1988 reforms. This rapid growth led to concerns that competition had become excessive; concern was heightened by the near failure of the nation's second largest private bank, Bank Duta. The bank announced in October 1990 that it had lost more than US$400 million, twice the amount of its shareholders' capital, in foreign exchange dealings. The bank was saved by an infusion of capital from its shareholders, which included several charitable foundations chaired by Suharto himself. The spectacular crash of Bank Summa in November 1992 was not protected by Bank Indonesia. Its owner, a highly respected wealthy businessman, was forced to liquidate other assets to cover depositors' losses.

Unrestricted transactions in foreign exchange by Indonesian residents had been a unique feature of the financial sector since the early 1970s. While many developing countries attempt to outlaw such so-called capital flight, the New Order continued to permit Indonesian residents to invest in foreign financial assets and to acquire the foreign exchange necessary for investments through Bank Indonesia without limit. Commercial banks in Indonesia, including state banks, were also permitted since the late 1960s to offer foreign currency--usually United States dollar--deposits, giving rise to the so-called Jakarta dollar market. By 1990 20 percent of total bank deposits were denominated in foreign currency. This freedom to invest in foreign exchange served the financial institutions well. During the 1970s, when banks' domestic credit activities were heavily restricted, most banks found it profitable to hold assets abroad, often well in excess of their foreign exchange deposits. When demand for domestic credit was high, banks resorted to international borrowing to finance expanding domestic loans. To control the domestic supply of credit by plugging the offshore leak, in March 1990, Bank Indonesia issued a new regulation that limited the net foreign position of a bank (the difference between foreign assets and liabilities) to 25 percent of the bank's capital.

Prior to bank reforms in October 1988, some private banks were essentially the financial arm of large business conglomerates and consequently did not make loans to businesses outside those connected with the bank's owners. The 1988 bank reforms limited loans to businesses owned by bank shareholders. When many of the government-subsidized credit programs targeted to small businesses were eliminated in January 1990, the government required banks to lend a 20 percent share of their loan portfolio to small businesses, defined as those businesses with assets, excluding land, worth less than Rp600 million (about US$300,000). This aspect of financial reform ran counter to the overall effort to improve bank efficiency, since the rule applied to all banks regardless of their expertise in small-scale lending. However, the policy reflected the government's persistent concern that the public might perceive the benefits of economic growth as limited to the wealthy few.

One of the most striking outcomes of financial reform was the revival of the Jakarta stock market in the late 1980s. Established in 1977, the stock market had become lifeless during the early 1980s because of extensive regulation of stock issues and price movements. In conjunction with substantial bank reforms, many restrictions on the Jakarta Stock Exchange were lifted in the mid1980s , broadening the range of firms that could issue equity and permitting stock prices to reflect market supply and demand. To tap the growing international interest in Asian investments, foreign ownership was permitted for up to 49 percent of an Indonesian firm's issued capital. The market's response to these reforms was dramatic. The number of firms listed on the exchange rose from 24 in 1988 to 125 in January 1991, and the market capitalization--the total market value of issued stocks--reached more than Rp12 billion. Although this amount of market capitalization was less than 15 percent of the volume of bank credit to private firms, the stock market promised to become an increasingly important source of finance.

Trade and Industrial Reform

Indonesia's industrialization during the 1970s and early 1980s was accompanied by a growing web of trade restrictions and government regulations that made private businesses the hostage of government approval or protection. The dictates of the market had little bearing on profitability, and even the most inefficient firms could prosper with the right government connections. As a consequence, almost all of Indonesia's industrial production was sold on domestic markets, leaving exports dominated by oil and agricultural products.

Major trade policy reforms, introduced in the mid-1980s, went a long way toward disentangling the government from the marketplace. These reforms proved very successful in promoting the growth of new export industries. Still, the large conglomerates that had emerged under heavy regulations also had the resources to benefit most in the more competitive environment. By the early 1990s, the government still confronted widespread popular concern over the distribution of gains from economic development.

The industrial and trade policy favored by government through the early 1980s was characterized by development economists as import-substitution industrialization. As illustrated by the steel industry example discussed above, the typical pattern was to encourage domestic producers to invest in a priority sector, selected by the Department of Industry, that could substitute domestic production for products previously imported. The enticement offered to the domestic investor often included sole license to import the product and restrictions on other potential domestic producers. The Department of Trade issued import licenses, and BKPM, which had jurisdiction over investment by all foreign firms and most large domestic firms, provided the constraints to potential domestic competitors. The overall direction of industrialization was framed in five-year development plans, but political influence often led to a more capricious pattern of benefits. In addition to almost 1,500 nontariff restrictions, such as import license requirements, tariffs ranging up to 200 percent of the value of an import were in place on those imports not affected by licensing.

The inefficiencies that plagued this strategy were documented by Department of Finance economists who were preparing for a major tax reform implemented in 1985. Case studies of firms in import substitute sectors showed they generated 25 percent of employment opportunities that investment in potential exports would have supplied, and that shifting investment from an import substitute to an export product would generate four times the foreign-exchange earnings. Indonesia thus was left out of the substantial regional growth in manufactured exports during the early 1980s. In Thailand and Malaysia, manufactured exports accounted for 25 and 18 percent of exports, respectively, by 1980, whereas manufactured exports generated only about 2 percent of total Indonesian exports that year.

The complexity of trade regulations provided a rich opportunity for corruption within the Customs Bureau, which administered policies and assessed the value of imports to determine the appropriate tariffs. In April 1985, the Customs Bureau was released from its responsibilities, and a Swiss firm, Soci�t� G�n�rale de Surveillance, was contracted to process all imports valued over US$5,000. Soci�t� G�n�rale de Surveillance determined the value of imports into Indonesia at their port of origin and shipped the products in sealed crates to the Indonesian destination. Importers within Indonesia reported that their import costs fell by over 20 percent within months of the reform.

The first measure to directly curtail high trade barriers came in the form of an export certification program designed to offset the high costs for exporters who purchased imported inputs. This was abandoned, however, when the United States threatened to curtail textile imports from Indonesia because of the alleged subsidy from the certification scheme. In response, Indonesia agreed to sign the General Agreement on Tariffs and Trade (GATT) Export Subsidy Accord in 1985. This provided a further impetus for more substantial trade reform since the agreement prohibited government compensation for export costs created by nontariff barriers to imported inputs.

In May 1986, the first in a series of more substantial trade reforms was announced. The reform package provided duty refunds for tariffs paid on the imports of domestic producers who exported a substantial share of their products. To overcome the problem of nontariff barriers, such as licensing restrictions on imports, exporters were granted the right to import their own inputs, even if another firm previously had exclusive privilege to import the product. Restrictions on foreign investment were reduced, particularly to stimulate production for export.

Although these reforms improved profits of exporting firms, they did not help to encourage exports from firms that preferred to supply the protected domestic market. In November 1988, a major trade reform began to dismantle the extensive nontariff barriers and to lower and simplify tariffs rates. By eliminating the influential plastics and steel import monopolies, government indicated the seriousness of the new policy direction. The 1988 reforms brought the share of domestic manufacturing protected by nontariff barriers to 35 percent from 50 percent in 1986.

Deregulation continued in a series of reform packages affecting both direct trade barriers and government regulations that indirectly influenced the "high-cost" business climate. By 1990 nontariff barriers affected only 660 import items, compared with 1,500 items two years earlier. Tariffs, still charged on almost 2,500 different imported items, had a maximum rate of 40 percent. BKPM adopted a new policy in 1989 to list only those economic sectors in which investment was restricted; the negative list replaced a complex Priority Scale List that had controlled investment in virtually all sectors. In 1991 the contract with Soci�t� G�n�rale de Surveillance was renewed under new provisions mandating that the Customs Bureau be trained to eventually replace the foreign firm.

Most of the substantial reforms that began in the mid-1980s and continued through the early 1990s reflected a new orientation to market-led economic development. In some cases, however, important new policies reflected the longstanding government concern that the private marketplace could not be trusted to ensure politically desirable outcomes. This was particularly true of policies concerning the processing of Indonesia's valuable natural resources and the sensitive area of pribumi business development.

Indonesia was the world's leading exporter of tropical logs in 1979, accounting for 41 percent of the world market. Concerns about environmental degradation and the lack of domestic log processing capacity led to restrictions on log exports beginning in 1980, culminating in a complete ban on log exports in 1985. The intent was primarily to foster the nascent plywood and sawmill industry, which could in turn export its output and expand employment and industry within the country. By 1988 Indonesia supplied almost 30 percent of world exports of plywood. The success of this policy led to other similar initiatives, including a ban on raw rattan exports in 1988 to foster the domestic rattan furniture industry and a substantial export tax on sawn timber in 1990 to promote the domestic wood furniture industry.

Many benefits that fostered the growth of large conglomerates were reduced or eliminated, but the conglomerates adapted quickly to the new environment. For example, the Bimantara Citra Group, operated by Suharto's son Bambang, lost its plastics import license held through Panca Holdings in 1988 but gained new interests in sectors that had previously been closed to private investment. The group became the first Indonesian company permitted to establish a privately owned television station--Rajawali Citra Televisi Indonesia (RCTI)--and, in the early 1990s, was poised to invest in petrochemical plants, long a government stronghold. Another son, Tommy Suharto, had a major holding in Sempati Air Services, the first private Indonesian airline permitted to offer international jet service in competition with the government airline monopoly, Garuda Indonesia. An extensive review of Suharto family holdings published in the Far Eastern Economic Review in April 1992 noted that public resentment of family business gains was growing, although government officials and businessmen refused to voice their concern openly.

The government took some measures to curtail the continued dominance of large conglomerates. In 1990 Suharto himself publicly called for large business conglomerates to sell up to 25 percent of their corporate shares to employee-owned cooperatives on credit supplied by the conglomerates themselves, to be repaid with future stock dividends. The request was not legally mandated, but the attendant publicity that clearly identified the major Chinese minority firms involved was viewed as pressure to comply. Within a year, 105 companies had sold much smaller shares of stocks, diluted by special nonvoting provisions, to the cooperatives. A further initiative in 1991 called for large firms to become the "foster fathers" of smaller pribumi businesses, which would serve as their suppliers, retailers, and subcontractors.

Large, state-owned enterprises faced greater competition, but privatization of these operations did not seem likely in the early 1990s. During the late 1980s, however, several measures were undertaken to prepare for possible eventual privatization, including a thorough independent assessment of the profitability of each enterprise and a review of management compensation in relation to performance criteria. In 1988 the Department of Finance issued a new regulation outlining measures that could be taken to improve the performance of state-owned enterprises. The measures included management contracts with the private sector, issuing private ownership shares on capital markets or direct sale to private owners, and liquidation.

Another government policy initiated in 1989 suggested that at least some state-owned industries would be protected from possible privatization. A Council for the Development of Strategic Industries was established, headed by Minister of State for Research and Technology Habibie. The council gained control of ten major state enterprises, including several munitions plants, the state aircraft firm Archipelago Aircraft Industry (IPTN), and Krakatau Steel. Under Habibie the industries' long-term development would be coordinated with continued government funding. This policy, viewed as a concession to the economic nationalists in the midst of government cutbacks, assured a major role for state-owned industries in Indonesia's most technologically sophisticated sectors.

Indonesia

Indonesia - EMPLOYMENT AND INCOME

Indonesia

Many developing nations face a similar dilemma: although growth in the modern industrial sector is critical for increasing GDP, it can provide only a small share of total employment opportunities. Indonesia's employment pattern illustrated this dilemma: the industrial sector employed about 6.5 million workers in 1989--only about 9 percent of the total labor force, whereas the agricultural sector still employed 41 million workers--55 percent of the total labor force (services accounted for the remaining 26 million employed workers--35 percent of the work force). The distribution of benefits from economic growth depended largely on how government policies affected employment opportunities nationwide and earnings in agricultural and service sectors. Since the population was still predominantly rural, the benefits of economic growth also depended on the opportunities available in rural areas.

Another major concern of government planners in the early 1990s was the rapid increase in the labor force. Repelita V estimated that the labor force would grow at a rate of 2.4 million workers per year, bringing the total to 86 million in 1993, up from 74.5 million in 1988. (The labor force in the early 1990s was usually slightly larger than the total number of employed workers because of unemployment.) The rapid rate of growth reflected both the increase in the working age population, estimated at 2.7 percent per year, and the increasing rate of labor force participation among women. The rate of increase of the female labor force was predicted to be 3.9 percent per year, compared with 2.4 percent per year for the male labor force.

Unemployment in 1989 was estimated at only about 3 percent of the total labor force. However, this figure ignored the high degree of underemployment--or workers employed in low-skill, informalsector jobs because of the lack of better opportunities. Repelita V expressed government concern over the mismatch between the education and skills of workers and the available job opportunities. The plan noted that government employment policy should shift away from the public works employment programs of the past that generated lowskill rural jobs, in favor of vocational training and greater assistance to small-scale enterprises.

Information on wages in Indonesia was frequently difficult to interpret because of imprecise definitions of job categories and different measures of labor. In his study of the Indonesian industrial sector, Australian economist Hal Hill reviewed the available data on employee compensation among medium and large firms. In the highest paid industry--basic chemicals--labor earnings averaged Rp260,000 (about US$234) per month in 1985. In the lowest paid industry--clay products--earnings were Rp32,000 per month (about US$29). The industrial earnings average was Rp84,000 per month (about US$76). The considerable interindustry variation presumably reflected different skill levels, but no information was available on the number of hours worked or the skills and education of the workers. Compared with wage levels in 1974, these earnings reflected an average increase of 5.6 percent per year when controlled for inflation.

These average figures disguised to some degree the low wages paid to the least skilled and most numerous employees in industry. Although Indonesia in 1992 had minimum wage legislation, outside observers, including representatives of United States labor unions, observed that the minimum wage law and other labor protection were frequently violated. The American Federation of Labor filed three unsuccessful petitions with the United States government from 1987 to 1990 to eliminate Indonesian tariff concessions under the Generalized System of Preferences because of labor law violations. The only officially sanctioned trade union in Indonesia, the All Indonesian Workers Union (SPSI), was tightly controlled by the government, and, until 1990, all strikes were illegal. The government relied on the army to help quell a rash of strikes during September 1991 in the industrial area of Tangerang in Jawa Barat Province, about thirty-two kilometers west of Jakarta. Workers were protesting wages below the minimum level, set at the equivalent of US$1.07 per day in that area.

Earnings outside the industrial sector were typically lower, with the exception of earnings in some services such as finance and banking. The Department of Manpower reported the average minimum monthly wages in several economic sectors for 1989, which ranged from about Rp67,000 (about US$38) in the plantation sector to Rp213,000 (about US$120) in banking and insurance. According to this source, the average minimum monthly wage in manufacturing was Rp130,000 (about US$73).

Many scholars have researched changes in income distribution under the New Order. The conspicuous consumption of the wealthy Chinese minority and Suharto family members, a stark contrast to the very modest means of most Indonesians, underscored concern about whether the average Indonesian was better off after two decades of growth in GDP. The Central Bureau of Statistics (BPS) provided extensive data for investigation, including decennial population and agricultural censuses, ten national socioeconomic surveys between 1963 and 1987, and two major labor force surveys in 1976 and 1986. In spite of the wealth of information, disagreements and uncertainties abounded, often because of changing definitions and incomparable data among different surveys, and concerns about the quality of data collected by the Central Bureau of Statistics. Nevertheless, a consensus emerged among many scholars, including economists at the World Bank and the contributors to a major economic review entitled The Oil Boom and After, edited by Anne Booth, that income actually became slightly more equally distributed from the 1960s to the 1980s.

The series of national socioeconomic surveys, known by the Indonesian acronym Susenas, were the most frequently used source for nationwide studies of income distribution and poverty. However, Susenas, based on a representative sample of 50,000 households, only reported household expenditures, not household income. To the extent that richer households saved more in addition to spending more, the surveys may have distorted income distribution. Based on Susenas data, the World Bank reported that when ranked by expenditure, the bottom 20 percent of population accounted for about 9 percent of total national expenditure in 1987, while the top 20 percent accounted for a little over 40 percent of total national expenditure.

A study in The Oil Boom and After summarized Indonesian income distribution from Susenas data with the Gini coefficient, a measure of concentration showing the relationship between the cumulative percentage of some groups of items (for example, households) and the cumulative percentage of the total amount of some variable (for example, income) frequently employed by economists. A smaller Gini coefficient, which ranges from 0.2 to 0.6 for most countries, indicates a more evenly distributed income. The Gini coefficient for Indonesian urban dwellers fell slightly from 0.33 in 1969 to 0.32 in 1987, while for the rural population the decline was more pronounced--from 0.34 to 0.26. Although income was becoming more evenly distributed in rural areas, urban areas appeared to be benefiting relatively more from economic growth. The ratio of average urban household expenditures to average rural household expenditures increased from about 1.4 in 1970 to 1.8 in 1987.

The incidence of poverty, or the number of households living under a specified poverty level of expenditure, is also an important indicator of the benefits from economic growth. The World Bank conducted an extensive analysis of poverty trends during the 1980s based on the 1984 and 1987 Susenas surveys. The study concluded that both the percentage of the population and the absolute number of the poor declined during this period. By 1987, 30 million Indonesians, or 17 percent of the population, lived in absolute poverty, while many more lived above but near the poverty line. The poverty line was estimated on the basis of the expenditure necessary to maintain a daily intake of 2,100 calories and to meet other basic needs. In 1987 the necessary expenditures amounted to Rp17,381 per month per person in urban areas, and Rp10,294 per month per person in rural areas.

The World Bank study applauded the overall success of the New Order regime in poverty reduction. The earliest reliable estimates of poverty in 1970 showed that 60 percent of the population then lived in absolute poverty. Since most of the poor earned a living in the agricultural sector, this success was attributed to improvements in agricultural productivity, in part the result of direct government investments and appropriate macroeconomic policies such as moderate inflation and a generally realistic exchange rate. The government sustained the decline in poverty in the 1980s by avoiding major budget cuts in programs that directly affected agricultural and rural development.

Indonesia

Indonesia - AGRICULTURE

Indonesia

Development Trends

During the 1970s and 1980s, Indonesia followed a wellrecognized trend among developing nations: a decline in agricultural production as a share of GDP. The agricultural sector, however, was still vital for several reasons. The vast majority of people lived and worked in rural areas, and most of their income was from agricultural activities. Rice, which dominated agricultural production in Indonesia, was the staple food for most households, urban and rural alike. The government considered adequate supplies of affordable rice necessary to avoid political instability. The New Order's most striking accomplishment in agriculture was the introduction of so-called Green Revolution rice technology, which moved Indonesia from being a major rice importer in the 1970s to self-sufficiency by the mid-1980s.

The 1980 population census indicated that 78 percent of the population was located in rural areas. This share continued to decline during the 1980s, but for a country at Indonesia's level of development, urbanization proceeded slowly. While agriculture contributed a decreasing share of GDP--falling from 25 percent in 1978 to 20.6 percent in 1989--about 41 million workers, or 55 percent of the total labor force in 1989, still found employment in the agricultural sector. Within the agriculture sector, food crops accounted for 62 percent of the value of production, tree crops for 16 percent, livestock for 10 percent, and fisheries and forestry equally for the remaining 12 percent of agricultural production in 1988.

<>Land Use and Ownership
<>Food Crops
<>Estate Crops
<>Livestock
<>Fishing
<>Forestry

Indonesia

Indonesia - Land Use and Ownership

Indonesia

Roughly 20 million hectares, or nearly 10 percent of Indonesia's total land area, were cultivated in the 1980s, with an additional 40 million hectares of potentially cultivatable land, primarily in Sumatra and Kalimantan. Smallholder cultivation of both food and estate crops predominated, accounting for about 87 percent of total land under cultivation; large plantations accounted for the remaining 13 percent. The pattern of cultivation and landholding in modern Indonesia reflected the distinctive natural ecosystems of Java and the Outer Islands, and the profound impact of colonial agricultural practices.

Java was the center of intensive rice cultivation on sawah or flooded cropland. This cultivation demanded rich volcanic soils and a fairly low gradient to permit water control, and supported a dense sedentary population. The Outer Islands ecosystem of swidden, a type of dryland agriculture known also as slash-and-burn agriculture, was practiced on the less fertile forested land with a diverse range of crops such as cassava, corn, yams, dry rice, other vegetables, and fruits. Small forest plots were cleared, harvested for a few seasons, and then permitted to return to forest. Because of the far lower productivity per hectare of land than sawah, swidden cultivation could only support low population densities. However, swidden farmers were also able to adopt commercial tree crops such as rubber and coffee and were the major suppliers of these important agricultural exports Java supplied most rice and through intercropping on sawah and cultivation on unirrigated land, most other major food crops.

In his classic study Agricultural Involution, anthropologist Clifford Geertz has given the most eloquent interpretation of the impact of colonial agricultural practices. In the late nineteenth century, agricultural "involution"--a reduction to former size--was centered in areas of Dutch sugar cultivation, primarily in Central and East Java. Here, the dense population supplied seasonal labor for sugar fields and mills and was still able to grow sufficient rice, even though the most fertile land was devoted to sugar cultivation. The village economy provided an equitable if marginal subsistence for all villagers through such labor-intensive techniques as double cropping, improved terracing, careful weeding, and harvesting with small finger-held blades rather than sickles. These practices continued through the early 1900s, a time when many rice-based agricultural economies such as Japan were increasing labor productivity in rice farming, a practice that released peasant labor for employment in more rapidly growing industries. On Java, the village rice-based economy experienced "involution," the absorption of a rapidly growing population that had limited outside opportunities in the foreigncontrolled plantation economy.

On the Outer Islands, the Dutch plantation economy was far less intrusive, coexisting as an enclave among the small-scale swidden cultivators. As a result of the sparse local populations, foreign planters had to import workers, usually Javanese or Chinese. The government of independent Indonesia confronted the task of agricultural modernization with this difficult inheritance. Densely populated Java was far behind in rice technology, yet improvements in rice productivity per worker could have pushed millions of households out of their only source of livelihood. Vast expanses of land remained uncultivated on the Outer Islands, but increasing cultivation there was limited by the natural characteristics of the tropical forest.

Under Sukarno's leadership in the early 1960s, these problems were tackled with a highly visible yet ultimately ineffective land reform. The land reform was part of a larger and more successful effort to modernize the colonial legal system of landownership. Under the Dutch, a dual system of land laws permitted nonIndonesians to register and obtain title for lands on the basis of Western civil law principles, whereas Indonesian ownership was governed by adat (custom), based on unwritten village practices. The dual system was intended to protect peasants from the alienation of their land. However, the more flexible, communal-based adat system also permitted the Dutch to rent communal village lands for sugar cultivation by contracting only with the village headman (penghula). In 1960 the proportion of settled land still recognized only under the adat system, with no formal survey or title, was 95 percent.

The Basic Agrarian Law, enacted in 1960, was a comprehensive legal effort to modernize Indonesian landownership. The law recognized previous ownership rights under both adat and Western systems, but provided a new certification process under which land was to be surveyed, mapped, and registered. All unclaimed land reverted to government ownership. Land certification, however, was not compulsory and registration was still far from complete by the end of the 1980s. The law also set limits on the size of landownership, depending on the population density of the region and the type of land. In areas with over 401 people per square kilometer, rice fields were limited to a maximum of five hectares and a minimum of two hectares. Absentee ownership was forbidden.

Some concentration of landownership had followed the collapse of the colonial sugar cultivation system on Java, but in essence the problem was one of land shortage, not distribution. By the standards of sawah cultivation, a wealthy landholder possessed three to five hectares, so the maximum of five hectares left very little surplus land. Only a small amount of land was redistributed before Suharto's New Order shifted the emphasis of agricultural policy away from land reform towards increasing production. The 1983 agricultural census showed that about 44 percent of all farm households were either landless or operated holdings too small to meet more than subsistence requirements. The average landholding on Java was 0.66 hectares, and ranged from about 1.5 to 3 hectares in other parts of the archipelago.

By the 1980s, the New Order had achieved undisputed success in expanding rice production, but the distribution of benefits among villagers was still debated. Some observers suggested that only already prosperous farmers benefited from the new technology. Disputes continued in part because conditions varied in different parts of Java, yielding different results in village-level studies. However, by the late 1980s, sufficient evidence had been gathered to show that the benefits from increased rice production, together with growing employment opportunities outside agriculture, had reached even the landless or near landless population.

Indonesia

Indonesia - Food Crops

Indonesia

Rice

Rice was the staple food in the Indonesian diet, accounting for more than half of the calories in the average diet, and the source of livelihood for about 20 million households, or about 100 million people, in the late 1980s. Rice cultivation covered a total of around 10 million hectares throughout the archipelago, primarily on sawah. The supply and control of water is crucial to the productivity of rice land, especially when planted with high-yield seed varieties. In 1987 irrigated sawah covered 58 percent of the total cultivated area, rainfed sawah accounted for 20 percent, and ladang, or dryland cultivation, together with swamp or tidal cultivation covered the remaining 22 percent of rice cropland.

The government was intensely involved in the rice economy, both to stabilize prices for urban consumers and to expand domestic output to achieve national self-sufficiency in rice production. Various governmental policies included the dissemination of highyield seed varieties through government-sponsored extension programs, direct investment in irrigation facilities, and control of the domestic price of rice through the National Logistical Supply Organization (Bulog), the government rice-trading monopoly. In the 1970s, Indonesia was a major rice importer, but by 1985 self-sufficiency had been achieved after six years of annual growth rates in excess of 7 percent per year. From 1968 to 1989, annual rice production had increased from 12 million to 29 million tons, and yields had increased from 2.14 tons of padi (wet rice growing) per hectare to 4.23 tons per hectare.

The most significant factor in this impressive increase in output and productivity was the spread of high-yield rice varieties. By the mid-1980s, 85 percent of rice farmers used highyield variety seeds, compared with 50 percent in 1975. High-yield varieties were promoted together with subsidized fertilizer, pesticides, and credit through the "mass guidance" or Bimas rice intensification program. This extension program also offered technical assistance to farmers unfamiliar with the new cultivation techniques. The new technology was not without its own problems, however. Several major infestations of the brown planthopper, whose natural predators were eliminated by the heavy use of subsidized pesticides, led to a new strategy in 1988 to apply the techniques of integrated pest management, relying on a variety of methods aside from pesticide to control insects and rodents. To help reduce pesticide use, in 1989 the subsidy on pesticides was eliminated.

Government investments in irrigation had also made a significant contribution to increased rice production. From FY 1969 to FY 1989, 2.5 million hectares of existing irrigated land were rehabilitated, and irrigation was expanded to cover about 1.2 million hectares.

Because the government objective of price stability for urban consumers could potentially undermine efforts to increase production by reducing the profitability of the rice crop, Bulog's operations evolved to take into consideration producer incentives as well as consumer costs. Domestic rice prices were permitted to rise gradually during the 1970s, although they were generally held below world rice prices. However, domestic prices were kept above world prices in several periods during the 1980s. Bulog influenced the domestic rice price by operating a buffer stock on the order of 2 million tons during the 1980s. When domestic prices fell, Bulog purchased rice through village cooperatives, and when prices rose above the price ceiling, Bulog released buffer supplies. The margin between the producer floor price and urban ceiling price was sufficient to permit private traders to operate profitably, and Bulog's distribution of rice was limited to under 15 percent of total rice consumed domestically in a given year.

Corn and other Food Crops

Although rice was by far the most important food crop, corn was the major source of calories for about 18 million people, especially in Jawa Timur and Jawa Tengah provinces. About 75 percent of corn production was consumed as a staple food source. Corn cultivation was concentrated on Java and Madura under a variety of conditions, but most frequently on tegalan, or rain-fed land without the system of dikes characteristic of floodable sawah. Other food crops included cassava, sweet potatoes, peanuts, and soybeans.

Indonesia

Indonesia - Estate Crops

Indonesia

Spice crops first attracted Europeans to the East Indies, but the tropical climate and rich volcanic soils offered a fertile laboratory for the introduction of new commercial crops such as sugar, coffee, and rubber. Large private plantations controlled by European and American interests became the backbone of the colonial economy in the late nineteenth century, when the Dutch colonial government began to limit the practice of tax collection by forced crop cultivation on village land. Even at the height of the plantation economy, however, small-scale peasant cultivators were competitive suppliers of a variety of commercial crops. In 1929, just before the world market collapse in the Great Depression, agricultural products were 75 percent of total Netherlands Indies exports, and about one-third of agricultural exports were from small-scale indigenous producers. Although sugar, then the single most important export crop, was entirely a plantation crop, a large share of rubber, next in export value to sugar, was supplied by smallholders; and coconut, then the third largest agricultural export, was produced almost exclusively by smallholders.

Although far less important in the overall economy, the estate crops were a significant share of exports and a vital source of income in the rural economy throughout the 1970s and 1980s. Smallholders continued to cultivate many estate crops grown on a large scale on government and privately owned plantations. Government-owned plantations were largely the legacy of nationalization of foreign estates during the 1950s, and restrictions on ownership still limited foreign participation, although joint ventures were not uncommon.

Rubber was generally the most valuable export crop, followed by coffee and oil palm. Exports of palm oil and coconut were periodically restricted to ensure adequate domestic supplies. A variety of other estate crops, including tobacco, pepper, tea, and cocoa, were also exported. Sugarcane was still cultivated but never regained its prominence after the collapse of the sugar industry during the Great Depression.

During the mid-1980s, the government initiated an ambitious plan to improve the technology and plant stock of small-scale producers. One of the Nucleus Estate Programs was a smallholder scheme that provided small plots of high-yielding tree crops to participating farmers in a determined location who shared the benefits of centralized technological and managerial assistance. A variety of difficulties were encountered with this strategy, and the planting area and productivity targets were rarely achieved. Outside observers criticized the nucleus-estate smallholder approach because only a small number of cultivators participated, leaving the majority of smallholders outside the nucleus estates without access to more productive hybrid tree stocks.

Rubber was cultivated on 3 million hectares of land in 1988, and about 80 percent of that area was owned by smallholders with holdings of two hectares or less. Smallholder cultivation was concentrated in Sumatra, especially in the provinces of Sumatera Utara, Riau, Jambi, and Sumatera Selatan. Some smallholder cultivation was found on Kalimantan, but less than 2 percent was outside Sumatra and Kalimantan. Government and private estates cultivated roughly equal areas, although private estates were subject to a legal maximum size varying by province, and so were smaller and more numerous than government estates. About 12 government-owned and more than 800 private rubber estates were concentrated in Sumatera Utara, Jawa Barat, Jawa Timur, and Kalimantan Tengah provinces.

Oil palm (Elaeis guineensis, Arecaceae) was the newest and fastest growing tree crop in the 1980s. Ten government estates- -primarily in Sumatera Utara Province--were the major producers, although eighteen private estates accounted for about 25 percent of the total 655,000 hectares devoted to oil palm in 1988. Smallholder cultivation of oil palm was insignificant. Exports of palm oil also expanded rapidly in the late 1980s, making Indonesia a major supplier, with 10 percent of the world market in 1988.

Coconuts were cultivated almost exclusively by smallholders. In 1983 about 3 million hectares were devoted to coconut production throughout the archipelago, although a large share was on Java. In the early 1980s, the World Bank estimated that as much as 60 percent of coconut products were not sent to the market but instead consumed by the cultivators, in part because of low producer prices reflecting government administration of the domestic coconut trade. Indonesia was the second largest producer of coconuts in the world after the Philippines, but remained an insignificant exporter because of government restrictions and inadequate processing facilities.

Coffee also was cultivated almost entirely by smallholders but, in contrast, remained an important export crop throughout the 1970s and 1980s. Processing and marketing of coffee was undertaken by the private sector with little government intervention. Most Indonesian coffee trees were of the Robusta variety, which is more hardy but of lower quality than Arabica coffee. Cultivation was concentrated on Sumatra, especially Lampung Province, which accounted for almost 25 percent of the estimated 500,000 hectares of smallholder cultivation in 1978.

Indonesia

Indonesia - Livestock

Indonesia

Smallholders, who owned nearly all of the livestock in the country, used their animals for draft power, manure, meat, and for future sale. Most livestock, including some 16 million goats and sheep, were simply tethered near the home or put out to pasture on communal grazing land. Beef cattle numbered over 10 million in 1989. The water buffalo, the most common draft animal, numbered 3.3 million. Several government-sponsored programs to increase livestock productivity through better extension services to livestock farmers and the expansion of ranching were in operation on the Outer Islands in the early 1990s. Since 1978 the government provided technical assistance to poultry farmers, particularly in or near urban areas. The government also made great efforts to improve the dissemination of superior breeds and modern medicines. Chickens were the fastest growing commercial livestock, numbering 508 million in 1989, an increase of 65 percent since 1984.

Indonesia

Indonesia - Fishing

Indonesia

Fish was the main source of animal protein in the average diet, with a per capita availability of 12.76 kilograms per year in 1988, compared with a total of 3.8 kilograms from all other meats combined. The fishing industry continued to rely on traditional methods and equipment, although the government was attempting to promote motorization for traditional fishing boats. About 14 percent of the 270,000 coastal vessels were motorized in 1980, compared with 2 percent of the total in 1970. Inland fish landings were estimated at 761,000 tons in 1989, an increase of almost 40 percent since 1984; sea fish landings were estimated to be 2.2 million tons in 1989, an increase of 31 percent since 1984. Foreign fishing vessels operating under license contributed to the growing fish exports, which reached 54,000 tons by 1988, an increase of 70 percent since 1980. Most fish exports were shrimp and tuna caught for the Japanese market. The supply of fish in Indonesian waters was threatened by illegal fishing from foreign vessels and in some areas by severe environmental degradation.

Indonesia

Indonesia - Forestry

Indonesia

Seventy-five percent of Indonesia's total land area of 191 million hectares was classified as forest land, and tropical rain forests made up the vast majority of forest cover, particularly in Kalimantan, Sumatra, and Irian Jaya. Estimates of the rate of forest depletion varied but ranged from 700,000 to more than 1 million hectares per year during the mid-1980s. In a critical evaluation of Indonesian forestry policy, economist Malcolm Gillis argued that deforestation could not be blamed on a single major factor but was instead due to a complicated interplay among commercial logging, Transmigration Program activities, and shifting or swidden cultivation, still practiced largely on Kalimantan. Gillis argued that the most immediate threat to Indonesia's forests was the government promotion of domestic timber processing, whereas the Transmigration Program was the greatest long-term threat.

The government had ownership rights to all natural forest, as provided for in the 1945 constitution. Ownership could be temporarily reassigned in the form of timber concessions, known as Forest Exploitation Rights (Hak Pengusahaan Hutan), or permanently transferred, as in the case of land titles granted to transmigration families. The average concession size was 98,000 hectares, and the usual duration was twenty years. Foreign timber concessions were curtailed to conserve resources in the 1970s, and by the 1980s, of more than 500 active forest concessions, only 9 were operated by foreign firms. Log production peaked in 1979 at 25 million cubic meters, of which about 18 million cubic meters were exported as unprocessed logs. Restrictions on unprocessed exports in the early 1980s contributed to a decline in total log production, which fell to 13 million tons in 1982. However, increasing demand for sawn timber and plywood began to boost production again, bringing it up to 26 million cubic meters by 1987. In that year, about half of total log production was exported in the form of sawn timber and plywood, the rest going into domestic consumption. Log production again dropped at the end of the 1980s, falling to 20 million cubic meters by 1989. The government attributed this decline to policies designed to preserve the natural forest. One such policy was the increase in a levy imposed on loggers for reforestation, which was raised from US$4 to US$7 for every cubic meter of cut log.

Indonesia

Indonesia - INDUSTRY

Indonesia

New Order Developments

After coming to power, the New Order government supervised the rapid industrialization of the Indonesian economy. Industrial production, as a share of total GDP, grew from 13 percent in 1965 to 37 percent in 1989. The protective trade policies of the 1970s contributed to the changing composition of industry, away from light manufacturing such as food processing and toward heavy industries such as petroleum refining, steel, and cement. These industries were often dominated by government enterprises. Although these large-scale, capital-intensive firms offered few employment opportunities to the rapidly growing labor force, the surge in manufacturing exports begun in the mid-1980s promised to increase employment and the role of private investment in the 1990s.

Despite its increasing significance, the industrial sector employed only about 10 percent of the work force. The BPS conducted a comprehensive economic census roughly every ten years beginning in 1964. The 1986 economic census provided detailed information on approximately 13,000 firms with more than twenty employees in all industrial sectors except oil and natural gas processing. Economist Hal Hill analyzed in detail Indonesian industrial growth based on census data, combined with national income account data on the oil and gas sector. The most important industrial sector, according to these studies, was oil and natural gas processing, which accounted for more than 25 percent of total value-added in industrial output. The second major industrial activity was the production of kretek cigarettes, the popular traditional Indonesian cigarette made from tobacco blended with cloves. Cigarette production accounted for 12 percent of total industrial valueadded . A diverse range of almost thirty major industrial sectors, from food processing to basic metals, accounted for the remaining production.

Hill identified seven ownership categories of industrial firms, including privately owned, government owned, foreign owned, and a variety of joint-venture combinations among government, the private sector, and foreign investors. Almost 12,000 firms from the total number of 12,909 firms surveyed were privately owned. Some 350 private-foreign joint ventures and 400 private-foreign-government joint ventures accounted for most of the remainder. The private firms were much smaller than the joint ventures; compared with government joint ventures, private firms were less than one-tenth the size and employed on average one-sixth the number of workers. Although far less numerous, government joint-venture firms still accounted for 25 percent of the total value of industrial production.

Government enterprises controlled all oil and natural gas processing and were important in other heavy industries, such as basic metals, cement, paper products, fertilizer, and transportation equipment. The improved economic climate for private investors following the trade deregulations is indicated in the importance of private ownership among the exporting manufacturing industries. Based on data from 1983, Hill estimated that the major manufacturing export industries, including plywood, clothing, and textiles, had over 60 percent of private Indonesian ownership.

The growing export manufacturing industries also offered many more employment opportunities than the heavy industries dominated by government and foreign joint ventures. Taken together, wood products, textiles, and garment industries accounted for 32 percent of the 1986 industrial labor force employed in large and medium size firms. Oil and natural gas processing, whose total production was equal in value to these three labor-intensive industries, employed only about 1 percent of the labor force. Basic metals industries also employed only 1 percent of the labor force, although they accounted for 6 percent of industrial production.

Foreign Inputs

The predominance of joint ventures with foreign firms over entirely foreign-owned firms, which numbered around fifty, reflected increasing limitations on foreign investment during the 1970s, following a liberal policy from 1967 to 1974. One of the first legislative acts of the New Order was to pass the Foreign Investment Law of 1967, which encouraged foreign investment with tax incentives and few limitations on equity ownership and employment of foreign personnel. Popular discontent with foreign economic domination, voiced in widespread protests during the 1974 visit of the Japanese prime minister Tanaka Kakuei, contributed to greater restrictions on foreign investment. New provisions required that all foreign investment be in joint ventures with Indonesian nationals, whose equity share should reach 51 percent within ten years. Enforcement of these provisions was somewhat arbitrary, however, and the greatest deterrent to foreign investment may have been the complex and sluggish bureaucracy implementing the everchanging regulations.

In the mid-1980s, foreign investment policy was again liberalized as part of the general reform movement. Administration of foreign investment was simplified, and the Investment Coordinating Board (BKPM) was required to approve projects within six weeks of initial application. In special cases, domestic equity could be as low as 5 percent for the initial investment, and licenses were subject to renewal for up to thirty years, altering an earlier policy under which all foreign investment licenses expired in 1997. The minimum investment amount of US$1 million was also lifted for special cases.

Overall, government and private ventures with foreign partners accounted for more than 40 percent of industrial production, according to the 1986 economic census. Japan was the major foreign investor in industry from 1967 to 1988, followed by Hong Kong and South Korea. The United States was the source of less than 1 percent of foreign investment in industry. This figure excluded the major United States investments in crude oil and gas exploration and production, considered part of the mining sector.

Foreign investment was often crucial for the development of capital-intensive heavy industries. A prime example was the Asahan Aluminum Project, a government joint venture with a consortium of Japanese companies that formed Nippon Asahan Aluminum Company. The aluminum smelter plant and two hydroelectric power stations, located in Sumatera Utara Province, were completed in 1984 with a capacity to produce 225,000 tons of aluminum ingots per year. The US$2.2 billion project became the focus of controversy when unforeseen difficulties in power generation and a decline in aluminum prices forced a major financial restructuring. The government equity share was increased from 25 percent to 41 percent, and in 1989 a provisional agreement was reached to allocate 51 percent of the plant's production to Indonesia, with the remainder exported to Japan.

Singapore joined Indonesia's manufactured export drive by assisting in the development of an industrial park on the island of Batam, located in Riau Province only nineteen kilometers offshore from Singapore. The 485-hectare facility, built by a state-owned company from Singapore and two private Indonesian firms, began operations in 1991. The Indonesian government hoped to attract foreign investment to the park by permitting full foreign ownership of export-oriented industries for five years. Singapore viewed the project as part of a "growth triangle" linking Singapore, Malaysia, and Indonesia, that would permit Singaporean investors to take advantage of more ample land and cheaper labor available in the neighboring countries.

In many industries, foreign firms supplied technical assistance and arranged for domestic production under licensing agreements, without direct equity participation in the domestic firm. For example, automobile assembly plants in Indonesia produced about twenty international brand name automobiles, from Fiat to Toyota, primarily under license agreements. The automotive assembly industry grew amidst heavily protected markets. The capacity of domestic firms in 1991 to produce about 250,000 units per year of as many as eighty different types and makes of vehicles meant that it would be difficult for the industry to achieve low-cost, largescale production for export. By international standards, a firm must produce at least 100,000 units of a particular vehicle to be competitive.

Under the leadership of the minister of state for research and technology, Bacharuddin J. Habibie, the government attempted to move into aeronautics with foreign technological assistance. The Archipelago Aircraft Industry (IPTN) was established in 1976 to assemble aircraft under license from Construcci�n Aeronauticas of Spain, and helicopters under license from Aerospatiale of France and Messerchmitt of Germany. By 1986 IPTN had delivered 194 aircraft, almost entirely to domestic buyers. A critical review of IPTN by two foreign economists argued that the endeavor was a premature leap into advanced technology and could only hope to be profitable by mandating continued domestic purchases of its aircraft. The government justified the US$3 billion investment on broader criteria than financial profitability, including the potential stimulus to domestic suppliers of aircraft parts and the training of highly skilled workers. Among the 12,000 employees, 2,000 were university graduates, many of whom were trained abroad. However, most aircraft parts were still imported in 1986.

Small-scale Industry

The modern sector of medium and large firms was the focus of government policy, but small-scale factories that employed from five to nineteen workers and cottage industries that employed up to four workers--usually family members--were far more numerous and supplied the majority of jobs. Small-scale establishments engaged in a wide range of activities, from traditional bamboo weaving to metal and leather working. Many of these industries offered parttime employment to rural workers during offpeak seasons. Statistics on these activities were tenuous because of the seasonal patterns and interviewing difficulties. A review of the available BPS data by economist Tulus Tambunan showed that small-scale industries employed 3.9 million workers in 1986, compared with 1.7 million employees of medium- and large-scale firms. Still, this figure reflected a significant decline from small industries' share of employment in 1974, which was about 86 percent of total industrial employment, or 4.2 million employees compared with only about 700,000 in medium and large industries.

Regional Industrial Development

The pattern of regional development in Indonesia mirrored the diversity of natural resources among the Outer Islands and the historical dominance of Java as the densely populated agrarian center. Java remained the economic center of the nation, producing about 50 percent of total GDP in the 1980s. Sumatra, the heart of the nation's oil and rubber production, ranked second with 32 percent of GDP. Half of total foreign investment, excluding the oil sector, from 1967 to 1985 was in Java, with the remainder dispersed widely throughout the nation.

In spite of this regional imbalance, there were important and more-or-less uniform features of economic development. By 1983 agricultural production, including nonfood crops such as rubber and forestry and fishing, had declined to less than half of total production in almost all twenty-seven provincial-level administrative units. The majority of the labor force still found employment in these activities, however. Almost all provinces shared in the rapid growth rates of the 1970s, and most attained annual growth rates between 4 and 8 percent per year. Specific industries usually reflected local resource endowments; for example, sawmills and plywood factories dominated manufacturing in Kalimantan, whereas Sumatran manufacturing was more diverse, including rubber processing, cement, and plywood. Major industries on Java included motor vehicle assembly in Jakarta, weaving in Jawa Barat Province and Yogyakarta, kretek cigarette production in Jawa Timur Province, and sugar refining in Jawa Tengah Province.

Indonesia

Indonesia - MINERALS

Indonesia

Indonesia's mineral resources were dominated by crude petroleum and natural gas but included significant reserves of coal, tin, nickel, copper, gold, and bauxite. Much industrial development was based on increased domestic processing of oil and natural gas. Most mineral production was exported after some degree of domestic processing to industrial nations, primarily Japan. In some cases, Indonesia's own mineral intensive industries, such as steel and aluminum, relied on imports of raw materials. Krakatau Steel imported about 2 million tons of high-grade iron ore in 1989, and P.T. Indonesia Asahan Aluminum imported 360,000 tons of alumina from Australia. On balance, however, Indonesia was a net exporter of minerals in large part because of petroleum exports. In 1989 the total value of mineral exports was US$10 billion, almost 90 percent of which was oil or liquefied natural gas; mineral imports were only US$1.4 billion.

<>Oil
<>Natural Gas
<>Coal
<>Tin
<>Nickel
<>Copper
<>Gold
<>Bauxite

Indonesia

Indonesia - Oil

Indonesia

Indonesia's oil production was formally governed by a quota allocation from OPEC. At the March 1991 OPEC ministerial meeting, Indonesia's quota was set at 1.445 million barrels per day, below the country's estimated production capacity of 1.7 million barrels per day. Indonesia's quota represented about 6 percent of total OPEC production. About 70 percent of Indonesia's annual oil production was exported on average during the late 1980s, but domestic consumption was increasing steadily and reached half of annual oil production by 1990.

Indonesia's oil industry is one of the oldest in the world. Oil in commercial quantities was discovered in northern Sumatra in 1883, leading to the establishment of the Koninklijke Nederlandsche Maatschappij tot Exploitatie van Petroleum-bronnen in NederlandschIndi� (Royal Dutch Company for Exploration of Petroleum sources in the Netherlands Indies) in 1890, which was merged in 1907 with the Shell Transport and Trading Company, a British concern that had been drilling in Kalimantan since 1891, to form Royal Dutch Shell. Royal Dutch Shell dominated colonial oil exploration for more than thirty years. By 1911 Royal Dutch Shell operated concessions in Sumatra, Java, and Kalimantan (then called Borneo), and Indonesian oil was almost 4 percent of total world production. Indonesia's most important oil fields, the Duri and Minas fields in the central Sumatran basin, were discovered just prior to World War II by Caltex, a joint venture between the American companies Chevron and Texaco, although production did not begin until the 1950s. By 1963 the Duri and Minas oil fields, located in Riau Province near the town of Dumai, accounted for 50 percent of oil production.

The postindependence government increased its control over the oil sector during the 1950s and 1960s by increasing operations of several government-owned oil companies and by stiffening the terms of contracts with foreign oil firms. In 1968 the government companies--Indonesian Oil Mining company (Pertamin), National Oil Mining Company (Permina), and the National Oil and Gas Company (Permigan)--were consolidated into a single operation, the National Oil and Natural Gas Mining Company (Pertamina). At this time, a new form of contract--the production-sharing contract--was introduced. A production-sharing contract split total oil production between the contractor and the government, represented by Pertamina, and allowed the government to assume ownership of structures and equipment used for exploration and production within Indonesia. Indonesia's contract terms were considered among the toughest in the world, with the government in most cases receiving 85 percent of oil produced once the foreign company recovered costs.

Annual oil production in Indonesia peaked in 1977 at over 600 million barrels. The official price of Minas crude was then about US$14 per barrel, a substantial rise from the 1973 price of about US$4 per barrel as a result of OPEC's successful market manipulations. Prices continued to soar in 1981, reaching US$35 per barrel, and oil exports peaked at US$15 billion, or about 70 percent of total export earnings. In 1982, however, production declined, reaching a low of 460 million barrels and the oil market began to weaken that same year, when Indonesia's Minas crude was priced at US$29. The market collapsed in 1986, bringing the Minas price to below US$10 per barrel. Recovery of oil prices began slowly, and by 1989 Minas was priced at about US$18 per barrel. Total production in 1989 was almost 500 million barrels, and oil exports were valued at US$6 billion.

Indonesia had proven oil reserves in 1990 equal to 5.14 billion barrels, with probable reserves of an additional 5.79 billion barrels. Throughout the archipelago there were sixty known basins with oil potential; only thirty-six basins had been explored and only fourteen were producing. The majority of unexplored areas were more than 200 meters beneath the surface of the sea. Indonesia's oil reserves were usually found in medium- and small-sized fields, so that continued exploration was vital to maintain production and known reserves.

In 1989 and 1990, the government loosened some provisions for new contracts to stimulate exploration, particularly in frontier areas. Improved oil market conditions in the late 1980s also contributed to a surge in production-sharing contracts. Fifty-seven of the 100 contracts active in 1992 were signed from 1987 to 1991. The newer contracts committed US$2.8 billion in exploration during the 1990s. Production from existing oil fields was still dominated by Caltex's operations in Sumatra, which accounted for 47 percent of Indonesian oil production in 1990. Twenty foreign oil companies, primarily United States-based, were active producers in 1990.

Pertamina operated eight petroleum refineries with a total capacity to produce 400,000 barrels per day of a variety of distilled products for domestic use and export. The Indonesian government subsidized the domestic prices of distillates, and in spite of several price increases during the 1980s, prices in Indonesia were well below international market prices by 1990. For example, kerosene, used primarily for cooking, was priced at Rp190 per liter following a 15 percent price hike in May 1990; the price of kerosene in Singapore was then equivalent to Rp643 per liter and in the Philippines, Rp512 per liter. The total cost of fuel subsidies amounted to Rp2.6 trillion (US$1.3 billion) in FY 1990. Pertamina forecast an increase in domestic demand for distilled products of 7 percent per year, and hoped to meet this demand and, simultaneously, to expand exports. Four new refineries with a total capacity of 500,000 barrels per day intended entirely for export were in various stages of planning in 1990.

Indonesia

Indonesia - Natural Gas

Indonesia

Indonesia was the world's largest producer and exporter of liquefied natural gas. Two major facilities, P.T. Arun at Lhokseumawe, Special Region of Aceh, and P.T. Badak, in Bontang, Kalimantan Timur Province, condensed natural gas through refrigeration to one-six hundredth of its volume for shipment in tankers. Both facilities were built in the late 1970s under supply contracts to Japan, although excess production was shipped to other destinations. After several expansions, the total capacity had reached 22.6 million tons per year by 1990. Exports of liquefied natural gas in 1990 were 20.6 million tons, valued at US$3.7 billion.

Although most of Indonesia's natural gas was supplied to liquefying plants for export in the early 1990s, about 20 percent was used for domestic consumption, primarily in fertilizer plants, where it was processed into ammonia and urea. Natural gas reserves were estimated in 1990 at 67.5 trillion standard cubic feet of proven reserves and 12 trillion standard cubic feet of probable reserves. Growing domestic and export demand encouraged plans for the development of the Natuna gas field, the nation's largest field, located in the South China Sea northeast of the Natuna Islands. The high carbon dioxide content of this field had previously deterred investment, but Esso Indonesia indicated willingness to invest US$12 billion to $US15 billion to treat and market the gas. Pertamina authorized further negotiations with Esso after reviewing the proposal in 1991.

Indonesia

Indonesia - Coal

Indonesia

Coal production declined in the 1970s because of increasing use of subsidized petroleum fuels. However, in the late 1970s Suharto announced a new effort to increase domestic coal use, especially in cement and electric power plants. Total coal production rose steadily in the 1980s to reach 11 million tons in 1990. Most coal reserves were located in southern Sumatra and eastern and southern Kalimantan. Total measured reserves were 4.2 billion tons, with an additional 12.9 billion tons classified as inferred reserves and 15 billion tons of hypothetical reserves. A government mining company, P.T. Tambang Batubara Bukit, produced the majority of coal in 1991, but ten coal cooperation contracts signed between 1981 and 1987 with foreign investors were expected to produce a total of 20 to 25 million tons per year by 1994.

Indonesia

Indonesia - Tin

Indonesia

Indonesia was one of the world's four major tin producers, behind Brazil but close in ore production to Malaysia and China in the late 1980s. Tin ore production was centered on Bangka Island, part of Sumatera Selatan Province. New exploration was planned in 1989 on Sumatra and offshore Bangka Island. Indonesia is a member of the Association of Tin Producing Countries and was required in FY 1989 to restrict tin exports to no more than 31,500 tons as part of the association's Supply Rationalization Scheme. The government enterprise P.T. Timah controlled the majority of tin mining and, together with an Australian mining firm, operated a tin smelter in Muntok, located in northwestern Bangka Island. In 1989 the smelter, which had a capacity of 32,500 tons per year, produced 29,900 tons of refined tin from local ore. In the late 1980s, Indonesia exported 80 percent of its tin production. Some tin ore was shipped to Malaysia for processing, although tin metal was shipped primarily to Singapore. Most of the growing domestic tin consumption was used in tin plating and for solder. Official proven reserves of tin were 740 million tons.

Indonesia

Indonesia - Nickel

Indonesia

Indonesia was among the world's top five producers of nickel ore in 1989, although Canada and the then-Soviet Union produced much greater quantities. The major nickel mining operations were run by P.T. Aneka Tambang (also known by the abbreviated P.T. Antam), the Indonesian government mining firm, and by P.T. Inco, an international firm owned primarily by the Canadian firm Inco Limited, with a minority share owned by Sumitomo Metal Mining Company of Japan. At its integrated nickel complex at the Soroako Concession in Sumatera Selatan Province, P.T. Inco processed ore into nickel matte, which was then exported to Japan. Plans were underway in 1989 to expand the capacity of the complex from 35,000 tons to 47,630 tons capacity. P.T. Inco also planned to issue from US$300 million to US$400 million in stock shares on the Jakarta Stock Exchange in 1990 to meet the 20 percent domestic equity ownership requirement mandated in its 1967 contract with the Indonesian government. P.T. Aneka Tambang had mine operations in the Pomalaa area of Sulawesi Selatan Province and on Gebe Island, Maluku Province. A joint venture between P.T. Aneka Tambang and Australian Queensland Nickel planned to open a new nickel mine on Gag Island, Irian Jaya Province, in 1991. P.T. Aneka Tambang also operated a ferronickel processing plant in Sumatera Selatan Province with a capacity of 4,800 tons per year of contained nickel. Total nickel ore reserves in Indonesia represented 12 percent of world reserves, or 367 million tons with a nickel content between 1.5 to 2 percent.

Indonesia

Indonesia - Copper

Indonesia

Copper mining in the late 1980s was dominated by the FreeportMcMoRan Copper and Gold Company, a United States firm, which, through its joint venture subsidiary Freeport Indonesia, had operated the Ertsberg Mountain mine in the Jayawijaya Mountains of Irian Jaya Province since the early 1970s. The mined ore was milled and then sent 115 kilometers by pipeline to Freeport's Amamapare port. The mine produced 32 million tons before becoming depleted. To expand its operations, in 1989 Freeport Indonesia was granted an exploration license by the Indonesian government that added 2.5 million hectares to its original 10,000-hectare concession. A major new discovery on Grasberg Mountain, three kilometers north of the Ertsberg Mountain site, was expected to come under production in 1990 and to produce around 270,000 tons annually by the end of 1992. It was projected to become the world's largest open-cast mine, and at one of the lowest costs in the world. Total proven and probable reserves of copper, centered in the Ertsberg and Grasberg areas of Irian Jaya, were 15 billion tons. In a related joint venture, Freeport Indonesia, Nippon Mining (Japan), Metallgesselschaft (Germany), and a private Indonesian investor had plans to start construction of a 150,000-ton annual production capacity, US$600 million copper smelter in Gresik, Jawa Timur Province. Given its 10 percent ownership of Freeport Indonesia, the Indonesia government had high profits at stake.

Indonesia

Indonesia - Gold

Indonesia

Most gold production officially reported in government statistics was a byproduct of Freeport Indonesia's copper mining. In 1989 total official gold production was about 6,000 kilograms, of which about 4,000 kilograms was extracted by Freeport Indonesia with a 15,000 kilogram production expected by the end of 1992. However, a large number of small-scale mining operations in Kalimantan may have produced as much as 18,000 kilograms of gold in 1989. Many of these small mines were operated illegally on foreign concessions. In 1989 there were approximately eighty foreign contractors with concessions for gold exploration, primarily in Kalimantan, but only a small number had producing mines.

Indonesia

Indonesia - Bauxite

Indonesia

Bauxite was being mined in the early 1990s by P.T. Aneka Tambang on Bintan Island and three neighboring islands, and most bauxite was exported to Japan. Total bauxite reserves of 396 million tons were found in the Bintan Island area and in Kalimantan Barat Province. Reserves of commercially exportable bauxite were much more limited, although on-site processing into alumina had the potential to be commercially feasible with below export grade reserves. Bauxite, the demand for which had increased during Repelita V after having slowed down during Repelita IV, is a primary input in the production of aluminum. It must first be refined into alumina. Plans were underway in 1991 for an alumina refinery, and the Department of Mining and Energy had been seeking an interested foreign partner to develop a US$600 million facility on Bintan Island since the late 1980s. Alumina input for P.T. Indonesia Asahan Aluminum was imported from Australia.

Indonesia





CITATION: Federal Research Division of the Library of Congress. The Country Studies Series. Published 1988-1999.

Please note: This text comes from the Country Studies Program, formerly the Army Area Handbook Program. The Country Studies Series presents a description and analysis of the historical setting and the social, economic, political, and national security systems and institutions of countries throughout the world.


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