Presentation on Survey to be published in Bulletin of Indonesian Economic Studies, April 2011.

1. Survey of Recent Developments
for
Bulletin of Indonesian Economic Studies
Ross McLeod
Indonesia Project, ANU
23 February 2011

2. Survey of Recent Developments
Main Topics
• Political developments
• Macroeconomic developments
• Export trends: a longer-term perspective
• Rethinking city management
• Financial Services Authority
• The eruption of Mount Merapi

3. Political Developments
• Government’s approval rating (LeSI)
– High but falling (85% to 63% July 09 to December 10)
– Corruption specific (84% to 51%)
• Gayus saga confirms fears about lack of progress on corruption
– Bribes to tax officials
– Bribes to law enforcement officials
– Bribes to prison officials
– Bribes to immigration officials…
– Higher officials remain untouchable?
• Government ‘lies’ (i.e. gap between rhetoric and action)
– Protection of citizens
– Improved transparency/accountability
– Reduction of corruption
– Reduction of poverty
– Damage to environment
– Neo-liberal economics/foreign takeovers…

4. Macroeconomic Developments
• But the good news is
– Economy is in good shape
– Growth rate has risen to almost 7%p.a.
– Inflation around 7%p.a.
• a little higher than targeted (4-6%), but under control
• but food prices a concern
– Stock market performed very well in 2010
• More later if there is time…

5. Rethinking City Management
• SBY’s proposals
– New capital city
– New administrative capital
– Neither approach would solve problems of Jakarta and other big
cities
– News flash: Jakarta Governor ordered to solve the problem by
2020 (with demonstrable progress by 2014…)!
• Reinterpreting the problem
– Not just traffic congestion/inadequate public transport, but poor
city management in general
• poor water supply
• groundwater pumping and subsidence
• lack of sewerage and water-borne disease
• flooding
• broken roads
• garbage problems …

6. Rethinking City Management
• Fixing problems or replicating them?
– We need to know: why don’t cities work well?
– Nobody seems to offer a clear and persuasive analysis
• A hypothesis for consideration
– Prices of services and rates too low to cover cost of service
provision
– Almost a guarantee of inadequate, poor quality supply of
services
• Managing a city for profit
– The case of Lippo Village, Karawaci
– Can this approach be applied more widely?

7. Avoiding Banking Disasters
• A new Financial Services Authority (OJK)?
– AFC was original catalyst
• Banking collapse in 1997-98 cost $50 billion
– Decision in principle appeared in law on BI in 1999
– Supposed to be established by end 2002
– Deadline missed, then shifted to end 2010
• Draft law 11 years, still under discussion
– With no ‘champion’ the decision had been forgotten
– Revived interest reflects 2008 Bank Century failure (cost $700
million)
– Model is FSA in UK: but already found wanting by GFC!

8. Avoiding Banking Disasters
• Internal inconsistency
– Art 34 of BI Law: Bank supervision transferred from BI to OJK
– Art 24 of BI Law: Bank supervision is carried out by BI
– Inconsistency repeats in draft OJK law
• Unclear objectives
– What purpose is served by creating this new organisation?
• Protect economy against serious destabilisation?
• Protect customers of financial institutions against improper business
conduct?
– These are two very different objectives, perhaps best handled by
different organisations
• Unclear logic
– Why should supervision be better than before?
– Answer has to start from analysis of why supervision failed previously
• Bottom line: policy decisions should be based on careful analysis,
not knee-jerk reactions to events

9. Mount Merapi Eruption
• New natural disasters in October/November, many
fatalities
– Wasior (flash flood, 300 dead); Mentawai islands (tsunami, 500
dead); Merapi (multiple eruptions, 400 dead)
• Awan panas and lahars
– Immediate and delayed damages/fatalities
• Evacuation and support
– Well planned; seems to have worked well
– Evacuees want support, not just charity
• Return or relocate?
• Redesigning and rebuilding infrastructure
– Merapi is a fact of life
– Need to design infrastructure with this in mind
– Urgent need to clean out Kali Code

10. Gunung Merapi

16. Macroeconomic Developments in Detail
• Growth
• Unexpected surge to 6.9% p.a. in Q4 2010
• Strong investment the main demand factor
• Private consumption a slight concern
• Manufacturing still lagging, but improving
• Trade, hotels and restaurants very strong

17. GDP Growth (Demand side)
(% p.a.)
20
15
10
5
0
-5
-10
Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10
Gross Domestic Product (GDP) Private consumption
Government consumption Investment

18. GDP Growth (Demand side)
(% p.a.)
25
20
15
10
5
0
-5
-10
-15
-20
Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10
Gross Domestic Product (GDP) Exports Imports

19. GDP Growth (Supply Side)
(% p.a.)
10
8
6
4
2
0
-2
Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10
Gross Domestic Product (GDP) Manufacturing
Construction Trade, hotels & restaurants

20. GDP Growth Quarter on Quarter
(Seasonally adjusted, % p.a. annualised rates)
14
12
10
8
6
4
2
0
Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10
Private consumption Manufacturing
Construction Trade, hotels & restaurants

21. GDP Growth Quarter on Quarter
(Seasonally adjusted, % p.a. annualised rates)
70
60
50
40
30
20
10
0
-10
-20
Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10
Exports Imports

22. Macroeconomic Developments
• Inflation
– Target exceeded slightly in 2010
– Monetary policy too loose
• Money growth too fast/interest rates reduced
• Recent increase in ‘policy rate’ means little or nothing
• Food prices
– Increasing rapidly
– Climatic factor (too much rain)
– Bureaucratic factor (delayed rice imports by Bulog)
• Import tariffs temporarily removed

23. Macroeconomic Developments
• Financial markets
– Exchange rate against $US very stable
• At great cost to BI
– Stock market has been booming
• But recent signs of nervousness

24. Macroeconomic Developments
• The budget
– Fuel subsidies limited by forcing private car owners
to purchase Pertamax rather than Premium?
– Subsidies continue for motor cycles (50 million votes
vs 10 million car owners…)
• Budget unlikely to have stimulatory impact in
2011

25. 2010 and 2011 Budgets
(Rp trillion)
2010 2011 Change relative to
Revised Actual: 2010 rev. 2010 act.
budget Actual budget Proposed budget budget
Key revenue items % % %
Income tax 362 357 98.4 415 14.4 16.2
VAT 263 252 95.8 309 17.6 22.8
Spending on
Personnel 163 148 90.8 181 11.0 22.3
Goods and
services 113 91 80.8 132 16.8 44.6
Capital 95 75 79.4 122 28.1 61.3
Energy subsidies 144 140 97.2 134 -7.1 -4.4

26. Macroeconomic Developments
• Return of discretionary taxes
– Special (discretionary) treatment for ‘pioneer’
industries
• Strong linkages; high value added/externalities; new
technology… (all operationally undefinable?)

27. Longer-term Export Trends
• Changes in major component shares
• Changes in sub-component shares
• Changes in country destinations
– Benefiting from Asia’s growth

28. Monetary Policy and Inflation
(% p.a.)
16
14
12
10
8
6
4
2
0
-2
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11
CPI inflation Currency in circulation SBI rate 6 month Real SBI rate

29. Composite Stock Price Index (CSPI) and Exchange Rate
CSPI Rp/$
4,000 12,000
3,000 9,000
2,000 6,000
CSPI
1,000 3,000
Exchange rate
0 0
6-Jan-10 6-Mar-10 6-May-10 6-Jul-10 6-Sep-10 6-Nov-10 6-Jan-11

30. Change in Export Composition, 1988-2010
(% of total value)
Chemicals
Food & Live Animals
1988
1996
Crude Materials, Inedible 2010
Animal & Vegetable Oils & Fats
Mineral Fuels
Manufactures
0 10 20 30 40 50

31. Trends in Energy Exports
(% of total exports)
30
25
Oil
20
15
10
Gas
5
Coal
0
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

32. Trends in Other Natural Resource Exports
(% of total exports)
12
Vegetable Oil & Fats
Crude Rubber
9 Metalliferous Ores & Metal Scrap
Seafood
Coffee, Tea, Cocoa & Spices
6
3
0
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

33. Trends in Key Manufactured Exports
(% of total exports)
20
Wood Manufactures Paper & Cardboard
Footwear Electrical & telecomm's
16 Textiles & clothing
12
8
4
0
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

34. Country Shares of Indonesian Non-Oil and Gas Exports
(%)
Others
Malaysia
India
Singapore
1997
China 2010
USA
Japan
0 10 20 30 40 50

35. Country Shares of Indonesian Oil and Gas Exports
(%)
Others
Malaysia
Australia
Singapore
1997
China 2010
South Korea
Japan
0 10 20 30 40 50