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1996 Country Reports On Economic Policy and Trade Practices

Department of State report submitted to the Senate Committees on Foreign Relations and on Finance and to the House Committees on Foreign Affairs and on Ways and Means, January 1997.

	1994	1995	1996	1/
Income, Production and Employment
Nominal GDP	175.5	198.1	221.7
Real GDP Growth (pct)	7.5	8.1	7.6
GDP by Sector: 2/
Agriculture	30.5	33.5	36.8
Manufacturing	41.8	50.2	60.3
Services	62.6	71.0	80.5
Government	10.6	10.4	10.5
Per Capita GDP (US$)	913	1014	1116
Labor Force (millions)	86	90	94
Unemployment Rate (pct)	3.7	4.4	4.6
Money and Prices (annual percentage growth)
Money Supply (M2)	20.2	27.6	30.8
Consumer Price Inflation (pct)	9.6	9.0	8.0
Exchange Rate (rupiah/US$)
Official	2161	2249	2335
Balance of Payments and Trade
Total Exports (FOB)	40.2	45.5	50.4
Exports to US 3/	6.5	7.4	8.2
Total Imports (CIF)	32.3	39.8	44.9
Imports from US 3/	2.8	3.4	3.7
Trade Balance	7.9	5.7	5.5
Balance with US 3/	3.7	4.0	4.5
External Public Debt	101.3	108.5	116.5
Debt Service Payments/GDP (pct)	7.9	7.9	7.4
Current Account Deficit/GDP (pct)	1.7	3.6	3.9
Fiscal Deficit/GDP (pct)	-0.2	-1.0	0.1
Gold and Foreign Exchange
Reserves (end of period)	13.2	14.7	17.1
Aid from US (millions of US$)	55.0	96.0	71.0
Aid from All Other Sources	5.2	5.3	5.2

Sources: Government of Indonesia, US Department of Commerce, IMF

1/ Estimates based on available monthly data in November 1996
2/ GDP at market prices
3/ Source: U.S. Department of Commerce and U.S. Census Bureau; exports FAS, imports customs basis; 1996 figures are estimates based on data available through November 1996.

1. General Policy Framework

Indonesia has made remarkable economic progress over the last 30 years. When President Soeharto took power in 1967, it was one of the world's poorest countries, with per capita GDP of $70 per person. Indonesia's estimated per capita GDP passed $1000 in 1995, life expectancy has risen to 63 years from 41 years in 1965, and infant mortality and illiteracy rates have fallen dramatically. Real GDP growth has averaged over 7 percent per year since 1991, while inflation has been confined to the 5-10 percent range.

In the latter part of 1995, the economy began to show signs of overheating. Inflation threatened to exceed 10 percent, imports grew by more than 25 percent, and the current account deficit more than doubled, growing from $3.0 billion (1.7 percent of GDP) in 1994 to $7.2 billion (3.6 percent of GDP) in 1995. In early 1996, the government took a series of actions designed to cool the economy, including raising the reserve requirements for commercial banks and running a fiscal surplus by using proceeds of privatization to repay high-interest official debt. By September 1996, those actions appeared to be making an impact as inflation dropped to 7.1 percent and the current account deficit stabilized as a percentage of GDP.

The government maintains a balanced budget in the sense that expenditures do not exceed domestic revenue plus foreign assistance receipts. The Central Bank controls the money supply through the purchase and sale of its own debt instruments, known as "Sertifikat Bank Indonesia."

The Indonesian government has made considerable progress in trade and investment deregulation, usually by periodically implementing "deregulation packages" of liberalization measures. In mid-1994, Indonesia lowered investment barriers, and in May 1995 the government unveiled a comprehensive tariff reduction package which covered roughly two-thirds of all traded goods and will reduce most tariffs to under five percent by 2003. The June 1996 deregulation package detailed a schedule of tariff reductions to meet the government's goal of reducing all tariffs in the 1-20 percent range to 5 percent or less by 2000, and to reduce all tariffs in the 20 percent and higher range to 10 percent or less by 2003. However the government's deregulation packages have made comparatively little progress in reducing non-tariff barriers.

Indonesia's economic development offers promise for U.S. business. U.S. exports to Indonesia have quadrupled since 1987. In 1995, the United States enjoyed the benefit of a 27 percent increase in total Indonesian imports. U.S. exports to Indonesia grew by nearly 20 percent in 1995 to $3.4 billion. The best prospects for U.S. exporters include equipment used in the construction of infrastructure, machinery, agricultural products for consumption and as manufacturing inputs, aviation equipment, and household consumer goods

2. Exchange Rate Policies

The Indonesian currency, the rupiah, is on a managed float, depreciating slowly against a basket of trading partners' currencies. In the past several years, Bank Indonesia has steadily widened the band between its buying and selling rate on the rupiah in an effort to encourage the development of an interbank foreign exchange market and discourage short term capital flows. At the end of October 1996, the exchange rate was 2320 rupiah per dollar.

3. Structural Policies

In general, the government allows the market to determine price levels. The government enforces a system of floor and ceiling prices for certain "strategic" food products such as rice. In some cases, business associations, with government support, establish prices for their products. Direct government subsidies are confined to a few goods such as fertilizers.

Individuals and businesses are subject to income taxes. In 1995, the government reduced the highest marginal income tax rate to 30 percent for earnings in excess of $33,000. A value-added tax and import duties are other important sources of government revenue. Companies can apply for an exemption from or a rebate of import duties and VAT paid on inputs used to produce exports. A few products remain subject to export taxes, usually with the goal of job creation. For example, in October 1989 export taxes on sawn lumber were raised to prohibitive levels and in May 1992 a previous export ban on logs was replaced by high export taxes.

In late 1995 President Soeharto issued a decree encouraging all taxpayers with incomes above $45,000 to donate 2 percent of after-tax income to charity. While the legal situation remains murky, a December 1996 presidential decree indicates that contributions may be obligatory and apply to foreign companies.

4. Debt Management Policies

Indonesia's medium and long term foreign debt totals about $110 billion, with about $63 billion owed by the state sector and $47 billion by the private sector. In 1996 Indonesia will pay approximately 35 percent of total export earning to principal and interest payments on its foreign debt. The government is fully committed to meeting its debt service obligations and has no plans to seek a debt rescheduling.

A Cabinet-level team was set up by the government in September 1991 to oversee foreign borrowing. The team is charged with reviewing applications for foreign commercial credits to finance projects in which the government or a state owned enterprise is involved. Financing for purely private projects is not affected.

5. Significant Barriers to U.S. Exports

Import licenses: The government has been reducing the number of items subject to import restrictions and special licensing requirements. Since the January 1996 deregulation package, 203 tariff lines remain subject to restrictive import licenses, down from 261 in 1994 and 1,112 in 1990.

Services barriers: Despite some loosening of restrictions, services trade entry barriers continue to exist in many sectors, particularly in the financial sector. Foreign banks, securities firms, and life and property insurance companies are permitted to form joint ventures with local companies, but in most cases the capitalization requirements are higher than for domestic firms. Foreign accounting firms must operate through technical assistance arrangements with local firms, and citizenship is a requirement for licensing as an accountant. Foreign agents and auditors may act only as consultants and may not sign audit reports. Foreign law firms are not allowed to establish practices in Indonesia. Attorneys are admitted to the bar only if they have graduated from an Indonesian legal faculty or an institution recognized as the equivalent. Foreign companies incorporated in Indonesia may issue stocks and bonds through the capital market.

Distribution in the domestic market remains quite restricted. The June 1996 deregulation package included a first step in opening the distribution sector to majority foreign investment by allowing foreign firms with plants in Indonesia to import and sell complementary goods from affiliated companies. Majority owned foreign plants may also sell their own products down to the wholesale level. Indonesia imposes a quota on the number of foreign films which may be imported in a given year. Films may be imported and distributed only by fully Indonesian-owned companies.

Standards, testing, labeling and certification: In May 1990, the government issued a decree which states that the Department of Health must decide within one year of receipt of an application whether to grant registration for new foreign pharmaceutical products. In practice, registration can take longer, although companies report that the process is slowly improving. Foreign pharmaceutical firms have seen copied products available on the local market before their products were registered. Through changes in its patent law, the government is addressing such problems.

Investment barriers: The government is committed to increasing foreign investment and to reducing burdensome bureaucratic procedures and substantive requirements for foreign investors. The most substantial measure was taken in June 1994, when the government dropped initial foreign equity requirements and sharply reduced divestiture requirements. Indonesian law now provides for both 100 percent direct foreign investment projects and joint ventures with a minimum Indonesian equity of 5 percent. In addition, the government opened several previously restricted sectors to foreign investment, including harbors, electricity generation, telecommunications, shipping, airlines, railways, roads, and water supply. Some sectors remain restricted or closed to foreign investment and are carried on the so-called negative list. They include retail trade, television and radio broadcasting, aircraft manufacture, logging, and wood processing.

Most foreign investment proposals must be approved by the Capital Investment Coordinating Board (BKPM). Investments in the oil and gas, mining, banking, securities and insurance industries are covered by specific laws and regulations and handled by the relevant technical ministries.

In March 1996, Indonesia announced a "pioneer" auto industry policy intended to promote the establishment of an indigenous Indonesian auto industry. The program grants import tariff and tax preferences to only one company which meets certain requirements, including that it be fully Indonesian owned and that it meet specified domestic content levels within three years. In addition, the company may import up to 45,000 completely built-up units duty free until it has established production capacity. The United States is engaged in consultations on this policy under the World Trade Organization.

Government procurement practices: In 1994, the government enacted a new procurement law to regulate government procurement practices and strengthen the procurement oversight process. Most large government contracts are financed by bilateral or multilateral donors who specify procurement procedures. For large projects funded by the government, international competitive bidding practices are to be followed. The government seeks concessional financing which includes a 3.5 percent interest rate and a 25 year repayment period with 7 years' grace. Some projects do proceed on less concessional terms. Foreign firms bidding on certain government-sponsored construction or procurement projects may be asked to purchase and export the equivalent in selected Indonesian products. Government departments and institutes and state and regional government corporations are expected to utilize domestic goods and services to the maximum extent feasible, but this is not mandatory for foreign aid financed goods and services procurement. State owned enterprises which have offered shares to the public through the stock exchange are exempted from government procurement regulations.

Customs procedures: In response to grave concern about the effectiveness of its Customs Service, the government decreed in 1985 that all imports valued at more than $5,000 must bear a verification report issued by the Swiss inspection firm Société Generale de Surveillance (SGS) regarding the type of good, quality, quantity, and applied cost. These inspections are carried out at the point of exit of all shipments to Indonesia and duties calculated based on the effective price contained in the examination report. Beginning in April 1997, all pre-shipment inspection will be phased out and the Customs Department will resume full authority over customs valuation.

6. Export Subsidies Policies

Indonesia joined the GATT Subsides Code and eliminated export loan interest subsidies as of April 1, 1990. As part of its drive to increase non-oil and gas exports, the government permits restitution of VAT paid by a producing exporter on purchases of materials for use in manufacturing export products. Exemption from or drawbacks of import duties are available for goods incorporated into exports.

7. Protection of U.S. Intellectual Property

Indonesia is a member of the World Intellectual Property Organization and is a party to certain sections of the Paris Convention for the Protection of Intellectual Property. It withdrew from the Berne Convention for the Protection of Literary and Artistic Works in 1959.

Indonesia is making progress in intellectual property protection. In April 1996, the U.S. Trade Representative named Indonesia on its Special 301 Priority Watch List for software piracy and failure to protect trademarks. The government often responds to U.S. companies which put forward specific complaints about pirated goods and trademark abuse, but the court system can be capricious, and punishment of pirates of protected intellectual property is very rare. New patent, trademark, and copyright laws submitted to Parliament in December 1996 are designed to bring Indonesia's laws into compliance with the WTO Agreement on Trade-Related Aspects of Intellectual Property. They appear likely to address many of the remaining legal deficiencies which pose problems for U.S. companies.

-- Patents: Indonesia's first patent law came into effect on August 1, 1991. Several areas of concern remain, including compulsory licensing provisions, a relatively short term of protection (14 years), and a provision which allows importation of 50 pharmaceutical products by non-patent holders. When enacted, the new patent law may address many of these concerns.

-- Trademarks: The April 1993 trademark law provided for determination of trademark rights by registration rather than first use. The law provides protection for well known marks but because the judicial process is time-consuming and unreliable, companies continue to find it difficult to protect well known marks in Indonesia. After registration, marks must actually be used in commerce and cancellation actions must be lodged within five years of the trademark registration date.

-- Copyrights: In 1987, Indonesia enacted amendments to its copyright law which largely brought it into conformity with international standards for copyright protection. A bilateral copyright agreement between the United States and Indonesia went into effect in August 1989 extending national treatment to each other's copyrighted works. The government has demonstrated that it wants to stop copyright piracy and that it is willing to work with copyright holders to this end. There is good enforcement of the ban on pirated audio and video cassettes and textbooks, but enforcement efforts against software piracy are still in an early stage.

-- New technologies: Biotechnology and integrated circuits are not protected under Indonesian intellectual property laws. The government is in the process of preparing laws on trade secrets, industrial design, and integrated circuits.

-- Impact: US industry has placed considerable emphasis on improvement of Indonesia's intellectual property regime, but it is difficult to estimate prospective losses incurred by current inadequacies in protection.

8. Worker Rights

a. The Right of Association: Private sector workers, including those in export processing zones, are by law free to form worker organizations without prior authorization. However, government policies and current numerical requirements for union recognition constitute a significant barrier to freedom of association and the right to engage in collective bargaining. The Federation of All-Indonesian Trade Unions (SPSI), the only trade union federation recognized by the government, and single company "plant-level unions" can legally bargain on behalf of employees or represent workers in the Department of Manpower's labor courts. The government may dissolve a union if it believes the union is acting against the national ideology, Pancasila, although it has never actually done so, and there are no laws or regulations specifying procedures for union dissolution.

Two labor groups other than SPSI are active but not recognized by the government: the Serikat Buruh Sejahtera Indonesia (SBSI, Indonesian Prosperity Trade Union), and the Alliance of Independent Journalists (AJI). The government considers the SBSI and AJI to be illegal and has harassed them by arrests, interrogations, and disbanding meetings, but has not formally banned them. The leader of the SBSI, Muchtar Pakpahan, was arrested on subversion charges in July 1996; his trial began in early December.

Civil servants are not permitted to join unions and must belong to KORPRI, a nonunion association whose central development council is chaired by the Minister of Home Affairs. State enterprise employees, defined to include those working in enterprises in which the state has a holding of 5-percent or more, usually are required to join KORPRI, but a small number of state enterprises have SPSI units. Teachers must belong to the teachers' association (PGRI). All organized workers except civil servants have the legal right to strike. While state enterprise employees and teachers rarely exercise this right, private sector strikes are frequent.

b. The Right to Organize and Bargain Collectively: Recognized trade unions and plant level unions can legally engage in collective bargaining. In companies without unions, the government discourages workers from utilizing outside assistance, preferring that workers seek its assistance. By regulation, negotiations must be concluded within 30 days or be submitted to the Department of Manpower for mediation and conciliation or arbitration. Agreements are for two years and can be extended for one year. According to NGOs involved in labor issues, the provisions of these agreements rarely go beyond the legal minimum standards established by the government, and the agreements are often merely presented to worker representatives for signing rather than being negotiated.

Although government regulations prohibit employers from discriminating against or harassing employees because of union membership, there are credible reports from union officials of employer retribution against union organizers, including firing, which is not effectively prevented or remedied in practice. Charges of antiunion discrimination are adjudicated by administrative tribunals. However, because many union members believe the tribunals generally side with employers, many workers reject or avoid the procedure and present their grievances directly to the national human rights commission, parliament and other agencies. Administrative decisions in favor of dismissed workers tend to be monetary awards; workers are rarely reinstated. The provisions of the law make it difficult to fire workers, but the law is often ignored in practice.

On June 1, 1996 the Minister of Manpower issued a new regulation permitting unions affiliated with the SPSI to collect union dues directly through the check-off system, rather than having the Department of Manpower collect dues.

The armed forces, which include the police, continue to involve themselves in labor issues, despite the 1994 revocation by the Minister of Manpower of a 1986 regulation allowing the military to intervene in strikes and other labor actions. A 1990 decree giving the Agency for Coordination of National Stability (BAKORSTANAS) the right to intervene in strikes in the interest of political and social stability remains in effect.

c. Prohibition of Forced or Compulsory Labor: The law forbids forced labor, and the government generally enforces it. However, there are credible reports of teenage children being forced to work under highly dangerous conditions on fishing platforms off the coast of northeastern Sumatra. These platforms are miles off shore, with access controlled by the employers, and in many cases the children are held virtual prisoners on the platforms and forced to work for up to three months at a time for well below the minimum wage. According to knowledgeable sources, hundreds of children may be involved. The local government has done little to address the problem.

d. Minimum Age for Employment of Children: Child labor exists in both industrial and rural areas, and in both the formal and informal sectors. According to a 1995 report of the Indonesian Central Bureau of Statistics, four per cent of Indonesian children between the ages of 10 and 14 work, and another four per cent work in addition to going to school. Indonesia was one of the first countries to be selected for participation in the ILO's International Program on the Elimination of Child Labor (IPEC), and it signed a memorandum of understanding with the ILO on May 29, 1992, to guide collaboration under this program. One hundred thirty government labor inspectors received ILO-sponsored training on child labor matters under the IPEC program. However, enforcement remains lax.

e. Acceptable Conditions of Work: Indonesia does not have a national minimum wage. Rather, area wage councils working under the supervision of the national wage council establish minimum wages for regions and basic needs figures for each province, a monetary amount considered sufficient to enable a single worker to meet the basic needs of nutrition, clothing, and shelter. While Indonesia has succeeded in dramatically lowering the level of poverty throughout the country, until recently the minimum wage rates have usually lagged behind the basic needs figures. The government raised minimum wage rates the last three years, and in 1996 required employers to pay workers for 30 days during a month. In Jakarta the minimum wage is about $2.28 (rupiah 5200) per day. An additional increase is planned for late 1996.

There are no reliable statistics on the number of employers paying at least the minimum wage, though government efforts at enforcement have increased in recent years. Estimates by observers range from 30 to 60 percent.

Labor law and ministerial regulations provide workers with a variety of other benefits, such as social security, and workers in more modern facilities often receive health benefits, free meals, and transportation. The law establishes 7-hour workdays and 40-hour workweeks, with one 30-minute rest period for each 4 hours of work. The law also requires 1 day of rest weekly. The daily overtime rate is 1½ times the normal hourly rate for the first hour, and twice the hourly rate for additional overtime. Observance of laws regulating benefits and labor standards varies from sector to sector and by region. Employer violations of legal requirements are fairly common and often result in strikes and employee protests. The Ministry of Manpower continues publicly to urge employers to comply with the law. However, in general, government enforcement and supervision of labor standards are weak.

Both law and regulations provide for minimum standards of industrial health and safety. In the largely Western-operated oil sector, safety and health programs function reasonably well. However, in the country's 100,000 larger registered companies in the non-oil sector, the quality of occupational health and safety programs varies greatly. The enforcement of health and safety standards is severely hampered by the limited number of qualified Department of Manpower inspectors as well as by the low level of employee appreciation for sound health and safety practices. Allegations of corruption on the part of inspectors are common. Workers are obligated to report hazardous working conditions. Employers are forbidden by law from retaliating against those who do, but the law is not effectively enforced.

f. Rights in Sectors with U.S. Investment: Working conditions in firms with U.S. ownership are widely recognized as better than the norm for Indonesia. Application of legislation and practice governing worker rights is largely dependent upon whether a particular business or investment is characterized as private or public. U.S. investment in Indonesia is concentrated in the petroleum and related industries, primary and fabricated metals (mining), and pharmaceutical sectors.

Foreign participation in the petroleum sector is largely in the form of production sharing contracts between the foreign companies and the state oil and gas company, Pertamina, which retains controls over all activity. All employees of foreign companies under this arrangement are considered state employees and thus all legislation and practice regarding state employees generally applies to them. Employees of foreign companies operating in the petroleum sector are organized in KORPRI. employees of these state enterprises enjoy most of the protection of Indonesian labor laws but, with some exceptions, they do not have the right to strike, join labor organizations, or negotiate collective agreements. Some companies operating under other contractual arrangements, such as contract of work and, in the case of the mining sector, cooperative coal contracts, do have unions and collective bargaining agreements.

Regulations pertaining to child labor and child welfare are applicable to employers in all sectors. Employment of children and concerns regarding child welfare are not considered major problem areas in the petroleum and fabricated metals sectors. Legislation regarding minimum wages, hours of work, overtime, fringe benefits, health and safety applies to all sectors. The best industrial and safety record in Indonesia is found in the oil and gas sector.

Category		Amount
Petroleum		5,132
Total Manufacturing		204
Food & Kindred Products	30
Chemicals & Allied Products	105
Metals, Primary & Fabricated	8
Machinery, except Electrical	1
Electric & Electronic Equipment	31
Transportation Equipment	(1)
Other Manufacturing	(1)
Wholesale Trade		64
Banking		(1)
Finance/Insurance/Real Estate		36
Services		(1)
Other Industries		1,404
TOTAL ALL INDUSTRIES		7,050

(1) Suppressed to avoid disclosing data of individual companies.

Source: U.S. Department of Commerce, Bureau of Economic Analysis

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