Indonesia Summary

Introduction

Following four decades of authoritarianism, Indonesia has made persistent efforts to transition to a popularly elected government while deepening its involvement in international trade. In November 2001 Indonesia secured IMF disbursements by agreeing to a series of economic reforms, which it now struggles to implement, particularly in the banking sector. It also faces the challenges of dealing with international charges of corruption and human rights violations, as well as resolving growing separatist pressures in the provinces of Aceh and Irian Jaya. Indonesia's stability has further been challenged of late leading up to the independence of East Timor in May 2002 and following the terrorist bombing in Bali the following September. Such instability acts as a substantial deterrent to much needed investment in the region, as well as a drain on resources that might otherwise be allocated to trade activities which generate growth.

Agriculture

Despite being a member of the Cairns Group of 17 agricultural exporting countries pushing for deep cuts in tariff rates and the elimination of all subsidies, Indonesia is pressing for policies that permit greater flexibility in tariff rate application by developing nations. The government claims that higher tariffs on basic food staples such as rice, sugar, soybeans, and corn are necessary to ensure food security and to protect the domestic agricultural sector. Though the country has been allowed to impose higher import tariffs on the four products under the current WTO agreement, IMF conditionalities have pressured Indonesia to keep tariff rates relatively low.

Privatization

Indonesia's privatization program began at a cautious pace, but the 1997 economic crisis and ensuing IMF reform program accelerated the transfer to the market of responsibilities for covering the costs of production in the sectors of water, energy and health. Following a February 2003 study, Business Watch Indonesia (BWI) concluded that this privatization drive forced by the IMF reforms has created an "access divided society," segregating individuals' access to essential public services according to their purchasing power.[1]

Anti-Dumping and Countervailing Measures

As a major commodity, textile, and footwear exporter, Indonesia is among a group of developing countries increasingly demanding the reform of rules to prevent trade distortion. Together with 25 other members, Indonesia successfully filed a WTO complaint against the U.S. Byrd amendment, which stipulates that duties collected from anti-dumping cases be distributed to the American companies involved. The ruling was initially issued in September 2002 and subsequently upheld by a January 2003 international appellate panel; Indonesia now advocates that the U.S. Congress abolish the amendment as soon as possible.

Labor

Sixteen nations including the U.S., Japan, China and countries in the European Union are demanding that the Indonesian government remove its Economic Need Test (ENT) policy, which enables it to limit or ban foreign workers, and that Indonesian professionals and managers also be allowed to seek jobs abroad. The Minister of Manpower and Transmigration fears, however, that the lack of quality and skill among domestic managers and professional workers compared to foreigners could create a much greater unemployment problem if the country's labor sector were liberalized. A special task force was sent to Geneva in January 2003 to renegotiate the initial WTO scheme; though the liberalization is currently scheduled to begin in March, Indonesia could delay the action until 2005 if the 16 nations agree to the provision.

Competition with China

Indonesia met China's 2001 accession to the WTO with a substantial degree of anxiety. Based upon the high degree of correlation between the export structures of the two countries, a significant decline is expected in Indonesia's textiles and apparel industries, as China becomes more integrated into the system of international trade.[2] Furthermore, while Indonesia's security concerns and weak banking sector continue to encourage foreign investors to relocate, China's attractiveness to foreign investment is growing. China, however, still faces a major challenge in delivering on its WTO commitments. Faced with the heightening competition, Indonesia must now find niches and complementary opportunities among ways to benefit from Asia's fast-growing domestic markets.

Conclusion

Indonesia's commitment to multilateralism has been confirmed by its active participation in WTO negotiations, as well as its timely implementation of Uruguay Round obligations and additional WTO and Association of Southeast Asian Nations (ASEAN) commitments. Indonesia fully implemented the final stage of its commitments under the ASEAN Free Trade Agreement on schedule on 1 January 2002. The country has, however, expressed reservations about the pace of liberalization within the ASEAN Free Trade Area (AFTA) and indicated an interest in pursuing emergency exit clauses pertaining to general commitment under the agreement. Trade liberalization and other structural reforms undertaken by Indonesia have successfully stabilized the economy and fostered growth. But the economy remains fragile and the recent global downturn has heavily reduced foreign investment on which the economy critically depends.

Last updated June 2004

[1] NGO warns of unrestrained privatization of public services. Emerging Markets Datafile, Jakarta Post. 14 Feb 2003.
[2] Sethaput Suthiwart-Narueput. "Regional Impact of China WTO Accession". World Bank. Jakarta, Indonesia. 7 November 2002.