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Indonesia FOREIGN AID, TRADE, AND PAYMENTS
Aid and Trade Policies
Indonesia's exports were vital to its economic
development, as
exports earned the foreign exchange that permitted
Indonesia to
purchase raw materials and machinery necessary for
industrial
production and growth. During the 1980s, about 25 percent
of
domestic production, or GDP, was exported. Although
petroleum was
the most important export, other exports included
agricultural
products such as rubber and coffee and a growing share of
manufactured exports. In the late 1980s, the government
classified
about 70 percent of imports as raw materials or auxiliary
goods for
industry, about 25 percent of imports as capital goods,
primarily
transportation equipment, and only around 5 percent of
imports as
consumer goods (see
table 19, Appendix).
Export earnings also contributed to Indonesia's ability
to
borrow from world financial markets and international
development
agencies. On average, about US$3 billion per year was
borrowed
during the 1980s. These borrowings primarily financed
governmentsponsored development projects. However, increasing
interest
payment obligations in the late 1980s helped bring more
restraint
to government borrowing.
Indonesian exports were traditionally based on the
country's
rich natural resources and agricultural productivity,
making the
economy vulnerable to the vicissitudes of changing world
prices for
these types of products. For example, the Dutch colonial
economy
suffered when world sugar prices collapsed during the
Great
Depression, and fifty years later, the New Order endured
the
dramatic oil market collapse in the mid-1980s.
Manufactured exports
offered the prospect of more stable export markets during
the
1980s, but even these products were threatened by
increased trade
protection among industrial countries. To avoid heavy
reliance on
a few trade partners, the government pursued several
measures to
diversify export markets, especially to other developing
nations
such as China and Indonesia's fellow members of the
Association of
Southeast Asian Nations
(ASEAN--see Glossary).
Substantial trade reforms during the 1980s contributed
to the
surge in manufactured exports from Indonesia. The most
important
manufactured export was plywood, whose domestic production
was
facilitated by the ban on log exports in the early 1980s.
In 1990
plywood accounted for over 10 percent of total merchandise
exports.
Although not yet significant individually, a wide range of
manufactured products, including electrical machinery,
paper
products, cement, tires, and chemical products, helped
bring
overall manufactured exports to 35 percent of merchandise
exports,
or a total of US$9 billion in 1990, up from less than US$2
billion
in 1984 (see
table 20, Appendix).
The growth in non-oil exports helped Indonesia maintain
a
positive trade balance throughout the 1980s in spite of
the oil
market collapse. However, increases in imports, service
costs such
as foreign shipping, and interest payments on outstanding
foreign
debt all contributed to a worsening current account
deficit in the
late 1980s. The deficit more than doubled from US$1.1
billion in
1989 to US$2.4 billion in 1990. The 1991 current account
deficit
was predicted to reach as high as US$6 billion.
The government had successfully avoided a debt crisis
in the
early 1980s when many developing countries, including the
neighboring Philippines, were forced to temporarily halt
debt
repayments. In a comparative study of Indonesia and other
debtor
nations, economists Wing Thye Woo and Anwar Nasution
argued that
Indonesia's success was due to two main factors: heavy
reliance on
long-term concessional loans and sustained high exports
because of
a willingness to devalue the exchange rate even when oil
export
revenues were buoyant
(see Monetary and Exchange Rate Policy
, this
ch.). When dollar interest rates soared in the early
1980s,
Indonesia's average interest rate on long-term debt was 16
percent
compared with over 20 percent paid by Brazil and Mexico.
By 1990 Indonesia's total outstanding foreign debt had
reached
US$54 billion, more than double the amount in 1983. Over
80 percent
of this debt was either lent directly to the government or
guaranteed by the government. Measures to reduce foreign
borrowing
together with the rise in export earnings brought the debt
service
ratio from 35 percent in 1989 to 30 percent in 1990
(see Government Finance
, this ch.). Indonesia continued to rely heavily on
borrowing from official creditors rather than private
sources such
as commercial banks or bond issues. In 1990 US$33 billion,
or 75
percent, of government debt was from official creditors;
of this
amount, US$18.5 was at concessional terms. In 1990 US$5
billion in
new loan commitments from official creditors were secured
at an
average interest rate of 5.7 percent, with an average
maturity of
twenty-three years, whereas US$1 billion in new
commitments from
private creditors entailed a 7.4 percent interest rate and
an
average of fifteen years maturity.
The mounting government concern over foreign debt led
to the
establishment of a Foreign Debt Coordinating Committee in
1991,
which included ten cabinet ministers chaired by the
coordinating
minister for economics, finance, industry, and development
supervision. The committee was given broad powers to
document and
coordinate all foreign borrowing that was related to
either the
central government budget or the state enterprise sector.
Although
in theory this debt excluded private-sector foreign
borrowing, such
borrowing could be included if the investment project
received any
state financing or supply contracts from state
enterprises. The
power of this committee was made apparent in its first
initiative
in 1991, which postponed until 1995 four major energy and
petrochemical projects representing a total investment of
US$10
billion.
Multilateral aid to Indonesia was long an area of
international
interest, particularly with the Netherlands, the former
colonial
manager of Indonesia's economy. Starting in 1967, the bulk
of
Indonesia's multilateral aid was coordinated by an
international
group of foreign governments and international financial
organizations, the Inter-Governmental Group on Indonesia
(IGGI--see Glossary).
The IGGI was established by the government of
the
Netherlands and continued to meet annually under Dutch
leadership,
although Dutch aid accounted for less than 2 percent of
the US$4.75
billion total lending arranged through the IGGI for FY
1991.
The Netherlands, together with Denmark and Canada,
suspended
aid to Indonesia following the Indonesian army shootings
of at
least fifty demonstrators in Dili, Timor Timur Province,
in
November 1991
(see Political Dynamics
, ch. 4). The
shootings led to
international protests against government policy in the
former
colony of Portuguese Timor, which had been forcefully
incorporated
into the Indonesian nation in 1976 without international
recognition. Indonesian minister of foreign affairs Ali
Alatas
announced in March 1992 that the Indonesian government
would
decline all future aid from the Netherlands as part of a
blanket
refusal to link foreign assistance to human rights issues,
and
requested that the IGGI be disbanded and replaced by the
Consultative Group on Indonesia
(CGI--see Glossary) formed
by the World Bank.
Indonesia's major aid donors--Japan, the World Bank,
and the
Asian Development Bank
(see Glosssary)--contributed about 80 percent of
IGGI-coordinated assistance, and were willing to continue assistance outside
the IGGI framework. Other
donors,
however, such as the European Community, had charter
clauses
refusing financial assistance to governments that violated
human
rights. Although European Community did not sever its aid
ties to
Indonesia following the 1991 events in East Timor, human
rights
concerns were expected to affect subsequent negotiations
(see Human Rights and Foreign Policy
, ch. 4).
Data as of November 1992
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