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INDONESIA TRADE DIRECTORY ON DISK

1993

TRADEWARE BOX 406 WHITE MARSH VA 23183




TITLE       : INDONESIA - ECONOMIC AND TRADE POLICY -



                             Key Economic Indicators

                   (Billions of 1983 Rupiah (RP) Unless Otherwise Noted)

                                            1989      1990      1991
                                                                (est)
          Income, Production
            and Employment

          Real GDP                         107,321   114,921   122,391
          Real GDP Growth (pct)                7.4       7.4       6.0
          GDP by sector
            Agriculture                     22,086    22,645       N/A
            Mining and energy               16,727    17,198       N/A
            Manufacturing                   19,836    22,182       N/A
            Electricity, gas, water            616       720       N/A
            Construction                     5,878     6,587       N/A
            Retail trade and hotels         17,230    18,772       N/A
            Transport and communications     5,667     6,207       N/A
            Banking                          4,228     4,812       N/A
            Real estate                      2,880     3,012       N/A
            Government                       8,397     8,887       N/A
            Other services                   3,716     3,909       N/A
          Real per capita income (Rp '000)     613       588       631
          Labor force (mils)                  73.6      75.9      78.2
          Unemployment rate (pct)             3.10      3.26       2.8

          Money and Prices

          Money supply (Ml) (pct) 1/          39.8      18.4       6.1
          Interest rates 2/                   12.4      14.5      17.7
          National savings/GDP (pct)          21.4      21.4      22.0
          Investment/GDP (pct)                23.5      24.6      25.0
          Consumer price index 3/ 4/           337       115       126
          Change in CPI 4/                     6.0       9.5       9.5
          Wholesale price index 5/             162       178       185
          Exchange rate (Rp/$) 6/            1,770     1,843     1,950

          Balance of Payments
            and Trade (US$ million)           1989      1990      1991

          Exports FOB                       22,974    26,807    14,300 9/
            Oil and gas                      8,914    11,931     6,000 9/
            Non-oil/gas                     14,060    14,876     8,300 9/
          Imports FOB                      -16,310   -21,455   -12,200 9/
            Oil and gas                     -2,406    -3,222    -1,700 9/
            Non-oil/gas                    -13,904   -18,233   -10,500 9/
          Services (net)                    -7,944    -8,592    -4,700 9/
          Current account                   -1,280    -3,240    -2,500
          Annual official debt service       6,845     6,645     7,196
          Exports to U.S. FOB                3,497     3,365     3,400
          Imports from U.S. CIF              2,218     2,520     1,990
          U.S. direct investment             3,770     3,827       N/A
          Official reserves (end of period)  6,562     8,661     9,754
          Total foreign assistance 8/        4,297     4,156     4,750
            of which U.S.                       90       135       138

1/  Annual growth rate, except for 1991 which is first half of 1991 over
first half of 1990.
2/  Interbank funds rates; 1991 rate is January to June average.
3/  End of period.  For 1989, FY 1977/78 equals 100; starting 1990, FY
1988/89 equals 100; due to change in basis of calculating CPI, comparable
data for earlier years are not available.  Fiscal year is from April 1 to
March 31.
4/ First nine months of 1991.
5/ 1983 equals 100; end of year except for 1991 which is end-June.
6/ Period average; for 1991, period is January to August.
7/ Whole year totals.
8/ Total is amount pledged at the annual Intergovernmental Group on
Indonesia (IGGI) donors' meeting (does not include all special assistance
and aid outside the IGGI context.)
9/ Jan-Jun 1991 total only.


1.  General Policy Framework

   The principal objectives of the Indonesian government's economic policies
are twofold:  to reduce the country's reliance on the oil sector as a source
of foreign exchange and government revenues, and to stimulate job creation
by giving freer rein to the private sector.  Since the early 1980s the
government's strategy has been generally successful in enhancing the
country's economic performance.  Growth in real gross domestic product has
exceeded five percent every year since 1986, and was above seven percent in
both 1989 and 1990.  Due to the government's success in promoting non-oil
exports, the performance of the national economy is less closely tied to the
price of oil:  in FY 1981/82 oil and gas comprised more than 80 percent of
export earnings and 70 percent of domestic revenues; in FY 1990/91 they
contributed 43 percent of export earnings and 45 percent of domestic
revenues.  This progress has been achieved while holding inflation to single
digit levels and maintaining a convertible currency for both current and
capital account transactions.  While underemployment remains a concern, job
creation has generally kept pace with the rapidly expanding work force.

   The government's wide-ranging reforms, known as "deregulation," are aimed
at reducing burdensome regulations and administrative controls.  The reforms
have covered sectors such as banking and capital markets, taxation, customs,
foreign trade, investment, transport, and telecommunications.  The
deregulation program has boosted economic performance and given the private
sector a more prominent role in the economy.  New opportunities for sales in
export and domestic markets have resulted in rapid expansion of the non-oil
manufacturing sector, which since 1983 has grown at an average annual rate
of over 12 percent.  Private investment has also been robust.  Foreign
investment approvals in 1990 exceeded $8.7 billion; domestic investment
approvals were over $30 billion.  Private fixed investment as a percentage
of total fixed investment increased from about 50 percent in the late 1970s
to 61 percent in 1990, underlining the growing role of the private sector in
the economy.

   Strong domestic demand, fueled by vigorous private and public investment,
has strained limited infrastructure and pushed up inflation.  Increased
private sector borrowing from offshore to finance investment has heightened
concern about Indonesia's ability to service the resulting higher levels of
debt.  In addition, the current account deficit in 1990 grew rapidly due to
higher imports and slower growth in exports.  In an effort to reduce
inflation and curb the demand for imports, in mid-1990 the government
responded by slowing monetary growth.  In October 1991 it further decided to
postpone several major projects financed with foreign commercial credits.

   In the longer term, creating jobs for the country's relatively young
population will pose a continuing challenge for economic policymakers.
While the population growth rate has been reduced to just under two percent,
an estimated 2.3 million persons will enter the workforce each year.  The
government estimates that creating jobs for these new entrants will require
annual GDP growth of five percent or better for the foreseeable future.
Another challenge will be completing and consolidating deregulation reform.
Entrenched interests and restrictive regulations in certain sectors continue
to pose obstacles to increasing the flexibility and efficiency of the
economy.  The Government, however, remains fully committed to the process of
deregulation, and more deregulation packages are in preparation.

   Fiscal policy:  The Government is seeking to augment its limited funds
available for development through efforts to increase tax collections; in
each of the last three fiscal years, domestic revenues have increased by at
least 30 percent.  The Indonesian authorities are required in principle to
maintain a balanced budget without borrowing from domestic sources; however,
external debt payments and government salaries together account for about 70
percent of operating expenditures.  Foreign donors therefore finance a major
share of development expenditures through bilateral or multilateral aid
programs.  The current five-year economic plan assigns a large role to
private sector investment as a source of financing for economic growth.

   Monetary policy:  In the conduct of monetary policy, the Central Bank
buys and sells financial paper.  The Government has on occasion ordered
state-owned enterprises to withdraw deposits from the banking system.  It
also provides subsidized credit to financial institutions lending in target
sectors.  In early 1990 the government announced its decision to phase out
these credits and further restricted new credits to a few priority sectors;
between January 1990 and September 1991, outstanding liquidity credits
declined almost 20 percent, from Rp 16.2 trillion to Rp 13.5 trillion
(approximately $6.9 billion).  In 1988 reserve requirements were cut from 15
percent to 2 percent.  Indonesia imposes no capital controls.


2. Exchange Rate Policies

   The government has maintained the convertibility of the rupiah since the
1960s.  There are no foreign exchange controls.  The government follows a
managed float policy based on a basket of major trading currencies,
including the U.S.  dollar.  Current policy is to maintain the
competitiveness of the rupiah through a gradual depreciation against the
dollar, at a rate of about five percent a year.  The exchange rate on
November 1, 1991 was 1,977 rupiah per U.S. dollar.


3. Structural Policies

   In general, the government does not intervene directly to set prices, but
allows the market to determine price levels.  To promote food security, the
government enforces a system of floor and ceiling prices for certain food
products, for example, rice.  In some cases, business associations, with
government support, establish prices for their products.  In mid-1990 the
government, in response to domestic shortages, prohibited the export of
certain types of cement.  In 1990, the government established a new domestic
clove trading system; the purchasing body's clove buying is supported with
Central Bank liquidity credits.  Direct government subsidies are confined to
certain goods such as fertilizers and petroleum products.  The Government is
committed to reducing subsidies for agricultural inputs.  On January 1,
1989, pesticides subsidies were removed.  The fertilizer subsidy has been
reduced annually from 1989 through 1991.

   Individuals and businesses are subject to income taxes.  The maximum rate
is 35 percent of annual earnings in excess of Rp 50 million (about
$25,000).  On April 1, 1985, a value-added tax (VAT) was introduced.  The
level of tariff protection has been reduced.  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.  In October
1989 export taxes on sawn lumber were raised to prohibitive levels.  In July
1988, Indonesia and the United States signed a double taxation agreement,
which entered into force in December 1990.


4. Debt Management Policies

   Indonesia's medium and long term foreign debt, both official and private,
totals about $65 billion.  In 1991 Indonesia will pay approximately $4.7
billion in principal payments and $2.9 billion in interest payments on
public sector debt, or about 26 percent of its projected total export
earnings.  The government is fully committed to meeting its debt service
obligations and has no plans to seek a debt rescheduling.

   In response to the sharp increase in external debt occasioned by higher
private sector offshore borrowing, the government in September 1991 set up a
cabinet-level team 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.  The
announcement of the team's formation stated that financing for purely
private projects is not directly affected.  The team is also charged with
prioritizing the use of offshore funds by project and with establishing
ceilings for government total borrowing by fiscal year.  In October 1991 the
team announced guidelines on public and private sector foreign commercial
borrowing through FY 1995/96 ranging from $5.6 to $6.5 billion total per
year.  It also decided to defer four large projects in the petroleum sector
with a total cost of $9.8 billion.


5. Significant Barriers to U.S. Exports

   By Indonesian law, foreign companies cannot engage in wholesale or retail
distribution of foreign or domestic goods, only Indonesia companies have
this right.  An Indonesian company is defined as comprised of 51 percent
Indonesian ownership and a board of directors consisting of mostly
Indonesian nationals.

   Foreign firms must select an Indonesian agent or distributor to market
their products in Indonesia.  The foreign company may only appoint one sole
agent for the entire country, while an Indonesian firm may enter into
several sole agency agreements.

   Import Licenses:  Since 1986, import licensing requirements have been
relaxed in a series of deregulation packages, the most recent of which were
issued in May 1990 and June 1991.  Items still subject to import licensing
include some agricultural commodities (rice, sorghum, sugar), alcoholic
beverages, and some iron and steel products.  Remaining import licensing
requirements may be waived in some cases for companies importing goods to be
incorporated into subsequent exports.  The importation of most types of
completely built-up passenger vehicles is forbidden.  Tariffs and surcharges
have often replaced licenses as the preferred method of protecting certain
domestically produced goods.  As trade and investment market-opening has
progressed, accompanied by more rapid economic growth, U.S. exports to
Indonesia have increased.

   Services Barriers:  Services barriers abound, although there has been
some loosening of restrictions, particularly in the financial sector.
Foreign banks, securities firms, and life and property insurance companies
are permitted to form joint ventures with local companies; in all cases, the
capitalization requirements are higher than for domestic firms.  Foreign
companies incorporated in Indonesia may issue stocks and bonds through the
capital market.  Foreigners are permitted to purchase up to 49 percent of
all non-bank shares listed on the stock exchange.

   Foreign attorneys may serve as consultants and technical advisors.
However, attorneys are admitted to the bar only if they have graduated from
an Indonesian legal faculty or from an institution recognized by the
government as equivalent.  Foreign accountants may serve as consultants and
technical advisors to local accounting firms.  Air express companies are not
permitted to own equity in firms providing courier services, although they
may arrange with local firms to provide services in their name and provide
expatriate staff to the local firms.

   Indonesia imposes a quota on the number of foreign films which may be
imported in a given year and restrictions are placed on their distribution
within the country.  All U.S.  films must be imported by a group of six
fully Indonesian-owned companies.  In September 1990 the Motion Picture
Export Association of America established a representative office in
Indonesia.  U.S. film producers would like to distribute their films
directly or, as an interim measure, establish joint ventures for this
purpose.

   Standards, Testing, Labelling, and Certification:  In May 1990 the
government of Indonesia issued a decree which stated that the Department of
Health must make a decision within one year of receiving a complete
application for registration of a new foreign pharmaceutical product.  Under
the national drug policy of 1983, a foreign firm may register prescription
pharmaceuticals only if they both incorporate high technology and are
products of the registering company's own research.  Foreign pharmaceutical
firms have complained that copied products sometimes become available on the
local market before their products are registered.

   Investment Barriers:  Although deregulation has reduced the difference in
treatment between foreign and domestic investors, national treatment for
foreign investments does not exist.  With the qualified exception of new
investment on Batam Island, foreign investment must be in the form of joint
ventures.  Usually with minimum Indonesian equity of 15 percent.  With very
limited exceptions, foreign partners must divest over a period of time to
achieve majority Indonesian ownership, according to the law.  Although
wholesale distribution of products manufactured by a joint venture is
permitted, retailing is closed to foreign investors.

   Most foreign investment must be approved by the Capital Investment
Coordinating Board (BKPM).  Line departments handle investment in the oil
and gas, non-oil minerals, financial, and forest concession sectors.  BKPM
maintains a list of sectors closed to further foreign and/or domestic
investment.  There are several provisions under which foreigners may exploit
or occupy land in Indonesia, but only Indonesians may own land.  There are
numerous restrictions on the employment of expatriates by both domestic and
foreign/joint venture firms.

   Government Procurement Practices:  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 generally followed.  Under a 1984
Presidential Instruction ("Inpres-8") on government-financed projects, the
government generally requires concessional financing which at least meets
the following criteria:  3.5 percent interest and a 25 year repayment period
which includes 7 years' grace.  Foreign firms bidding on certain
government-sponsored construction or procurement projects must agree to
purchase and export the equivalent in selected Indonesian products.
Government departments and institutes and state and regional government
corporations are required to utilize domestic goods and services to the
extent they are available (this is not mandatory for foreign aid-financed
goods and services procurement).  An October 1990 government regulation
exempts state-owned enterprises which have offered shares to the public
through the stock exchange from government procurement regulations; as of
October 1991 one such enterprise had made a public offering.


6. Export Subsidies Policies

   Indonesia has joined the GATT Subsidies 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 manufacturing export
products.  Exemptions 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 is not a signatory to the Berne Convention for
the Protection of Literary and Artistic Works, but is considering adhering
to it.  Indonesia has made progress in intellectual property protection, but
it remains on the U.S. Trade Representatives's Special 301 "watch list"
under the provisions of the 1988 Omnibus Trade and Competitiveness Act.

   Patents:  In November 1989 Indonesia enacted its first patent law which
came into effect on August 1, 1991.  Implementing regulations clarified
several areas of concern, but others remain including compulsory licensing
provisions, a relatively short term of protection, and a provision which
allows importation of 50 specific products by non-patent holders.  The
patent law and accompanying regulations include product and process
protection for both pharmaceuticals and chemicals.

   Trademarks:  The government has submitted to Parliament a trademark bill
which it hopes will become law by April 1992; in the interim, a new
trademark regulation broadening the definition of well-known marks was
issued in May 1991.  Several U.S. companies have trademark cases pending
before the Indonesian Supreme Court.  The new law is expected to improve
significantly existing law which makes cancellation of trademarks registered
in bad faith difficult after a nine-month opposition period.

   Copyrights:  On August 1, 1989 a bilateral copyright agreement with the
United States went into effect extending national treatment to each other's
copyrighted works.  Enforcement of the ban on pirated audio cassettes and
textbooks has been vigorous; in September 1991 the government initiated a
crackdown on pirated videos.  The government has also conducted raids
against software pirates, prompting retail outlets to take pirated material
off their shelves.  The government has demonstrated that it wants to stop
copyright piracy and that it is willing to work with copyright holders
toward this end.  Enforcement to date has significantly reduced losses from
pirated property, but problems still exist.

   New Technologies:  Biotechnology and integrated circuits are not
protected under Indonesian intellectual property laws.  Indonesia has,
however, participated in a World Intellectual Property Organization
conference on the protection of integrated circuits and is considering
introducing legislation.

   Impact:  It is not possible to estimate the extent of losses to U.S.
industries due to inadequate intellectual property protection, but U.S.
industry has placed considerable importance on improvement of Indonesia's
intellectual property regime.


8. Worker Rights

   a.     The Right of Association

   Private sector workers, including those in export-processing zones, are
free to form or join unions without previous authorization, but in order to
bargain on behalf of employees a union must meet the requirements for legal
recognition and register with the Department of Manpower.  Less than 6
percent of the 76 million member work force is organized.  The All Indonesia
Workers Union (SPSI), which groups together private sector workers, is the
only recognized intersectoral trade union body.  Unions draw up their own
constitutions and rules and elect their representatives under close
government scrutiny.

   All unionized workers, with the exception of civil servants, have a legal
right to strike.  With a few exceptions, civil servants and employees of
state enterprises must belong to the Indonesian Corps of Civil Servants
(KORPRI), a nonunion association, and do not have the right to strike.  By
government regulation, a separate and compulsory dispute resolution and
appeals process exists for civil servants and public employees to protect
their interests.

   b.     The Right to Organize and Bargain Collectively

   Collective bargaining is provided for by law, but only registered trade
unions can engage in it.  Once an employer is notified that 25 employees
have joined the union, it is under a statutory obligation to bargain.
Workers can organize without restriction in private enterprises.  There are
no laws which prevent bargaining from taking place in export processing
zones, but no companies in the zones which have SPSI units have negotiated
collective bargaining agreements.  If the State has a partial interest, the
enterprise is considered to be in the public domain, but this does not
legally limit organizing.  There is a significant number of
government/private joint ventures which have labor unions and bargain
collectively.  Regulations forbid employers from harassing employees because
of union membership.

   c.     Prohibition of Forced or Compulsory Labor

   Forced labor is strictly prohibited.

   d.     Minimum Age for Employment of Children

   The Department of Manpower acknowledges that there is a class of children
under age 14, which is the legal minimum age for employment, who, for
socio-economic reasons, must work.  Special protections exist for children
aged 7 to 14 and such employment must be with the permission of the child's
parent or guardian.  Employers are required to ensure that these children
have access to junior high education within the framework of the compulsory
schooling law.  The Department of Manpower conducts periodic inspections and
can impose sanctions for violations.

   e.     Acceptable Conditions of Work

   The law establishes 7-hour workdays and 40-hour workweeks with a
half-hour of rest for each 4 hours of work.  Minimum wages are established
by region by Wage Councils working under the supervision of the National
Wages Council.  An extensive body of labor law and regulation provides
workers with vacation pay, maternity leave, public holidays, overtime and
sick pay, severance and service pay, etc.  Workers also receive
transportation and food allowances and holiday bonuses.  Workers in more
modern facilities receive health benefits, social security contributions,
and free meals.  An extensive body of law and regulation provides for
minimum standards of industrial health and safety.

   f.     Rights in Sectors with U.S. Investment

   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 pharmaceuticals 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 control 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 contracts 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 etc. applies to all sectors.  The best
industrial and safety record in Indonesia is found in the oil and gas sector.



            Extent of U.S. Investment in Goods Producing Sectors

                   U.S. Direct Investment Position Abroad
                      on a Historical-Cost Basis - 1990
                         (Millions of U.S. Dollars)

Category                                         Amount

Petroleum                                         3,209
Total Manufacturing                                 135
          Food & Kindred Products                  (D)
          Chemicals & Allied Products                72
          Metals, Primary & Fabricated               10
          Machinery, except Electrical             (D)
          Electric & Electronic Equipment            -1
          Transportation Equipment                    0
          Other Manufacturing                      (D)
Wholesale Trade                                    (D)

TOTAL PETROLEUM/MANUFACTURING/WHOLESALE TRADE      (D)

(D)-Suppressed to avoid disclosing data of individual companies

Source:  U.S. Department of Commerce, Survey of Current Business
          August 1991, Vol. 71, No. 8, Table 11.3