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Indonesia's
exports were vital to its economic
development, as exports earned the
foreign exchange that permitted Indonesia'sto
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
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
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
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'ssuccess
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'saverage
interest rate on long-term debt was 16
percent compared with over 20 percent
paid by Brazil and Mexico.
By
1990 Indonesia'stotal
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.). Indonesiacontinued
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'seconomy.
Starting in 1967, the bulk of Indonesia'smultilateral
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
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