EL NIÑO QUE SE ESTÁ DESARROLLANDO

since 2003, the investment ratio (investment/GDP) has tended to increase, albeit still considered low. In 2007, the investment ratio in Indonesia was about 24.9%, much lower than that of China which was around 33% to 50%. In light of this, much remains to be done by the government to foster higher growth of productive investments so that the investment ratio can at least achieve the pre-crisis level of 30%. Particularly, various hurdles hampering the progress of investments need to be resolved, such as those in infrastructure construction projects as well as to encouraging more inward foreign direct investments.

3. Major Policies Related to Foreign Direct Investments and Domestic Investments

Considering the importance of encouraging investments to spur higher and sustainable economic growth, the Government has implemented some major policies, both direct and indirectly, for foreign direct investments and domestic investments. During the 1980s, the Government announced deregulations in the financial sector, as a strengthened and competitive financial sector is important for supporting economic activities, including investments. The deregulation also affected both the current and capital accounts.

Banking sector deregulation took place on 1 June 1983, and became the starting point of a more market based monetary policy framework (i.e., liberalising interest rates, streamlining Bank Indonesia’s liquidity credit, abolishing credit ceilings, and concurrently introducing new indirect instruments, namely open market operations). With this deregulation, state banks were allowed to determine the deposit and credit rates on their own. By moving towards a more market based system, the Government expected the state banks to be more competitive,

Graph 16: FDI to GDP Ratio Graph 17: Investment Ratio (DI/GDP)

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in order to improve their financial intermediation function in the economy, and thereby play a more important role in financing economic activities efficiently. In relation to export-import activities, efforts to promote more competitive business climate was supported with the issuance of Presidential Instruction no.4/1985 that allowed private surveyors to check the export-import of goods. In the following year, the Government released the regulation that completely removed the export certificate (SE), which took effect on 6 May 1986 (SE is a facility for an exporter to attain free tax and subsidy).

Furthermore, in 1987, the Government released three policies: the first policy is related to current account liberalisation, the second policy to promote domestic investment, and the third aimed at enhancing foreign direct investment. The first policy was the deregulation of the automotive industry, machine industry, electrical machinery, and import tariff reduction. The Government reduced tariffs for goods such as textile, cotton and iron-steel. Along with this policy, the Government also simplified the procedure for business approvals in the machine industry as well as the procedure for assembling automobiles and to assemble and build automotive parts. These policies were implemented on 15 January 1987. The second policy were the Government Regulation No.13, 1987 and the Presidential Decree No. 16, implemented on June 1987. The Government simplified the procedure for obtaining permission to invest in sectors such as mining, agriculture, health, and manufacturing. On 24 December 1987, the Government released the third policy to promote foreign direct investment and exports, whereby the procedures for FDI and domestic investments were simplified. Moreover, the Government also simplified the approvals for exports, to create economic competitiveness. Furthermore, in November 1988, a measure to reduce restrictions in the distribution of products by foreign factories was issued.

More broadened financial reforms were introduced aggressively in late 1980s, starting with the deregulation in the banking sector and foreign exchange transactions, and subsequently followed by deregulation in the capital market and foreign direct investments. The deregulation was aimed at attracting foreign capital and creating a conducive environment for investments. The “October 1988 Package Policy” was intended to increase the degree of monetisation in the economy through broadening the opportunity for opening banks and branches, facilitating the operations of joint ventures of foreign banks with local partners in six major provincial cities, and smoothening the conversion of national private banks into foreign exchange banks.

In May 1989, restrictions on foreign direct investment were also relaxed. In addition, the priority list of open and closed sectors used by Indonesia’s Investment Coordinating Board (BKPM) to approve investments was replaced by a simplified “negative list” of closed sectors.

In the capital market, Government reforms were initiated in October 1987 and December 1988. These measures were aimed at fostering development of the capital market with a view to boost investor confidence and improving investment climate. Since then, foreigners are allowed to purchase stocks in the domestic capital market, while foreign securities companies are permitted to form joint ventures with local partners. In 1995, a new capital market law was enacted to strengthen the legal foundation of the market

Policy measures issued in the 1980s have helped investments to grow quickly, especially foreign direct investments. The share of foreign direct investments to GDP and investments to GDP had improved significantly (Graph 16 and 17). This has proven that government policies were effective in promoting foreign direct investment in 1980s. The Government has continued to implement other policies related to both domestic investments and foreign direct investments before the Asian financial crisis started in the middle of 1997.

In the 1990s, the Government continued its endeavour to foster investments and exports. Starting in May 1990, the Government issued the deregulation package covering four development sectors of manufacturing, trade, health, and agriculture. In 1991, it implemented another deregulation packet in June to cover five areas, i.e., investment, manufacturing, agriculture, trade, and financial sectors. The deregulation also removed the monopoly power of state companies for the importation of certain goods such as food, fruits, and meat. The Government also allowed state companies which have the licenses, to import commercial cars. This policy immediately increased the importation of commercial vehicles causing prices in the domestic market to drop, thus enhancing market competitiveness.

Further measures were introduced to promote foreign investments, particularly related to market access (as stipulated in the Government Regulation No. 20/1994 and amended by the Government Regulation No. 83/2001 concerning Equity Ownership for Foreigner Investors) and import tariff reduction. The easy market access for foreign investors is allowed in any sector of the economy for which equity ownership is permissible up to 100%, except for banking and finance companies. For insurance businesses, foreign investors are permitted to own equity up to 85% whereas it is up to 99% for banking and securities companies.

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Like most countries, Indonesia still maintains some restrictions on sectors that are considered strategically important to the country and which serve as public goods. For instance, investments in infrastructure projects such as ports, electric power plants, telecommunications, shipping lines, airlines, potable water, public railways, atomic energy reactors and mass media can only be in the form of joint ventures between foreign and local partners. The share of the domestic partner in a joint venture company shall be at least 5% of the total paid-up capital upon its establishment. The Government also boosted domestic investments by deregulation policies in the automotive and wheat industries in 1993.

One year before financial crisis began, the Government released 11 deregulations related to current account liberalisation. Among them is the removal of the ceiling on the exports and imports of foreign factories in 1996. With the depreciating Rupiah against the US Dollar when the Asian financial crisis started in mid 1997, the Government implemented a package of deregulations in July 1997 to support current account liberalisation. It reduced the import tariffs of 1600 variant products, among of which included agriculture, trade and health products. This regulation was followed by the Rules related to both national and regional tax revenue. It also regulated bank credit in land procurement and processing.

The highest reduction of import tariff was in the industry, agriculture and health sectors consecutively. The Government implemented the Ministry of Finance Decree to reduce the export tariffs on palm oil, palm oil seed, and Crude Oil Palm (CPO) from 30% to 10%. These policies were aimed at promoting exports, thus affecting the current account. The deregulation package resulted in the reduction of the import tariff in average, from 13.0% to 11.9%. The deregulation also permitted private companies to import sugar which was monopolised before by the Bureau Logistic (state company).

The Government also allowed the import of used ships in the deregulation. Meanwhile, export procedures were simplified by increasing the amount on the report value for export (PEB) meaning that only export values of more than 300 million rupiah need be reported which previously was for 100 million rupiah. As the result, small and medium scale companies could export their products up to a value of 300 million rupiah without PEB.

Structural reforms in various areas have improved economic stability and supported stronger economic performance in the 2000s. The balance of payments had recorded surpluses in the 2000s, mainly on the strength of the current account fuelled by more vigorous exports. Global economic trends marked by continued

solid external demand primarily from developing economies and strong commodity prices, contributed to the strong performance of the current account surplus (Graph 18).

To promote domestic investments, the Government also provided similar facilities to private companies for FDI. These included the duty free importation of materials and capital goods for two years. The impact of these policies implemented on July 1997, resulted in an investment growth of 8.6%. Investment also increased from 397 trillion rupiah in 1996 to 431 trillion rupiah in 1997.

Act No. 5, 1999 on privatisation policies were aimed at resolving the crisis problem in Indonesia by the Government and Legislative Council. In 2005, the Government also released four policies packages for the energy, monetary, fiscal, and investment sectors to promote investments and in anticipation of oil price increases and the depreciation of Rupiah against the US Dollar.

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Finally, the Government released Presidential Decree No.3, 2006, to support the investment climate. The area covered included general, customs, tax, labour, and small-medium scale businesses and cooperation (Table 1). The results of these policies were that in the following year, investments increased by 9.16% from Rp403 trillion in 2006 to Rp440 trillion in 2007.

In conclusion, Government policies after the financial crisis focused on encouraging investments, especially when foreign direct investments, dwindled in the aftermath. Deregulation polices implemented by the Government supported the investment climate while others were aimed at enhancing current account performance. With current account liberalisation, the business climate became more competitive and attracted foreign investments to Indonesia.