98-4851 MOREPRESS RELEASE
PRESS/TPRB/94
1 December 1998
 INDONESIA MUST CONTINUE ECONOMIC REFORMS WHILE
SAFEGUARDING ACCESS TO KEY EXPORT MARKETS
Indonesia, in its worst economic recession since 1963, must continue to implement reforms
and stabilization programmes if it is to revitalize its economy. For their part, Indonesia's trading
partners should resist domestic protectionist pressures and help Indonesia regain economic stability by
remaining open to the country's exports.
A new WTO report on Indonesia's trade policies and practices states that the economic crisis
which began in mid-1997 put an end to 35 years of continuous economic growth. Inflation is expectedto reach between 80 and 100% by the end of this year, up from an average of  10% during the years of
high economic growth. In the first half of 1998, Indonesia's GDP shrank by 12% and is expected to
fall by 10 to 15% for the year as a whole.
The WTO's report and a policy statement by the government of Indonesia will provide the
basis for two days of discussion at the WTO on 3 and 4 December 1998.
According to the WTO's report, the causes of th e recent financial and currency turmoil can be
attributed to both external and internal factors. The sudden withdrawal by international investors from
Asian financial markets in mid-1997 was compounded by internal developments such as the growinguncertainty about economic, social and political stability in Indonesia. The result has been a major
loss of confidence in Indonesia's immediate prospects of economic recovery.  The crisis revealed
long-standing impediments to growth, which have, over time, contributed to unduly high costs for the
economy as a whole.  These impediments include the many trade distortions that have survived the
wave of liberalization in the 1980's and 1990's.  In response, the authorities undertook to acceleratethe pace of reforms, to engage in a major review of anti-competitive practices (including monopolies,
oligopolies and cartels) and to restructure the banking system.
The WTO's report states that Indonesia ought to accelerate these reforms if it wants to restore
past gains achieved by trade liberalization efforts.
While Indonesia's investment regime is now open, the WTO report notes that the increasing
use of tax incentives for investment is worrisome as it tends to encourage over-investment in non-
competitive sectors, increases tax revenues foregone at a difficult time for the budget, and contributes
to regional tax competition. According to the report, Indonesia's continued pursuit of policies aimed at
achieving a more stable and transparent business environment, including the modernization andEMBARGO: NOT FOR PUBLICATION
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MOREenforcement of laws, would constitute a more effective way of attracting foreign investors.
Since 1994 Indonesia has significantly reduced its applied tariffs, with the lowering of rates
going well beyond Indonesia's WTO commitments.  Applied MFN tariffs have been reduced from an
unweighted average of about 20% in 1994 to 9.5% in 1998. In 1998, tariffs on food items were
reduced to a maximum of 5%.  Nevertheless, high tariffs continue to protect beverages, motorvehicles and textiles and clothing.  Indonesia committed itself to reduce the maximum applied tariff
for all products to 10% by 2003.  Besides tariffs, Indonesia has undertaken to remove all non-tariff
barriers and export restrictions, that, until the financial crisis, continued to affect a large share of the
economy (10% of imports, 40% of exports, 30% of  production). In the sectors concerned, these
measures were often combined with other forms of assistance, including restrictions on domestic
trade, price fixing and subsidies, all of which aimed at providing protection to local producers on
various grounds (including infant industry protect ion, management of natural resources or simply
favouritism).  Accordingly, restrictive licensing requirements and local content programmes are
gradually being phased out.  Quantitative restrictions on exports are being converted into taxes, whose
rates are to be reduced to a maximum of 10% by year 2000.
Since the beginning of the crisis, Indonesia has also deregulated trade in the main agricultural
commodities (except rice, for social reasons), terminated production and trade monopolies in certain
intermediate industries (cement, plywood, rattan) and reduced export taxes on wood.  However, with
the devaluation of the Rupiah increasing the cost of imported food, it has been important that
deregulation not trigger further price increases.  The report notes that large subsidies are still
necessary to stabilize domestic prices of essential foodstuff.
Overall, the authorities can be praised for having, in such difficult circumstances, resisted
potential protectionist pressures, including the temptation to use the leeway to raise tariffs allowed by
the growing gap between bound and applied MFN rates (about 25% at present).
Nevertheless, the restoration of confidence in the Indonesian economy will also entail the
establishment of more rules-based, competition-oriented internal policies.  In the past, the position of
large conglomerates and all kinds of cartels and marketing arrangements have been facilitated by the
absence of clear competition rules and a certain tolerance of anti-competitive practices.
Conglomerates have been the main beneficiaries of Government support, namely the tax incentives,subsidized lending, production licenses, and trade privileges.  While these conglomerates contributed
to Indonesia's expansion in the past, the outcome was a concentration of production and of private
debts in the hand of a few business groups.  While the Government has terminated several monopolies
since the onset of the crisis, further progress could be achieved in strengthening the competition
framework, introducing greater transparency in the attribution of Government loans and subsidies,
and effectively enforcing existing laws and regulations in the area of Government procurement.
Prior to the crisis, Indonesia's selective approach to trade and investment liberalization created
"winners", namely the beneficiaries of continued protection or assistance, and "losers", that is the
firms, who either did not benefit from privileges or were adversely affected by them.  Since the crisis,
there has been a growing realization that such distortions constitute major impediments to Indonesia's
competitiveness.
The trade and investment policies followed by the Government in the past two decades have
generally been beneficial to the manufacturing sector.  Average MFN tariffs are low (well under
10%), except for chemicals and motor vehicles, and all industries are open to FDI.  However, some
parts of manufacturing continued to be assisted by high and escalating tariffs (automobile, textiles andclothing), restrictive licensing (petro-chemicals), restrictive marketing arrangements (cement, paper)
and export taxes (wood products).  These measures, which are legacies of old import-substitutionPRESS/TPRB/94
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MOREpolicies, threaten the competitiveness of the industries concerned.  The Government is committed to
removing most of them under the present reform programme.
Indonesia is gradually abandoning its traditional reliance on Government control and public
monopolies in services.  Infrastructural services (telecommunications, water supply, electricity) have
been largely opened to FDI, financial services have been deregulated, and significant commitments
were made in the GATS.  Since the beginning of the crisis, Indonesia removed remaining restrictions
on FDI in services and, as part of its efforts to restructure its financial sector, further relaxedownership limits in banking.  The Government is considering a further opening up of the
telecommunications services.
The report notes that current reforms should therefore be seen as a continuation, or, indeed, an
acceleration, of the kinds of trade and investment policies that have greatly contributed to Indonesia's
economic development and integration in the world economy over the past decade. Full
implementation of these reforms, together with Indonesia's WTO commitments, could help Indonesiato stabilize its economy by 1999 and return to economic growth by 2000.  The WTO's report
concludes that the success of these reforms in fostering Indonesia's eventual economic recovery
depends crucially on a pick-up in exports, which itself relies heavily on the maintenance of a stable,
predictable and open international trading system.  For their part therefore, WTO Members, many of
whom already provide substantial financial and technical assistance to Indonesia, can lend furthersupport to Indonesia's unilateral economic and trade reforms by resisting domestic protectionist
pressures.
Notes to Editors
The WTO's Secretariat report, together with a policy statement prepared by the Indonesian
Government, will be discussed by the WTO Trade Policy Review Body (TPRB) on 3 and 4 December
1998. The WTO's TPRB conducts a collective evaluation of the full range of trade policies and
practices of each WTO member at regular intervals and monitors significant trends and developments
which may have an impact on the global trading system. The Secretariat report covers the
development of all aspects of each of Indonesia's trade policies, including domestic laws andregulations, the institutional framework, trade policies by measure and by sector. Since the WTO
came into force, the new "areas" of services and tr ade-related aspects of intellectual property rights
are also covered.
To this press release are attached the summary observations from the Secretariat report and a
summary of the government policy statement. The full Secretariat and government reports areavailable for journalists from the WTO Secretariat on request (call 41 22 739 5019). They are also
available for the press in the newsroom of the WTO internet site (www.wto.org). The Secretariat
report, together with the government policy statement, a report of the TPRB's discussion and the
Chairman's summing up, will be published in hardback in due course and will be available from the
WTO Secretariat, Centre William Rappard, 154 rue de Lausanne, 1211 Geneva 21.
Since December 1989, the following reports have been completed: Argentina (1992),
Australia (1989, 1994 & 1998), Austria (1992), Bang ladesh (1992), Benin (1997), Bolivia (1993),
Botswana (1998), Brazil (1992 & 1996), Burkina Faso (1998), Cameroon (1995), Canada (1990,
1992, 1994 & 1996), Chile (1991 & 1997), Colombia (1990 & 1996), Costa Rica (1995), Côte
d'Ivoire (1995), Cyprus (1997), the Czech Republi c (1996), the Dominican Republic (1996), Egypt
(1992), El Salvador (1996), the European Communities (1991, 1993, 1995 & 1997), Fiji (1997),
Finland (1992), Ghana (1992), Hong Kong ( 1990 & 1994), Hungary (1991 & 1998), Iceland (1994),
India (1993 & 1998), Indonesia (1991 and 1994), Is rael (1994), Jamaica (1998), Japan (1990, 1992,
1995 & 1998), Kenya (1993), Korea, Rep. of (1992 & 1996), Lesotho (1998), Macau (1994),
Malaysia (1993 & 1997), Mali (1998), Mauritius (1995), Mexico (1993 & 1997), Morocco (1989 &
1996), New Zealand (1990 & 1996), Namibia (1 998), Nigeria (1991 & 1998), Norway (1991 &PRESS/TPRB/94
Page 5
MORE1996), Pakistan (1995), Paraguay (1997), Peru ( 1994), the Philippines (1993), Poland (1993),
Romania (1992), Senegal (1994), Singapore (1992 & 1996), Slovak Republic (1995), the Solomon
Islands (1998), South Africa (1993 & 1998), Sri La nka (1995), Swaziland (1998), Sweden (1990 &
1994), Switzerland (1991 & 1996), Thailand (1991 & 1995), Trinidad and Tobago (1998), Tunisia
(1994), Turkey (1994 & 1998), the United States (1989, 1992, 1994 & 1996), Uganda (1995),
Uruguay (1992 & 1998), Venezuela (1996), Zambia (1996) and Zimbabwe (1994).PRESS/TPRB/94
Page 6
MORETRADE POLICY REVIEW BODY
INDONESIA
Report by the Secretariat - Summary Observations
The period under review (1994-98) has been one of great contrast for Indonesia.  After three
decades of continuous growth fostered by political, social and macro-economic stability, the Asian
economic crisis of 1997 has sown the seeds of major change in Indonesia's economy and politicalsystem.  The crisis, and the subsequent fall in GDP, the largest among ASEAN countries, revealed
underlying weaknesses in Indonesia's economic and financial structures, which prompted calls for
reform.  Subsequently, Indonesia embraced a programme of measures aimed at stabilizing the
economy, restructuring its ailing banking system, and creating the conditions conducive to a more
efficient, market-based allocation of resources in several key sectors.
Trade and foreign direct investment have been at the heart of Indonesia's economic policy
during the review period.  In 1994-96, the pace of trade and investment reforms had slowedsomewhat, compared with previous years, with liberalization proceeding in a selective manner.  In the
face of the recent economic crisis, however, the Government undertook to accelerate the pace of
reforms and to remove many remaining restricti ons on domestic and international trade.  These
reforms involve, inter alia, a major review of anti-competitive practices, including monopolies,
oligopolies and all other restrictive marketing arrangements that had survived Indonesia's tradeliberalization in the last decade.  This will contribute to a "levelling of the playing field" across many
sectors, creating a more open, competitive marketplace, where few firms will remain protected.
ECONOMIC ENVIRONMENT
In the period under review, the Indonesian economy went from high growth to deep
recession.  From 1994 to 1996, real GDP grew on average by 8% annually.  Although economic
activity started to decelerate in the second half of 1996, the financial crisis of 1997 transformed a soft
landing of the Indonesian economy into a serious recession.  In the first half of 1998, GDP shrank by
12%, and is expected to fall by 10-15% for the year as a whole.  In addition, inflation has climbed
from an average of 10% in the years of high growth to an expected rate of 80-100% at the end of1998, with the sharp devaluation of the rupiah playing a role, particularly through higher prices of
imported food.  These have also raised the cost of food subsidies and have contributed to the budget
moving from a small surplus in the 1996/97 fiscal year to a projected deficit of 8.5% of GDP in
1998/99.
Indonesia's international trade has also been seve rely affected by the recession in the country
and elsewhere in Asia.  Imports, which increased by nearly 27% in 1995, declined by 3% in U.S.
dollar value in 1997 before falling by 30% in the first quarter of 1998, under the combined effects of
the drop in domestic demand, the devaluation of the rupi ah and a decline in trade finance.  Exports, a
major element that could have stimulated activity in current circumstances, have fallen (in value
terms) as a result of the slump in demand elsewhere in Asia and the marked decline in domestic
production, generated in part by the lack of imported inputs, with the trade finance factor and a
serious shortage of containers also playing their role.
The causes of the financial and currency turmoil are multiple and complex.  External factors,
such as the withdrawal of international investors from Asia in the wake of the Thai, Philippines and
Korean crises, were compounded by internal developments, particularly growing uncertainty about
economic, social and political stability in Indonesia.  The outcome was a major loss of confidence in
Indonesia's immediate prospects.  Macroeconomic imbalances have not been the source of marketconcern in the case of Indonesia.  Instead, a late change of perception about the soundness of thePRESS/TPRB/94
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MOREfinancial system led to a dramatic reassessment of the economic risk, and, as economic conditions
deteriorated, a re-evaluation of the political and social risks.  The reversal of market sentimentcorresponded to the excessive optimism prevailing before the crisis, which led investors, and possibly
the international community, to underestimate th e risks associated with economic activities in
Indonesia.  The significant devaluation of the rupiah, while improving export competitiveness helped
slow imports, and may have contributed to a rapid transmission of the crisis to the real economy.  As a
consequence of these factors, Indonesia is into its worst recession since 1963.
In response, the authorities decided on the need for reform to restore confidence and set the
conditions for stable sustainable growth.  They have reiterated Indonesia's commitment to stable
macroeconomic policies, started to restructure the banking sector and addressed long-standing
structural impediments to growth, many of which had been identified in the course of previous Trade
Policy Reviews.  These impediments include the many trade distorting barriers that survived the wave
of liberalization in the 1980s and 1990s, and which have, over time, contributed to unduly high costs
for the economy as a whole.  The issue of Indonesia' s competitiveness had in fact already become a
concern in 1996, when growth in exports, a main economic strength, started to decelerate.
As reforms will inevitably take time, the recovery of the Indonesian economy is unlikely to be
rapid.  After the collapse of activity in 1998, the most optimistic scenarios forecast a stabilization of
the economy in 1999 and a recovery in 2000.  Consequently, the living standards of Indonesians as a
whole cannot be expected to return to their pre-crisis levels before the early years of the next century.Before the crisis is over, however, a substantial proportion of Indonesia's population will have  slipped
back below the poverty line.
Institutional Framework
Whereas during the past three decades, Indonesia's institutional and political structures were
characterized by a high degree of stability, the economic crisis that arose in the second half of 1997
created the conditions of a major political transition, involving the preparation of free democratic
elections and the elaboration of  a new constitution.
Until the recent financial crisis, there were few changes in administrative responsibilities
concerning economic policy, apart from the merging in 1995 of the Ministry of Industry and theMinistry of Trade into one single entity, the Ministry of Industry and Trade, which is now responsible
for all domestic and international trade matters.  Since the crisis, however, important changes have
been introduced to implement the programme of economic reforms.  The National Economic and
Financial Resilience Council, a body chaired by the President of the Republic, was established to
supervise implementation of the reform programme.  Bank Indonesia was granted autonomy over theformulation and the implementation of monetary policy.  The supervision of state-owned enterprises
was transferred from line Ministries to a newly-created Ministry for State-Owned Enterprises and a
Privatization Board was established.  Finally, the Government created the Indonesian Bank
Restructuring Agency (IBRA), a financial body responsible for the restructuring of Indonesia's ailing
banks.
Indonesia's legal system, particularly the laws and regulations pertaining to business, has been
modernized.  Prior to the financial crisis, Indonesia had already revised its Company Law andintroduced new Customs and Intellectual Property Rights laws in order to give full effect to
obligations undertaken in the context of WTO Agreements.  Since the beginning of the crisis, the
process of legal reform has accelerated.  A major review of the Bankruptcy Law, the Banking Law,
the Central Bank Law, the Company Law and liquidation regulations is underway.  Other priorities
involve the establishment of a more effective Commercial Court System and the introduction ofclearer competition rules.  Continued progress in these areas would make a major contribution to
restoring the international business community's confidence in Indonesia.PRESS/TPRB/94
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MOREFollowing significant liberalization in the period 1993-95, and, as a result of the reforms in
1998, Indonesia's investment regime is now very open.  Partly as a result, Indonesia has attractedunprecedented amounts of foreign direct investment (FDI) since the 1994 Trade Policy Review.
While reflecting a legitimate desire to maintain it s locational advantage, the increasing resort to tax
incentives for investment may be worrisome as it tends to encourage over-investment in non-
competitive sectors, increases forgone tax revenues at a difficult time for the budget, and contributes
to regional tax competition (with Indonesia not the only country in the region using investmentincentives).  Instead, Indonesia's continued pursuit of policies aimed at achieving a more stable and
transparent business environment, including th e modernization and enforcement of laws, will
arguably constitute a more effective way of attracting foreign investors.
TRADE POLICY BY MEASURE
During the early part of the review peri od (1994-96), when economic growth was high,
Indonesia continued to deregulate in a pragmatic and gradual manner.  This approach neverthelessallowed the process to be highly selective and excluded some major sectors from reforms.  Since the
onset of the financial crisis, however, Indonesia has decided to extend reforms to even the most
protected areas of its economy.  With full implementation, these reforms will make the present period
under review a watershed in the process of liberalization.
Border measures
One of the most notable achievements during the review period was the significant reduction
of applied tariffs, with the lowering of rates going well beyond Indonesia's WTO commitments.
Applied MFN tariffs have been reduced from an unw eighted average of about 20% in 1994 to 9.5% in
1998.  Further unilateral tariff cuts are scheduled up to 2003 in accordance with a clearly defined
programme of tariff reduction.  By 2003, the maximum applied tariff for nearly all products will notexceed 10%.  Already in 1998, tariffs on food items have been reduced to a maximum of 5%.
Nevertheless, high tariffs continue to protect a few products such as alcoholic beverages, motor
vehicles, certain basic chemicals, and, to a lesser extent, leather and textiles products.  While the
erosion of tariff peaks and gradual reduction of all rates will alleviate the distortions embodied in the
tariff schedule, notably the level of escalation, the process is still incomplete.  Producers of finalgoods in the manufacturing sector generally, and in the textiles and clothing and wood industries, in
particular, continue to benefit from substantial tariff escalation.
Until the financial crisis, limited progress had been made in removing the array of non-tariff
barriers (NTBs), such as import monopolies and restrictive licensing, as well as export controls, which
continued to affect up to 10% of imports, 40% of non-oil exports and 30% of production.  In thesectors concerned, NTBs and export measures were often combined with other forms of assistance,
including restrictions on domestic trade, price fixing and subsidies, all of which were aimed at
providing implicit or explicit protection on various grounds (including infant industry protection,
security of food supply, management of natural resources or favouritism).  As a result, the list of
products benefiting from some form of protection or assistance was still extensive when the crisis
broke late in 1997, covering most strategic food commodities, mining and wood resources, key
intermediate industrial goods (fertilizers, cement, iron and steel) and transport equipment.
The removal of trade restrictions is at the centre of Indonesia's current reform process.
Besides the tariff reduction programme, Indonesia has undertaken to remove all non-tariff barriers and
export restrictions not justified on health, safety or environmental grounds by the end of the century.
Accordingly, the number of tariff lines covered by import licensing requirements has fallen
substantially (by half, overall, since the last Trade Policy Review, taking into account the fulfilmentof WTO commitments).  Furthermore, local content programmes are gradually being phased out.
Restrictions on exports are also being removed.PRESS/TPRB/94
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MOREMore specifically, Indonesia deregulated trade in  the main agricultural commodities (except
rice and soybeans, for social reasons), terminated production and trade monopolies in certainintermediate industries (cement, plywood, rattan), and reduced export taxes on key commodities
(wood).  Further deregulation of trade, particularly additional cuts in tariffs and export taxes, is
scheduled over the next two years. It is also noteworthy in this time of crisis that Indonesia has
resisted protectionist pressures, including the temptation to use the leeway to raise tariffs allowed by
the growing gap between bound and applied rates.
Internal measures
The restoration of confidence in the Indonesian economy will also entail the establishment of
more rules-based, transparent and competition-oriented internal policies.  In the past, internal policies
contributed to the consolidation of the position of large public and private conglomerates, which
continued their expansion in the absence of clear competition rules and a certain tolerance of
restrictive marketing arrangements and cartels.  In addition, these conglomerates benefited from tax
incentives, tax exemptions, subsidized lending, production licenses and other formal and informalGovernment support. During the review period, conglomerates continued to dominate key sectors
such as agri-food, steel, basic chemicals, pharmaceuticals, forestry and wood products, paper and
communications.  They often received these internal (a s well as external) privileges in return for their
implementation of the Government's industrialization objectives.
The authorities have moved to address a number of shortcomings in Indonesia's competition
and regulatory framework pertaining to business and in its protection of intellectual property rights.
Since the crisis, the Government has terminated numerous production and distribution monopolies in
the cement, plywood, paper, cloves and other sectors.  Indonesia also intends to introduce a
consolidated competition framework by the end of 1998 and is committed to enhanced transparency
both in the granting of subsidies and loans for Government-sponsored projects and for the upcominground of privatization.  The economy might also benefit from more streamlined, efficient and
effectively enforced government procurement practices.
TRADE POLICIES BY SECTOR
Prior to the crisis, trade and investment liberalization had affected some sectors more than
others.  The provision of assistance or protection for selected sectors produced "winners", namely the
net beneficiaries, and "losers", that is the firms who either did not benefit from privileges and
protective measures, or were adversely affected by them.  Since the crisis, however, there has been a
growing realization that such distortions to compe tition constitute a major impediment to improving
the competitiveness of the Indonesian economy.  Consequently, since late 1997, Indonesia has to alarge extent deregulated trade and distribution in agriculture, eliminated certain protection and trade
privileges in manufacturing, and prepared further steps to liberalize telecommunications and financial
services.  Together, these measures are integral to Indonesia's economic recovery.
Agriculture
While liberalization in agriculture as well as in forestry lagged behind that of the rest of the
economy until 1997, domestic and international trade was largely deregulated in late 1997 and early
1998.  Imports have been the most affected, with a large reduction in tariffs and the removal ofBULOG's monopoly rights concerning all commodities under its control (except rice, for social
reasons).  Obstacles to domestic trade are also being removed and export controls substantially
relaxed.
Although the long term benefits of these reforms are evident, there are difficulties in
liberalizing agriculture under the present difficult economic and social conditions.  With thedevaluation of the rupiah increasing the cost of imported food, it has been socially important thatPRESS/TPRB/94
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MOREderegulation not trigger further price increases.  La rge subsidies are currently necessary to stabilize
domestic prices of essential food items (including rice and cooking oil).  In addition, with thedevaluation of the rupiah, a number of agricultural items, in which Indonesia is self-sufficient, such as
palm oil, became very competitive in the world market.  It was thought that this could lead to
domestic shortages, if exports materialized, and add to inflationary pressure.  To deal with these
difficulties, the Government introduced temporary export bans on rice, wheat, wheat flour and other
basic commodities;  these bans were converted into export taxes in September 1998.
Manufacturing
The trade and investment policies followed by the Government during the past two decades
have been extremely beneficial to the manufacturing sector.  These policies have been continued
during the period under review.  Applied MFN tariffs in manufacturing have been lowered to a simple
average of 9.7% in 1998.  The average collected duty is even lower, given that a high proportion of
production and trade takes place in duty-free zones. The opening up of nearly all industries to FDI
between 1993 and 1995 helped attract large amounts of FDI.
Despite liberalization, some parts of manufacturing continued to be assisted by high and
escalating tariffs (automobiles, textiles and garments), restrictive licensing (certain petro-chemicals),
administratively determined local-content requireme nts (transport equipment), restrictive marketing
arrangements (paper, cement) and export taxes (wood products).  While these policies have
encouraged the shift of production towards higher value-added products, by driving prices and costsabove import-competing levels, they also threatened the long-term competitiveness of the industries
concerned.  In the context of the present reform programme, the Government is taking steps to
remove trade restrictions affecting these industries.
Services
The expansion of services has gone hand-in-hand with the overall development of the
economy, which generated needs for telecommunications, transport or financial services, and with a
change in policy focus.  In areas such as telecommunications, aviation and financial services,
Indonesia gradually abandoned its reliance on government control and public monopolies.  As a
result, infrastructural services (telecommunications, water supply, electricity) were largely opened to
FDI in 1994-95;  financial services were deregulated in the late 1980s and early 1990s; and in theperiod under review, competition was introduced in certain segments of the telecommunications and
air transport market.
Reflecting the domestic reform process and external deregulation, foreign access to the
Indonesian services market has increased.  In the Uruguay Round, Indonesia made specific
commitments in several services areas in the GATS, and it added to these in the recent WTOnegotiations on telecommunications (1996) and financial services (1997), thereby contributing to their
successful conclusion.  Services are already largely open to FDI.  In 1994 basic infrastructure was
opened to foreign investors, provided a 5% minimum of Indonesian equity was maintained.  This
encouraged foreign firms to invest in teleco mmunications and power generation, where they have
become major operators.  In 1998, the (main) remain ing restriction on FDI in services, i.e. that on
domestic (wholesale and retail) trade, was removed.  As part of its efforts to restructure the financial
sector, the Government is currently considering relaxing the remaining limits on foreign ownership inbanking.
TRADE POLICIES AND FOREIGN TRADING PARTNERS
The broad direction and objectives of Indonesia's trade and investment policies have not
changed during the review period, but have been given renewed impetus by the present crisis.  Prior toPRESS/TPRB/94
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MORE1997, trade and investment liberalization already proceeded to a large extent on a unilateral basis,
with the benefits of such liberalization being exte nded on an MFN basis.  Current reforms are also to
be implemented on an MFN basis. In several cases, they complement (financial services) or anticipate
(the elimination of certain local-content requirements) the implementation of existing WTO
commitments.
Indonesia's commitment to multilateralism has recently again been confirmed; in particular,
this has been shown by its timely (and in some cases advanced) implementation of its Uruguay Roundobligations and additional commitments in recent WTO negotiations covering information
technology, telecommunications and financial services.  In its relations with ASEAN partners,
Indonesia adheres to the principle of open regionalism, an approach that it also promotes in the APEC
forum.  Tariff reductions under the AFTA-CEPT scheme of ASEAN have been kept largely in line
with unilateral MFN tariff cuts, so that the ma rgin of preference has remained small (around 2%).
Current reforms should therefore be seen as a continuation, or, indeed, an acceleration, of the
kinds of trade and investment policies that have greatly contributed to Indonesia's economicdevelopment and integration in the world economy over the past decade.  Fully implementation of
these reforms, together with Indonesia's WTO comm itments, would result in Indonesia having one of
the most open economies among developing countries by the turn of the century.
For their part, WTO Members, many of whom already provide substantial financial and
technical assistance to Indonesia, can lend further support to its unilateral economic and trade reformsby resisting domestic protectionist pressures.  The success of these reforms in fostering Indonesia's
eventual economic recovery depends crucially on a pick-up in exports, which itself relies heavily on
the maintenance of a stable, predictable and open international trading system.PRESS/TPRB/94
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MORETRADE POLICY REVIEW BODY
INDONESIA
Report by the Government
Indonesian economic performance at a glance
PRE-CRISIS PERFORMANCE
Since the late sixties, Indonesia has made steady progress with its economic development.
This progress can be easily observed by through Indonesia’s annual GDP growth rate, which averaged7%, for each of the past twenty-five years.  Other indications of progress include an increased per
capita income and low inflation rate.  In 1996, per-capita income surpassed US$ 1,000.  For the last
ten years Indonesia’s inflation rate was moderate, averaging less than 10% each year.
In the early years of development, Indonesia was still heavily dependent on the export of oil
and gas.  However, since the late 1980’s, the manufacturing sector has replaced oil and gas as the
main source of export revenue. With the increasingly diversified economy, coupled with a skilled
work force and a strong commitment to free-market economy, Indonesia offers the internationalbusiness community enormous opportunities for trade and investment.
Since 1994, Indonesia has made significant improvements to its investment climate.
Procedures for obtaining investment approval have been simplified.  Foreign investment companies
are allowed to fully own their businesses. Another policy was introduced in 1995 when the Indonesian
government announced the schedule of tariff reductions through the year 2003.  The schedule is anacceleration of the Indonesian commitment under the WTO and contains substantial reduction of
tariffs on raw materials and intermediate products needed by various industries.
C
URRENT PERFORMANCE
The Indonesian economy continually enjoyed strong growth during the year of 1996, and first
half of 1997.  However, since mid-1996, Indonesia was affected by the EL-NINO phenomenon,causing severe drought in many food production centers, mass harvest failure and heavy smoke in
Sumatra and Kalimantan islands.
The Indonesian economy was interrupted by currency turmoil in July 1997 which spilled over
into monetary and economic crisis.  This crisis has brought serious problem to Indonesian domestic
and foreign trade.
Structural adjustment in all sectors is needed for Indonesia to overcome the current economic
crisis through the assistance of international institutions such as the IMF, World Bank, and ADB as
well as bilateral assistance.  The Government has signed letters of intent with the IMF on the
implementation of reformation and stabilization programs;  examples include the removal of
structural rigidities, improvement of fiscal transparency, and restructuring of the banking system.
Due to budget limitations, the government has set up a new revised budget for the fiscal year
of 1998/1999.  The revised budget is based on the following assumptions: 12% GDP decline, Rp.
10,600 per US dollar exchange rate, USD $13/barrel revenue from oil exports, and a 66% inflation
rate.
Privatization program on state-owned companies has been going on under the new State
Ministry of State-Owned Enterprises.  The supervision of all state-owned enterprises was transferred
from line Ministers to the State Minister for State Owned Enterprises by the Government RegulationPRESS/TPRB/94
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MORE50/1998 and Presidential Instruction 15/1998.  This move is seen by the Government as the first step
in rationalizing the management of State-Owned Ente rprises, leading to their eventual privatization.
A Privatization Board, responsible for the management and privatization of State-Owned assets, was
established after the first Letter of Intent with IMF.
In the process of restructuring of the banking system, 16 insolvent banks had their licenses
revoked.
To boost the confidence in the banking system, the Government established the Indonesian
Bank Restructuring Agency (IBRA) on 27 January 1998.  In April 1998, IBRA announced liquidity
criterion to determine whether a bank should be placed under supervision, taken over, closed or have
its assets frozen.  To date, 26 banks have been closed or had assets frozen, 4 private banks have been
taken over, and 48 state and private banks are currently being closely supervised.
In accordance with legislation passed by the Development Reformation Cabinet, the Central
Bank of Indonesia is in the process of becoming an independent agency.
The Indonesian economy relies on manufacturing, trade, tourism, agriculture, and the
exploration of mineral resources.  Manufacturing sector always dominates; for example, it accounted
for 25.6% of Indonesia’s GDP in 1997.  The main products of the consumer goods were textiles,
processed foods, motor vehicles, and electronics equipment.   The main intermediate goods included
plywood, cement, fertilizer, metals and glass products.  The second largest economic sector in 1997
was trade and tourism, accounting for 16.9% of GDP.  Also during 1997, the agriculture sector,covering forestry and fishing, accounted for 14.8% of GDP.  The main agriculture products for export
are rubber, coffee, palm oil, cocoa, fish and shrimp.
The Indonesian economy has dramatically slow ed down due to the current monetary and
economic crisis.  To reverse this situation, the following need to be addressed:
(i) Increasing domestic demand;
(ii) lowering inflation;
(iii) increasing non-oil/gas exports;  and
(iv) political reformation.
To reverse the economic downturn, the Government of Indonesia continues to pursue prudent
monetary and fiscal policies and also take action to strengthen the financial system.   The governmentis committed to rapid economic stabilization as well as ensuring adequate supplies of food and basic
necessities to all areas of the country.
KEY DEVELOPMENTS IN TRADE AND ECONOMIC POLICY SINCE THE  LAST
REVIEW
Since the last review in 1994, the Indonesian Government has taken several measures to
satisfy international commitments and improve the international competitiveness of the Indonesian
economy.  These measures clearly demonstrate that the Government of Indonesia is consistently
implementing its commitments under the WTO, ASEAN and APEC.PRESS/TPRB/94
Page 14
MOREMay 1995 Deregulation Package
In May 1995, the Government of Indonesia announced a series of deregulation measures as
part of its efforts to improve efficiency and endurance of the national economy, and to increase the
competitiveness of Indonesian products in the international market.  This deregulation package
includes, among other items, the following provisions:
(v) Gradual reductions in the rate of import tariffs.  All import tariffs that are currently
over 20% will be reduced to a maximum rate of 20% by 1998 and a maximum rate of10% by 2003.   Import duties that are currently 20% or lower will be reduced to a
maximum of 5% in the year 2000;
(vi) numerous import duties will be immediately reduced to a rate between 5% and 20%;
(vii) many current import surcharges will be eliminated or reduced;
(viii) a number of products previously protected by non-tariff barriers and which could
only be imported by registered importers or importer producers, will be opened to
general importers;
(ix) capital goods with a minimum value of 30% of the companies original investment
which are imported by companies undergoing business restructuring will be
exempted from import duties;
(x) some business sectors previously closed to new investment have been opened.  These
sectors include, among others, cooking oil from palms, finished/semi-finished rattanproducts, manufacture of industrial boilers, motor vehicle industry, aircraft
maintenance, and domestic trade support services;
(xi) some business sectors are closed to new investment.  These include mangrove wood
processing, cyclamate and saccharine industries, manufacture of pulp using sulfite,
manufacture of chlor alkali using mercury, and chlorofluoro carbon (CFC/Freon)industry;
(xii) licensing procedures for industry have been simplified.  Industries in the Industrial
Zone and Bonded Zone will be directly provided with an industrial license (IUI-Izin
Usaha Industri) without being required to first obtain a Letter of Principle Approval.
In order to expand, a company needs only submit its plan for expansion.  Aregistration receipt, which acts as an industrial business permit, will be given to
small-group industries;  and
(xiii) a number of business sectors remain reserved for small business or small businesses
in cooperation with medium or large businesses.  Such sectors include, for example,
poultry breeding, traditional hats, and tools.
1996 Deregulation Measures
In January and June 1996 the Government of Indonesia announced a set of economic
deregulation measures which include:
(xiv) Continuation of the Scheduling of Tariff Reductions .  In the May 1995
Deregulation Package, the Government announced the phase reduction of tariffs.
One group of tariff lines is to be reduced in steps, so by the year 2000 they will notPRESS/TPRB/94
Page 15
MOREexceed 5%.  Another group of tariff lines is to be reduced so, by the year 2003, they
will not exceed 10%.  The government is now announcing the schedule of tariffreductions (see attached table) to be implemented in coming years so the business
community can best plan investment and production.
(xv) Reduction in Tariffs on Imported Capital Goods . A number of steps have been
taken to reduce the tariffs on imported capital goods.
(xvi) Elimination of Tariff Surcharges .  In accordance with the Customs Law, the
surcharges on imported goods will be eliminated.  In doing so, Indonesia accelerates
the implementation of the WTO commitments.
(xvii)  Simplifications of Non-Tariff Barriers .  To expedite the procurement of capital
goods and raw materials and to improve the efficiency of industry, several non-tariff
barriers have been eliminated.  These steps also reflect the acceleration of Indonesia’s
commitment under the WTO to reduce the number of non-tariff barriers.
(xviii)  Regulation on Anti-Dumping .  To counter dumping practices by foreign exporters,
the Anti-Dumping Regulation has been introduced.  This measure is consistent with
the WTO Agreement on Anti-Dumping.
(xix) Facilitation of Exports .  Simplification of requirement and procedures to obtain the
Certificate of Origin, elimination of inspection of export goods by Surveyor, and
elimination of the PEB document for exports with a value of Rp 100 million or less,are measures adopted to facilitate export.
(xx) Simplification of Licenses for Industry within Industrial Estates .  To increase
export activities, the Government simplified license requirement for industries within
the Industrial Estates.
(xxi) Operation of Bonded Areas/Bonded Warehouses .  The operation of Bonded Areas
and Bonded Warehouses, which could previously be done by state enterprises, is now
opened to the private sector.
(xxii)  Relaxation of Restrictions on Export and Import Activities by Foreign
Investment Manufacturing Companies .   Some latitude is given to foreign
investment manufacturing companies for import and sale of their own products up thewholesale level.
(xxiii)  Simplification of Procedures for the Import of Waste as an Industrial Raw
Material .   Procedures for the importation of waste as industrial raw material will be
improved and adjusted under Customs Law.
1997 Deregulation Packages
On 7 July 1997 the Government announced the economic policy deregulation as a
continuation of the preceding series of deregulation packages.   The economic policy reform in this
deregulation package included: reduction of import tariff, private auction house, non-direct
investment company, transfer of capital goods, export without notification, regional taxes and
redistribution and non tax revenues in the industry and trade sectors.  The purpose of this package was
to decrease bureaucracy and increase exports.PRESS/TPRB/94
Page 16
MOREStarting from 17 September 1997 the Government reduced the import duty on raw and
auxiliary materials for certain products covering 153 tariff items.  This reduction was implemented tostimulate export oriented industries and to increase the sustainable national economy.
The range of the reduction of import duties is between 5 to 10 percentage points, and the final
tariff will become zero, 5, 10 and 15 percent.  The reduced duties apply to raw materials for: textiles
(40 tariff items), wood processing (67 tariff items), basic chemical products (31 tariff items) and
leather products (9 tariff items).
The raw and auxiliary materials for steel, machinery and automotive and agriculture products,
are respectively 3 tariff items each.
Indonesian Economic Experience in 1997
Over the past three decades, Indonesia has reaped maximum benefits from structural changes
that were created to achieve a more integrated global economy.  The maintenance of macroeconomic
stability through the pursuit of prudent fiscal and monetary policy, financial sector reform, and greater
openness of the economy have been the keys to this success.  During this period, the economy grew atan average of almost 7% a year, inflation was contained at a single digit level and the economy
became more diversified, with the private sector having a greater role in the economy.
The second half of 1997 marked the beginning of the Indonesian economic downturn as
reflected in the slowdown in economic activities , soaring prices, and weakening of financial
institutions.  The battered Rupiah exchange rate c oupled with high interest rates led to a slowdown in
many economic sectors.
The economy is estimated to have grown by only 4.65% in 1997, far below the performance
of the previous year.  The slowdown accounted for the weakening domestic demand, mainly
consumption and investment in both private and pu blic sectors.  The weakening domestic demand was
reflected in a much reduced pace in expansion of the bank loan for investment and consumerspending.  The inflation rate rose significantly, reaching 11.05% in 1997, fuelled by the depressed
Rupiah exchange rate, and the long drought associated with the change in the global climate that
adversely affected agricultural output.
Indonesian Economic Policy in 1998
Recognizing the problems confronting the country, the government of Indonesia has
introduced various programs and adjustment measures.  As a member of the IMF, World Bank, andADB, Indonesia frequently consults these institutions and invites them to provide advice about how to
improve the economy.  On 15 January 1998, the Government adopted the Program of Economic and
Financial Reform and Restructuring.  This program was formulated to cover actions in several areas
including: efforts to restore financial sectors, fiscal consolidation, monetary issues, the exchange rate,
and structural adjustments in the form of broadening and deepening the deregulation program.  Tocomplement and modify the Memorandums of 15 January 1998, the Government of Indonesia signed
two Supplementary Memorandums on 8 April 1998 and 24 June 1998.
Considering its broad scope and its coverage of a number of economic aspects, the program
will be implemented over the three-year period.  Its implementation will be closely monitored and
reviewed.  To that end, Indonesia will be assisted  by experts from the IMF, World Bank, and ADB.
The fundamental objective of the structural adjustment program is to increase national
efficiency and competitiveness of the Indonesian economy.  To accomplish this objective, the steps tobe implemented include:PRESS/TPRB/94
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MORE(xxiv)  On 21 January 1998, special tax and customs benefits previously granted to the
National Car Program were discontinued.
(xxv)  A gradual reduction of import tariffs, including those on chemical products and
iron/steel, to 10 percent in the year 2003.  Starting on 1 January 1998, import tariffs
on a large number of chemical products were reduced from 10 – 20 percent to 5
percent.  Most tariffs on iron/steel will also be reduced starting January 1999.
(xxvi)  Starting 1 January 1998, various commodities, such as wheat, wheat flour, soybean
and garlic, can be imported freely under General Importer status.  Currently, soybean
and garlic imports are subject to a 20 percent tariff and wheat and wheat flour imports
are subject to a 10 percent tariff.  They are to be reduced to 5 percent in the year
2003, and the administered retail price of cement has also been abolished.
(xxvii)  A reduction of obstacles hindering exports, including export taxes, is to be
implemented in stages.
The main structural elements of Memorandum of Economic and Financial Policies include
further deregulation, trade liberalization, privatization of state enterprises, improvements in the
banking system and corporate restructuring.
While medium-term outlook remains uncertain given the severity of the crisis, the objective
of the Government of Indonesia is to restore sustainable economic growth with low inflation as
quickly as possible.
The Government of Indonesia attaches the highest priority to ensuring that food and other
essential items are available at affordable prices to the entire population.  Food prices, particularly the
price of rice and cooking oil, have risen drastically since the beginning of May 1998, causing serious
social hardship.  While most private trade is functioning well, the Government is taking a number of
actions to ensure that there are no remaining impediments to the efficient movement of basiccommodities throughout the country.
The program also envisages that virtually all of the restrictions that have been in place over
time will soon be removed.  For instance:
(xxviii)  From 1 February 1998, BULOG monopoly is limited solely to rice;
(xxix)  the Clove Marketing Board is eliminated by June 1998;
(xxx)  all restrictive marketing arrangements are abolished by 1 February 1998, specifically:
cement, paper, and plywood;
(xxxi)  all formal and informal palm oil plantation barriers are removed by 1 February 1998;
(xxxii)  effective on 1 February 1998, tariffs on all food items were cut to a maximum rate of
5 percent, while tariff rates on non-food agricultural products were reduced by5 percentage points;  and
(xxxiii)  on 29 May 1998, the Government adopted a reformation policy on investment in
which the list of Sector Closed for Investment was revised.PRESS/TPRB/94
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MORESectors Closed for Investment
(i) Primary Sectors
• Cultivation and Processing of Marijuana and the like
• Exploitation of Sponges
• Contractors of Forest logging
• Uranium mining
Secondary Sectors
• Hazardous Pesticides of Penta Chlorophe nol, Dichloro Diphenyl Tricholo Ethane
(DDT), Dieldrin, Chlordane.
• Production of pulp using Sulphite processing and production of Pulp with whitening
Chlor
• Alkalin Chloride Industries using Mercury process
• Manufacturing of Choloro Fluoro Carbon (CFC/Freon)
• Manufacturing of Cymate and Saccharine
• Processing of mangrove wood to produce finished/semi-finished goods
• Liquor/Alcoholic beverages
• Firecrackers and fireworks
• Explosive Materials and the like
• Manufacturing of weapons and related components
• Printing of valuable papers
• Postage stamps
• Duty stamps
• Commercial Paper of Bank Indonesia
• Passports
• Stamped Postage
Tertiary Sector
• Casino/Gambling
Sectors Closed for Investment when a part of the shares are owned by foreign
citizens and/or foreign legal entities
Primary Sectors
• Freshwater fish and fresh water fish cultures
• Forest Utilization Right
Tertiary Sectors
• Taxi/Bus transportation
• Local shipping
• Private television broadcasting, Radio broadcasting services, News Paper and
Magazines
• Operation of cinema
• Spectrum Management of Radio Frequency and Satellite Orbit.PRESS/TPRB/94
Page 19
MORE• Trade Services and its support Services, except: Retailer (mall, supermarket,
department store and shopping center), Distributor/Wholesale, Restaurant, Quality
Certification Services, Market Research Services, and After Sales Services.
• Medical Services: general clinics, maternity Clinic, specialist clinic and dental clinics.
INDONESIAN COMMITMENTS IN THE INTERNATIONAL FORA
THE IMPLEMENTATION OF MULTILATERAL INITIATIVES
The ratification of Marrakesh Agreement has been done by the government of Indonesia on 2
December 1994.  The government supports the role of WTO in strengthening the multilateral trading
system and commits to the implementation of the obligations and responsibilities arising from theUruguay Round.  This was shown by Indonesian commitments in WTO which recently includes
information technology, telecommunication, and financial services.
Concerning the implementation of the UR results, Indonesia abolished most of the non-tariff
barriers it committed to in Schedule XXI. Furthermor e, the Government has also eliminated import
surcharges since June 1996. The remaining non-tariff barrier is in the oil sector.
As a member of the WTO, Indonesia has implemented the WTO Valuation Agreement since
1 April 1997.  Since that time, the determination of customs value for the imported goods is based on
the provisions of the Agreement.  Moreover, Indonesia created the following instruments in the form
of law and regulations, such as Custom Law No.10/1995; Ministerial Decree of Finance No.
690/KMK.05/1996; Circulated Letter of Custom s Director General N o.SE-11/BC/1997; Director
General of Customs Decree No.KEP-14/BC/1997 and No.KEP-21/BC/1997.  In line with the
implementation of the Agreement, Indonesia also revised its import procedures to accommodate thenew customs valuation system.  Thus, the imported goods are processed through a green or red
channel.  The selection for the green or red is based on the risk assessment conducted by intelligence
unit.
Since 1994, Indonesia has undertaken a concerted exercise to improve existing IPR protection
and procedures according to international standards and practices as prescribed by all international
conventions and intellectual property rights.  Efforts are also underway to enact  new laws and amend
existing ones in compliance with WTO/TRIPS Agreements.  As of May 1997, Indonesia enacted three
new laws in the field of IPR, namely:
(xxxiv)  Laws No.12 of 1997 regarding The Amendment to Law no.6 of 1982 on Copyright,
as amended by law No.7 of 1987;
(xxxv)  Law No.13 of 1997 regarding The Amendment to Law No.6 of 1989 on Paten;  and.
(xxxvi)  Law No.14 of 1997 regarding The Amendment to Law No.19 of 1992 on Trademark.
Steps are being undertaken to fulfill Indonesia’s WTO/TRIPS obligations by the year of 1999.
Enactment of new laws, namely, for the protection of plant varieties, performers’ right and lay-out
designs of integrated circuits as well as minor amendments to the existing patents and trademark lawsare at various stages of drafting.
Indonesia has put into effect the most favored nations for all WTO members and has never changed
the status since mid 1995.  As for information, the Ministerial decree of Finance signed on January
21, 1998 mentioned reducing the tariff with MFN system for all nations.PRESS/TPRB/94
Page 20
ENDThe Implementation of Regional Initiatives
Indonesia attaches strong importance to regional cooperation and continues to participate
actively in various regional groupings, such as ASEAN and APEC.
As one of the Bogor Declaration initiators on trade and investment liberalization on 2010 for
industrialized economies and 2020 for developing economy APEC members, Indonesia has
committed to continual liberalization on trade and investment.  Indonesia will continue to pursue tariff
reductions in line with its trade liberalization efforts and commitments in ASEAN and APEC.
Indonesia’s priority is focused on efforts to enhance trade and economic cooperation within
ASEAN in the field of trade and services, intellectual property rights, transportation and
communication, infrastructure development and industrial cooperation.
To implement the ASEAN-AFTA commitments, Indonesia has taken measures since 1994 to
lower its tariffs, and renewed the schedule of tariff reduction for AFTA by the year of 2003, which
includes 7.212 tariff lines.  Those tariffs consist of Inclusion List (6.622), Temporary Exclusion List(541), Sensitive List (4), and General Exception list (45).
The current economic crisis will not change Indonesian commitment to implement CEPT-
AFTA scheme by the year 2003.
THE FUTURE DIRECTION OF INDONESIAN POLICIES
Over the years, the government has consistently demonstrated its ability to maintain its
commitment to economic development.  However, due to unprecedented economic turbulence since
mid 1997, the government’s first priority, in short-term, is to stabilize economic and political
situations.  The most urgent priorities for the government are improving the distribution system and
ensuring adequate supplies on basic need commodities.
The government of Indonesia is committed to continue the reform program covering 5 main
components:
(xxxvii)  Maintaining macro economic stability;
(xxxviii)  reforming and strengthening the banking system;
(xxxix)  restructuring corporate debt;
(xl) pursuing structural reform to improve governance and private sector efficiency;  and
(xli) taking action to protect the poor and sustain key human resource investments.
Indonesia will continue to uphold its commitments to the international community.