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Year: 2001
Rank: 114
Score: 3.55
Category: Mostly Unfree

Trade Policy 3.0 Government Intervention 1.5 Foreign Investment 3.0 Wages and Prices 3.0 Regulation 4.0
Fiscal Burden 3.0 Monetary Policy 5.0 Banking and Finance 4.0 Property Rights 4.0 Black Market 5.0

Scores for Prior Years: 2001 3.55 2000 3.50 1999 3.15 1998 2.85 1997 2.90 1996 2.85 1995 3.40

Population: 203,678,368

Land area: 1,919,440 sq. km

Major industries: petroleum and natural gas, textiles, mining, cement, chemical fertilizers, plywood, food, rubber, tourism

Major agricultural products: rice, cassava (tapioca), peanuts, rubber, cocoa, coffee, palm oil, copra, other tropical products, poultry, beef, pork, eggs

GDP: $198 billion

GDP growth rate: -13.2%

Per capita GDP: $972

Exports of goods and services:
$69 billion

Major export trading partners: Japan 18.0%, US 15.6%,
Singapore 10.6%, South Korea 6.6%, China 4.1%

Imports of goods and services:
$71 billion

Major import trading partners: Japan 15.7%, Singapore 11.6%, South Korea 8.3%, US 8.0%, Germany 6.3%

Foreign direct investment (net):
-$189 million

Indonesia’s post-crisis recovery is plagued by a lack of strong financial institutions and the rapid turnover of ministers responsible for economic reform. Although President Abdurrahman Wahid has committed his government to economic development and the rule of law, he has aggravated institutional weaknesses by frequently changing course and inexplicably firing two prominent economic ministers. The government intended to eliminate oil and gas subsidies in April 2000, but in the face of political pressure, Wahid delayed implementation until July and then delayed again until October. Compounding the problems of the executive branch, Indonesia’s judiciary has an erratic arbitration record toward foreign businesses, and the legislature is only now implementing laws on investment and banking. Political stability is fragile at best; provincial leaders are demanding more power, and separatist movements and sectarian violence contribute to a general sense of crisis throughout the archipelago. The average tariff rate is declining, along with revenues from state-owned enterprises and government ownership of property; however, Indonesia’s property rights score is worse, and the government has failed to follow through on opening key sectors to foreign investment. As a result, Indonesia’s overall score is 0.05 point worse this year.

Trade Policy
Score: 3–Better (moderate level of protectionism)

Indonesia’s tariff rates range from 5 percent to 30 percent. The average tariff rate is 8.9 percent, down from 9.5 percent. As a result, Indonesia’s trade policy score is 1 point better this year. Indonesia maintains non-tariff barriers. According to the U.S. Trade Representative, "Major concerns recently articulated by U.S. industry include: the absence of a transparent and predictable regulatory environment, including with respect to the issuance of licenses and administrative rules…."

Fiscal Burden of Government
Score—Income and Corporate Taxation: 2.5–Stable (moderate tax rates)
Score—Government Expenditures: 3–Better (moderate level of government expenditure)
Final Score: 3–Stable (moderate cost of government)

Indonesia’s top income tax rate is 30 percent; the average taxpayer faces a 10 percent marginal tax rate. The top corporate income tax rate is 30 percent. In 1998, government expenditures equaled 21 percent of GDP, down from 28 percent in 1997.

Government Intervention in the Economy
Score: 1.5–Better (low level)

Government consumes 5.8 percent of GDP. In 1997, Indonesia received 5.7 percent of its total revenue from state-owned enterprises and from government ownership of property, down from 9.8 percent in 1996. As a result, Indonesia’s government intervention score is 0.5 point better this year.

Monetary Policy
Score: 5–Worse (very high level of inflation)

From 1990 to 1999, Indonesia’s weighted average annual rate of inflation was 27.37 percent.

Capital Flows and Foreign Investment
Score: 3–Stable (moderate barriers)

Indonesia has reformed its foreign investment code. The government now allows 100 percent foreign ownership in many sectors and has opened many sectors once closed to foreign investors. Following liberalization, 25 sectors maintain restrictions on foreign direct investment, and 16 of these completely bar FDI. Restricted sectors include taxi and bus services, some media, and medical services. The government has passed a law opening the telecom sector to foreign investors but under severely restricted conditions, allowing the state monopoly to continue its domination of the sector for several years. In September 1999, the legislature rejected a bill that would have ended the state oil and gas monopoly; as a result, Pertamina, which the Economist Intelligence Unit describes as "the most notoriously corrupt state run company in the country," retains its exclusive rights over the sector. Since the government retains control over the most lucrative sectors of the economy and has failed to follow through on plans to allow foreign competition, Indonesia’s capital flows and foreign investment score is 1 point worse this year.

Banking and Finance
Score: 4–Worse (high level of restrictions)

Indonesia’s banking system is in transition, as many banks became insolvent as a result of the Asian financial crisis. The government has undertaken some reforms. Foreign banks—so long as they are among the world’s 200 largest banks and have a minimum credit rating of "A"—are now allowed to open branches, but only in Jakarta. Foreigners now may own 99 percent of local banks, up from the previous limit of 49 percent, but at least one member of the executive board of each of these local banks must be Indonesian. The crisis also increased the level of government ownership and regulation of banking, and a large number of banks remain state-owned, albeit reconfigured.

Wages and Prices
Score: 3–Stable (moderate level of intervention)

The market sets most prices, although the government still controls the prices of many products, including sugar, soybeans, and rice. According to the Economist Intelligence Unit, "A handful of commodities and services remained classified as under ‘administered prices’ at the end of 1998, including petrol, electricity, liquefied petroleum gas, rice, cement, hospital services, potable/piped water, city transport, air transport, telephone charges, trains, salt, toll-road tariffs and postage." Indonesia has a minimum wage.

Property Rights
Score: 4–Worse (low level of protection)

Indonesia’s legal framework is based on Dutch commercial codes that have not been updated since colonial times. Court rulings can be arbitrary and inconsistent, and the judicial system suffers from corruption. According to the U.S. Department of State, "The Constitution provides for an independent judiciary; however, it remains subordinated to the executive and suffers from pervasive corruption." As a result, Indonesia’s property rights score is 1 point worse this year.

Score: 4–Worse (high level)

Indonesia’s regulatory environment is characterized by corruption, which the government has pledged to eliminate. According to the Economist Intelligence Unit, however, "Criticism of Abdurrahman Wahid’s style of government has continued, with increased questioning of his real commitment to rooting out corruption." Many regulations are applied arbitrarily, and payoffs may become necessary to receive an "exemption" from a government regulation. Overlapping local and national regulations confuse the business process, particularly when they contradict one another.

Black Market
Score: 5–Worse (very high level of activity)

Indonesia has a very large black market, mainly in labor and manufacturing. The U.S. government has targeted Indonesia for massive intellectual property rights violations, which are effectively encouraged by indifference on the part of legislators and a lack of enforcement by the police. According to the Business Software Alliance, the software piracy rate in Indonesia is over 90 percent.

Score: 3.0-3.70 is considered moderate (The smaller the score the better ie:1.0-2.0)


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