| |  | Positive Reforms in Ease of Doing Business 2009
The number of days to start up a business has gone down from 105 to 76, while the costs and number of procedures have also been reduced. | | | | Investment Climate Activities
The World Bank’s Private Sector Development team (PSD) has been helping the government improve investment legislation and regulations, with the goal being to simplify investment procedures and remove unnecessary red tape. | | |
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| | Indicators in Indonesia (Figures show the most recent available data and the year) | | |
Private Sector Following a year of very weak performance in the aftermath of the fuel price adjustment in 2005, investment in Indonesia began to show strong signs of recovery in the final quarter of 2006, with year-on-year investment growth rising to 8.2 percent, from less than 2 percent in the previous four quarters. Strong growth continued during the first half of 2007, with investment rising by 7.3 percent, well above GDP growth of 6.1 percent. Investment is once again making a major contribution to economic expansion, accounting for just over one-quarter of total GDP growth during the first half of 2007. The investment-to-GDP ratio, which had fallen from nearly 30 percent in the mid-1990s to 19 percent in 2003, is now back up to 24 percent. These positive investment trends are due in large measure to a favorable macroeconomic situation, with inflation sharply lower, interest rates declining, the debt-to-GDP ratio falling, strong export growth and a relatively stable exchange rate. However, over the past two years the government has initiated a series of reform measures designed to improve the business environment and these reforms are beginning to show results. Three economic policy packages were issued in 2006, including one on the investment climate, one on infrastructure and one on financial sector reform, and a comprehensive follow-up package was issued in June 2007 detailing 168 specific reform measures to be carried out over the next 12-18 months. Landmark legislation was also passed by the Indonesian parliament in 2007, including a new investment law and a new tax administration law. Major reforms of tax and customs administration are ongoing, with substantial progress in some areas. Business surveys indicate that tax refund time and import clearance time, two major complaints of investors, both dropped between 2006 and 2007. On the micro side, optimism on both internal and external factors has translated into stellar performances of majority public companies listed in the Jakarta Stock Exchange (JSX). Some 78% of 344 listed companies booked profits last year with total profit-capitalization of IDR 55,4 trillion, 14 % higher than in 2005. As a result, average JSX Price to Earning Ratio (P/E) rose to 21x, almost approaching the average Asia Pacific P/E Index of 25x. This rising P/E indicates growing investor confidence towards companies’ earning growth prospect. Going forward, private sectors progress remains on track, albeit still struggling with some issues such as.lack of infrastructure support, corporate governance, bureaucratic red tape, etc. However, commodities, mining and plantation sectors are expected to become key drivers of growth in the private sector’s.. Trade
The year of 2008 was a good year for Indonesia’s exports. Commodity boom and strong demand took Indonesia’s exports into a new height. Exports had enjoyed period of remarkable expansion due to rising commodity prices and strong demand from the region and other emerging markets such as Malaysia, China, and India. Total exports topped $136 billion in 2008 and grew annually at a 20 percent clip. Likewise, total exports in 2007 had reached $114 billion or grew by 13 percent compared to 2006. Indeed, export growth was mainly driven by exports of agriculture and natural resources such as CPO, rubber, mining, minerals, petroleum, and natural gas. But exports of certain manufactured products such clothing, footwear, and automotives also increased considerably as Indonesia continues to regain competitiveness in the global market. However,  bursting commodity bubble and global economic crisis hit exports in the early 2009. Value of exports fell sharply since in the last quarter of 2008 after enjoying healthy growth since mid 2007. Total export value in the 4th quarter of 2008 declined by 6.2 percent on year-to-year basis or 22 percent on quarter-to-quarter basis (figure 1). Export continued to dip in January 2009 and fell by 36.1 percent (yoy) or 17.7 percent compared to December 2008. To large extent, the decline of export value has been driven by the collapse in price of crude oil which caused exports of oil and gas to contract by 31 percent in 4th quarter of 2008 on a year on year basis. (figure 2). Plummeting commodity prices and rapidly deteriorating economic growth of Indonesia’s major trading partners are also causing severe drop in export value of agriculture, minerals and mining. Indonesia’s exports of textiles, clothing, and footwear (TCF) also slumped by 15.5 percent (yoy) in January  2009, as the crisis in global finance runs deeper and the world economy contracted further.
Figure 1: Slow Down in Exports since 4th Quarter of 2008 Growth of Exports (% y to y)
Figure 2: Slow Down in Exports Driven by Agriculture and Mining Growth of
Major Non-Oil and Gas Exports (% y to y)
Source: BPS, WB Trade flows have started to recover in the second quarter, according to the trade values data and anecdotal reports of volumes being handled by ports. By May of 2009, export values were almost 30 percent above their February lows, due to the partial recovery in the price of energy (including crude palm oil) and some other commodities, and, reportedly, higher export demand for some items. Imports were up almost one-third, for similar reasons, although capital goods imports remained compressed. The rebound in export values is broadly in line with the forecasts presented in the June Indonesia Economic Quarterly. However a slightly stronger outlook in 2009 for Indonesia’s major trading partner growth and export prices has slightly lifted projected exports, now forecast to fall 12 per cent in values terms in 2009, and 10 percent in volumes terms. The same factors plus the resilience of domestic demand in Indonesia have also lifted the 2009 outlook for imports. Total imports in 2009 are now expected to be only 11.6 percent lower than in 2008; import volumes are expected to contract by a smaller amount.
Source: BPS & World Bank
Investment Climate Investment is the key to long term sustainable growth and poverty reduction. Prior to the 1997/98 Asian economic crisis, Indonesia enjoyed investment rates of 28%-30% of GDP, which contributed to a sharp drop in poverty from the 1970s to 1997. After the crisis investment fell to just 20%-22% of GDP, economic growth slowed, poverty stagnated and unemployment rose. While macroeconomic, social and political stability are keys to creating the foundation for a sustained recovery in investment, microeconomic reforms are also critical to remove obstacles faced by private investors. These obstacles include excessive red tape and regulation, complex licensing and approval systems, inefficient tax and customs administration, and official corruption. Improvements in infrastructure, which has seen little development since the crisis, are also critically needed to support private sector investment.
Value Chain Analysis
The case of shrimp and textile/apparel sectors
The shrimp and textile/apparel sectors have strategic connotations to Indonesia’s efforts in boosting trade and reducing poverty.
Shrimp exports reached US$920 million in 2005 . Some 1.7 million farmers are believed to be involved in the industry (a total of 6.8 million mouths to be fed assuming that each farmer has three family members to support);
Indonesia exported US$8.7 billion of textile and apparel products in 2005, accounting for 10.3% of the country’s total exports. Yet both sectors seem to have lost their competitive edge in world markets – the world market share for Indonesia’s shrimp and textile/apparel exports has dropped by 0.2% and 0.6% respectively over the last five years. Several factors have accounted for this:
In textile and apparel: - Strong competitive pressures posed by China and other low-wage countries
- Low investment and technological stagnation
- Low labour productivity
- Weak trade facilitation measures;
- High operational costs
- Lack of a market strategy
In shrimp: - Lack of capacity to export high value-added processed shrimp products
- Weak enforcement of existing aquaculture products and process standards
- Poor quality of domestic brood to produce fry
- High cost of shrimp feed relative to competing countries
- Poor management practices
- Burdensome business costs that increase production costs
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Challenging Investment Climate Investment is the key to long term sustainable growth and poverty reduction. Prior to the 1997/98 Asian economic crisis, Indonesia enjoyed investment rates of 28%-30% of GDP, which contributed to a sharp drop in poverty from the 1970s to 1997. After the crisis investment fell to just 20%-22% of GDP, economic growth slowed, poverty stagnated and unemployment rose. While macroeconomic, social and political stability are keys to creating the foundation for a sustained recovery in investment, microeconomic reforms are also critical to remove obstacles faced by private investors. These obstacles include excessive red tape and regulation, complex licensing and approval systems, inefficient tax and customs administration, and official corruption. Improvements in infrastructure, which has seen little development since the crisis, are also critically needed to support private sector investment. Read more ... More Progress:
 Low Competitiveness Level
Private Sector
- Doing Business
The World Bank’s annual Doing Business report tracks business environment constraints in 175 economies. Indonesia ranks poorly on many of these indicators. Using the detailed Doing Business data base, the PSD team is developing action plans for the government to improve its ranking on key indicators.
For example, progress in cutting days to start a business from the current level of 97 days to the government’s target of 30 days can be achieved by eliminating unnecessary steps, such as the letter of domicile, payment of the non-tax state revenue fee, the requirement to evidence paid-up capital, and the publication requirement, and by merging the Business Trading License with the Business Registration Certificate.
The remaining steps can be accelerated by setting strict time limits for government offices to process applications. Action plans can also be drawn up for improvements in the time to pay taxes and to import merchandise. To develop the detailed action plans, information from the Doing Business data base will be supplemented by field checks and discussions with relevant authorities, interviews with accounting firms, law firms, notaries and other professionals knowledgeable about business constraints, and discussions with the private sector.
More World Bank Programs:
Investment Climate Activities
Value Chain Analysis
Programs on Trade Sector | |
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