The Developing Economies

Volume 43, Number 1 (March 2005)

■ The Developing Economies Volume 43, Number 1 (March 2005)
■ B5
■ 105pp
■ March 2005

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Fukunari Kimura, "International Production/Distribution Networks and Indonesia," pp. 17-38

This study examines the industrialization performance of Indonesia through a comparative evaluation with other East Asian economies. While neighboring countries actively formulated international production/distribution networks, Indonesia fell behind in utilizing the benefits of globalizing corporate activities. International production/distribution networks are supported by new economic thought such as fragmentation, agglomeration, and theories about the business firm; and a policy package of development strategies should be designed to utilize such opportunities. The design of Indonesia's development strategies and "institutions," however, does not conform to the globalizing world because the presence of network-forming foreign companies is not large enough to make them influential "actors." This author argues that the traditional comparative advantage argument for Indonesia's economic development is possibly misleading. Rather, Indonesia must learn the experience of its neighboring countries and introduce foreign companies as new actors to break the old "structure."

Mitsuhiro Hayashi, "Structural Changes in Indonesian Industry and Trade: An Input-Output Analysis," pp. 39-71.

This study evaluates the current achievement of industrialization in Indonesia and clarifies what the major challenges are for sustaining industrialization. This is done by examining structural changes in the economy from the period before to the period after economic crisis using the method of input-output (I-O) analysis. After tracing the history of economic development in Indonesia, changes in industry and trade between 1995 and 2000 are viewed using skyline chart analysis, industrial linkage analysis, and growth-factor decomposition analysis. Results indicate that from 1995 to 2000, the manufacturing industry expanded the share of production, strengthened export orientation, and lowered import dependency. However, these phenomena appear to have resulted primarily from slumps in growth factors other than export demand as well as sharp declines in the value of the rupiah. This study shows that the current decrease of investment is a bottleneck in industrialization and indicates an urgent need for Indonesia to improve the investment environment, particularly for foreign investors.

Hikmahanto Juwana, "Reform of Economic Laws and Its Effects on the Post-crisis Indonesian Economy," pp. 72-90.

This study evaluates the effectiveness of the economic laws some of which were introduced in the IMF-led post-crisis reforms to address serious problems faced by the Indonesian economy. It is argued in the study that the economic law reform has not been as effective as expected since the implementation of a law has not conformed with legal policy. The objective of the legal policy of the Bankruptcy Act, which was enacted in accordance with IMF conditionality, was to liquidate insolvent domestic companies and to relieve foreign creditors. At the implementation stage, however, the ruling of the commercial courts was often handed down against creditors. The ineffective implementation was due to several factors; one of them was judges' defensive reaction to possible hostile takeover by foreign creditors.

Yuri Sato, "Bank Restructuring and Financial Institution Reform in Indonesia," pp. 91-120.

The banking sector underwent drastic reform in post-crisis Indonesia. Bank restructuring, driven by IMF conditionalities, resulted in the exit of insolvent banks and ownership changes of major private banks. Through recapitalization and sales of government-held shares, foreign-owned banks emerged as leading actors in the place of business-group-affiliated banks. As part of the restructuring process, an exit rule was created. The central bank, which up to that time had been given only partial authority under the jurisdiction of the Minister of Finance, now gained a full range of authority over banks. The central bank's supervision system on banks, risk management systems at individual banks, and their efforts to build risk management capacities, began to function. This is totally different from the old financial institution under the Soeharto regime, where banks had no incentive to control risks, as the regime tacitly ensured their survival.

Hitoshi Yonekura, "Institutional Reform in Indonesia's Food Security Sector: The Transformation of BULOG into a Public Corporation," pp. 121-48.

The National Food Logistics Agency (BULOG) which had managed food security, buffer-stock operations, and domestic food price stabilization through its monopoly over imports and distribution was reorganized into a public corporation, "Perum BULOG," in May 2003. This study investigates the background and the process of reforming BULOG, and seeks to clarify the characteristics and remaining problems of institutional reform implemented in Indonesia since the economic crisis and the impact of globalization. The major findings are: (1) the reforms led by the IMF and World Bank were an attempt to curtail the rent-creation mechanism inBULOG and to improve its corporate governance; (2) globalized and standardized modules of institutional reform methods were applied for reforming BULOG, but the implanted institutions will need substantial time to take root; (3) there is still a failure to coordinate among food security institutions, particularly between the Ministry of Agriculture and Perum BULOG.

Gaku Kato, "Forestry Sector Reform and Distributional Change of Natural Resource Rent in Indonesia," pp. 149-70.

After the collapse of the centralized Soeharto regime, deforestation caused by over-logging accelerated. To tackle this problem, an IMF/World Bank-led forestry sector reform program adopted a market-friendly approach involving the resumption of round wood exports and raising of the resource rent fee, with the aim to stop rent accumulation by plywood companies, which had enjoyed a supply of round wood at privileged prices. The Indonesian government, for its part, decentralized the forest concession management system to provide incentives for local governments and communities to carry out sustainable forest management. However, neither policy reform worked effectively. The round wood export ban was reimposed and the forest management system centralized again with cooperation from a newly funded industry-led institution. In the midst of the confusion surrounding the policy reversal, the gap between the price of round wood in international and domestic markets failed to contract, although rent allocations to plywood industries were reduced during 1998-2003. The rents were not collected properly by the government, but accumulated unexpectedly in the hands of players in the black market for round wood.

Kazuhisa Matsui, "Post-Decentralization Regional Economies and Actors: Putting the Capacity of Local Governments to the Test," pp. 171-89.

Decentralization in Indonesia was introduced institutionally in 2001, with a democratization drive promoted by international donors and by the intention of the new government to clear away the centralistic image of Soeharto. Decentralization has had some effects on regional economies and on local government administration. Compared to the period before decentralization, the share of gross regional domestic product and local government finance has increased in Java, though investment and bank borrowing have expanded to the outer islands. In qualitative aspects, decentralization has transferred not only administrative authority but also many new vested interests from the center to regions. Local governments have become more extensive economic actors in regional economies. Regional economic actors now compete actively for such vested interests and have missed the opportunity to create market-friendly regional economies. The government sector should not be a mere rent-seeking economic actor, but should play a role as a facilitator promoting private sector activities in regional economies.

Kosuke Mizuno, "The Rise of Labor Movements and the Evolution of the Indonesian system of industrial relations: A Case Study," pp. 190-211.

This study analyzes a case of labor conflict at a garment company in West Java with particular reference to the rules and strategies among the parties involved. Using game theory, the study analyzes the formation of the critical point of labor conflict and examines the negotiations that led to the formation of stable industrial relations. At that point, the Nash equilibrium was at the company strategy of collaboration and at the workers' strategy of hostility, the company having assumed that the workers would mount a strong resistance to the company's hostile strategy. Under circumstances of weak law enforcement, the effective strategy for the workers was not only to obtain knowledge concerning the law but also to gain the support of the community, as well as solidarity among union members, and to pursue creative strategies. This study also shows that an important rule for stabilizing industrial relations is continual communication among the company, labor unions, and the members of the workers' organizations.