Make your own free website on Tripod.com

INDONESIA: ENVIRONMENTAL DEVELOPMENT IN REPELITA VI
AND ITS INTERFACE WITH TRADE, BUDGET, AND NATIONAL ACCOUNTS
 

I. PREFACE

Indonesia's economic performance has been one of the best in the developing world. Over the past 25 years, average GDP growth exceeded 6%, inflation averaged less than 10% and absolute poverty's incidence was reduced from 60% of the population to about 14%. The Sixth Five-Year Development Plan (REPELITA VI) and the Second Twenty-Five Year Long-Term Development Plan (PJP II) both program continued macroeconomic stability, high growth, and poverty reduction. Their most important target is rapid non-oil export growth, to act as the "locomotive" for growth in employment and GDP and to ease the external debt burden. As continuations of past achievements, the Plans' targets are feasible provided policy changes improve efficiency, and financing needs are met.

Throughout the 25-year implementation of the first Indonesian long-term development period (PJP I), development had been carried out continuously, more extensively, and equitably. This is in line with the Development Trilogy, that requires the maintenance of a harmonious relationship between equity, economic growth and the national stability. PJP I has overcome various fundamental problems and has significantly enhanced the standard of living of the people and has established a strong foundation for facilitating the implementation of the subsequent stages of development. Economic development in PJP I has been able to create a healthy economic stability and has developed economic institutions that are necessary for supporting development.

Various basic policies, such as the balanced and dynamic budget principle, the open capital account system, and the prudent pursuance of macro-economic policies, have greatly contributed to the attainment of development objectives. Satisfactory economic growth and equitable development have been attained in conjunction with economic stability. The average economic growth rate in PJP I has been 6.8 percent per annum. The inflation rate, which was very high in the 1960s, was reduced to an average of 17.2 percent per year in the 1970s, that was further reduced to an average of 8.7 percent per year in the 1980s.

All economic sectors, including the industrial sector, the agricultural sector, and other sectors, have made significant progress. As a whole, the industrial sector grew at an average rate of approximately 12 percent a year between 1969 and 1992. In the same period, agriculture has also made significant progress, as reflected among others in the achievement of self sufficiency in rice in 1984, that has been maintained to date. This success has dramatically altered Indonesia's position from the world's largest rice importing country in the '70s to a country which can supply its own rice consumption needs. Thus, the attempt to establish a stronger economic base, characterized by a growing industrial sector and supported by a solid agricultural sector, has been realized.

The high economic growth coincides with a more balanced economic structure. The share of the industry in the national product continues to rise. Since 1991, the industrial sector's contribution to the national product has exceeded the share contributed by the agricultural sector. Indonesia's dependance on oil has continued to fall since the early 1980s. In 1981 the contribution of oil and gas to the national product reached 24 percent, while by 1992 it had dropped to only 13 percent.

Continuity will depend on change in many areas. In the past, growth was based on natural resources--oil & gas, and forestry--but the depletion of stocks and continued weakness in oil prices means further diversification is needed. Recent high growth was based on non-oil industrial exports, along the lines of the East Asian model. Continuing this growth in increasingly competitive world markets will require a more flexible and efficient economy. External borrowing was used to ease the past diversification from natural resources and recently private borrowing grew rapidly; REPELITA VI now targets a reduction in the heavy external debt burden. Banking sector weaknesses could hinder growth. Industrial growth, and the associated urbanization, are beginning to overload the environment and infrastructure, requiring attention. Finally, many of the remaining poor are isolated in resource-poor areas. They need high quality social sector programs, as well as continued broad-based growth, to lift them out of poverty.

The key to dealing with these issues is continued macroeconomic stability, coupled with policy changes to improve efficiency, as REPELITA VI recognizes. Continued macroeconomic stability remains the cornerstone for rapid growth and poverty reduction. Macroeconomic stability would be enhanced by tighter monetary and fiscal policy, strong efforts to deal with the banking system's problems, and continued prudent debt management.

Monetary policy would benefit from closer coordination with exchange rate policy, and increased attention to shifts in external financial markets; this would help achieve balance of payments targets. Tighter fiscal policy would raise public saving, accommodating private investment and helping to reduce the external debt burden

Fiscal tightening will entail firm implementation of the Budget, restraint in routine and off-budget spending, further tax administration improvements, and further increases in property taxes, forestry fees (brought on-budget), electricity and fertilizer prices.

Policies to improve efficiency--to do more with less--are critical to achieving the Plans' targets. Greater efficiency could raise growth of GDP and employment with the same investment/saving. Greater efficiency in delivery of social services and poverty programs could reduce poverty faster. And greater efficiency, in a long-term, macroeconomic sense, would require greater attention to environmental costs and sustainability.

Policies to improve efficiency can be categorized in four broad areas: a) Incentive improvements. Deregulation that cuts high tariffs across-the-board, and reduces non-tariff barriers, export restrictions, and investment restrictions would increase efficiency and external competitiveness, contributing to the rapid growth of non-oil exports and jobs. Improved public sector pricing, described above, would stimulate efficiency and improve equity and the environment. b) Investment in human capital and infrastructure. The envisaged increase in private participation would be encouraged by development of regulatory frameworks that also protect the public interest. c) Implementation improvements (in the broadest sense) in public programs. Allocational improvements, better pricing, more reliance on private providers, and improved project implementation would make more efficient use of scarce resources. d) Institutional development to improve the effectiveness of markets and program implementation, in areas such as the regulatory framework, the legal system and land titling, and the management of external debt, urbanization, privatization, the environment, and delivery of social services, especially to the poor.
 
 

II. THE SECOND LONG TERM DEVELOPMENT PLAN (PJP II)
 

A. CHALLENGES, CONSTRAINTS AND OPPORTUNITIES

Sustaining High Economic Growth

Development in PJP I has significantly increased the standard of living of the population. This is reflected in the growth of per capita income from US$ 70 in 1969 to around US$ 700 by the end of PJP I. Although this is major achievement, the Indonesian per capita income is still low compared to other countries. Sustaining high economic growth will therefore still be one of the main challenges in PJP II. Closely related to the challenge for increasing income per capita is the challenge for controlling further the population growth rate. Therefore, PJP II still faces the challenge of further reducing the population growth rate.

Increasing equitable development

Development achievements in the economic field as well as in other fields must be accompanied by enhanced equity. Although much has been achieved in PJP I, there are various inequities that still must be resolved, such as the gap between different regions, between the western part and the eastern part of Indonesia, between Java and outside Java, between urban and rural areas, between agriculture and industry, and between different socio-economic groups. Unless consistent efforts are made to resolve this problem, inequity could lead to greater social envy that would pose a menace to the maintenance of national stability.

Related to the equity issue, is the problem of the population still living below the poverty line. In terms of absolute total number there has been a significant decrease, from 70 million in 1970 to 25.9 million in 1993. Percentagewise, however, the figure in 1993 still means that around fourteen percent, namely one out of seven people in Indonesia is still poor.

Another main challenge is the unequal population distribution. In certain areas, especially in Java, the population density is very high. Moreover, in PJP II, the process of urbanization will increase, with more than half of the population living in urban areas within 25 years. It could cause a negative impact as the rural will loose their skill and educated labor force, which in turn could hamper their productivity. In addition, urban areas will face a variety of social, economic and political problems.

Improving the Quality of Human Resources

In addition to meeting the provision of the 1945 Constitution, the requirement to increase the quality of human resources is a must for enabling the country to increase productivity and thus to become capable to compete in domestic as well as in world markets. In PJP II, Indonesia must no longer depend mainly on the development of natural resources but must mainly rely on the development of human resources. Therefore, the challenge in PJP II is to improve education and health for enhancing human resources quality.

Developing Science and Technology

Development of the Indonesian nation towards a developed and self-reliant nation will very much be determined by its ability to utilize and master science and technology. Development of science and technology must be able to enhance the quality of human resources in order to be able to deal with the challenges of development in the coming periods. Therefore, the challenge on science and technolgy development in PJP II is to ensure that the utilization, development and mastering of science and technology can accelerate the enhancement of the quality of the people, increase productivity and efficiency, expand employment opportunities, and increase the well being of the whole population.

Conservation of Natural Resources and the Environment

In PJP II, economic growth is to accelerate wherein industry is to perform as the main engine of growth the share of the industrial sector increasing more relative to agriculture. Such growth will naturally affect the availability and utilization of natural resources. Also in PJP II, economic activities will increasingly be concentrated in urban areas. This will increase the risk of pollution in urban areas. The high economic growth and still increasing total number of population will tend to result in the expansion of critical lands.

Thus a challenge in PJP II, is to ensure the preservation of a balance between economic growth and the conservation of natural resources and the environment in the context of maintaining sustainable development.

Development of Law, Social Institutions and National Culture

The increasing role of the industrial sector in development will bring changes in values that will cause social problems. As industrialization and modernization proceed, efforts to maintain and develop social institutions and culture must be established. To ensure that rapid industrialization and greater openness to the global economy, will not adversely affect national identity and unity and that will not endanger national stability, is a big challenge for PJP II.
 

B. GENERAL OBJECTIVES OF PJP II

To achieve the progress, self-reliance and prosperity called for in the in 1993 Broad Guidelines of State Policy, economic activities must be developed quickly. To this end, a high rate of economic growth is projected in PJP II, averaging 7 percent per year. This growth rate is even higher than the average economic growth rate achieved during PJP I of 6.8 percent per year, which was considered high by international standards.

This economic growth is accompanied by an effort to lower population growth. We will strive to reduce the population growth rate to 0.9 percent per annum by end of PJP II. If this economic and population growth target is achieved, at the end of PJP II, real Indonesian income per capita will increase by almost 4 times, to around US $ 2.600 in 1989/90 constant prices.

To achieve those various targets, the industrial sector is expected to become the motor of the economy. During PJP II the industrial sector should grow by 9 percent per year on average. The industrial sector is also relied as the main supplier of productive main field which gradually will replace the role of agricultural sector. The link between industrial sector and the agricultural sector will be strengthened by developing agroindustry and agribusiness. The link between the industrial sector and natural resource sectors such as mining will also be improved, thereby enhancing the strength of the industrial sector.

Rapid industrialization will lead to a continuous decline in the share of GDP coming from agriculture. Nevertheless, the agricultural sector maintains a strategic role in PJP II. In addition to supplying food for the population, the agricultural sector will be the main source of living for a large part of the Indonesian work force. A relatively high agricultural growth rate of 3.5 percent per annum is therefore anticipated during PJP II.
 

III. THE SIXTH FIVE-YEAR DEVELOPMENT PLAN (REPELITA VI)

REPELITA VI (1994/95-1998/99) programs continued macroeconomic stability, sustained high growth, and further reductions in poverty. Under the Plan, Indonesia's per capita GDP is expected to reach US$1,000 (incurrent prices), reflecting real GDP growth of 6.2% and population growth of 1.6%, on average. Non-oil exports are programmed to continue to be the main "locomotive" of growth, rising 16.8% p. a. in dollar terms. This growth would be an important factor in industry's 9.4% p. a. growth. Agriculture is projected to grow 3.4% p. a. compared to the 2.9% p.a. achieved during the last Plan period, an increase that may be difficult to achieve without increased attention to agricultural exports. The projected growth pattern would continue the economy's diversification away from oil & gas. As part of macroeconomic stability targets, REPELITA VI plans to reduce the average current account deficit to less than 2% of GDP, reduce the reliance on foreign borrowing and raise official foreign exchange reserves prudently.

REPELITA VI's main targets are largely a continuation of past performance. In particular, the projected growth rates of GDP, 6.2%, and non-oil exports, 16.8%, are lower than the 6.9% and 17.9% rates actually achieved during REPELITA V, respectively. This continuity means that REPELITA VI's targets should be attainable given appropriate policies and the required foreign financing.
 

Policies to Achieve REPELITA VI's Goals

Community will require policy change however. Ensuring continuity in macroeconomic stability and reducing dependence on foreign borrowing while financing needed investment will depend on strengthened macroeconomic policies along the lines described above.

Policy changes to improve efficiency --doing more with the same resources--will be needed to ensure continued rapid growth further reductions of poverty and environmental sustainability as REPELITA VI recognizes. In a macroeconomic sense, Indonesia's high ICOR indicates the need for increased efficiency in public programs and for further deregulation to stimulate private sector efficiency. Greater efficiency could raise growth to rates similar to Thailand and Malaysia, two low ICOR countries. Opportunities exist to increase efficiency in programs to reduce poverty. And fully taking into account environmental costs and sustainability is fundamental to macroeconomic efficiency.

The efficiency-enhancing policy changes to support Repelita VI's targets of rapid growth, poverty reduction and environmental improvements can be grouped into four broad areas:

General Objectives and Priorities of Repelita VI

The general objective of REPELITA VI is the growth of self-reliant Indonesian person and Indonesian people through increased participation, efficiency, and productivity of the people, in the context of increasing the people's standard of living, intelligence and overall wellbeing. The GBHN 1993 also stipulates that in line with the emphasis of development in PJP II. The priority of REPELITA VI is the development of economic sectors, that comprise industry, agriculture and services, and in parallel to the enhancement of human resource quality.

a. Enhancing Human Resource Quality

Human resources are one of the most important resources in development. By increasing human resource quality, the Indonesian people will be able to improve their dignity, their participation in development, and their ability to select optimally in taking benefits of other development resources which are more limitedly available and able to produce better works.

In accordance with the raising of human resource quality, work force productivity as measured by the ratio of value added per worker is expected to increase an average annual rate of 3.3 percent. Agricultural work force productivity is expected to grow by an average of 2.4 percent per year, industrial work force productivity by 3.7 percent per year, and work force productivity of other sectors, including the service sector, by 1.7 percent per year.
 

b. Economic Growth and Structural Change of the Indonesian Economy

Economic growth in REPELITA VI, will reach an average of 6.2 percent per year, accelerating from 6 percent in the first year to 6.6 percent in the fifth year. With this overall growth rate, per capita income will increase by 4.7 percent per year and will exceed US$ 1,000 by the end of REPELITA VI.

To achieve a 6.2 percent average annual growth rate during REPELITA VI, the contribution of non-oil/gas sectors must rise. National product coming from oil/gas is estimated to grow on average 6.9 percent per year, non-oil/gas processing will grow at about 10 percent per year, and agriculture will grow on average by 3.4 percent per year. Other sectors, including transport services, telecommunications, trade, finance and mining, will grow at an average of 6.0 percent per year. As a consequence of these sectoral developments, the share of manufacturing in GDP will rise to 24.1 percent in constant 1989/90 prices, and the share of agriculture will decline to about 17.6 per cent. The share of other sectors will decline to 58.3 percent.

On the demand side, one of main factors which can contribute to achieving the development target of 6.2 percent average annual growth is the enhancement of non-oil/gas exports. During REPELITA VI, the annual growth rate of non-oil/gas exports is expected to increase from 16.3 percent to 17.5 percent, or an average of 16.8 percent per year. Exports of manufactured products will need to grow by 17.8 percent per year on average.

Sectoral economic growth will rely on the industrialization process, supported by agriculture. The economic structure will undergo a basic transformation. The role of industry and services, both in production and in employment generation, will continuously increase, and the role of agriculture will relatively decline. Non-oil sectors will continuously be promoted thereby further reducing reliance of the economy on oil and gas. Non-oil and gas commodities, especially manufacturing products, will become an increasing share of total exports.
 

c. Enhancement of Equity and Poverty Alleviation

The aim of enhancing equity and poverty alleviation of REPELITA VI, encompasses objectives for improving the people's business capability and role, especially through cooperatives, small-scale businesses, traditional and informal businesses, and medium-scale businesses that grow from small businesses. Efforts will be made to reduce the discrepancy between urban and rural areas. The development of eastern Indonesia and other less-developed regions will be accelerated.

Poverty alleviation is one of the most important aim in promoting equitable development. The poverty alleviation target in REPELITA VI is to reduce the total number of poor population to around 12 million, or 6 percent of the population. Likewise, the total number of poor villages will also be generally be overcome by the end of REPELITA VII.

In the context of increasing equity, efforts will be continued to promote regional development through policies directed at the reduction of inter-regional and rural-urban disparities. Regional development is made more intensive to improve the efficiency of the regions and maximize their potential. More balanced growth between regions will allow the share of various regions in total Gross Regional Domestic Product (GRDP) to become more balanced. The development of urban and rural areas will be made more balanced in order to reduce migration to urban areas.
 

d. Economic Stability

To support growth and equity, it is necessary to maintain economic stability. In REPELITA VI, prudent macro-economic policies will be continued. The inflation rate will be kept at an average annual rate of under five percent. The current account balance is expected further improve and the deficit will be maintained below 2 percent of GDP. Foreign exchange reserves, that are necessary for maintaining stability under the free foreign exchange system, will be maintained at a level that is sufficient for financing a minimum of five months of imports.
 

National Development Aims and Policies

Among twenty development sectors covered in the national development policy framework, six main sectors will be explained below. The sectors of development in the economic field in REPELITA VI consist of: (i) industry, (ii) agriculture, (iii) irrigation, (iv) food and nutrition, (v) manpower, (vi) trade, (vii) transportation, (viii) mining, (ix) forestry, (x) national enterprises, (xi) tourism, (xii) posts and telecommunications, (xiii) cooperatives, (xiv) regional development, (xv) marine, (xvi) aerospace, (xvii) finance, (xviii) transmigration, (xix) energy, and (xx) environment. The six main sectors will be explained below are industry, agriculture, trade, mining, forestry, and environment.

a. Industry

The objectives of industrial development are to strengthen the national economic structure by strengthening forward and backward linkages between sectors, improving the resilience of the economy, expanding employment and business opportunities and promoting the growth of all economic sectors.

In REPELITA VI, manufacturing, including oil and non-oil/gas manufacturing, is estimated to grow at an average annual rate of 9.4 percent. Non-oil/gas manufacturing will grow at an average rate of 10.3 percent per year. With this level of growth, the contribution of manufacturing to GDP will increase from 20.8 percent at the end of REPELITA V to 24.1 percent at the end of REPELITA VI. Over the same period of time, the contribution from non-oil manufacturing will increase from 17.6 percent to 21.3 percent.

Along with increased industrial production, exports of manufactured products are expected to increase by an average of 17.8 percent per year. With this rate of growth, manufactured exports are expected to reach US$ 54.8 billion by the end of REPELITA VI.

Non-oil/gas manufacturing consists of agroindustry, basic metals, capital goods, chemicals, and other important industries. Agroindustry, which includes, among others, processed food, processed timber, leather goods, goods made of rubber, and paper, is expected to grow on average by 8.2 percent per year. Basic metals and capital goods, which includes industrial machinery and equipment, transportation equipment, electronics and telecommunications, are estimated to grow on average by 12.6 percent per year.

To support the achievement of these objectives, a range of policies is required to develop industry, using the following strategy: (1) developing broad spectrum industries which are orientated towards the international market, natural resource-intensive industries with a rising technological level, labor-intensive industries which become more skilled-intensive over time, and technology-intensive industries; (2) developing industries by accelerating technological mastery in order to solidify the base for producing superior industrial products; (3) developing industries which rely on the market mechanism, with the private sector as the main actor; and (4) developing industries which emphasize growth and distribution by giving priority to those industries capable of fast growth and of improving the community's participation in a productive manner.

Priorities for industrial development during REPELITA VI will include: (1) agroindustry, which is developed through the network of agroindustrial activities and productive agrobusiness; (2) industries which process mineral resources; (3) the machinery, capital goods and electronics industries, including industries which produce components and engage in sub-assembly; and (4) export-oriented industries which become increasingly skill-intensive and varied over time, including textiles and textile products.

The development of agroindustry and agrobusiness is carried out to increase value added, intensify and strengthen the industrial structure, increase exports of industrial products, extend business opportunities and employment, and alleviate poverty. To accomplish this, policies shall be undertaken to develop agro-processing industries which utilize comparative excellence and create competitiveness, as well as harmonizing this with development of agricultural commodities which will improve farmers' purchasing power and create domestic markets. Policies will also be developed and implemented which improve the mastery and application of technology for processing agricultural products.
 

b. Agriculture

During REPELITA VI agricultural development shall be directed towards raising the quantity, quality and diversity of agricultural products and improving efficiency. Agricultural development will also be directed towards the fulfillment of food and nutritional needs, and the need for basic materials for industry. Linkages between agriculture and other industries are to be encouraged and developed, so that agriculture can benefit from domestic and foreign market opportunities, and contribute to the expansion of business and employment opportunities. These objectives are directed towards improving the standard of living of farmers and the rural community.

In addition to improving the income and living standards of farmers, the objectives of agricultural development during REPELITA VI are to improve the diversification of agricultural businesses and products and to intensify and extend agriculture with the support of agro-industry. Additional objectives are to improve labor productivity and employment opportunities in the agricultural sector, supply a diverse range of food products, and raise product quality through better processing. Agriculture should also contribute to regional development. Other objectives include maintaining food self-sufficiency, improving the farmers' capability to master and apply agricultural technology, improving the productivity of farm enterprises, and improving competitiveness both at home and overseas.

During REPELITA VI, the average growth rate of the agricultural sector shall be 3.4 percent per year. With this rate of growth, the sub-sector of food crops and horticulture is expected to reach an average growth rate of 2.5 percent, animal husbandry 6.4 percent, plantations 4.2 percent and fisheries 5.2 percent per year. With the growth of industry's share in GDP, the share of agriculture in GDP is expected to decrease from 20.2 per cent at the end of REPELITA V to 17.6 percent at the end of REPELITA VI.
 

c. Trade

Domestic trade development during REPELITA VI shall be geared towards further improving the role of the domestic market by developing a pattern of trade and a distribution system which is stronger and more extensive. The target of foreign trade development shall be the expansion of overseas markets, as reflected in growing non-oil/gas exports, and the strengthening of non-oil/gas exports through exports of non-industrial products.

In quantitative terms, the domestic trade targets shall be to achieve an average growth rate of 6.6 percent per year, so that by the end of REPELITA VI the contribution from the trade sector to GDP shall reach 17.5 percent. The average labor force growth rate in the trade sector is targeted to reach 3.5 percent per year, so that by the end of REPELITA VI it will be capable of absorbing 14.0 million workers, or 13.5 percent of all new employment opportunities.

Non-oil/gas exports are expected to increase on average by 16.8 percent per year so that at the end of REPELITA VI non-oil/gas export revenue should reach US$ 61.2 billion. The export value of farm products, industrial products, and mining products are estimated to grow by 6.8 percent, 17.8 percent and 15.0 percent per year, respectively, so that by the end of REPELITA VI the export value of these products shall be, respectively, US$ 3.6 billion, US$ 54.8 billion and US$ 2.8 billion. By the end of REPELITA VI, industry will account for 89.4% of total merchandise exports, agriculture for 5.9 percent, and mining for 4.6 percent.

Domestic trade policy in REPELITA VI shall be directed towards strengthening and expanding the market, improving consumer protection, enhancing business competitiveness which protects small and medium size businesses, and improving the role of cooperatives in trade. Foreign trade policy will be geared towards improving the competitiveness of export commodities, improving the structure of non-oil/gas exports, increasing the number of countries to which we export, and improving the role of Indonesia in trade cooperation, both bilaterally, regionally, and multilaterally, including cooperation among the developing countries.

Trade activities must also be geared towards stimulating the people's economic potential by supporting small size businesses, economically deprived groups, household enterprises, and informal and traditional businesses. This is carried out in an integrated manner through the creation of a supportive climate, provision of trading places, credit facilities and other financial resources, the improvement of trade extension and information, and the development of business capacity and business protection.
 

d. Mining

In REPELITA VI, mining development shall be continued and be geared towards utilizing the riches of mining natural resources in an economic and optimal way by continuing to preserve the environmental functions. Further, the development of mining shall be directed towards providing basic materials for the domestic industries, for purposes of energy generation and in the interest of the people and for increasing exports, improving state and regional revenues as well as expanding employment and business opportunities. The utilization of the riches of mining natural resources shall be sought in an optimal way for national development and in the interest of the people's welfare.

The objectives in the development of the mines during REPELITA VI are for increasing production and diversification of mining products for fulfilling the needs for basic materials for the industries and as a primary source of energy as well as for other people's purposes; increasing exports; creating an efficient and productive system for mining management which is supported by the capacity to master the technology and by a highly qualified human resources; improving the participation of the people in the mining business through the cooperatives; expanding the development of mining in the regions for the purpose of supporting regional development, particularly the eastern part of Indonesia; and providing reliable information services on geology and mineral resources, for purposes of further exploration, space organization, as well as for the mitigation of geological natural disaster.

During REPELITA VI, the growth of the mining sector is estimated to reach the average of 2.6 percent per year, which provides new additional employment opportunities for 147 thousand people. The absorption of work force in this sector is particularly expected from the increasingly growing and developing of people's mining business, including small scale mining in the form of cooperatives.

The national products from mining consist of mineral and coal as well as natural oil and gas. The targets in mineral and coal development which shall be reached by the end of REPELITA VI are the production of 71 million tons of coal, 40.3 thousand tons of tin, 2.75 million tons of nickel ores, 11 thousand tons of ferrous nickels, 50 thousand tons of matte nickels, 1 million ton of bauxite, 1.761 thousand tons of copper concentrate, 70.6 thousand kilograms of gold, 143 thousand kilogram of silver, and 340 thousand tons of laterite. While the targets in the mining of natural oil and gas which shall be achieved by the end of REPELITA VI are for maintaining the production of natural oil and condensed substance at 547.5 millions of barrel per year, producing natural gas at 2,960 billion cubic feet, exploiting the terrestrial heat at 1,025 megawatts, producing LNG at 28 million tons and LPG at 3.5 million tons.

In order to reach these targets, mining development policies are geared towards the efforts for developing information on geology and mineral resources; improving production, processing and diversification of mining products; as well as developing various supporting systems for improving development effectiveness of the mines, including the development of human resources and the mastery of technology as well as establishing a business climate and business partnership.
 

e. Forestry

Forestry development during REPELITA VI shall be geared towards bringing best benefits for the people's welfare by always preserving continuity and life forestry functions. The main aim in the development of forestry sector during REPELITA VI is to preserve protected natural forests for 92.4 million hectares. By preserving the protected natural forest potentials, an optimum and long-lasting production shall be achieved. In accordance with this development, there shall be efforts to improve the welfare of the poor people around and in the forests.

For the purposes of ensuring continuity and provision of basic materials for the industry and for local consumption, the production targets for logs during REPELITA VI is determined to be 188.3 million of cubic meters. While the targets for the non-timber products shall be approximately 1,360 thousand tons for rattan, 364 thousand tons for sap, 29.8 thousand tons for tengkawang tree, 30 thousand tons for sago flour, and 788.6 million cubic meters for firewood.

In order to achieve the above targets, the policy for forestry development covers the efforts for stabilizing protected forest regions and for improving the quality and productivity of the state's and people's forests; improving the efficiency and productivity of forest management and processing of forest products as well as diversifying forest products; improving the role of the community in overcoming poverty in the places surrounding the forests as well as improving the income of the backward regions; improving the role of the cooperatives, the traditional, the small and medium size businesses in forestry development; preserving the forests as a protection for the living environment and for the ecosystem; improving forest management capabilities in the regions and improving forestry development control.
 

f. Environment

The development of environment is an important part of the ecosystem functioning as a buffer to the life of all living beings. The development of the environment shall be directed towards bringing about continuity of environment functions in a dynamic balance and harmony with the population growth for ensuring sustainable national development. The development of the environment shall be aimed at improving quality and at utilizing the natural resources in a sustainable way, at rehabilitating environmental damages, and at controlling pollution and promoting the quality of environment.

The objectives in the development of environment during REPELITA VI are, among others, for improving the identification of the number and size of natural resources and the environmental functions, identification of damage levels, its utilization, and possible development, maintaining the natural resources and environmental functions; maintaining conservation areas and protected forests, biodiversity, DAS (river basin) areas, coral reefs, and mangroves ecosystem forests; establishing a more efficient and effective institutional system of environment; the control of air and water pollution, caused by developmental activities or by people's way of living; pollution control of 101 most important rivers all over Indonesia, which have been heavily polluted; control of coast damages and the maintenance of quality and function of coastal areas; and recovering production potentials of critical soil in at least 39 DASes.

In order to reach these objectives, certain policy measures shall be adopted. The portfolio requires that the selection of location for development is always be based on the capability of the environment to support the development. Other policy measures include the efforts to reduce industrial hazardous wastes the efforts for managing the waste and adequate control of pollution, efforts in determining environmental quality standard; efforts in conservation and rehabilitation of natural resources and the environment; and effort in developing institutions, people's participation, and capability of human resources in managing the environment.

 

IV. ENVIRONMENTAL OBJECTIVES IN REPELITA VI

Environmental Objectives play a key role in REPELITA VI. The Plan targets improvements in the management of natural resources and minimization of pollution as key objectives. Achieving these goals will entail a three-pronged approach focusing on policy, investment and institutions. Successful environmental and natural resource management depends on maximizing the links, between sound economic policies and sound environmental outcomes. In particular this entails taking full advantage of "win-win-win" pricing policies that reflect the true value of fuels and energy, forests, water, and land to the country. But moving to market prices is not sufficient in many cases, such as clean air and water. Here it will be necessary to use a mix of regulatory policies and market-based policies such as pollution charges to limit environmental degradation. These policies will encourage private investment in pollution control. In the public sector, investments in reducing congestion, and in water, sewage treatment, and sanitation will be key factors in maintaining a healthy urban environment. Finally, achieving REPELITA VI's environmental goals will entail improvements in the design, scope and effectiveness of institutions charged with meeting those goals, coupled with information campaigns to enlist the support of the public in the sound management of the environment.

REPELITA VI and the Second 25 Year Long-Term Development Plan aim to improve natural resource management and minimize pollution. Problems of natural resource management are the sustainability of forestry and potential declines in oil & natural gas reserves, with water basin and aquifer management becoming important issues. The highest priority pollution problems are water supply and sanitation, vehicle emissions, and industrial pollution in the main urban centers.

Better use of incentives, in particular pricing that more closely reflects the true value of resources and the costs of activities to the environment, would encourage more efficient use of resources, less damage to the environment, and more fiscal revenues, a so-called "win-win-win " solution. A good example is the 1993 increase in petroleum prices. Other important areas where higher prices would generate win-win-win solutions are, first and foremost, forestry royalties and stumpage fees (with revenues brought into the budget), but also electricity and fertilizer prices. In addition, there is considerable scope for increasing water charges and effluent fees, although these measures would have to be complemented with institutional developments that discouraged tapping of aquifers and self-disposal that would harm water resources. Fees for parking or access to congested urban zones could reduce bottle-necks and associated vehicle pollution.

Investment will also be necessary to reduce pollution. Massive public investments will be needed to limit urban congestion and realize REPELITA VI's ambitious targets for delivery of safe water (from 50% to 75% of the population) and sanitation (from 25% to 54% of the population). A key issue will be implementation of the investment plan; over the last five years, investments in urban water and sanitation fell significantly short of targets. Effectiveness of service delivery could also be improved by greater reliance on contracts with the private sector for construction and management of systems. In addition, private investments will be needed to reduce the enormous projected increase in industrial pollutants that otherwise would accompany the projected industrial growth. Adjustments in investments need to begin now, because 85% of the projected increase in pollution over the PJP II would come as a result of growth, not existing production. A mixture of pollution charges, regulation, and development of institutional enforcement capacity will be needed to encourage these private investments.

Institutional development also will play a major role in improving management of natural resources and reaching the Plan's environmental goals. In the area of natural resource management, institutional development will be critical to enforcement of higher charges for logging and water/sanitation. In the area of oil and gas, a decision will be needed soon on whether what adjustment, if any, would be desirable in contract terms, given the long lead times for development of fields, the projected decline in net oil & gas exports, and the projected trends in world oil prices. Institutional development also will be needed to limit the growth of pollution, by strengthening the capacity of the local governments, which will increasingly implement urban infrastructure investments, and the institutions charged with monitoring and enforcing environmental standards. A final, important institutional element will be to build a public consensus in favor of environmental protection, particularly in the business community, and to provide public information about environmental problems and solutions.
 

V. INCENTIVE FRAMEWORK IMPROVEMENTS TO PROMOTE COMPETITIVENESS AND EFFICIENCY

Since 1990, the approach to deregulation has shifted. Cuts in protection have become more specific, less widespread. Non-tariff barriers cover about 30% of manufacturing and 35% of agriculture, about the same as in 1991. The average nominal tariff has been about 20% since 1991. Average effective protection in manufacturing remains about 50%, meaning, on average, domestic producers can be 50% less efficient than their international competitors and still sell in the domestic market, although they of course cannot export.

Agriculture and agro-industry have some of the highest protection, and suffer under most of the export restrictions. One result is higher food prices in Indonesia, an effective tax on consumers. The export-oriented firms have little incentive to develop backward linkages because local costs of many inputs are high. Competitive pressures on the high cost firms will increase as a result of the last two deregulation packages, which allow export oriented firms to sell more in the local market, benefitting consumers. However, monitoring will be needed to ensure that their gains in sales reflects higher efficiency, not simply their access to duty-free inputs.

Restrictions still limit investment, and thus competition, in a number of sectors. Foreign direct investment is subject to additional restrictions, in particular limits on investments in certain sectors, and fairly high minimum investment requirements. Moreover, the last deregulation package increased the required divestiture of equity to 51% after 20 years (except for firms in bonded or export zones). Although actual foreign investment has continued to grow, new investment proposals fell in 1993 and Indonesia will face tougher competition for direct foreign investment in the future. If direct foreign investment were to decline, and/or existing, footloose investment were to pull-out, then the transfer of technology and the growth of exports would decline.

A change to more across-the-board deregulation would boost exports and generate the efficiency, productivity growth and international competitiveness needed to achieve the goals of REPELITA VI. Such a program would be particularly appropriate currently, given the possibility of low oil prices, the substantial increase in competition for export markets and direct investment, and the opportunities provided by the Uruguay Round's opening of markets, particularly for agricultural and agroindustrial products. Such a program would encourage competition and automatically weed out inefficient producers, which cannot be supported in the current, more competitive international environment.

An across-the-board deregulation program to promote efficiency would entail: (1) Elimination of NTBs (with replacement by temporary tariffs); (2) Reduction of high tariffs (including surcharges) to a stated maximum, at most 15%, perhaps over a pre-specified period to- allow producers time to adjust; (3) Elimination of export restrictions (except for auctions to allocate textile export quotas and perhaps for tariffs in some forestry markets where Indonesia has monopoly power, although here the recommended increases in forestry fees would in any case raise export prices); (4) a supportive exchange rate policy, to smooth gradually the adjustment to a lower average rate of protection and higher levels of exports and imports; and (5) further easing of the restrictions on investment, particularly the special restrictions on direct foreign investment, for example by easing of divestiture and minimum investment conditions, in order to improve technology transfer and access to foreign markets.
 

Trade Deregulation: Eliminating Export Restrictions

In contrast to the easing of import restrictions over the past nine years, Indonesian exports have been subjected to increasing regulation and control. Export restrictions now cover half of total non-oil exports. The export restrictions take four forms: export bans (72 products), regulated exports, which can only be exported by exporters approved by the Ministry of Trade (1,827 products), supervised exports, which require approval by the Ministry of Trade (105 products), and export taxes (80 products). Most of these restrictions are directed toward agricultural exports. Products accounting for nearly two-thirds of the $4.1 billion in agricultural exports, including all the large cash crops--rubber, palm oil, coffee, and copra--are subject to some form of export restriction. Trade associations also affect the marketing of some, primarily agricultural commodities.

Five reasons are cited for using export restrictions: (i) to deal with quotas imposed by importing nations; (ii) to conserve natural resources and endangered species; (iii) to promote higher value added downstream industries; (iv) to raise the quality of the exported products; and (v) to regulate domestic supplies. Export restrictions are an appropriate instrument for controlling exports subject to quotas in importing countries and, in some instances, to protect endangered species. However, they are not appropriate instruments for the other objectives. As discussed below, they often have unwanted side effects or large welfare costs. An appropriate course for stimulating exports would be continued deregulation to eliminate all bans, regulations, taxes and other restrictions on exports. In light of the analysis below, the only export restrictions that would remain are those on textile exports while they remain subject to Multi Fiber Arrangement quotas (with the quotas auctioned) and the bans on the export of endangered species. For a few select products (some species of tropical hardwood and some spices such as nutmeg) it could be argued that the nature of long-term demand and Indonesia's market share offer scope for the possibility of export taxes to influence favorably world prices by implicitly taxing production. However, the potential benefits must be weighed against the real costs of determining and enforcing such measures. Export taxes create an incentive to smuggle and effective control of smuggling is difficult in the Indonesian archipelago.

Promoting higher value added downstream industries. Export restrictions are used to lower input costs and thereby promote downstream industries. This leads to resource misallocation from under-production of the input and over-production of the processed good. The export restrictions on logs provide a good example of how export restrictions to promote higher value added downstream activities leads to resource misallocation and welfare losses. The export of logs was banned from 1985 to 1992 when the ban was replaced by prohibitive export, taxes. The ban on log exports lowered their domestic price, which increased the incentive (effective protection) for log process. However, rather than encourage the highest value added processing such as woodworking and furniture production, the ban benefitted activities that profit from high throughput of logs, mainly plywood mills. The granting of log export quotas for the 1981-85 period only to logging concessionaires who had wood processing facilities in operation or under construction also encouraged the development of the plywood sector. These policies were successful in capturing the international tropical plywood industry from Japan and Korea. Since the log ban became fully operational in 1985, the value of plywood exports, helped by world price increases in 1987 and since 1990, has increased rapidly.

Domestic log prices remain below world prices after eight years of export bans and prohibitive export taxes. The failure of log processors to bid up domestic log prices to the world level reflects a lack of competition in the domestic industries. The plywood export marketing system indirectly controls entry to the plywood industry through its power to allocate plywood export quotas. High export taxes on sawn timber restrain demand from another large potential demander of logs. Their main benefit has been to increase the supply of cheap logs to the plywood industry.

To increase the efficiency of resource use in the plywood industry, log users need to face the world price for logs and entry barriers into the domestic log market need to be reduced. New concession licenses, or renewals, would need to be de-linked from processing capacity, and existing concessions free to sell logs on the domestic market to processors. The royalty rate would need to be raised annually to reach international parity levels. Stumpage fees would also need to rise to encourage forest conservation. The prohibitive export taxes on logs and sawn timber would need to be replaced by much lower ad valorem export taxes. To ensure that domestic log prices rise, a target date--for example, the year 2000--would be set for opening the log market to exports.
 

VI. NATURAL RESOURCES AND THE ENVIRONMENT in REPELITA VI

Environmental quality and sustainability are an integral part of the Indonesian Government's development concerns. As REPELITA VI states: "Environmental values influence all of the desirable development activities of the Second 25 Year Plan.'

The growing attention to these issues in the Government's development strategy reflects an increased awareness of the costs and risks of the worsening environmental conditions due to past growth, and potential for continued environmental degradation in the future. Past growth was heavily dependent on natural resources--oil, gas and forest products. Although the Government has successfully reduced that dependence, the sustainable management of natural resources and the environment remains a major challenge.

The environment provides two key functions in support of economic activity. First, it is a source of natural resources, both renewable and non-renewable, for use in production. Natural resources must be managed over time, in light of opportunities for trade, to maximize sustainable growth. Second, the environment must absorb waste products created during the production of goods and services. The environment's capacity is limited and use of that capacity must be explicitly managed because externalities and poorly defined property rights make leaving such management to the market an incomplete solution. For both natural resources and the environment, efficiency and sustainability could be enhanced by greater reliance on fees that reflect the economic costs and benefits of resources (so-called win-win policies because they simultaneously improve environmental and economic outcomes). Improvements in incentives will need to be coupled with institutional improvements, particularly in forest, land and marine fishery management.

Unless existing policies and practices are changed, analysis of current environmental conditions and the likely impact of future growth and development indicates that three main problems will emerge that will threaten overall GDP growth and equity in REPELITA VI and the Long-Term Development Plan.

First, future growth and development, including the process of industrialization, would increasingly strain Indonesia's stock of key natural resources (land, forests, water and energy) and the sustainability of critical ecosystems (including groundwater aquifers in cities, and watersheds and coastal and marine ecosystems throughout Indonesia). This would occur despite the shift away from growth based directly on natural resources. Moreover, inefficiencies in the allocation and use of natural resources and the prospects for, continued degradation of critical ecosystems, call into question the sustainability of even current levels of economic activity in a number of key sectors.

Second, pollution from industrial and urban sources (human waste, solid waste and vehicle emissions), already poses a threat to health and welfare. This threat would increase because of the concentration of industry in cities. Moreover, continued growth of congestion and pollution in Indonesia's main cities would erode the efficiency of public and private sector investment, reduce Indonesia's ability to attract foreign investment, and could lead to strong community resistance to industrial expansion, again with serious implications for overall growth.

Third, the poor are particularly vulnerable to growing pollution and the erosion of natural resources. Lacking the resources to protect themselves, they would bear the brunt of polluted water and air in the cities and the falling productivity of marginal lands in the country side. The poor would also contribute to environmental degradation through unsustainable production practices and the unsafe disposal of human and other wastes. Dealing with these environment-related issues of equity will become increasingly important in the coming years.

The potential consequences of these issues have led to a growing awareness in Indonesia of the need to improve the management of natural resources, reduce the level of urban and industrial pollution, and enhance equity in the outcomes of future growth and development. This will require continued improvements in the policies and incentives for environmentally responsible behavior, a substantial increase in investments in environmental protection by both the Government and the private sector, and sustained efforts to strengthen the institutions responsible for environmental planning and management.
 

The Role of Natural Resources in Growth

The Changing Reliance on Primary Commodities. Indonesia has the good fortune to own vast and varied natural resources: the world's second largest expanse of tropical forest, fertile soil, teeming seas, prolific oil and gas deposits, and generous amounts of coal, tin, copper and gold. These resources significantly contributed to GDP growth during the First 25-Year Plan. At the start of that Plan in 1970, the value added in the production and exploitation of primary commodities represented about 60% of total GDP: in minerals (primarily oil) 27%; in agriculture (food and other crops, plus livestock), 28%; and in fishing and forest resources another 5%. The first-stage processing of basic commodities (logs into sawn wood, hides into leather, etc.) represented only about 4% of GDP, and further downstream processing (sawn wood into furniture, leather into shoes) less than 2%. The export of primary commodities accounted for 94% of total foreign exchange revenues. Two-thirds of the labor force was employed in the primary sectors.

This picture has changed significantly in the last 25 years, in both relative and absolute terms, with significant implications for the environment. The share of value added from primary commodities in total GDP has declined markedly: from 60% in 1970, to 39% today. Primary exports declined from 94% of the total in 1970 to about 60% today. Employment in the primary commodity sector has fallen from 65% to less than 55%. These trends will continue. In absolute terms, however, the value added of primary commodities has more than doubled over the past twenty years--from Rp21,300 billion in 1970 to Rp44,300 billion in 1990 (in constant 1983 prices)--with "exhaustible" resources (oil, LNG and other minerals) up by 128%, and "renewable resources (agriculture, fishing and forestry) up by 91%. While these sectors will grow more slowly over the next two decades, their total value added is likely to increase by a further 50% by the year 2010. Similarly, commodity exports have increased by 130% over the past twenty years, and are likely to increase in the medium term, particularly if deregulation proceeds in agriculture.

Proper Accounting for Natural Resources. Annual value added from natural resources is only a part of the picture linking growth and natural resources. One must also pay attention to the stock of natural resources. For a level of GDP to be sustainable, at a minimum the capital used up in generating that GDP growth must be replaced. This means investment must at least equal both the depreciation of man-made capital (broadly defined to include human capital) and the depletion of natural capital. If not, a country is consuming its capital. When the stock is gone, GDP must collapse. For growth in GDP, the growth in investment in both forms of capital must exceed their depreciation.

Traditionally, national accounts have only dealt with this problem in terms of manmade capital. Statisticians created the concept of Net Domestic Product (NDP), which nets depreciation from investment and GDP. Clearly, if net investment is negative the capital base is eroding and NDP will decline.

Where natural resources are a key contributor to growth, changes in the stock of natural resources must a]so be tallied. If depletion of natural resources is not properly reflected in national accounts, the sustainable growth rate may be overestimated. This is because current income (annual GDP or NDP) can reflect profits made from using up stocks of resources that may be either non-renewable or being used at a rate greater than is sustainable or renewed.

Measuring natural resource stocks requires measuring the physical additions to those stocks through natural growth, as in the case of forests, or through new discoveries, as in the case of oil. Physical reductions must also be recorded, chiefly as depletion as the stock is used up in production. Depletion is the natural resource equivalent of depreciation.

As is readily apparent, the physical stocks of Indonesian natural resources has declined since the 1970. For tropical timber the decline is roughly 0.8% per annum, while for oil it is 0.69%. Most of the tropical timber decline has been related to conversion of forest into estate crop plantation. The figure rises to 2% for oil if one uses the peak 1975 reserve stock as a base. The 1975 oil reserve figure is higher for two reasons. First, for oil and gas the estimate of reserves is not absolute physical reserves but proven reserves (usually about 25 % of physical reserves). Proven reserves are those amounts of oil and gas economically recoverable at existing prices. Given this definition, increases in prices such as the first oil shock, by increasing what could be spent to recover oil and gas, increase the amount of proven reserves. Second, higher prices and profits encourage higher investments in exploration that, when successful, increase proven reserves.

In combining different natural resources to derive a natural capital stock, one needs to value the physical stocks. In principle, the economic value of a natural resource is the revenue that accrues from its exploitation less the minimum cost required to cover returns to all the factors of production used in exploiting the resource. For a resource like oil or gas, it is feasible to estimate its value as the difference between the market price of the resource, and the cost of actually exploiting it. This value is often called the resource's economic rent.

One difficulty faced in valuing forests (or other resources) is the existence of values other than the simple economic ones: amenity value (such as the non-destructive recreational use of forests); option value (the retention of a natural resource in expectation of an as yet undiscovered benefit--the commonly heard argument for biodiversity and gene pool conservation in forests is an example); and existence value (the psychological or spiritual value society derives from the existence of a natural resource, aside from any physical use of it). Many forests, in Indonesia and elsewhere, have spiritual or sacred value to society, especially to indigenous traditional forest dwelling or adjacent groups.

Indonesia's forests also provide economic benefits external to the holders of the resource, such as soil and water effects, in watersheds and downstream. Tropical forests also have an enormous capacity to store carbon, and to re-absorb it when in a regenerating state, and this has implications for global climate change. Were these benefits to be valued, they would come out to be highly significant--possibly as significant as the timber values of the resource. Some of these benefits, e.g., carbon sequestering, are global rather than national in nature.

Even with this admittedly poor method, the value of timber is extremely large when compare to oil and gas, the natural resources that have figured most prominently in many discussions of Indonesia's economy. This higher value of forests, compared to oil and gas, underscores the need for closer attention to forestry management. This is especially true given the renewable nature of forests when compared to oil and gas.

Oil and gas figure more significantly in measured GDP, and for these resources, as noted above, it is feasible to value the resource stock by subtracting extraction costs from market prices. Doing so reveals that the value of Indonesia's oil stock has declined since the early 1980s, as international prices, and hence economic rents, have fallen.

Looking ahead, the declining or stagnant trends in the value of timber, oil and gas stocks have important implications for sustainable growth. If one adopts the view that sustainability allows for substitution of manmade for natural capital, then rates of manmade capital accumulation will need to increase to offset the declines in natural resource stocks. The rate of decline in physical resources of renewable resources like timber will need to be brought in line with sustainability. Failing to do so endangers the roughly US$4.5 billion in exports and US$8 billion in income that forestry contributes to the economy each year. Indonesia's readiness to adhere the green labeling requirements will be important in combining continued export revenues with sustainable management. With non-renewable resources, eliminating declining physical stocks of oil and gas is not a long-run option. Nonetheless, increased exploration expenditures, and the new discoveries that will flow from them, could increase the stocks of proven reserves and hence maintain production levels and GDP.