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Indonesia's
exports were vital to its economic
development, as exports earned the
foreign exchange that permitted
Indonesia to purchase raw materials
and machinery necessary for industrial
production and growth. During the
1980s, about 25 percent of domestic
production, or GDP, was exported.
Although petroleum was the most
important export, other exports
included agricultural products such as
rubber and coffee and a growing share
of manufactured exports. In the late
1980s, the government classified about
70 percent of imports as raw materials
or auxiliary goods for industry, about
25 percent of imports as capital
goods, primarily transportation
equipment, and only around 5 percent
of imports as consumer goods
Export
earnings also contributed to
Indonesia's ability to borrow from
world financial markets and
international development agencies. On
average, about US$3 billion per year
was borrowed during the 1980s. These
borrowings primarily financed
government sponsored development
projects. However, increasing interest
payment obligations in the late 1980s
helped bring more restraint to
government borrowing.
Indonesian
exports were traditionally based on
the country's rich natural resources
and agricultural productivity, making
the economy vulnerable to the
vicissitudes of changing world prices
for these types of products. For
example, the Dutch colonial economy
suffered when world sugar prices
collapsed during the Great Depression,
and fifty years later, the New Order
endured the dramatic oil market
collapse in the mid-1980s.
Manufactured exports offered the
prospect of more stable export markets
during the 1980s, but even these
products were threatened by increased
trade protection among industrial
countries. To avoid heavy reliance on
a few trade partners, the government
pursued several measures to diversify
export markets, especially to other
developing nations such as China and
Indonesia's fellow members of the
Association of Southeast Asian Nations
Substantial trade reforms during the
1980s contributed to the surge in
manufactured exports from Indonesia.
The most important manufactured export
was plywood, whose domestic production
was facilitated by the ban on log
exports in the early 1980s. In 1990
plywood accounted for over 10 percent
of total merchandise exports. Although
not yet significant individually, a
wide range of manufactured products,
including electrical machinery, paper
products, cement, tires, and chemical
products, helped bring overall
manufactured exports to 35 percent of
merchandise exports, or a total of
US$9 billion in 1990, up from less
than US$2 billion in 1984
The
growth in non-oil exports helped Indonesia
maintain a positive trade balance throughout the
1980s in spite of the oil market collapse.
However, increases in imports, service costs such
as foreign shipping, and interest payments on
outstanding foreign debt all contributed to a
worsening current account deficit in the late
1980s. The deficit more than doubled from US$1.1
billion in 1989 to US$2.4 billion in 1990. The
1991 current account deficit was predicted to
reach as high as US$6 billion.
The
government had successfully avoided a debt crisis
in the early 1980s when many developing countries,
including the neighboring Philippines, were forced
to temporarily halt debt repayments. In a
comparative study of Indonesia and other debtor
nations, economists Wing Thye Woo and Anwar
Nasution argued that Indonesia's success was due
to two main factors: heavy reliance on long-term
concessional loans and sustained high exports
because of a willingness to devalue the exchange
rate even when oil export revenues were When
dollar interest rates soared in the early 1980s,
Indonesia's average interest rate on long-term
debt was 16 percent compared with over 20 percent
paid by Brazil and Mexico.
By
1990 Indonesia's total outstanding foreign debt
had reached US$54 billion, more than double the
amount in 1983. Over 80 percent of this debt was
either lent directly to the government or
guaranteed by the government. Measures to reduce
foreign borrowing together with the rise in export
earnings brought the debt service ratio from 35
percent in 1989 to 30 percent in 1990 .Indonesia
continued to rely heavily on borrowing from
official creditors rather than private sources
such as commercial banks or bond issues. In 1990
US$33 billion, or 75 percent, of government debt
was from official creditors; of this amount,
US$18.5 was at concessional terms. In 1990 US$5
billion in new loan commitments from official
creditors were secured at an average interest rate
of 5.7 percent, with an average maturity of
twenty-three years, whereas US$1 billion in new
commitments from private creditors entailed a 7.4
percent interest rate and an average of fifteen
years maturity.
The
mounting government concern over foreign debt led
to the establishment of a Foreign Debt
Coordinating Committee in 1991, which included ten
cabinet ministers chaired by the coordinating
minister for economics, finance, industry, and
development supervision. The committee was given
broad powers to document and coordinate all
foreign borrowing that was related to either the
central government budget or the state enterprise
sector. Although in theory this debt excluded
private-sector foreign borrowing, such borrowing
could be included if the investment project
received any state financing or supply contracts
from state enterprises. The power of this
committee was made apparent in its first
initiative in 1991, which postponed until 1995
four major energy and petrochemical projects
representing a total investment of US$10 billion.
Multilateral
aid to Indonesia was long an area of international
interest, particularly with the Netherlands, the
former colonial manager of Indonesia's economy.
Starting in 1967, the bulk of Indonesia's
multilateral aid was coordinated by an
international group of foreign governments and
international financial organizations, the
Inter-Governmental Group on Indonesia The IGGI was
established by the government of the Netherlands
and continued to meet annually under Dutch
leadership, although Dutch aid accounted for less
than 2 percent of the US$4.75 billion total
lending arranged through the IGGI for FY 1991.
The
Netherlands, together with Denmark and Canada,
suspended aid to Indonesia following the
Indonesian army shootings of at least fifty
demonstrators in Dili, Timor Timur Province, in
November 1991 The shootings led to international
protests against government policy in the former
colony of Portuguese Timor, which had been
forcefully incorporated into the Indonesian nation
in 1976 without international recognition.
Indonesian minister of foreign affairs Ali Alatas
announced in March 1992 that the Indonesian
government would decline all future aid from the
Netherlands as part of a blanket refusal to link
foreign assistance to human rights issues, and
requested that the IGGI be disbanded and replaced
by the Consultative Group on Indonesia formed by
the World Bank.
Indonesia's
major aid donors--Japan, the World Bank, and the
Asian Development Bank --contributed about 80
percent of IGGI-coordinated assistance, and were
willing to continue assistance outside the IGGI
framework. Other donors, however, such as the
European Community, had charter clauses refusing
financial assistance to governments that violated
human rights. Although European Community did not
sever its aid ties to Indonesia following the 1991
events in East Timor, human rights concerns were
expected to affect subsequent negotiations
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