I.                   introduction

1.         Since the previous Trade Policy Review in 2003, Indonesia has continued a broad-based political and economic reform programme aimed at sustainable development and the alleviation of poverty.  Under this programme, which includes a further opening of the economy, Indonesia achieved 5.5 per cent overall economic growth in 2006, while inflation had fallen to 6.6 per cent from over 17 percent in the previous year. Coupled with falling debt and growing reserves, this turnaround of the economy means that Indonesia has now been able to pay increasing attention to addressing social problems.  Apart from the economic austerity programs used to tackle the financial crisis of 1997/98, Indonesia’s difficulties have included coping with a series of various large-scale natural disasters (tsunami, earthquakes, flooding) that strained resources.  Internationally, Indonesia is a strong supporter of the Doha Development Agenda, and has been an active participant in the WTO negotiations.  It has also strengthened its trade and investment ties with neighbours in the Asia-Pacific region.

2.         Political and institutional reforms are central to the modernization of the economy, and in the last ten years Indonesia has undergone important democratic change, most recently manifest in the direct election of President Susilo Bambang Yudhoyono and Vice-President Yusuf Kalla.  The Government has also devolved increased authority and responsibilities to the regions, where it has lifted spending to help improve welfare across the country.  It has made a major effort to address the issue of corruption, including in tax administration, customs and public procurement, by greater transparency and auditing in relation to both process and decision-making.  It has sought to improve competition within the Indonesian economy, and hence also external competitiveness. A new Investment Law (approved by the legislature in March 2007) should contribute to this process. While state-owned enterprises provide an increasing net return for the Government, further privatisation is envisaged, consistent with national development objectives.  The Government has made some important advances in the implementation of protection of intellectual property rights.  While progress has been made on many fronts, the effort to develop a modern, efficient, more open and competitive economy is ongoing.  

3.         Consistent with its broad approach to modernising the economy, the Government of Indonesia is also progressing on trade policy.  Tariffs – now the main trade policy instrument - are in the process of being lowered and made more uniform in line with the ASEAN Tariff Harmonization Program.  As a consequence of these changes and the deeper integration in the regional and the world, the overall import weighted applied MFN rate has come down to a moderate 8.3 per cent in 2006,[1] demonstrating the openness of the Indonesian economy. Moreover, non-tariff measures are continuing to be reduced and eliminated. Agriculture, critical to the livelihood of a large part of the Indonesian population, has started to benefit from a revitalization programme providing support for infrastructure, financial services, research and development and institutional reform. Industrial policy is oriented to fostering cluster groups, with selective use of incentives to support the development of Indonesia’s regions and deepen and diversify industrial production in the face of stiff international competition and a fast-changing business environment.  Indonesia is also seeking to develop a modern services sector that it also regards as important through inter-sectoral linkages for the country’s efforts to improve competitiveness in traditional and non-traditional exports.

4.         In international trade relations, Indonesia is an active participant in the current WTO negotiations, working together with other WTO Members to achieve a balanced outcome, consistent with the development objectives that are central to the Doha Declaration.  Indonesia’s principal concerns are to obtain improved access for its key agricultural and manufactured exports, while ensuring obtaining guarantees for its most sensitive sectors objectives and some flexibility to develop its industrial sector.  Indonesia, which is the coordinator of G-33 (a group of developing countries), believes that the negotiations in these areas point towards some welcome understanding of its key concerns.  When the details are fully elaborated, the way should be clear for a speedy conclusion of the negotiations, provided WTO Members countries are ready to make the necessary political choices.

5.         High among the Government’s priorities is to continue to build on the existing reforms, further lifting economic growth to increase employment opportunities. Among the newer reforms, investment legislation that was approved by the legislature on 29 March 2007 and the accompanying implementing regulations should further help to improve the climate for investment and improve the competitiveness of business more generally. The Government is also working to ensure that the benefits of the reforms -political, institutional, legal, social and economic reforms – are available to all the Indonesian people in a safe, just, democratic and prosperous Indonesia.  However, there are some constraints, internal and external, that need to be addressed. Moreover, implementation of many reforms already approved is underway but will take time.  In a democracy, progress cannot be achieved overnight in implementing the comprehensive reform package set out by President Susilo Bambang Yudhoyono and Vice-President Yusuf Kalla.  Much also depends on economic conditions in world markets, affecting commodity prices and the flow of earnings to help to develop and modernize the economy.  Despite the challenges ahead, Indonesia faces the future with greater confidence than at any time in recent years, and looks forward to working with its trading partners to build a more open, secure and stable environment for their mutual trade and investment.

II.                ECONOMIC ENVIRONMENT

A.       Main Economic And Policy Developments

6.         Since the previous Trade Policy Review of Indonesia, the Government has been carrying out its own economic reform package, following completion of the IMF reform program in 2003. This has taken place against the background of a series of devastating natural disasters, including the tsunami of December 2004 in Aceh and Nias, the large earthquake in Yogyakarta and Central Java in May 2006 and other smaller but also very destructive earthquakes in Nias, Papua, West Sumatra, Nusa Tenggara, North Sulawesi, the mud volcano in East Java that has been flowing since May 2006, the July 2006 earthquake and tsunami in West Java and floods which  hit various parts of Indonesia in the early part of 2007. In addition, avian influenza has already claimed many Indonesian lives.

7.                   The economic reforms are being implemented within the overall framework of the Agenda for National Development for 2004-2009, which has three main goals, namely i) A Safe and Peaceful Indonesia, ii) A Just and Democratic Indonesia, iii) A Prosperous Indonesia.  With regards to the agenda for enhancing the prosperity of the people, the main target is to reduce total number of the poor population and lower unemployment. To attain these targets, the Indonesian Government under President Susilo Bambang Yudhoyono and Vice-President Yusuf Kalla created a "cut-through" strategy: i) to accelerate economic growth (pro-growth); ii) to create employment (pro-job) and reduce poverty (pro-poor); and iii) to revitalize the agricultural sector.

8.                   In order to accelerate economic growth, in 2005 the Government announced several refinements of policy to impart great dynamism to the economy and to cope with external pressures, such as the oil price rises and the increase of interest rates.  The modifications extended to energy, monetary, fiscal and investment policies. In the energy area, the government outlined its intention to reduce fuel demand and encourage the progressive development of new energy sources such as bio-fuels. The specific measures taken covered: i) the adjustment of the fuel price for the industry and mining sector with the market price, ii) economizing the use of fuels in government activities, iii) the adjustment of overall fuel prices; and iv) the accelerated the reduction of fuel usage by electricity power plants.  Cuts were also made in fuel subsidies, but these were offset by the unconditional cash transfer programme (UCT) to reduce the impact of the changes on the poor, although this is to be modified later this year to a cash for work program and a comprehensive program to improve the welfare of the poor people such as in the areas of education and health.  Fiscal incentives were also introduced to help industry, including by strengthening competitiveness, improving the business climate and compensating workers. The incentives, listed in the October 2005, package involved changing the value added tax status of primary products to non-taxable products, and the waiver of customs duties for several industrial inputs. 

9.                   These adjustments, together with interest rate increases, were intended to put fiscal and monetary policy on a solid footing, but they also occasioned a slow down in the economy in early part of 2006.  This was partly offset by export growth that reached 17.6 per cent, and recovery was evident in the latter part of 2006, with growth accelerating to 6 per cent in the last two quarters, bringing the rate of growth of the economy to around 5.5 per cent for the year as a whole.  Inflation, which had surged to 17.1 per cent in 2005 (when fuel prices had increased by more than 100 per cent), was curtailed to 6.6 per cent by the end of 2006 (2 percentage points below the targeted level). Inflation stabilization and relatively good performance in the balance of payments, with a surplus of 3.7 per cent of GDP and a historical high of foreign exchange reserves of US$43 billion (even after early repayment of $7.8 billion in debt to IMF) , contributed towards a stable Rupiah exchange rate throughout 2006.   However, despite these encouraging indicators, renewed growth has not been matched by similar growth in employment opportunities, and the Government is making an effort to lift growth to around 6.3 per cent in 2007 to help address this problem.  This should also contribute to poverty alleviation, as should a number of other specific policies, as discussed below.

B.       Financial Sector Restructuring

10.               Financial sector reforms are aimed at overcoming the problem of access to capital and finance needed as working capital and for growth.  While large businesses have access to international financial markets, small and medium-size business face high domestic interest rates.  To help overcome this problem, Government and Central Bank have been working to drive down inflation to single-digit levels, which it achieved in 2006, following an increase in 2005.  This should pave the way for a further decrease in interest rates that will also provide a stimulus to growth. 

11.               The Government is seeking to address weaknesses in the financial market by diversifying the sources of funding available to the real sector, both from financial institutions and capital markets. In addition, the Government is also taking steps to strengthen financial sector stability to re-build public and market confidence in the Indonesian financial sector, decreasing the risk of any recurrence of the financial crisis. The Government is also seeking to promote competition between banks, other financial institutions and the capital market to improve the overall efficiency of the financial sector. If successful, the competition will drive down current inflated margins, and hence the cost of finance. The financial sector package, aimed at assisting in this process, is targeted mainly at regulatory and institutional reforms. A follow up financial sector package, being prepared in early 2007, is directed at increasing access to finance and lowering the cost of finance.

C.       Investment

12.               While the Government plays a key role in the provision of public services, including health, education, infrastructure, etc., private sector investment, including inward foreign direct investment, is important for the modernisation and greater efficiency of the economy. Therefore, investment policy has been an important component of the policy changes that were introduced in 2005.  These reforms, intended to improve, the country’s investment climate cover are contained in three policy reform packages launched in the first half of 2006.  The investment policy package (February 2006) covers the following areas: i) general investment policies; ii) customs; iii) taxation; iv) the labour market; v) small and medium-size enterprises (SMEs). The Infrastructure Development Package (March 2006) provides the policy framework for public private partnership and the risk sharing to enable acceleration of the building of infrastructure with private sector participation. The Financial Sector Reform Package (July 2006) aims at improving coordination between the Government and the central bank, Bank Indonesia, and to continue reform steps to strengthen the banking industry, non-bank financial institutions and the capital market. 

13.               A number of areas in each of these reform packages have been completed such as the risk sharing framework for infrastructure; the revised Customs Law; and most recently the  Investment Law which was passed in Parliament on 29 March 2007.  At the same time there is an ongoing program of deregulation, administrative and bureaucratic reforms aimed at increasing the efficiency and good governance of the public service.

14.               In the last three years domestic investment has risen sharply, doubling between 2002 and 2005 (from Rp.26 trillion to Rp. 50.6 trillion). In 2006, realized domestic investment until November amounted to Rp 153.9 trillion and realized foreign investment amounted to Rp 42.8 trillion (with Indonesia’s currency assumption Rp 9,100 for 1 US$).  This has been concentrated in the food, chemicals and pharmaceuticals industries as well as in electricity, gas and water supplies. Foreign direct investment tends to fluctuate considerably from year to year but has shown a moderate overall positive secular trend since 2003, reaching $8.9 billion in 2005. FDI is concentrated mainly in the large plantations, chemicals, automotive, and pharmaceutical sectors, but there are significant levels also in transportation, warehousing, communications and construction.  Thus while policies are bearing fruit, Indonesia would benefit from further investment by the private sector.  

D.       Infrastructure

15.               Apart from the general objective of improving the investment climate, the reforms also targeted the challenges in improving infrastructure. Government of Indonesia recognizes that investment in infrastructure is necessary to improve the overall investment climate and to support economic growth. It has been focussing on establishing an effective framework for policy, regulation and new institutions, sector specific reforms, facilitating the involvement of local government in the provision of infrastructure, and improved project preparation.  It has also been improving government procurement procedures to ensure value for money in public works and the elimination of corruption.  (The Government also considers that public works are beneficial in the short term by generating jobs and growth while the infrastructure to come on stream has longer term goals).

16.               Despite improved public finances, the Government does not have the economic capacity to finance all necessary infrastructure development. It is estimated that around 60 percent of funding needed for infrastructure building will need to come from the private sector. To deal with this budget constraint, Government has adopted some strategies such as promoting Public Private Partnerships (PPP).  Under this strategy, a risk sharing framework has been designed with the private sector, and funding has been allocated in the 2006 budget for the initial capital for an infrastructure fund which is expected to be supplemented by other investors to increase the pool of funds accessible for infrastructure development by the private sector. This strategy will also enable Government to focus its efforts to improve infrastructure development in lagging areas of the economy such as eastern part of Indonesia. There is also a priority program to accelerate the generation of 10,000 MW electricity capacity, given the urgent need to increase electricity availability. This Reform Package also provides a policy framework providing incentive for infrastructure maintenance ensuring that the cost for maintenance is available to private sector investors.

E.       Decentralisation And Special Economic Zones

17.               The decentralisation process that started in 2001 is intended to extend economic progress to Indonesia’s diverse regions where living standards range from levels comparable to those of the developed world to other areas that have very low incomes.  This has involved transfers to the regions that have almost tripled since 2001.  Today, an issue is to ensure that these increased funds are spent effectively.

18.               The Government is also taking action to create a number of special economic zones which can also be islands of excellence and best practices.  That is, whilst the process of economic and institutional reforms will be achieved in the medium term, in the shorter term, the government will create the best practices in terms of policies, institutions and investor service in these geographically defined zones. There are areas with existing clusters of industries or infrastructure where it is possible to create best practices in term of policy, in local government and quality of institutions. These will have a single zone authority responsible for regulatory framework, licensing and dealing with investors.  It will involve working closely with local government which will play the key role within the overall framework set by the central government.

III.             INSTITUTIONAL FRAMEWORK

A.       Political Change

19.                Since 1998, Indonesia, which is a republic with a presidential system, has undertaken major reform of its political and governmental structures, with four amendments of the constitution in this period. The executive, judicial and legislative branches have been revamped, creating a newly democratic political system.  The first direct elections of the President and Vice-President were held in 2004. Presidential terms are five years and limited to a maximum of two consecutive terms.

20.               The highest representative body at national level is the People’s Consultative Assembly (MPR).  Its main functions include supporting and amending the Constitution, inauguration of the President and the formalization of broad outlines of state policy. The MPR contains two houses: the House of Representatives (DPR) with 550 members and the Regional Representatives Council (DPD) with 168 members.

21.               The DPR passes legislation and monitors the executive branch. Members of the DPR are elected for five-year terms on a proportional representation system from more than two thousand electoral districts.  Since 1998, the DPR's role has increased markedly, including a total control of statutes production without executive branch interventions, all members are now elected The DPD is a new chamber, based on the 2001 constitution amendment. Its members are representatives from the thirty-three provinces; each has four non-partisan representatives. The DPD represents regional areas within national politics and its role is restricted to bills concerning matters of regional management.

22.               As a unitary state, a political power was highly concentrated at the national government. Through the decentralization process, however, the central government has devolved significant powers to regional government with a view to extend the regional government power and responsibility in fostering social and economic development. Between the years 2004 and 2009, all 480 provincial governors, heads of districts and mayors will be directly elected. This is intended to improve the political and economic accountability of the local public officials to their constituents.

23.               One of implications of those democratic reforms is on the policy formulation process. Since a policy needs to be debated in order to achieve consensus across the country, policy formulation process may take a longer time. Nevertheless, the process has created a greater sense of ownership of all stakeholders on the importance of a policy.

B.       Institutional And Legal Reform

24.               Indonesia has taken a number of steps to modernize its economy and the functions of the state.  Among the more important measures being implemented are those intended to improve the fairness, efficiency and transparency of its institutions and procedures. These include stringent measures to deal with corruption, new public procurement procedures, customs procedures, tax administration, investment procedures (as discussed in the previous chapter), manpower, transport, etc. as elaborated below.  

25.               A central element is the determination of the Government to stamp out corruption.  To this end, the Corruption Eradication Commission (KPK), established under Law 30/ 2002, has extensive powers to deal with corruption, including wire-tapping, blocking the travel of persons being investigated, inspection, blocking of bank accounts and prosecution.  It can cut red tape to investigate any national public servant suspected of being involved in corruption.  Furthermore, Indonesian Presidential Decree Number 11 year 2005 has set the Establishment of Special Team to fight Corruption, which has been able to carry out people’s concerns to fight against corruption cases. Its activities have led to jailing of officials, including at senior levels.

26.               In its efforts to create economic stability and a conducive investment climate, the Government of Indonesia recognizes that development and enforcement of the protection of IPRs which would encourage creativity and innovation is fundamental. Therefore, the Government of Indonesia, under Presidential Decree Number 4/2006, has created a special task force on Intellectual Property. Several significant efforts have been taken since the decree was issued. The National Team is now coordinating reports on IP-related data/activities from various government institutions including the national police, customs, the Attorney General’s Office, the Supreme Court, the Ministry of Industry, the Ministry of Trade, and the Ministry of Agriculture. The National Team has determined that all related activities on IP shall support the national policy on the strengthening of IP enforcement system. This concerted effort has resulted in the downgrading from Priority Watch List status to Watch List status imposed on Indonesia by USTR on IPR-related issues in early 2007.

27.               In relation to government procurement, the Government of Indonesia has introduced new procedures to improve the transparency and efficiency of procedures and to foster competition in bidding for Government contract (Presidential Decrees 80/2003 and 8/2006).  The procedures covered by the decree relate to transparency, efficiency and effectiveness, fairness and accountability, including by simplifying bid procedures and acquirements and encouraging post qualification method for open tender. The decree obliged to all government agencies to declare Government project plans and announce the tender invitations. Widespread procurement public notices are expected to increase the number of procurement participants, to enhance the quality of procurement process and to achieve more accountability and reliability of the process and simultaneously obtain government expenditure savings, as a result of more options to gain the best tender.  The President Decree also allows procurement participants to file complaints and/or claims if there is any indication of corruption, collusion, nepotism and violation of contracts. The decree urges that moral integrity and responsibility along with technical qualifications and capability of procurement professionals is essential to conduct procurement operations, and this is enforced through a training and examination programme.  Presidential Decree 8/2006 requires agencies to announce projects, invite tender, and provide related information in one national newspaper, and by 2008 the announcement of tenders will also be publicized in a national procurement website currently under development.

28.               The Government is developing an Electronic Government Procurement System (E-GP) to enhance transparency, accountability, and efficiency in the procurement system, and by reducing opportunities for corruption  (Presidential Instructions 5/2003 and 5/2004) on the subject of Electronic Government Procurement (E-GP).  In early 2008 the Government will conduct an E-GP pilot project in several line ministries and selected provinces/local governments. In the future, the E-GP will be progressively implemented nation-wide.

29.               The government has been modernizing customs administration, to facilitate trade. Under this programme the time for customs clearance has been greatly reduced.  The customs administration has accelerated the restitution of duties on imported goods that are used in exports and established a priority channel for producer-importers as well as qualified general importers. The Government of Indonesia intends to improve its business environment and strengthen business competition by enhancing trade facilitation.  This includes improving the transparency and efficiency of export, import and customs procedures by establishing a National Single Window. On Line Certificate of Origin facility was also launched in January 2006 as an integral part of the National Single Window. In 2006 the Port of Batam has a pilot project to implement the National Single Window and in 2007 this is being followed up by the port of Tanjung Priok, Jakarta.  By 2008, through the agreement in ASEAN, Indonesia has to finish its preparation for a National Single Window and start linking to the ASEAN Single Window (ASW) network.

30.               In 2002, the Directorate General of Taxes (DGT) launched a modernization programme for tax administration.  The essence of this programme is to implement the spirit of good governance through the application of a transparent and accountable tax administration system by utilizing the reliable and the modern information technology.  The modernization has three major purposes: i) to achieve the high level of compliance; ii) to achieve the high level of public confidence to tax administration; and iii) to achieve the greater productivity of tax personnel in ensuring the compliance of taxpayers.  To this end DGT has also implemented a public awareness campaign.  Among the efforts to improve its services, DGT is simplifying administrative requirements and filing procedures, and modernizing tax offices.  It also plans call-centres in district tax offices.  DGT is progressively introducing electronic filing to reduce personnel contacts with official and reduce the opportunities for corruption.

31.               Concerning income tax, a draft law proposes, inter alia, the reduction of income tax rate for individual and corporate taxpayers.  Minister of Finance Regulation No. 137/PMK.03/2005  raises the amount of exempt income as deduction of net taxable income for calculation of Individual Income Tax as well as Withholding Income Tax.

32.               The key steps in the investment reform package, noted in the previous chapter, cover: general policies; customs (see above); tax rates, structure and administration; labour market reform and programmes to assist small and medium-size enterprises.

33.               Competition policy is an important part of the Government reforms, intended to improve the functioning of the Indonesian economy.  In recent years there has been considerable progress in deregulating international trade policy in Indonesia, with the reduction of import tariffs, licensing and export restraints.  This should help provide competitive environment for local firms in both import and export markets.  In addition efforts have been made at increasing competition within the economy.  For example, Law No. 5/1999 is intended to safeguard the public interest and to increase the national economic efficiency, ensuring equal opportunities for big, medium and small businesses; to prevent monopolistic practices and other unfair business competition; and to create efficiency in business sector. The law covers a wide spectrum of anti-competitive behaviour, ranging from prohibited business activities and agreements to abuse of the dominant position, including those related to Merger and Acquisition (M&A) practices. The law has been in place since 2000, but the technical implementation rules for mergers and acquisitions are now in the process of completion.  Following the law, by the Presidential Decree No. 75/1999 Komisi Pengawas Persaingan Usaha (KPPU, Commission for The Supervision of Business Competition), an independent regulatory agency, was established to supervise anti-competitive business practices and to provide policy recommendations to the government concerning competition-related policy issues. Also in support of the law, a number of technical regulations has been enacted for its implementation, covering procedures for the operation of the commission.   In the period 2000-2006, KPPU has received 471 reports, but only 48 reports relate to competition issues (under Law No.511999), and KPPU has handed down decisions in 41 decisions, mainly concerning bid-ridging activities in government procurement.

34.               Standards.  The National Standardization Agency of Indonesia (BSN) has the responsibility for developing and promoting National Standardization in Indonesia, including through standards development, conformity assessment, and standard implementation.  In recent years there has been a restructuring of the institutional framework and procedures to foster openness, transparency, consensus, impartiality, coherence, and effectiveness, taking account of the development dimension and of international rules. The objective is to strengthening national competitiveness and improving the transparency and efficiency of trade transaction while assuring protection to consumer safety, public health, environment and security.  By  November 2006 there were a total of 6723 standards approved as National Standards of Indonesia (SNI) status of national standard: 96.8% voluntary standards and 211 (3.2%) as mandatory standards.

35.               Considering the importance of standards for trade facilitation, Indonesia has joined international standard fora such as International Organization for Standardization (ISO), International Electrotechnical Commission (IEC), Codex Alimentarius Commission (CAC), and International Telecommunication Union (ITU).  Indonesia will become the chair of ISO DEVCO in the period 2007-2008 and currently acts as vice chair in ISO/TC 207.

36.               In the context of WTO, BSN acts as a Notification Body and Enquiry Point for Indonesia, and until November 2006 there were 18 technical regulation notified to the WTO Secretariat.

37.               In the field of conformity assessment, Indonesia is now continually improving its technical capabilities. After becoming signatories of IAF/PAC MRA for QMS in 2000, APLAC/ILAC MLA for calibration in 2003, IAF/PAC MRA for EMS in 2004 and lastly the APLAC/ILAC MLA for inspection body (December 2004).

C.       International Trade Relations

38.               Indonesia’s trade relations are principally governed by its membership of the WTO. In addition, Indonesia is also engaging in regional cooperation such as ASEAN, APEC, ASEM, Developing 8, as well as in bilateral cooperation. Indonesia considers that the above cooperation are consistent with Multilateral Trading System of WTO including the enabling clause and GATS which allowing it to deepen its integration more rapidly with neighbouring countries in the fast growing Asian region. The Economic integration of ASEAN region has been an important sector in the greater peace, stability and prosperity of the region.  In this sense, Indonesia considers that its regional agreements are building blocks for longer term multilateral liberalisation.

1.                  Multilateral Cooperation

(a)      World Trade Cooperation (WTO)

(i)                 Doha Development Agenda

39.               Indonesia has been an active participant in the WTO Doha Work Programme, in its own right and as a member of the G20 and the G33.  The Doha Declaration put development at the centre of the current negotiations, but the delivery of the development promise depends to a large degree on faithful implementation of the Doha text.  Indonesia considers that the essential technical work has been completed, but that political will and flexibility are urgently needed to move the negotiations toward a successful conclusion.  In this respect, on 20-21 March 2007, Indonesia hosted a G-33 Ministerial Meeting that welcomed the new political emphasis shown by WTO Members to re-ignite the negotiation and called on WTO Members to translate this commitment into concrete positive movement in the light of the window of opportunity to conclude the negotiations.  The G-33 stressed that success in the negotiations would be measured by the contribution made to development.  Focussing mainly on agriculture the G33 Meeting stressed the potential of the negotiation to benefit the world’s small and vulnerable, resource-poor farmers.[2]

40.               For Indonesia, the negotiations on agriculture and non-agricultural market access are critical.  In agriculture, there is a need to concretise the solution to the problems faced by poor farmer in the developing countries through the Special Products (SPs) and Special Safeguard Mechanism (SSM) modalities. Regarding special products, there is a need to have verifiable indicators that can also be prioritized. Regarding the Special Safeguard mechanism, there is a need to be flexible in developing  solutions based on the import volume and product price criteria (volume and price triggers). However, the key to a successful conclusion to the negotiations is agreement between the developed countries on reductions in tariffs and domestic support, as well as elimination of export subsidies and similar measures.

41.               In NAMA Indonesia supports the reduction and elimination of tariff peaks, high tariffs and tariff escalation, especially on products of export interest to the developing countries, as well as less than full reciprocity by developing countries. Nevertheless, Indonesia stands ready to make commitments to reduce substantially its bound rates in the context of a balanced outcome of the overall negotiations, taking account of the Single Undertaking.  However, it is also concerned to retain a degree of flexibility to develop its industrial sector that is so important for jobs (and hence poverty alleviation), especially in the light of the experience of the crisis of 1997/98 and the subsequent austerity programme.  Indonesia believes that its moderate tariffs can help the development of outward-oriented industrial production that could become internationally competitive in the longer term. 

42.               In services, Indonesia emphasizes that agreement on this issue should not erode developing countries’ flexibilities that were so carefully negotiated in the Uruguay Round. Negotiation in services must allow developing countries to liberalize sectors at the pace that correlate with their levels of development. In this context, sequencing and on going requisite changes in domestic institutions and regulations are important in the services liberalization process.  In the spirit of constructive engagement, Indonesia has made offers in nine sectors: business services, communications, health and social services, transport, tourism and related services and other services not elsewhere included (energy services).  

43.               The protection of intellectual property rights is crucial for an environment that is conducive to innovation.  However, it is important that this be seen in the context of the greater need to protect welfare, as in the case of access to affordable drugs and technologies, as well as providing some protection to traditional knowledge.  There is a need in the WTO to resolve the issues of the relationship of the TRIPS to the Convention on Biodiversity and the extension of Geographical Indications to products other than Wines and Spirits. The objective of Indonesia on TRIPS is to work progressively towards full implementation of the TRIPS Agreement, and it has already taken a number of measures in this respect, among others the revision of related laws and regulations on intellectual property rights, institutional development of intellectual property related agencies as well as law enforcement. 

44.               In the issue of TRIPS and Public Health, Indonesia and other developing countries had made an effort to struggle for the opening of market access for the developing countries in acquiring cheap patented medicines in protecting the public health. The Doha Round had opened a way for developing countries to negotiate exemption towards imported license on medicine goods/products. Indonesia is committed to fulfilling its commitment under the TRIPs and Public Health arrangements that were concluded in December 2005.

45.               The different needs and capacities of developing countries have been recognised in the GATT and WTO since 1955 as the basis for special and differential treatment. Addressing these development needs and capacities was rightly central to the Doha Ministerial Declaration, and Indonesia looks forward to full implementation of the promises of Doha in the post-Doha Work Programme of the WTO. Indonesia would wish to see Special & Differential Treatment being more precise, effective and operational.  Equally important are the various issues related to implementation of the results of the Uruguay Round, where deadlines have repeatedly been missed and problems have only partially been resolved. 

46.               Trade Facilitation.  Indonesia supports the negotiations to facilitate trade.  In this respect, it would be useful to have further clarification of GATT Articles V (Freedom of Transit), VII (Valuation for Customs Purposes), and X (Publication and Administration of Trade Regulations).  Indonesia considers that a successful outcome may need to be supported with the provision of technical assistance and capacity building for the developing countries.

47.               Trade and Environment.  Indonesia supports the negotiation to enhance mutual supportiveness between trade and environment.  Indonesia is of the view that trade liberalization needs to be positive for trade, environment, and development.

(ii)        Regular Activities

48.               Indonesia has made 58 (fifty-eight) notifications in various areas, and has outstanding obligations to submit 36 notifications.[3]  However, because of the complexity of notification requirements, a lack of human capacity and the periodical staffing changes (tour-of-duty) of responsible officials, fulfilment of the notification obligation has not been progressing well yet. In order to resolve this problem, Indonesia is trying to enhance the staff capacity and to improve coordination between domestic agencies in order to complete its outstanding notifications.

49.               The Indonesian government has adopted trade remedy policy in the form of anti-dumping, subsidy and countervailing duties, as well as safeguards:

-    Government regulation number 34 dated 4^th June 1996 on anti-dumping and countervailing duties

-    Presidential decree number 84 dated 16^th December 2002 on safeguarding domestic industry against surges in the import of goods

On anti-dumping measures, KADI (Indonesian Committee on Anti Dumping) has investigated 34 cases between 1996 and 2007, and  cases have been terminated. The Indonesian Government has imposed the duties in 14 cases, of which six have been imposed since January 2004 (Calcium Carbide, Carbon Black, Uncoated Writing, Paracetamol, Wheat Flour HS, and Cavendish Bananas).

50.               The Indonesian Government has taken serious steps to respond to allegations of dumping raised by foreign government against Indonesia exports. During the period under review, there were 61 dumping allegations on Indonesian products, where more than half (34 cases) of them imposed anti-dumping duties.

51.               On safeguard measures, the Indonesian government has imposed a safeguard duty on Ceramic Tableware and terminated the Matches case as well as thee Cast and Rolled Glass case. The Authority which conducts global safeguard investigations is KPPI (Indonesian Committee on Safeguards).

(b)      South-South Cooperation

(i)         Global System of Trade Preferences (GSTP) - UNCTAD

52.               Indonesia is currently participating in talks to expand the GSTP which it regards as a valuable instrument for the expansion of South-South cooperation.  Indonesia considers that South-South cooperation in trade in goods and services, as well as in investment, technology and other areas, can bring important benefits to developing countries.

(ii)        Developing 8 (D-8)

53.               As a member of Developing 8, Indonesia has signed the Preferential Trade Agreement (PTA) which aimed to expand trade among their members by reducing tariff on goods and other trade restrictions.

(iii)       Organization of Islamic Conference (OIC)

54.               Indonesia has actively participated in OIC and has signed the protocol on the Preferential Tariff Scheme for TPS-OIC (PRETAS).   

2.                  Regional Cooperation

(a)      Association of South East Asian Nations (ASEAN)

(i)         ASEAN Economic Integration

55.               Twelve priority integration sectors were identified for accelerated economic integration (Agro based, wood based, Textile and Apparel, Automotive, Electronic, Healthcare, e-ASEAN, Tourism, Rubber based, Air Travel, Fisheries and Logistic Services).  Steps towards policy integration include in the ‘horizontal’ areas (e.g., customs, including the ASEAN Single Window); standards; rules of origin; non-tariff measures; and the liberalization of trade in services. Indonesia is country coordinator for the wood based and automotive sectors.

56.               At the 12^th ASEAN Summit, the Leaders affirmed their strong commitment to accelerate the establishment of an ASEAN Community by 2015 as envisioned in the ASEAN Vision 2020 and the ASEAN Concord II and signed the Cebu Declaration on the Establishment of ASEAN Community by 2015.  In particular, the Leaders agreed to hasten the establishment of the ASEAN Economic Community by 2015 and to transform ASEAN into a region with free movement of goods, services, investment, skilled labour, and freer flow of capital.  Several Member Countries took on the coordinator role for each sector.  Each priority integration sector has a roadmap, which combines specific initiatives of the sector and the broad initiatives that cut across all sectors such as trade facilitation measures. Integration of Services Liberalisation towards 2015.

(ii)        ASEAN-Dialogue Partner

57.               ASEAN is seeking to establish RTAs with partners such as China, Japan, Korea and CER members (Australia and New Zealand), and India. At the ASEAN Summit in 2002, ASEAN members and China signed a framework agreement to begin negotiations in 2003 to create the world’s largest FTA with a combined market of 1.7 billion people. Subsequently, The ASEAN and Chinese Economic Ministers signed the Trade in Goods Agreement and Dispute Settlement Mechanism Agreement under ASEAN-China FTA (ACFTA) on November 2004, which then launched the goods implementation through Early Harvest Programme on July 2004 which consists of agricultural products. The gradual tariff elimination for products in Normal Track started in 2005 and end on year 2015. Finally, just recently on January 2007, the ASEAN Economic Ministers and The Chinese Foreign Affairs Minister signed the Services Agreement. At the first package of services agreement.

58.               The Framework agreement between ASEAN and Korea was signed by the Leaders on December 2006. At the same time, The ASEAN and Korea Economic Ministers signed the Dispute Settlement Mechanism Agreement of ASEAN-Korea FTA (AKFTA), and afterward, on August 2007, the Trade in Goods Agreement was also signed by the Ministers. Negotiations for AKFTA services and investment are still on going and expected to be finalized within this year. The implementation of goods agreement is expected to start on June 2007 upon completion of domestic ratification from each party. The FTA negotiations with CER (Australia and New Zealand), Japan and India are targeted to conclude at the end of 2007, and implemented on early 2008. . Furthermore, it is also expected that ASEAN and the EU will launch the ASEAN-EU FTA negotiations.

59.               Other than FTAs negotiations, ASEAN also involved in cooperation under Trade and Investment Framework Arrangement (TIFA) with United States, Trade and Investment Framework (TIF) with Australia, and in the process of establishing ASEAN-Canada Trade and Investment Cooperation Arrangement (TICA). Indonesia plays an important role as the country coordinator for ASEAN countries in dealing with ASEAN consultations with United States and Canada.

(b)      Asian Pacific Economic Cooperation (APEC)

60.               Indonesia is committed to implementing APEC’s voluntary target of open and free trade, as well as services and investment for developing country members by 2020, as set out in the Bogor Declaration of 1994. APEC economies are to achieve their targets on a voluntary and non-binding basis ("concerted unilateral liberalization"). In order to develop a high-quality RTAs/FTAs, Indonesia contributed in designing Model Measures of the minimum requirement for RTAs/FTAs on non-binding basis. Based on the Individual Action Plan (IAP) peer review process of 2005, it was considered that Indonesia was already over half way to achieving the Bogor Goals. Indonesia indicated in the IAP 2005 that, inter alia, tariff rates would be reduced, while import and export restrictions would be further eliminated.

(c)      Asian-Europe Meeting (ASEM)

61.               As a member of Asian-Europe Meeting (ASEM), Indonesia will take part in implementing the Leaders’ vision of deepening the partnership to face future challenges, broadening the perspective through marking out focussed areas for action, and reinforcing the institutional mechanism by forging a stronger partnership as outlined in the Helsinki Declaration.

3.                  Bilateral Cooperation

62.               In line with its policy of establishing closer economic relations with countries in the Asian region, Indonesia has been negotiating with Japan since mid 2005 to establish a bilateral Economic Partnership Agreement that covers goods, rules of origin, customs procedures, investment, services, movement of persons, competition policy, energy and mineral resources and cooperation. These negotiations are in the final stage and it is expected to be completed in 2007.  Indonesia is also in the process of negotiating Preferential Trade Agreement with Pakistan, and exploring the possibility to negotiate PTA/FTA with India and Iran.

63.               Talks and consultation on a range of trade and investment issues are also being held with major developed countries i.e. United States, EU and Australia.

4.        Others

64.               Indonesia is determined to make best use of opportunities under the GSP.  It considers that such preferences are a useful means of helping to diversify and expand its industrial sector, and as such contribute to the overall economic developments of Indonesia, including job creation and the alleviation of poverty.

65.               Considering the importance of human resources and infrastructure development, Indonesia is continuously assessing its needs and priorities to request to the donor countries for Technical Assistance and Capacity Building. In this regard, Indonesia appreciates to several donor countries and agencies namely, JICA, the European Union, USAID, AUSAID, KOICA, Switzerland, Sweden, WTO Secretariat, JETRO,  New Zealand, Switzerland, India, China and the Netherlands.

(D)    Investment Treaties

66.               Indonesia has signed 61 Bilateral Investment Treaties/Investment Guarantee Agreements. However, current tendency of negotiating Economic Partnership Agreement covers broader sectors including investment, services, labour, cooperation, capacity building, etc.

IV.              TRADE AND RELATED POLICIES

A.       Overview of policy and development  

67.               Indonesia’s trade and related policies are part of its overall social and economic development strategy, and not goals in themselves. While trade and related polices should contribute to the improved efficiency and overall growth of the economy that will increase the availability of resources for social purposes, policies - and their implementation - need to take account of short- to medium-term social consequences of change, particularly in the light of persistent unemployment and poverty, especially in some regions.  Because of the diversity of the levels of development across the archipelago, Indonesia considers that social justice requires the greater effort to spread the benefits of its economic achievements to all of its peoples, as in the decentralisation programme of recent years.  Indonesia is also of the view that the longer term development of the economy needs to be consistent with Indonesia’s underlying comparative advantage.  However, policy interventions may be need to realize these goals in the presence of externalities associated with certain economic activities and in the light of important distortions on world markets, including barriers to exports.  The pace of policy implementation also depends on the success in building supply capacities and social indicators.  While Indonesia’s own polices are obviously key, assistance from treading partners and donors can also be of considerable assistance. 

68.               With regard to the structure of the Indonesian economy, services now make the largest contribution to GDP, around 40 per cent in recent years.  Manufacturing is second at some 28 per cent, while the share of agriculture has fallen form 15.5 per cent in 2002 to 12.9 per cent in 2006, and mining and quarrying has grown for 8.8 per cent tot 10.6 per cent in the same period.  Construction has grown slightly to 7.5 per cent, while the electricity, gas and water sector has remained stable at around 1 per cent.  Clearly services and industry are now major employers, particularly in the urban areas, and any sectoral policy changes need to take account of the potential impact on employment.   However, the agricultural sector is also critical for the poorest regions of the country.  The sector has an important role in the provision of the most basic food of the nation, rice, but it also has a large element of subsistence farming, and, overall, the agricultural sector is a net consumer of rice.

69.               Indonesia has considerable natural resources, renewable, such as its extensive tropical forests, fishing, etc., and non-renewable, such as oil and gas, and minerals.   Managing these resources prudently for sustainable development is a major challenge for any government, and more so for Indonesia because of its many islands. To this end, various programmes are being implemented and being improved, including for example the management of its forestry and fishing resources. 

B.       Trade developments and policy

1.                  Developments

70.               Since the last Trade Policy Review, Indonesia's trade balance has fluctuated, but registered a trade surplus of over $3 billion in 2006.  Exports grew at the robust rate of some 18 per cent in the period 2003-06, reaching record levels.  Much of this can be attributed to strong commodity prices, in particular oil and gas, but also rubber,  palm oil, coal and metal ores, as well as the healthy growth of the world economy. However, measures to improve the competitiveness of the Indonesian economy, including control of inflation, also seem to be paying off.

71.               Oil and gas exports reached some $2.2 billion in 2006, an increase of 17.6 per cent over the previous year.  (In 2005 the increase was partially associated with world price increase of crude oil, which also triggered an increase in the value of oil and gas imports since Indonesia is a net importer of such products).  Non-oil & gas exports of goods reached $79.5 billion, nearly 20 per cent higher than in 2005. 

72.               In the light of reduced expectations for the growth of the world economy, the Government target for non-oil export growth in 2007 is 14.5 per cent.  Reaching this target will require special effort, in particular on trade-related infrastructure, but much depends on the external environment, such as the economic growth of major markets and commodity prices.

2.        Tariff policy

73.               To fulfil its commitments in the Uruguay Round, Indonesia implemented significant changes in its bound MFN tariffs over the period 1996-2003 (under Minister of Finance Decree No. 378/KMK.01/1996). In addition, it has begun to implement further changes in its applied MFN rates under the ASEAN Tariff Harmonization Program for the period of 2005 to 2010, as well as reductions in AFTA preferential rates, consistent with its views on the importance of integration within the Asian region.

74.               To accommodate national economic interests, however, some products have been excluded from the general schedule of tariff reduction program.  These are mainly in the agricultural, chemicals, plastics, metals, alcoholic beverages and automotive sectors, as well as products related to moral and security items. The tariff reduction schedule for these products was stipulated in the Minister of Finance Decree No. 542/KMK.01/1997.

75.               The implementation of the tariff reduction program has changed Indonesian tariff structure significantly. In 1995, the average tariff rate was 15.6 per cent, with rates ranging from 0 to 10 per cent covering 3,832 tariff lines (or just over half of the total of 7,386 tariff lines). In 1996, the year when the program was first launched, the average rates declined to 13 per cent, with an expansion of the rates lying in the 0-10 per cent range to 56 per cent of lines. By the end of the tariff reduction program (2003), the average rates had fallen to 7.2%, while rates lying in the 0-10 per cent range had increased to 83.4 per cent of lines.

76.               In 2004, one year after the tariff reduction program ended, Indonesia adopted the new tariff classification under “ASEAN Harmonized Tariff Nomenclature” (AHTN) as part of Indonesian commitment under AFTA. As noted earlier, the purpose of the programme is a gradual lowering and harmonisation of rates, intended to reduce inter-sectoral distortions, while preserving a moderate overall level of assistance to the productive sector on an MFN basis.  The programme beyond 2010 has not yet been finalised.

77.               With the new classification, the total tariff lines increased drastically from 7,540 in 2003 to 11,163 in 2004.  As a consequence of the technical classification changes, tariff rates also changed, and the average tariff increased to 9.9 per cent, with rates between 0 and 10 per cent covering 8,387 tariff lines (75 per cent of the total of 11,163 tariff lines).

78.               As a continuation of the tariff reduction program, Indonesia introduced the Tariff Harmonization Program for the period of 2005-2010. Under the programme, the average tariff reached 9.5 per cent in 2006, with rates in the 0-10 per cent range covering 8,365 tariff lines or 74.9 per cent the total.

3.        Tariff Quotas

79.               Currently, Indonesia does not utilize tariff quotas.

4.        Tariff Exemptions or Concessions and Duty Drawbacks

80.               To increase the efficiency and the competitiveness of domestic industries, Indonesia provides certain tariff exemptions or concessions, in accordance with Indonesia Custom Law (Law 10/1995). The importation of raw materials, components, or machineries that are used by a certain industrial sectors can be exempted from import duties. Some of industries granted tariff exemptions or concessions include aircraft maintenance, public transportation, energy and telecommunications.

81.               In addition, Indonesia is also implementing the Duty Drawback System on the re-export of imported inputs. This policy is stipulated in the Minister of Finance decree No. 580/KMK.04/2003. 

5.        Non-tariff measures 

82.               In order to improve the functioning of the economy in line with its dynamic comparative advantage and make it more responsive to long-term international price movements, Indonesia has also been progressively eliminating non-tariff measures, in particular the use of import licences which is currently limited to dangerous materials; explosives; ozone-depleting substances; alcoholic beverages; salt; propylene copolymers; lubricant; clove; textiles and textile products; nitrocellulose; machines and machinery; optical discs; and rough diamonds.

83.               The most important measures still in place are: i) the regulation on the timing of the import of rice and sugar: ii) verification and other requirements for the export of tin and granite; and ii) the ban on the export of logs and sand. 

84.               The rice import regulation is intended to provide support for poor farmers in the face of distorted world prices as a result of subsidies by some rice-exporting countries, but it is periodically relaxed at times of shortage, that is during non harvest periods, to stabilise prices. 

85.               The ban on the export of logs is used to support Indonesia’s forestry and wildlife conservation policy while a broader forest management programme is being put in place.  Because of the many islands and the rugged terrain, it is difficult and requires extensive resources to implement the forest management programme, which is also targeted at mining and to support forest or near-forest dwellers.  The government is also planning a compensation tax to be paid by mining and logging companies to compensate for environmental damage and finance re-afforestation programme, to be implemented by local communities. Given the porous sea and land border, the export ban allows the immediate identification of illegal logs leaving the country.  Cooperation is also being provided by a number of neighbouring countries as well as European countries in controlling the import of logs form Indonesia. Although a log export ban is currently in effect, relaxing the export ban has been under study mainly in relation to the plantation forestry program.   

6.        Incentives

86.               Concerning central and local authorization of investments, the Ministry of Domestic Affairs is now preparing the amendment to Government Regulation No.25 Year 2003. This process is expected to reach its final stage coinciding with the Investment Law Bill that has just been approved by the legislature.

87.               To anticipate challenges that will be faced by Indonesia such as global competition and as mandated in Law No. 32 year 2004 regarding Local Government (an amendment of Law No. 22 year 1999), the Government is now preparing a Government Regulation Bill (GRB) concerning the Guidance for Granting Incentives and Investment Facilitation in Local Area. A draft is currently being discussed with affected sectors.

C.       Sectoral policies

1.        Agriculture

88.               Agriculture plays an important role in the Indonesian economy, providing employment for over 38 million people.  There is also an important linkage to poverty, since the majority of Indonesia’s poor live in rural communities and are hence highly dependent on the agricultural sector. Food crops and animal husbandry are the key sectors for smallholders.  Rice, being the main staple food, remains a sensitive commodity politically because it is important both for the rural producers/consumers and urban consumers. Some key products such as rice and sugar are subject to high levels of intervention in other countries, thereby depressing world prices.

89.               To further develop the sector, the Government launched the agricultural revitalization programme in 2005.  A set of policy instruments on rural infrastructure, financial services, research and development and institutional developments are used in support of this programme.  Under the programme, the Government provides subsidies to increase production on food crops such as on fertilizers and hybrid seeds. Subsidized credit to smallholder farmers (“food security credit”) is intended to motivate smallholder farmer to have more access to commercial banks, sharing risk between the Government, the commercial banks and the farmers.

90.               As noted the Government regulated rice imports in 2004, with the main restrictions operating during harvesting.  BULOG as a state-owned agency procures and buys rice from farmers using the HPP (Government procurement price). BULOG, however, has the capacity to absorb 5 to 6 % of the total domestic rice production.  BULOG also distributes rice to the needy and poor families nation-wide under the RASKIN (Rice for the Poor) programme, funded with state finance amounting to IDR 4,000 billion a year or around $435 million a year. The RASKIN program distributes 15 to 20 kg of rice per poor household per month. There are 10.8 million households classified as eligible, as real food support to maintain food security of poor households.  The Government also reserves a rice stock in BULOG for emergencies and price stabilization within the country.

91.               The Government switched from ad valorem to specific tariffs for sugar in 2003.  Currently, the tariff is Rupiah 550 per kg of raw sugar and Rupiah 700 per kg for refined/white sugar. The Government regulates sugar imports to protect domestic farmers from low prices, particularly during the harvesting periods when prices tend to fall.  The importer registration mechanism is therefore applied to registered importers who have to absorb at least 75 percent of small farmers’ sugarcane.  In 2006, the Government restricted the amount of import of sugar to 300,000 tons for the period of November to April.

92.               Based on the risk analysis and OIE recommendation on BSE, and in line with the current situation of diseases, a new regulation - Agriculture Ministerial Decree No. 482/Kpts/PD.620/8/2006 dated 22 August 2006 - has been released concerning Import Requirements for Ruminants and Products from BSE-Infected Country or Zone into the Indonesian Territory. The Decree described in details the category, BSE status and import requirements.

93.               To prevent fruit fly to Indonesia from other country, Indonesia applied Minister Agriculture Decree No.37/Ktps/HK.060/1/2006 concerning Technical Requirements and Plant Quarantine Actions for the importation into the territory of The Republic of Indonesia of Fresh Fruits and/or Fruit Vegetables which had been notified to the WTO Secretariat with notification no. G/SPS/N/IDN/24 on 18 May 2006. According to above decree, Indonesia designated only 7 (seven) points of entry for the effectiveness of Plant Quarantine Action to prevent fruit fly from abroad, namely:

1    Tanjung Priok Seaport, Jakarta

2    Tanjung Perak Seaport, Surabaya

3    Belawan Seaport, Medan

4    Batu Ampar Seaport, Batam

5    Soekarno-Hatta International Airport, Jakarta

6    Ngurah Rai International Airport, Denpasar

7    Makassar Seaport

94.               Government of Indonesia consider to stipulate Requirements and Plant Quarantine Actions for the Importation of Wood Packaging into the Territory of the Republic of Indonesia. Implementation of this regulation to be in accordance with International Standard for Phytosanitary Measures (ISPM) # 15 which had been notified to the WTO Secretariat with notification no.G/SPS/n/IDN/27 on 29 May 2006

2.        Fisheries

95.               Indonesia’s Marine and Fisheries development plays an important role in providing employment, food sources, poverty alleviation and development, especially for the outer islands. A key milestone in the fisheries development was the prorogation of the new Fisheries Law Number 31 2004. The Law provides the national mandate and legislative support from the parliament for the government to pursue fisheries development. The new Law on fisheries aims at a new direction for fisheries management intended to improve of living condition of small-scale fishermen and fish farmers; to increase government revenues and foreign exchange earnings; to spur the expansion of job opportunities; to increase the supply and consumption of fish which is rich in protein sources; to optimize the management of fishery resources; to increase the productivity, quality, added value and competitiveness; to increase the supply of raw materials for the fish processing industry; to achieve optimal utilization of fisheries resources, areas for fish culture and fish resources environment; and to ensure the conservation of fishery resources areas for fish culture and spatial management. 

96.     In order to improve fisheries management, the Government issued Government Decree number 17/2006 on Fisheries Management. The Government Decree applied new scheme of fisheries management which eliminates foreign vessels from operating in the Indonesian Economic Exclusive Zone or build Land Based Industry through Integrated Fisheries Investment Management Unit in Indonesia by joint venture. Besides of this, productivity in the sea-fishing industry has remained low while over-fishing in some areas has threatened to deplete fish stocks. Illegal fishing, by both foreign and domestic operators, also has been a serious problem and causing environmental damage. So, to take conservation of fish stock, the Minister of Marine Affairs and Fisheries has published Ministerial Decree number: KEP.34/MEN/2006 regarding the establishment of a coordination team on illegal fishing measures and fisheries processing industry revitalization.]

97.               However, productivity in the sea-fishing industry has remained low while over-fishing in some areas has threatened to deplete fish stocks. Illegal fishing, by both foreign and domestic operators, also has been a serious problem and causing environmental damage. Therefore in order to conserve fish stocks, the Minister of Marine Affairs and Fisheries has published Ministerial Decree number: KEP.34/MEN/2006 regarding the establishment of a coordination team on illegal fishing measures and fisheries processing industry revitalization.

3.        Oil, gas and minerals 

98.               While Indonesia has important reserves of fossil fuels, it is still a net importer of crude oil, so that the recent increases in oil prices mainly had a negative effect on trade and on inflation.  However, Indonesia is the world’s leading exporter of liquefied natural gas, and the country has potential for further development of hydro-electric and geothermal energy (as well as coal), and other “green” sources of energy such as bio-fuels, solar power, etc.  Domestically, the lack of infrastructure has limited the use of alternative energy resources, and investment in the sector is needed.  The increase in oil prices, if maintained, makes exploitation of these alternative sources of energy more viable, as well as being attractive from an environmental perspective.

99.               A noted in the previous TPR, the oil and gas sector has been liberalised under enabling legislation passed in 2001, and a number of foreign firms have entered the oil and gas market for exploration, production and retailing.  The Government is also privatizing Pertamina, the state oil and gas company.

100.            Except for tin, commercial mining is relatively unimportant in Indonesia, although there is some potential for the production of coal, metallic and non-metallic minerals, and investment has been growing in this sector.  Along with logging, mining has become an environmental issue that is now being subject to greater scrutiny and new regulations are being promulgated to address this issue, as noted earlier.

4.        Manufacturing

101.            Prior to the financial crisis of 1997-98, Indonesia had passed through several stages of industrial policy, including import-substitution industrialization in the 1960s and 1970s and moves to strengthen export-oriented activity and the industrial structure in the 1980s and early 1990s.  Since the industrial process was derailed by the crisis, the focus has shifted to ensuring the survival of the industry through the Industrial Revitalization Programme.  Under this programme, the Government has used several measures to promote international competitiveness, such as the promotion of cluster groups and value-chain alliances that have recently started to be used to gain and sustain industrial competitiveness.  The programme operates within the general context of the political, macroeconomic, institutional and legal reforms described earlier that are intended to improve the business environment.   They are also being implemented within the context of moderate, harmonized tariffs and the progressive elimination of non-tariff measures.  Incentives are principally used in relation to regional developments.   (These have mainly been tariff waivers on inputs in the past, as described above).

102.            The cluster theory gives prime importance to interaction among local firms and institutions whereas the global value-chain theory accords prime importance to interaction with global buyers. Under the cluster approach, the main objective is to promote collective efficiency or competitive advantage derived from externalities economies and joint actions. This is achieved through a product upgrading in the context of inter-firm interactions such as pool of skilled workers, specialized inputs and quick dissemination of knowledge within the cluster. Small firms in clusters are able to overcome some of the major constraints due to a lack of specialized skills, difficult access to technology, inputs, market, information, credit, and external services. Clusters overcome the constraints by facilitating interactions among firms, allowing resource sharing and transfer of skills and knowledge.  Clusters emphasize the importance of geographical proximity and networking also to reduce shipping and transaction cost.

103.            In accordance with the National Medium-term Development Programme (Presidential Regulation 7/2005), the focus is on strengthening and developing core clusters in the following areas: food and beverages, fishing, textiles and textile products, footwear, palm oil, timber (including rattan and bamboo), rubber and rubber products, pulp and paper, electrical engineering, and  petrochemical engineering.  The strategy involves strengthening linkages at all value chain levels in a cluster of related industries, improving value added along the value chain, improving resources employed by the industry, and developing small and medium-size industries.  This is to be achieved by promoting a conducive business environment (as described in earlier sections), determining prioritized industries and their spread, developing industries within the cluster approach and developing technological innovation capability.  Applying this approach is expected to induce industrial sector growth of the order of 8.5 per cent annually in the medium term.

5.        Services

104.            Services account for around 40 per cent of GDP, but exports of services only account for 7 per cent of total exports of goods and services, a net deficit of around $20 billion. This performance is less than satisfactory, and Indonesia recognizes that having access to efficient services  is important to the good functioning of a modern economy, including as an important input into the production and trade of traditional exports of goods.  Access to basic services is also important for human development.  In this respect, the WTO framework on services should not erode the flexibilities that are characteristic of the GATS and should allow developing countries to open up their services sectors at a pace that is consistent with their level of development. 

105.            Indonesia does not at the moment provide any special incentive for the development of trade-related services.  While  public works expenditures are one of the key means of development of infrastructure services that provide benefits to the people as well as inputs for production and trade, such services are procured in a public process to ensure that contracts are awarded on the basis of cost and efficiency, as discussed elsewhere in this report. 

106.            Supervision of services monopolies is intended to ensure security, efficiency and quality of services at a fair price, which also provides for maintenance and a reasonable return to the service supplier.

107.            Development of an efficient financial services sector has been a particular preoccupation of the government for some time, but particularly since the financial crisis. This sector is important as a source of finance for small and medium-size enterprises, which do not have easy access to international sources.  Regulation of financial services is intended to ensure proper prudential supervision, security for account holders, and to help promote the real sector of the economy.

108.            Other services that are particularly important for Indonesia are transport and communications – given the geographic diversity of the country –and tourist-related services which have started to recover after recent setbacks. Indonesia believes it has considerable potential for the development of labour services, e.g. in construction, for which a successful outcome of the Mode 4 negotiations in the WTO would be beneficial.

V.                 FUTURE DIRECTIONS

A.       Economic Perspectives

109.            The economic outlook for Indonesia has improved mainly as a result of the reforms that it has undertaken in recent years, and a healthy external environment.  The principal economic concerns of the Government relate to its ability to lift economic growth sufficiently to create jobs and address poverty.  However, it is important for social justice, peace and stability to address a wider range of social and economic issues.  Moreover, it is essential also to help raise the development of the poorer regions of the country where the problems of poverty are more acute. However, further progress depends on the success of the Government’s efforts in the ongoing implementation of the reforms and rebuilding of much needed infrastructure, as well as external developments in the world economy. 

110.            Economic growth in 2007 and 2008 is expected to reach 6.3% and 6.8% respectively. The main source of growth in the next two years is expected to come from revival of investment which in turn will expand the capacity of exports, as well as consumption growth and to a lesser extent compared with previous years, government spending.

B.       Government Programmes

111.            Progress has been made in the Government’s reform programme as already indicated above in terms of a number of new laws and regulations, as well as an ongoing process of changing legislation and regulations which are in different stages of implementation.  Further reforms, for example in the area of investment, are also under way or are being considered in the light of developments. As part of the effort to improve efficiency and public finances, further privatization of state-owned enterprises is being considered, but it will take time to prepare some of these businesses for privatization, and due account will need to be taken of the social consequences as well as the development implications, for example in the areas of public services such as transport and communications.

112.            There is a need for further efforts to modernize and develop the real sector.  As noted in the report, efforts are being made to revitalize the agriculture and industrial sectors, while the Government also recognizes that an efficient services sector is also a key to the development of international competitiveness.  From this perspective, its already open trade regime should be seen as a complement to other domestic policies, while the Government is moving carefully but progressively toward even greater opening up of the economy by reducing tariffs and non-tariff measures, facilitating trade and encouraging investment. In this the Government is confident that the new Investment Law and the implementing regulations, as well as the other components of the investment package, will contribute in an important way towards improving the investment climate.   Apart from its effort to improve the institutional and legal framework, the central Government needs to work more closely with the regional governments and the private sector in a number of areas, and to further develop an enabling environment for business, encouraging domestic as well as foreign direct investment. 

C.       Constraints, Challenges And Opportunities

113.            The major internal challenges that are now faced by the Government of Indonesia are in implementing its reform programme to bring improvements to the quality of life for all its peoples. In this respect, some of the greatest needs are in the areas of health and social programmes, education, and physical infrastructure, and the challenge is to deliver improvements across its diverse regions. Despite the improved economic performance, lower debt and an improved reserve position, Indonesia needs additional capital resources to carry forward these social and economic programmes.  The new Investment Law will help in this respect, but the progress in the implementation of the reforms will be gradual, given the bottom-up nature of the process, and the new legislative framework needs to be supported by short and medium term action plans to carry forward the momentum.  In some areas there is a need, especially in the poorer regions, to develop the administrative capacity to carry out reforms, even where funding has been provided.  In other areas, there is still a shortage of resources, human and capital, where Indonesia needs greater private sector involvement, and where foreign investment and aid could usefully assist.  The ongoing reforms also require the continuation of national dialogue to build a sense of consensus, ownership and common purpose in the new democratic framework.  Such a process even though it will take time, will also mean that the reforms should “stick”. Meanwhile, in the short term, the process of deregulation and bureaucratic reforms as well as creating islands of excellence and best practices within certain regions (Special Economic Zones) and within institutions, will be continued. In terms of opportunities, the growth and increase in per capita incomes of the 220 million population of Indonesia offers opportunities for a robust market as well as a source of young and productive labour force.  Indonesia also has a strong basis of natural resources on which to build on for its continued and sustained growth.

114.            Externally, the constraints facing Indonesia include improved, secure access to overseas markets for its main exports, and increased competition. This can best be addressed in the multilateral framework of the WTO, and Indonesia stands ready to make substantive commitments consistent with its development needs. Indonesia looks forward to continue working closely with other WTO Members to achieve a speedy and successful conclusion to the current negotiations, taking account of the development dimension of the Doha Declaration.  Indonesia also looks forward to the continued deepening of its integration within the East Asia and Asia-Pacific region, which is consistent with the WTO and becomes the building block for the multilateral process.

__________