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U.S. DEPARTMENT OF STATE
INDONESIA: 1994 COUNTRY REPORT ON ECONOMIC POLICY AND TRADE PRACTICES
BUREAU OF ECONOMIC AND BUSINESS AFFAIRS





                            INDONESIA

                     Key Economic Indicators
        (Millions of U.S. dollars unless otherwise noted)


                                     1992      1993      1994

Income, Production and Employment:

Real GDP (1983 prices)             64,623    66,942    69,013
Real GDP Growth (pct.)                6.9       6.5       6.7
GDP (at current prices)           128,022   144,713   157,230
By Sector:
  Agriculture                      24,992    26,711    29,021
  Mining                           14,733    14,734    16,008
  Manufacturing                    27,853    32,315    35,110
  Electricity/Gas/Water             1,058     1,301     1,413
  Construction                      7,540     8,692     9,444
  Retail Trade and Hotels          21,050    23,857    25,920
  Transportation/Comm.              8,423     9,932    10,791
  Banking/Finance                   6,157     7,310     7,943
  Real Estate                       3,249     3,647     3,962
  Government                        8,527    10,761    11,692
  Other Services                    4,440     5,455     5,927
Real Per Capita GDP                   691       768       821
Labor Force (millions)                 79        81        83
Unemployment Rate (pct.)              3.2       3.4       3.4
Underemployment Rate (pct.)          36.6      36.8      37.0

Money and Prices:  (annual percentage growth)

Money Supply (pct. rise)             20.0      26.5      15.0
Interest Rate 1/                     11.3       7.0      10.6
National Savings (pct. GDP)          25.0      25.0      25.0
CPI (pct. change)                     5.0      10.2      10.0
WPI (pct. change)                     5.3       3.6       7.4
Exchange Rate (Rp/USD) 2/           2,030     2,087     2,160

Balance of Payments and Trade:

Total Exports                      33,966    37,459    41,311
  Exports to U.S.                   4,332     5,439     5,999
Total Imports                      27,279    28,587    31,446
  Imports from U.S.                 2,777     2,770     3,254
Aid from U.S.                         155        94        90
Aid from All Sources                4,948     5,110     5,202
Foreign Debt (official/private)    72,927    85,837    89,858
Debt Service Ratio                   32.1      30.0      31.2
Foreign Exchange Reserves          11,161    12,352    13,140
Trade Balance                       6,687     8,872     9,865
  Trade Balance with U.S.           1,555     2,669     2,745


N/A--Not Available

1/ Interbank fund rates.
2/ Period average.


1.  General Policy Framework

    Indonesia is an economic success story.  In 1967, when
President Soeharto took power, it was one of the world's
poorest countries, with per capita GNP of $70 per person, half
that of India and Bangladesh.  In 1993, Indonesia's per capita
GNP passed $700, triple that of Bangladesh and more than double
India's.  Life expectancy has risen dramatically -- from 41 in
1967 to 63 in 1993 -- while infant mortality and illiteracy
rates have plummeted.

    Real GDP growth has averaged 6.7 percent per year over the
last five years.  Through a restrictive monetary policy and a
conservative fiscal stance, the government has held inflation
to the 5-10 percent range.  With strong export performance and
manageable import growth, the current account deficit dropped
from $4.4 billion in 1991 to $1.9 billion in 1993.

    Prospects for continued growth are good.  Government and
private sector projects are alleviating infrastructure
shortages, particularly in telecommunications, electric power,
and roads.  The banking industry continues to adjust to the
more stringent prudential regulations introduced in 1991 and
modified in 1993; credit constraints began to ease in late 1993.

    In 1994 Indonesia continued to take steps to open the
economy.  Indonesia ratified the Uruguay Round agreements and
became a founding member of the World Trade Orgainization on
January 1, 1995.  Indonesia was the 1994 chairman of APEC (Asia
Pacific Economic Cooperation); on November 15 President
Soeharto hosted leaders of the APEC economies at a meeting in
which they declared the goal of reaching free trade in the
region by the year 2020.

    In June 1994, the government issued another deregulation
package aimed at improving the investment climate.  This set of
measures opened up several previously closed sectors to foreign
investment and eliminated barriers to 100 percent foreign-owned
investment in most, but not all, sectors.  Further progress is
needed, however, to eliminate remaining barriers to foreign and
domestic trade, to replace the outdated commercial code, and to
establish clear and transparent accounting and auditing
standards.

    Indonesia's development is good news for U.S. business. 
U.S. exports to the country have doubled since 1988, totaling
2.8 billion dollars in 1993.  The best prospects for U.S.
exporters stem from the government's efforts to improve
infrastructure; they include equipment for power generation,
telecommunications, roads, harbors, and airports.  U.S.
exporters can also provide inputs for Indonesia's rapidly
expanding manufacturing sector.  For example, the United States
already supplies about half of the textile industry's
requirements for cotton.


2.  Exchange Rate Policies

    The government has maintained the convertibility of the
rupiah since the 1960s.  There have been no foreign exchange
controls since 1972.  The government follows a managed float
based on a basket of major trading currencies, including the
U.S. dollar.  Current policy is to maintain the competitiveness
of the rupiah through a gradual depreciation against the
dollar, at a rate of about five percent a year.  The exchange
rate at the end of October 1994 was 2,170 rupiah per dollar.


3.  Structural Policies

    In general, the government allows the market to determine
price levels.  The government enforces a system of floor and
ceiling prices for certain "strategic" food products such as
rice.  In some cases, business associations, with government
support, establish prices for their products.  Direct
government subsidies are confined to a few goods such as
fertilizers.

    Individuals and businesses are subject to income taxes. 
The maximum rate is 35 percent of annual earnings in excess of
rupiah 50 million (about $25,000), but the government has
introduced legislation that would reduce the maximum rate to
30 percent.  In 1985, a value-added tax (VAT) was introduced. 
Import duties are another important source of government
revenue.  Companies can apply for an exemption from or a rebate
of import duties and VAT paid on inputs used to produce
exports.  A few products remain subject to export taxes,
usually with the goal of job creation.  For example, in October
1989 export taxes on sawn lumber were raised to prohibitive
levels; and in May 1992 a previous export ban on logs was
replaced by high export taxes.  According to government
officials, total tax compliance in Indonesia is about 55
percent.


4.  Debt Management Policies

    Indonesia's medium and long term foreign debt totals about
$95 billion, with $60 billion owed by the state sector and
$35 billion by the private sector.  In 1994 Indonesia will pay
approximately 31 percent of total export earnings in principal
and interest payments on its foreign debt.  The government is
fully committed to meeting its debt service obligations and has
no plans to seek a debt rescheduling.

    The cabinet-level team set up by the government in
September 1991 to oversee foreign borrowing has had a
measurable effect on controlling public offshore debt.  The
team is charged with reviewing applications for foreign
commercial credits to finance projects in which the government
or a state-owned enterprise is involved.  Financing for purely
private projects is not directly affected.  The team is also
charged with prioritizing by project the use of offshore funds
and with establishing borrowing ceilings.  In October 1991 the
team announced ceilings on public sector foreign commercial
borrowing and guidelines for private sector borrowing through
FY 1995/96 ranging from $5.5 to $6.5 billion total per year.


5.  Significant Barriers to U.S. Exports

    Import Licenses:  Since 1986, import licensing requirements
have been relaxed in a series of deregulation packages.  Items
still subject to import licensing include some agricultural
commodities (rice, wheat, sorghum, sugar), alcoholic beverages,
and some iron and steel products.  Remaining import licensing
requirements may be waived for companies importing goods to be
incorporated into subsequent exports.  In June 1993, the
government lifted the previous ban on most types of completely
built-up passenger vehicles, although the ban was replaced with
high import duties and surcharges, totalling as much as
300 percent in many cases.  Automotive imports have followed
previous patterns, in which nontariff barriers such as bans and
licensing requirements have been replaced with tariffs and
surcharges.

    Services Barriers:  Services barriers abound, although
there has been some loosening of restrictions, particularly in
the financial sector.  Foreign banks, securities firms, and
life and property insurance companies are permitted to form
joint ventures with local companies although they are not
allowed to establish 100 percent foreign-owned subsidiaries or
branches.  In all cases, capitalization requirements for
foreign joint venture firms are higher than for domestic
firms.  Foreigners may purchase up to 49 percent of a company's
shares listed on the stock exchange.

    Foreign attorneys may serve as consultants and technical
advisors.  However, attorneys are admitted to the bar only if
they have graduated from an Indonesian legal facility or from
an institution recognized by the government as equivalent. 
Foreign accountants may serve as consultants and technical
advisors to local accounting firms.  Air express companies are
not permitted to own equity in firms providing courier
services, although they may arrange with local firms to provide
services in their name and second expatriate staff to the local
firms.

    Indonesia imposes a quota on the number of foreign films
which may be imported in a given year.  Films may be imported
and distributed only by fully Indonesian-owned companies.  In
November 1994 the government issued the final set of
regulations necessary to allow U.S. video companies to work
with Indonesian distributors to provide legal video and laser
disc rentals and sales.

    Standards, Testing, Labelling, and Certification:  In May
1990 the Government of Indonesia issued a decree which stated
that the Department of Health must decide within one year of
receipt of a complete application for registration of new
foreign pharmaceutical products.  Under the national drug
policy of 1983, a foreign firm may register prescription
pharmaceuticals only if they both incorporate high technology
and are products of the registering company's own research. 
Foreign pharmaceutical firms have complained that copied
products sometimes become available on the local market before
their products are registered.

    Investment Barriers:  By enacting a new deregulation
package in June 1994, the government took a large step forward
in improving Indonesia's investment climate.  The package,
known as PP 20, dropped initial foreign equity requirements and
sharply reduced divestiture requirements.  Indonesian law now
provides for both 100 percent direct foreign investment
projects and joint ventures with a minimum Indonesian equity of
5 percent.  In addition, PP 20 opened several previously
restricted sectors to foreign investment, including harbors,
electricity generation, telecommunications, shipping, airlines,
railways, roads and water supply.  Some sectors, however,
remain restricted or closed to foreign investment.  For
example, foreign investors may not invest in retail
operations.  They may, however, distribute their products at
the wholesale level.

    Most foreign investment proposals must be approved by the
Capital Investment Coordinating Board (BKPM).  Investments in
the oil and gas, mining, banking and insurance industries are
handled by the relevant technical ministries.  While BKPM seeks
to function as a one-stop investor service, most investors will
also need to work closely with various technical government
departments and with regional and local authorities.  There are
limited provisions under which foreign nationals may exploit or
occupy real property in Indonesia, but ownership is limited to
Indonesian citizens.  There are numerous restrictions on the
employment of foreign nationals, and obtaining expatriate work
permits can be difficult.

    Government Procurement Practices:  In March 1994 President
Soeharto signed a decree which regulates government procurement
practices and strengthens the procurement oversight process. 
Most large government contracts are financed by bilateral or
multilateral donors who specify procurement procedures.  For
large projects funded by the government, international
competitive bidding practices are to be followed.  Under a 1984
Presidential Instruction ("Inpres-8") on government-financed
projects, the government seeks concessional financing which
meets the following criteria:  3.5 percent interest and a
25 year repayment period which includes 7 years grace.  Some
projects proceed, however, on less concessional terms.  Foreign
firms bidding on certain government-sponsored construction or
procurement projects may be asked to purchase and export the
equivalent in selected Indonesian products.  Government
departments and institutes and state and regional government
corporations are expected to utilize domestic goods and
services to the maximum extent feasible.  (This is not
mandatory for foreign aid-financed goods and services
procurement.)  An October 1990 government regulation exempts
state-owned enterprises which have offered shares to the public
through the stock exchange from government procurement
regulations; as of November 1994 only two such enterprises had
made a public offering.


6.  Export Subsidies Policies

    Indonesia joined the GATT Subsidies Code and eliminated
export loan interest subsidies as of April 1, 1990.  As part of
its drive to increase non-oil and gas exports, the government
permits restitution of VAT paid by a producing exporter on
purchases of materials for use in manufacturing export
products.  Exemptions from or drawbacks of import duties are 
available for goods incorporated into exports.


7.  Protection of U.S. Intellectual Property

    Indonesia is a member of the World Intellectual Property
Organization and is a party to certain sections of the Paris
Convention for the Protection of Intellectual Property.  It
withdrew from the Berne Convention for the Protection of
Literary and Artistic Works in 1959.  Indonesia has made
progress in intellectual property protection, but it remains on
the U.S. Trade Representative's Special 301 "Watch List" under
the provisions of the 1988 Omnibus Trade and Competitiveness
Act.

    Patents:  Indonesia's first patent law came into effect on
August 1, 1991.  Implementing regulations clarified several
areas of concern, but others remain, including compulsory
licensing provisions, a relatively short term of protection,
and a provision which allows importation of 50 pharmaceutical
products by non-patent holders.  The patent law and
accompanying regulations include product and process protection
for both pharmaceuticals and chemicals.

    Trademarks:  A new Trademark Act took effect on April 1,
1993.  Under the new law, trademark rights will be determined
by registration rather than first use.  After registration, the
mark must actually be used in commerce.  Well-known marks are
protected.  However, there are some remaining problems with
marks filed prior to 1991.  Cancellation actions must be lodged
within five years of the trademark registration date.

    Copyrights:  On August 1, 1989 a bilateral copyright
agreement with the United States went into effect extending
national treatment to each other's copyrighted works. 
Enforcement of the ban on pirated audio and video cassettes and
textbooks has been vigorous, although software producers remain
concerned about piracy of their products.  The government has
demonstrated that it wants to stop copyright piracy and that it
is willing to work with copyright holders toward this end. 
Enforcement to date has significantly reduced losses from
pirating, but leakages still exist.

    New Technologies:  Biotechnology and integrated circuits
are not protected under Indonesian intellectual property laws. 
Indonesia has, however, participated in a World Intellectual
Property Organization conference on the protection of
integrated circuits and is considering introducing legislation.

    Impact:  It is not possible to estimate the extent of
losses to U.S. industries due to inadequate intellectual
property protection, but U.S. industry has placed considerable
importance on improvement of Indonesia's intellectual property
regime.


8.  Worker Rights

    a.  The Right of Association

    Private sector workers, including those in export 
processing zones, are free to form or join unions without prior
authorization.  However, in order to bargain on behalf of
employees, a union must register as a mass organization with
the Department of Home Affairs and meet the requirements for
recognition by the Department of Manpower.  (In January 1994, a
new government regulation authorized non-affiliated "Plant
Level Unions" to be set up in individual plants and to
negotiate binding collective signing agreements.)  While there
are no formal constraints on the establishment of unions, the
recognition requirements are a substantial barrier to
recognition and the right to engage in collective bargaining. 
The one union recognized by the Department of Manpower is the
All Indonesia Workers Union (Serikat Pekerja Seluruh Indonesia,
SPSI).  Its membership is approximately 994,500, or about 1.4
percent of the total work force.  However, if agricultural
workers and others in categories such as self-employed and
family workers who are not normally union members are factored
out, the percentage of union members rises to approximately six
percent.

    Civil servants are not permitted to join unions and must
belong to KORPRI, a nonunion association whose central
development council is chaired by the Minister of Home
Affairs.  Teachers must belong to the Teachers' Association. 
Though technically possessing the same rights as a union, the
PGRI has not engaged in collective bargaining.

    All organized workers, with the exception of civil
servants, have the right to strike.  In practice, state
enterprise employees and teachers rarely exercise this right. 
Before a strike can occur in the private sector, the law
requires intensive mediation by the Department of Manpower and
prior notice of the intent to strike.  However, no approval is
required.

    b.  The Right to Organize and Bargain Collectively

    Collective bargaining is provided for by law, but only
recognized trade unions and "plant level unions" may engage in
it.  Once notified that 25 employees have joined a registered
union, an employer is obligated to bargain with them.  Before a
company can register or renew its company regulations it must
demonstrate that it consulted with the union or in its absence
a committee consisting of employer and employee representatives.

    Labor law applies equally in export processing zones. 
Regulations forbid employers from discriminating or harassing
employees because of union membership, but in practice
retribution against union organizers occurs.

    c.  Prohibition of Forced or Compulsory Labor

    Forced labor is forbidden by law.  Indonesia has ratified
ILO convention No. 29 concerning forced labor.

    d.  Minimum Age for Employment of Children

    Child labor exists in both industrial and rural areas.  The
Department of Manpower acknowledges that there is a class of
children under the age of 14 who, for socioeconomic reasons,
must work and legalizes their employment provided they have 
parental consent and do not engage in dangerous or difficult
work.  The workday is limited to four hours.  Employers are
also required to report in detail on every child employed, and
the Department of Manpower carries out periodic inspections. 
Critics, however, charge that the inspection system is weak and
that employers do not report when they employ children.

    e.  Acceptable Conditions of Work

    The law establishes 7 hour workdays and 40 hour workweeks,
with one 30 minute rest period for each 4 hours of work.  In
the absence of a national minimum wage, minimum wages are
established for regions by area wage councils working under the
supervision of the National Wage Council.  Ministerial
regulations provide workers with a variety of other benefits,
such as social security, and workers in more modern facilities
often receive health benefits and free meals.  However,
enforcement of labor regulations is limited and a number of
employers do not pay the minimum wage or provide other required
benefits.  The failure to implement government regulations has
been a significant cause of strikes.

    f.  Rights in Sectors with U.S. Investment

    Working conditions in firms with U.S. ownership are widely
recognized as better than the norm for Indonesia.  Application
of legislation and practice governing worker rights is largely
dependent upon whether a particular business or investment is
characterized as private or public.  U.S. investment in
Indonesia is concentrated in the petroleum and related
industries, primary and fabricated metals (mining), and
pharmaceuticals sectors.

    Foreign participation in the petroleum sector is largely in
the form of production sharing contracts between the foreign
companies and the state oil and gas company, Pertamina, which
retains control over all activity.  All employees of foreign
companies under this arrangement are considered state employees
and thus all legislation and practice regarding state employees
generally applies to them.  Employees of foreign companies
operating in the petroleum sector are organized in KORPRI. 
Employees of these state enterprises enjoy most of the
protection of Indonesian labor laws but, with some exceptions,
they do not have the right to strike, join labor organizations,
or negotiate collective agreements.  Some companies operating
under other contractual arrangements, such as contracts of work
and, in the case of the mining sector, cooperative coal
contracts, do have unions and collective bargaining agreements.

    Regulations pertaining to child labor and child welfare are
applicable to employers in all sectors.  Employment of children
and concerns regarding child welfare are not considered major
problem areas in the petroleum and fabricated metals sectors.

    Legislation regarding minimum wages, hours of work,
overtime, fringe benefits, health and safety, etc. applies to
all sectors.  The best industrial and safety record in
Indonesia is found in the oil and gas sector.




  Extent of U.S. Investment in Selected Industries.--U.S. Direct
Investment Position Abroad on an Historical Cost Basis--1993

                    (Millions of U.S. dollars)
                                                                
              Category                          Amount          

Petroleum                                             4,552
Total Manufacturing                                     160
  Food & Kindred Products                   (1)
  Chemicals and Allied Products              61
  Metals, Primary & Fabricated                6
  Machinery, except Electrical              (1)
  Electric & Electronic Equipment           (1)
  Transportation Equipment                   -1
  Other Manufacturing                       (1)
Wholesale Trade                                         -25
Banking                                                  95
Finance/Insurance/Real Estate                           (1)
Services                                                (1)
Other Industries                                        222
TOTAL ALL INDUSTRIES                                  5,031    

(1) Suppressed to avoid disclosing data of individual companies
Source: U.S. Department of Commerce, Bureau of Economic
Analysis

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