Paper No. 08-2006
The Indonesian economy was dominated by the government in the decades of the 1970s and 1980s through its control of major mining, manufacturing and agricultural activities. Hill (2000) estimates that as much as 40% of non-agricultural GDP was accounted for by government entities in the late 1980s There were still a lot of government corporations up until the late 1980s and early 1990s and governmental control over the banking system was still substantial. Non-financial state owned enterprises (SOEs) contributed 14.5% of GDP in the late 1980s. They also accounted for another 9% of gross domestic investment which rose to 15.7% over the period 1990 1997 (World Bank, 2000). Three SOEs are of particular note that dominate the sector in terms of revenue and assets are Pertamina (monopoly in oil and gas with diversified holdings in hotels, an airline and office buildings); PLN and PTTelkolm (monopoly in power and telecommunications industry respectively). The SOEs also employ a significant percentage of the labor force (25% according to data from the Indonesia Statistics Office). This strong role of the state was derived from the historical break with its colonial past under President Suharto and the distrust of capitalists. There was also a need for the Suharto regime in the three decades when he ruled to maintain control of enough industries to maintain its base for extortion and corruption. There was only a gradual and delayed shift toward export promotion and away from import substitution. This was partly the result of lobbying by entrenched interests that were making monopoly profits from new protected industries and corrupt officials that were operating the customs and port facilities. It also had to do with the control of key allocation and production agencies like Bulog and Pertamina. The decline in oil prices in the mid-1980s put pressure on the government to develop a more competitive economic environment which was reinforced by the growing integration of economies in Southeast Asia in conjunction with commitments to the ASEAN Free Trade Agreement. Policy measures focused on trade barriers. Tariffs were lowered and some import monopolies and import licenses were converted to tariff equivalents. There were also reforms in banking and the regulation of foreign direct investment. However, these reforms were partial in nature. Several banks remain under government control and policy required domestic partnerships for foreign direct investment (FDI) approval (see Dowling and Yap (2005) for further details. Nevertheless, despite these shortcomings in the policy environment, there was a measurable improvement in competition and economic efficiency, particularly in the manufacturing sector. Pangestu et al (2002) show that there was a decline in the level of industrial concentration and that the size distribution of firms has become more equal over time. There was also a decline in the prevalence of dominant firms therefore enhancing competition and reducing monopoly power. Finally, there was less stability in market shares after 1990, a development which reflects greater competition1. The evidence of enhanced competition over the decades of the 80s and90s is much less compelling in other sectors of the economy, including agriculture, services, infrastructure and some parts for manufacturing and mining sectors. There are a number of examples that can be cited to support this conclusion including the cement industry (where there were high tariffs on imports, restrictions on number of distributors and allocation of markets) as well as gas distribution, telecommunications and electricity (where an opaque regulatory framework prohibited a level playing field from developing as new entrants came into the market). Furthermore, in the telecoms sector the government remained the majority shareholder in PT. Telkom and Indosat.