Regions and Countries

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p. 10 of 15 BACK | NEXT Map Executive Summary I. Recent Economic Developments II. Short and Medium-Term Economic Prospects and Policy Issues A. Growth, Investment, and Saving B. Fiscal and Monetary Developments C. Balance of Payments D. Risks and Uncertainties III. Corruption as a Challenge to Development Appendix

Country Economic Review - Indonesia : II. Short and Medium-Term Economic Prospects and Policy Issues

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A. Growth, Investment, and Saving

41. The economy is projected to maintain moderate GDP growth of 3-4 percent% each year during 2002-2003. The projection assumes that household and government spending will continue to be the major elements supporting GDP growth. Exports and investment spending are, however, expected to improve by the end of -2003 (Table ). Exports are projected to benefit from the expected recovery in Organization for Economic Co-operation and Development (OECD) economies. Output will be more strongly supported by the manufacturing sector, as agriculture is unlikely to show strong improvement.

41. Key issues regarding growth center on stability and the environment for investment. Although market perceptions have improved in early 2002, longer-term prospects still remain clouded. Continued absence of peace and order in provincial areas such as Aceh will frustrate any systematic development planning. The Government estimates that there were 1.3 million people were internally displaced people in 2001. Security problems in Aceh, the Moluccas, Papua, and Sulawesi continue to discourage investment inhibit investors in these resource-rich regions. Threats to the security of foreigners, such as seen in the aftermath of 11 the September 11, 2001 terrorist attacks in the United States, also discourage foreign direct investment and encourage continued capital flight.

42. In the From a longer- term perspective, strengthening the legal and judicial system to provide protection for human rights and property is essential to encourage a high level of investment by Indonesians in their own country. Highly publicized failures instances in which the of the legal and judicial system failed to protect investor interests or enforce contractual arrangements has have discouraged potential investors. Improving governance in these areas should be the single most important focus for the Government to ensure long-term significant potential for growth. The 11thth Consultative Group for Indonesia (CGI) Meeting in November 2001 emphasized the interrelationship between poverty reduction, development, and strengthening governance.

43. The environment for investment is also affected by decentralization as many Under decentralization, local governments are taking actions that will discourage investment and trade in their regions. reportedly Local impose taxes on transshipments and on businesses, and implement inappropriate regulations, are being reported that will discouraginge private sector development.⁹ Part of the unfinished agenda for decentralization includes the development of mechanisms to ensure that national policy is not piecemeal subverted by local actions.

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⁸The projection figures for 2002 and 2003 are based on the updated statistics of economic indicators for 2001 and the first half of 2002, which provide an update to the earlier forecast in the Asian Development Outlook 2002.
⁹For instance in Bangka, South Sumatra, a regulation allows new companies to mine for tin with lax environment guidelines and in contravention of existing franchises.