Countries and Regions

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p. 6 of 33 BACK | NEXT I. Current Development Trends and Issues A. Political Setting B. Economic Growth C. Poverty D. Governance and Institutional Capacity E. Private Sector F. Gender Assessment G. Environment H. Regional Cooperation I. Development Constraints II. The Government's Development Strategy III. ADB's Development Experience IV. ADB's Strategy V. ADB's Assistance Program VI. Risks and Performance Monitoring and Evaluation

Country Strategy and Program 2006-2009 (Draft for Consultation): Indonesia : I. Current Development Trends and Issues

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E. Private Sector

22. One of the unique characteristics of the Indonesian business environment is the significant involvement of the public sector.¹⁷ Beyond heavy regulation of business entry and operations, the Government continues to control a significant portion of the country’s productive assets through its management of over 158 state-owned enterprises (SOEs). These SOEs enjoy monopoly rights in a number of sectors and receive preferential market access from the government in many others effectively “crowding out” private sector competitors.

23. Despite the heavy involvement of SOEs in the economy, the private sector has historically generated approximately 60–70% of the gross domestic product (GDP). While more than 75% of private sector GDP is generated by domestic companies, during the 1970s and 1980s Indonesia proved to be a highly attractive investment destination for foreign companies eager to tap its rich natural resource base. There were large inflows of foreign capital into the oil, gas, and mineral sectors despite the obligation to work through production-sharing contracts and other restrictive regulations. Further liberalization of the banking, insurance, and retail distribution sectors also led to increased foreign direct investment (FDI) in the years leading up to the financial crisis of 1997/98.

24. Of the major Southeast Asian economies, Indonesia has had the lowest level of FDI since the crisis. In 2005, FDI inflows were positive for the first time since 1998. Political instability, the rising cost of labor, and the general inefficiency of public administration and the judiciary have collectively added to the costs of doing business in the country Contractual disputes in the oil, water, and telecommunication sectors, constitutional court decisions in the electricity sector, high-profile bankruptcy judgments in the insurance sector, and the proliferation of new local regulations and taxes have highlighted the limited recourse available to resolve disputes, systemic corruption in the public sector, and the high level of political intervention in all aspects of commercial operations. Decentralization has aggravated this climate of uncertainty as the roles, responsibilities, and resources of the subnational governments have yet to be clearly defined.

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