analysis of state intervention policy and impact of european crisis in indonesia economic...
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F u a d B i s m a r I b r a h i m
H a i d i r A u l i a R e i z a p u t r a
N i e k e A r i s t a M e l i n a
N u r K h a i r u s y S y a k i r i n
R a h m a D w i g u n a w a t i
S h e i l a S a r a s w a t i F a h r i z a l
T i a r a P r a m u d y a w a t i
P e r m a t a h a r i
Groupe ESC Troyes – INBA3
Indonesia's achievement in the early 1970s was made by
three pillars. First, state support in agricultural sector. Second
balanced budget with prudent macroeconomic management.
Third, economic outpot growth annual rate is seven percent.
Altough Indonesia had suffered the Asian financials crises in
1998, the state have advanced as one of the most powerfull
economic power in the ASEAN region. Biggest contributor in
state’s revenue in Indonesia is tax with average increase of
taxation revenue during the period 2005-2010 is about 16,05%.
Indonesia has lots of regulations concerning labor, such as
regulation of the costs of having employees; minimum wages,
indemnities, and social charges. States’ and companies’ main
source of financing and capital in Indonesia is bank loans . This
paper will analyzes cause, process, and impact of states
intervention policy such as price intervention, taxation, labor
policy, and the impact of Euro Crisis on Indonesia Economic.
Effect of State Economic Intervention Policy and European Crisis to The Nation Economic: Case Study in Indonesia Economic Environment
1
Contents Chapter 1 .................................................................................................................................... 3
Introduction ................................................................................................................................ 3
1.1 Background ...................................................................................................................... 3
Chapter II ................................................................................................................................... 4
Materials and Data ..................................................................................................................... 4
2.1 Theorems of State Economic Intervention .................................................................. 4
2.2 Price intervention ............................................................................................................. 4
2.3 Taxation System In Indonesia .......................................................................................... 5
2.3.1 Indonesia Latest Tax Condition ................................................................................ 5
2.3.2 Income Tax for Corporation .................................................................................... 5
2.3.3 Consumer goods........................................................................................................ 6
2.3.4 Income Tax for Individual ........................................................................................ 6
2.3.5 Luxury goods ....................................................................................................... 7
2.3.6 Export and Import Tax .............................................................................................. 7
2.4 Labor Intervention ........................................................................................................... 7
2.4.1 Minimum Wages ....................................................................................................... 7
2.4.2 Termination Costs ..................................................................................................... 8
2.4.3 Social Charges .......................................................................................................... 8
2.4.4 Employment Level in Indonesia ............................................................................... 9
2.5 Capital Structure .............................................................................................................. 9
2.5.1 Definitions and Functions ......................................................................................... 9
2.5.2 Capital Control .......................................................................................................... 9
Chapter III ................................................................................................................................ 11
Analysis and Results ................................................................................................................ 11
3.1 Interferences on the market price system In Indonesisa ............................................... 11
3.1.1 Fact and Problem .................................................................................................... 11
3.1.2 Analysis................................................................................................................... 11
3.2 Taxation Analysis in Indonesia ................................................................................. 12
3.3 Labor Market ............................................................................................................. 12
3.3.1 Latest Increased Minimum Wage Analysis In Jakarta and Bekasi ......................... 12
3.4 Capital Stucture .............................................................................................................. 13
3.4.1 Source of Financing in Indonesia ........................................................................... 13
2
3.4.2 Comparative Advantages of Indonesia ................................................................... 14
3.5 Euro Crisis ..................................................................................................................... 15
3.5.1 Prolog of Euro Crisis ............................................................................................. 15
3.5.2 Impact of Euro Crisis in Indonesia ......................................................................... 15
Chapter IV ................................................................................................................................ 17
Conclusion ............................................................................................................................... 17
Bibliography ............................................................................................................................ 18
3
Chapter 1 Introduction
1.1 Background Indonesia's achievement in the early 1970s was made by three pillars. First, state
support in agricultural sector. Second balanced budget with prudent macroeconomic
management so the inflation rate is low and have a healthy balance sheet. Third, economic
outpot growth annual rate is seven percent and the indirect effect is a decreasing share of
poverty line from sixty percent in 1970s to eleven percent in 19961. Altough Indonesia had
suffered the Asian financials crises in 1998, the state have advanced as one of the most
powerfull economic power in the ASEAN region nowadays.
There are five formulations of problem on that will analyzed in this articlce: how is
the process and cause of price intervention in Indonesia to the Market, how is the process and
cause of Taxation in Indonesia, how is the process and cause of Labor policy in Indonesia,
how is the policy of capital structure in Indonesia, and how is the impact of euro crisis in
Indonesia. Price intervention by the government exists in Indonesia because in some
conditions, government’s intervention is inevitable. Intervention in the market is used to
protect both producers and consumers. Biggest contributor in state’s revenue in Indonesia is
Tax (±70%) which significantly increases until 20112. The increase is about 371% from 2001
or 152% from 2005. Average increase of taxation revenue during the period 2005-2010 is
about 16,05% while 2011 revenue increased 18,27% (greater than the average revenue in
period 2005-2010). Indonesia has lots of regulations concerning labor, such as regulation of
the costs of having employees; minimum wages, indemnities, and social charges. States’ and
companies’ main source of financing and capital in Indonesia is bank loans3. The state is also
dominant in capitalization of a vital enterprises and make it a state owned companies.
Manufacturing companies in Indonesia are showing a good growth which is a sign of leaping
to be a developed Nations. As Indonesia’s economy increasingly opens, then Indonesia is
vulnerable to shock external that implicates the economy condition and social development in
Indonesia. European and US financial crisis has several impact on domestic financial sector
such as the exports that relied in the european or american market.
Based on the paragraph above we conlude five main purposes of this article: First to
know the process and cause of price intervention in Indonesia to the Market; Second, to
know the process and cause of Taxation in Indonesia; Third, to know the process and cause
of labor policy in Indonesia; Fourth, to know the policy of capital structure in Indonesia; and
fifth, to know the impact of euro crisis in Indonesia.
1 Radelet, S., 1998. Indonesia's Implosion.
Available at: http://www.cid.harvard.edu/archive/hiid/papers/indimp.pdf 2 World Investment Report 2011 Available at: http://www.unctad-docs.org/files/UNCTAD-WIR2011-Full-
en.pdf 3 Nagano, M., 2003. Determinants of Corporate Capital Structure in East Asia: Are there differences from the
Industrialized Countries?Available at: http://www.waseda.jp/wnfs/pdf/labo3_2004/wifs-04-002.pdf
4
Chapter II
Materials and Data 2.1 Theorems of State Economic Intervention
The neo-classical approach distinguished two fundamental theorems of state
intervention. The First theorem states, general equilibrium existence if existed will be pareto
efficient which are based from perfect competition market, unavailibility of public goods and
externalities, unavailibility of non-convexities in production and consumption and perfect
information. The Second theorem are based from the first thorems and adding assumption of
the existence of tax transfer to the government and conclude that pareto efficient can exist as
a solution to a general equilibrium system. The limit of the second theorems are based on the
limited role of the state by adding taxes and transfers and the intervention does not distort
economics agent decision making process because it only affects income and absence in
substitution effect The State could then, invoking the principle of rectification, intervene in
order to carry out this limited redistributive activity.4
2.2 Price intervention
Ceiling price is used to cope with condition in which the price of one good is too high,
and in order to make the people can still buy it, the ceiling is needed. However, there will be
shortage of goods. In condition where the price ceiling has been already set, the quantity
demanded by people (consumers) will exceed the quantity supplied by seller (producers).
Since the price ceiling is intended to benefit the buyers (consumers), it is important for the
government to decide in which situation the ceiling price is preferable.
Figure 2.1: Price Ceiling
Source : http://www.sparknotes.com/economics/micro/supplydemand/equilibrium/section2.rhtml
Price floor works the other way aroun. The government sets price floor for the benefit
of the sellers (producers). In Indonesia, this kind of government intervention is mostly
applied for agricultural products to ensure that the farmers (producers) can still make enough
money. As the price of agricultural products fluctuates depending on the weather, sometimes
4 BARR N. (1993) The Economics of the Welfare State, Weidenfeld and Nicholson, London in Karnik, Ajit
Theories Of States Interventions http://www.mu.ac.in/arts/social_science/eco/pdfs/depart/dwp38.pdf
5
the market price can be so low that the farmers (producers) cannot make enough money for
their living. Price floor intended to give a minimum price when oversupply is happening in
the market or the quantity supplied by sellers exceeds quantity demanded by consumers. This
condition leads to higher price since farmers produce so many than what buyers want at the
new condition.
Figure 2.2: Price Floor
Source : http://www.sparknotes.com/economics/micro/supplydemand/equilibrium/section2.rhtml
2.3 Taxation System In Indonesia 2.3.1 Indonesia Latest Tax Condition
The biggest contributor in state’s revenue in Indonesia is Tax (±70%) which
significantly increase until 20115. The increase is about Rp. 873.900.000.000 or 371% from
2001 or 152% from 2005. Even for 2012 according to APBN (budget revenue and
expenditure) projected to reach Rp. 1.016.200.000.000,00 or increased almost five-fold
compared to 2001 revenue6. Average increase of taxation revenue during the period 2005-
2010 is about 16,05% while 2011 revenue increased 18,27% (greater than the average
revenue in period 2005-2010).
2.3.2 Income Tax for Corporation
Only corporations which have gross profit (taken from Income Statement after
reconciliation) above Rp. 4.800.000.000,00 will be charged by tax amounted 25% and this
tariff is fixed7. And ones with gross profit below Rp. 50.000.000.000,00 will get a facility;
deduction in tariff amounted 50%. This regulation will not incriminate small and medium
enterprises which are being promoted by government. The number of SME always increase
over years and this kind of business has taken an important part in Indonesia’s economy.
5 World Investment Report 2011 Available at: http://www.unctad-docs.org/files/UNCTAD-WIR2011-Full-
en.pdf 6 Prof. Firmanzah., P., 2012. Pajak Dalam Struktur Pendapatan Negara. Available at: http://www.setkab.go.id
7Syafrianto, 2009. Tax Learning: Konsultasi Pajak Gratis: Batasan Pengusaha Kena Pajak.
Available at: http://syafrianto.blogspot.fr].
6
2.3.3 Income Tax for Individual
Taxable Income Level Tariffs
Up to Rp 50.000.000,00 5%
Rp 50.000.000,00 - Rp 250.000.000,00 15%
Rp 250.000.000,00 - Rp 500.000.000,00 25%
Above Rp 500.000.000,00 30%
Source: Anon., 2012. Seri PPH - Penghitungan Pajak Penghasilan Pasal 21 | Direktorat
Jenderal Pajak.
Available at: http://www.pajak.go.id
Personal Exemption Receiver Per year Per month
For the tax payer Rp 15.840.000 Rp 1.320.000
If the tax payer has been married Rp 1.320.000 Rp 110.000
If the tax payer has a child (max. 3) @Rp 1.320.000 @Rp 110.000
Source: Anon., 2012. Seri PPH - Penghitungan Pajak Penghasilan Pasal 21 | Direktorat
Jenderal Pajak.
Available at: http://www.pajak.go.id
Tax tariff for Individual income is progressive (5%-30%)8 in accordance to taxable
income, not to net income. Taxable income is calculated by cutting net income with personal
exemption. Single men with minimum wage will get his wage decreased until 90% because
of personal exemption. This personal exemption will increase if that single man has his own
wife and children. Thus, his taxable income will be in zero to negligible range. This kind of
regulation will not harm society because of its progressive tariffs and personal exemption.
One who has a small wage or more amenability will be charged by small amount of income
tax, and vice versa.
2.3.4 Consumer goods
For consumer goods, tariff is flat; 10% from product’s price9. Determination of sales
tax for consumer goods gives possibility to everyone to contribute in state’s revenue,
although it could be something unfair when we count to the percentage of each person’s
salary which is contributed to consumer good’s sales tax. Small tariff in sales tax for
consumer goods does not seem to give any significant problem for the level of consumption
because not all of sellers in Indonesia are categorized as taxable employer. Taxable employer
is the employer who has a gross revenue greater than Rp. 600.000.000,00/ year. Almost all
8 Anon., 2012. Seri PPH - Penghitungan Pajak Penghasilan Pasal 21 | Direktorat Jenderal Pajak.
Available at: http://www.pajak.go.id 9Anon., n.d. Penjelasan Umum Tarif. Available at: http://www.tarif.depkeu.go.id/Bidang/?bid=pajak&cat=ppn.
7
sellers in traditional market are not categorized as taxable employers so poor people still have
an option if they do not want to be charged by sales tax.
2.3.5 Luxury goods
Tariff is different for luxury goods, the value added range is between 10% - 75%10
,
depending on the goods classification. Luxury goods are determined by chancellor of the
exchequer. These are some explanations about luxury goods: That the item does not
constitute a necessity, goods are consumed by a particular society, in general, the goods are
consumed by higher income, goods are consumed to indicate status, and when consumed can
damage health and morals and disturbing the public order such as alcoholic beverages. Sales
tax for luxury goods exist with different tariff to maintain balance between the taxation of
low-income consumers with high-income consumers, to control the pattern of consumption of
taxable goods categorized as luxuries, as protection of small producers or traditional, and
need to secure the state revenue.
2.3.6 Export and Import Tax
Export tax in Indonesia has 0% tariff11
. This regulation is expected to stimulate
domestic manufacturers for developing their business abroad. Import tax tariffs vary
depending on the kind of goods which is imported. Tariff to import goods in which types of
goods are produced in the country as well will be higher. Imported good’s price will be
higher than domestic product thus citizens will prefer to buy domestic product. Domestic
entrepreneurs will grow because of their higher profit. In the contrary, there will be 0% tariff
for goods which is very needed in the state. This determination will help citizens to get
needed goods in lower price.
2.4 Labor Intervention
2.4.1 Minimum Wages Minimum wages were introduced in Indonesia in the early 1970s, they gain much
attention in the end of 1980s when government emphasize it on labor market policies. In the
early 1990s, the government tripled minimum wages in nominal terms and doubled them in
real terms. Nominal minimum wages were increasing during 1990s but in reverse, the real
wages were going down until 1998 due to high inflation. Based on the statistics from The
Manpower and Transmigration Ministry, the average minimum wage in Indonesia in 2011 is
Rp988.829,99 and it grows in 2012 to approximately Rp1.100.000,00. With this amount of
wages, people who live in a big city like Jakarta surely cannot survive. Even though their
minimum wages are still the highest among other cities, Rp1.529.000,00, the figure cannot
fulfill the needs of proper life in there, which cost almost two millions rupiah.
10
wahyudi, d., 2008. Pajak Atas Pembelian Barang Mewah | BLOG PAJAK INDONESIA. Available at:
http://dudiwahyudi.com
11
Anon., 2012. 0% dalam PPn (Pajak Pertambahan Nilai). Available at: http://www.stpi-pajak.com/berita-
131-0-dalam-ppn-pajak-pertambahan-nilai.html.
8
Kind of social charges Coverage
Work injury insurance Carrying & checking costs
Medicines and hospitalization
Rehabilitation
Compensation: 0.24% – 1.74% of monthly
wage
Death insurance Cemeteries
Compensation: Rp14.200.000,00
Insurance for old-age For 55 years old ++
Total permanent disabilities
Compensation: 5.7% of monthly wage
o 3% paid by employers
o 2.7% paid by employees
Healthcare Rp1.530.000,00 – Rp3.080.000,00
According to The Indonesia Labor Institute, average wages that Indonesian workers
receive nationally are only Rp1.100.000,00 it still least costly for labor intensive enterprises
compared with China (eq to Rp2.100.000,00), Thailand (eq to Rp2.700.000,00), and
moreover Singapore (eq to Rp5.000.000,00).Increasing in minimum wages give a positive
link between minimum wages and average wages of most groups of workers. But some
researchs states that, minimum wages cause contradictory effects. The wages of some
workers are pushed up by minimum wages, meanwhile the others are depressed.
The statistical analysis shows that increase in minimum wages does have a negative
effect on urban, formal sector employment, with the exception of white-collar workers. For
all workers, the elasticity of total employment to minimum wage is -0.112 and statistically
significant. This implies that for every change of 10% in minimum wages, more than one
percent new unemployment occurs. Meanwhile for females and youth, it is more than -0.3,
for less educated people -0.2. On the contrary, white-collar workers seem to be the only
benefitted out of this condition. The elasticity for them is to be 1.0 and statistically
significant. The higher the minimum wages, the more people are employed.12
2.4.2 Termination Costs
In Indonesia, employers cannot lay off workers just like they blink eyes. At least
employers have to pay three kinds of indemnities; severance, work-time appreciation, and
annual leave. Each one implies different costs. If lying off workers are undeniable, the
employers are at least ought to pay thrice of monthly wage for each worker they fire plus
some specific calculation for annual leave. This obviously will increase the costs of labor
supply.
2.4.3 Social Charges
Several kinds of social charges are payable to them. Thus, another kind of burden are
now on the shoulders of the employers. They are work injury insurance, death insurance,
insurance for old-age, and healthcare.
12
See Wage and Employment Effects of Minimum Wage Policy in the Indonesian Urban Labor Market by
SMERU Research Institute for details
9
2.4.4 Employment Level in Indonesia
Source: Indonesia Statistics Bureau
The latest employment level between Februari 2010 to Februari 2012 shows that
agriculture workfields in Indonesia is still the biggest contributor for employment level in
Indonesia. Thus, trade and services workfields have shown steady increasing growth of
employment level from 2010 to 2012. Meanwhile there are some declining absorption of
employment level on transportation and warehousing workfields from 2010 to 2012.
2.5 Capital Structure 2.5.1 Definitions and Functions
Capital Market is the market in which long term financial instruments, such as bonds,
equities, mutual funds and derivative instruments, are traded. Capital Market serves as an
alternative for a company's or state capital resources and public investment. Capital Market
plays important role in the economy of a country because it serves two function. First, Capital
Market serves as an alternative for a company's capital resources. The capital gained from the
public offering can be used for the company's business development, expansion, and so on.
Second, Capital Market serves as an alternative for public investment. People could invest
their money according to their preferred returns and risk characteristics of each instrument.
2.5.2 Capital Control
Capital controls are measured by imposing state's government activities at managing
capital account transactions. Whereas domestic regulatory authorities try to ensure that
capital market participants trade fairly with each other. Capital controls aim to ensure macro
economic effects of capital markets don't have a net negative impact on the nation. Most
0,00
20,00
40,00
60,00 In
mill
ion
s
Workfields
Employment Level in Main Workfields
Feb '10
Aug '10
Feb '11
Aug '11
Feb '12
10
advanced nations use capital controls sparingly as in theory that allowed markets freedom to
achieve win-win situation. Investors are free to seek maximum returns and The State can
benefit from investments that will develop their industry and infrastructure. Capital market
transactions can also have a net negative effect for instance, in financial crisis there can be a
capital flight, leaving a nation without sufficient foreign currency to pay for needed imports.
Source: http://www.idx.co.id/Home/AboutUs/IndonesiaCapitalMarketStructure/
There are several institutions play role in Indonesia capital market. Indonesian Capital
Market and Financial Institution Supervisory Agency (Bapepam-LK) states institution which
plays as market’s regulatory. That role is supported by another institution, there are
Indonesian Stock Exhange (IDX), Indonesia Clearing and Guarantee Corporation (KSEI) and
Indonesian Central Securities Depository (KPEI). While there are several players in market
capital i.e companies, investors, security company, supporting institution and supporting
profession.
11
Chapter III
Analysis and Results 3.1 Interferences on the market price system In Indonesisa 3.1.1 Fact and Problem
In this problem the price intervention will be focused on price intervention in the
agricultural sector especially in rice price which is the main food commodity in Indonesia.
The government has implemented price stabilization at two levels; local level, by interfering
in marketing through producers and public storehouses and international level, by doing
monopoly control over international trade. By setting floor and ceiling price the government
aims to protect both buyers (consumers) and sellers (producers). After the period of high
instability in politics and economy until mid-sixties, it leads Indonesia to have stable and
relatively low rice price. There are some changes in contexts and the objectives as well over
time to stabilize the price.
In 1968 Indonesia government created special agency called BULOG (Badan Urusan
Logistic) to manage a wide national set of local agency and warehouses located in the district
level called DOLOG13
. DOLOG has permission to store some quantities of rice. It buys rice
from farmer so the price of the rice (in these rural markets) will increase to the floor market.
Moreover BULOG get rice-paddy both from farmers’ cooperatives and private traders which
stimulate the establishment of village cooperatives (Koperasi Unit Desa). The establishment
of BULOG gives positive impacts for economy but started in 2000/2001 there was an
indication of corruption in this agency. The dilemmatic situation is that though Indonesia has
a lot of fields and farmers to produce rice, in fact, we still import rice from Vietnam, Thailand
and other countries. Frankly speaking, the supply of domestic rice is not sufficient to fulfill
the needs of a lot of Indonesians. Meanwhile, Indonesia is not really affected by the crisis
happening in Europe.
3.1.2 Analysis
Analysis on margins between floor and ceiling price set by the government and
fertilizer price relative to floor and world price have been performed around the period when
stabilization occurs. The state decided to import when domestic production was short in
condition in which it was high and the storage level of rice was already high, the state
decided to export it. At the beginning, government announced the ceiling price explicitly and
publicly in order to give more flexibility. Moreover, BULOG has access to an unlimited
credit line, guaranteed by the Bank Indonesia at commercial rates and highly subsidized
level. Shortly, all of these conditions shows that the government intervention in price which
aimed at the beginning give a contribution to economic growth. The targeted prices should
follow international prices and all of policies regarding price stabilization seemed to be
cheaper or less costly when Indonesia relies on Import than it has to manage surplus. That is
13
Cirad, F. Gérard, 2010. Indonesian experience in rice price stabilization Available at: http://www.inter-
reseaux.org/IMG/pdf/Indonesian_experience_in_rice_price_stabilization.pdf
12
why Indonesia faces dilemmatic situation when the supply of domestic rice is not sufficient to
meet the needs of huge population in Indonesia.
3.2 Taxation Analysis in Indonesia 1. Decreasing tax tariff for corporate income from 28% to 25% in 2010 surely has made
revenue from taxation fall14
. In the other hand, this regulation has stimulated some
investment activities because stockholders have more disposible income and expected to
get more profit. In our opinion, this determination has brought something good for the
economy. Even government could get a higher amount of taxation revenue although in
lower percentage of corporation income.
2. The number of active tax payer in Indonesia is about 3.600.000 and this number has
reflected something wrong in census for taxation purposes because employment number
in Indonesia is about 120.400.00015
. From the amount listed, only a little part pays the
tax. In our opinion, government not only must build a better census system, but also must
persuade all of citizens to have more willingness to give their contribution in paying tax.
Citizens as well must realize about their obligation.
3. The increasing taxation revenues in the last decade have given an impact to the decrease
of state’s debt portion as a financing resource in APBN. The ratio of debt to GDP fell
swoop on a point in the semester 1-2012; 24.3% compared to 77% in 2001. The budget
deficit during the first decades maintained an average of 1.4% (of GDP). In 2011 the
State budget deficit stood at 1.1% or could be reduced 54% from 2001 to reach 2.4%16
.
3.3 Labor Market 3.3.1 Latest Increased Minimum Wage Analysis In Jakarta and Bekasi
The labors in Indonesia since years ago have been demanding for higher wages to be
sure that they can satisfy the need of appropriate living standard. The latest information
comes from Jakarta and one of its surrounding cities, Bekasi. As Jakarta now is under the
leadership of new governor, labors ask for a better condition through monthly income. Only
few days ago, the governor accepted to give raise in minimum wage up to Rp2.216.243,68 or
44% percent increase from previous one.17
A high increase also appears in Bekasi, from
Rp1.422.252,00 to Rp2.100.000,00, which is 47,65%. Every year in every province in
Indonesia, there is always an increase of minimum wages. This is aimed to go beyond the
amount needed for appropriate living standard.
The theory of minimum price give an idea that the implication of minimum price will
bring out less number of employment because the increase in costs in factors of production.
Statistical study also shows elasticity level of employment relative to minimum wages, -
14
Prianti, M., 2008. BKPM usul tarif PPh Badan Turun Langsung Menjadi 25% mulai 2009.
Available at: http://www.ortax.org/ortax/?mod=berita&page=show&id=2351&q=10%20Waji&hlm=753
15Mentari, R., 2008. Evaluasi Kebijakan. Issue 2008.
16Prof. Firmanzah., P., 2012. Pajak Dalam Struktur Pendapatan Negara.
Available at: http://www.setkab.go.id
17Post, T. J., 2012. Jakarta workers ask for higher wages | The Jakarta Post.
Available at: http://www.thejakartapost.com/news/2012/10/25/jakarta-workers-ask-higher-wages.html
13
0.112, we predicted that in Jakarta there is a potential decrease in the level of employment
amounted almost 5%. Using the same method, we predicted 5,4% more unemployment in
Bekasi. This will create another problem, which is uneven distribution of purchasing power
because more people are getting less, some are getting more. We will witness in the next
years if the stipulation of minimum wage is working or not.
3.4 Capital Stucture 3.4.1 Source of Financing in Indonesia
Indonesia Central bank decides 5.62% of interest rate, 11.73% for working capital
lending rates and 11.35 for investment lending rates18
. The central bank also has proportion
of finance activities as shown in the chart below. It shows that Government bank is
dominantly in the activities, second is Deposit facility, the third is Bank Certificate and the
last one is Term deposit.
While in the commercial bank it has different structure. As the chart shows below,
financing activities are dominated by time deposit. Not that much differentiation, the saving
deposit comes the second. It shows that loans is much greater than equity.
Source: Okuda, H. & Take, Y., 2007. Economic Reforms and Financing Structure of Indonesian Listed
Companies After The Asian Crisis: Corporates Finance Issues and The Solutions
18
Central Bank of Indonesia, Bank Indonesia. Data available at: http://www.bi.go.id/sdds/
14
As shown in the table below, the banks has dominantly short-term activities than long
term activities. In case of capital market, it is just considered the long term which is Loans for
4,497.02 Millions of US$ greater than Bonds and notes for 681.84 Millions of US$
Source: http://www.bi.go.id/sdds/
3.4.2 Comparative Advantages of Indonesia
Manufacturing sector is the comparative advantages of the country because it
contributes the most of GDP in Indonesia. Number of manufacturing companies is 62% while
real estate is 15% and agriculture is 6% of all the companies in Indonesia19
. Since the labor
cost in Indonesia is cheap, there are so many manufacturing company invest their money to
build a new factory in Indonesia. Car and motorcycle companies are dominant in Indonesia
because huge market opportunity and easier consumption credit system. That is why in
Indonesia there are so many manufacturing companies establish there.
Source: http://www.bi.go.id/sdds/
As shown in the table, manufacturing industry contributes the most to the GDP with
506,624.3 billions rupiah. While the second come from agriculture, it contributes 327,233.5
billions rupiah. Indonesia still has comparative advantage in agriculture. Indonesia is one of
the countries who exports so many agriculture product to another countries. Agriculture
sector is the second most contributes to GDP Indonesia. Indonesia is one of tropical countries
in the world and it gives advantages to produce so many kind of agriculture products.
19
Okuda, H. & Take, Y., 2007. Economic Reforms and Financing Structure of Indonesian Listed Companies
After The Asian Crisis: Corporates Finance Issues and The Solutions
15
3.5 Euro Crisis 3.5.1 Prolog of Euro Crisis
In the middle of 2008, it was the beginning of an important change in the world
economy. Indonesia, as a small open economy country, cannot escape from the 2008 global
financial crisis. A high level of stock markets integration across countries drive the crisis to
transmit from the source country to the rest of the world relatively fast. Lehman Brothers as
the largest financial institution of the US announced its bankruptcy after failing to get the
assistance from the monetary authority on September 2008. The bankruptcy and fall downs in
turns affect countries whose had invested indirectly or directly in security or its derivatives.
Europe’s financial crisis originated from the growth of government budget deficit in
European countries, especially Greece, Ireland, and Portugal. Meanwhile, the growth of
government budget deficit was coupled with debt ratio per GDP that causes limited ability to
obtain financing deficit. No functioning of monetary policy in the Euro area and limited fiscal
space encourage economic slowdown even decline in some of European countries.
Macroeconomic condition of Indonesia started to fluctuate as seen from variables including
exchange rates, stock and commodity prices, external trade volumes, and even the
unemployment rates.
The impact of the European financial crisis and US into domestic financial market in
the form of changes in the stock price at which market reacts to the news and external
internal conditions. Then the exchange rate also weakened due to the short-term actions
investors attract portfolio. In addition, other impact is a rise in government bond yield as it is
influences by global sentiment due to the uncertainty in the global markets as well as the
possibility of tightening credit when there is recession in global economic.
3.5.2 Impact of Euro Crisis in Indonesia
Overall Indonesia’s economy so far is in relatively restrained. The impact of financial
sector is quite seen but it is much more influenced by global negative sentiment although the
economic fundamental actually relatively good. As Indonesia’s economy increasingly open,
then Indonesia vulnerable to shocks external that implicates the economy condition and social
development in Indonesia. European and US financial crisis has impact on domestic financial
sector. Effects of the global crisis on the domestic economy flow through several possible
transmissions: (1) Transmission of monetary and finance through changes in interest rates,
currency exchange rate, credit, and yield government bonds. (2) Transmission such as foreign
debt. (3) Transmission such as export and import trade. (4) Investment transmission in the
form of FDI and portfolio. (5) Transmission of commodities in the form of changes in
commodity prices20
. The impact on domestic economy will be felt in the real sector where the
volume and value of exports could decline, a decline in investment, and lower incomes.
Global crisis also in turn will affect domestic inflation where the direction and the magnitude
depend on some things such as commodity price changes, exchange rates changes and
20
Siregar, H., Hasanah, H. & Achsani, N. A., 2012. Impact of the Global Financial Crisis on the Indonesian
Economy: Further Analysis using Export and Investment Channels. European Journal of Social Sciences, pp.
438-450.
16
imported inflation. The possibility economic slowdown and fluctuation in inflation will affect
the level of welfare. This condition brings the impact on fiscal side that is an increasing in
government financing needs in driving the national economy and supporting government
policies as an effort to decrease poverty and unemployment.
Stability in Indonesia until November 2011 is still in a good way, although there’s
uncertainty about global condition. Financial disturbance has brought due portfolio outflows
from Indonesia that implied in foreign ownership of government debt, which decreasing each
period caused by presence of foreign selling transaction as an impact of panic on global
financial crisis. Commodity prices are likely to be decline caused by the crisis especially on
raw material prices. Depict on graph below. But Inflation is under control, was driven by
slowdown in food inflation when it faced Eid Day and also caused by the increasing of the
world gold price which has value for long run investment and gave the investor a safe heaven
in the middle of crisis.
Source: Ministry of National Planning Development, B., 2011. "Krisis Keuangan Eropa : Dampak
Terhadap Perekonomian Indonesia. Available at: http://www.bappenas.go.id/node/77/3444/krisis-keuangan-
eropa--dampak-terhadap-perekonomian-indonesia/
In Fact, with stability on monetary system, trade and investment, Indonesia economy
grew almost 3.5% in third quarter of 2011. Other sector that positively influenced by the
crisis mainly from tertiary sector 4.0%, secondary sector 2.1%, and 0.4% from primary
sector. From operating form, domestic activities contributed 4.6% of the growth, and export
import goods 8.3% and services 5.0%.21
21
Ministry of National Planning Development, B., 2011. "Krisis Keuangan Eropa : Dampak Terhadap
Perekonomian Indonesia. Available at: http://www.bappenas.go.id/node/77/3444/krisis-keuangan-eropa--
dampak-terhadap-perekonomian-indonesia/
World Commodity Price Index
January 2005- November 2011 (Quarterly)
17
Chapter IV Conclusion
After conducting the analysis about price intervention in Indonesia, taxation policy in
Indonesia, Labor market in Indonesia, Capital structure in indonesia, and The impact of
current eurocrisis in Indonesia we have five conclusion.
1. The state gives its intervention in setting price in market (mostly in agricultural sector)
in Indonesia. Price intervention by the state exists because in some conditions it is
inevitable. This intervention created to protect both producers and consumers. The state
conducts price intervention according to the situation where the settlement of the price
is needed. The government’s intervention, price stabilization, for instance, is purposed
to prevent such substantial domestic market’s price fluctuation. This intervention in
price can be used as measurement in order to reshape the economy in the future.
2. The increasing taxation revenues in the last decade have given an impact to the
decrease of state’s debt portion as a financing resource in APBN. The ratio of debt to
GDP fell swoop on a point in the semester 1-2012; 24.3% compared to 77% in 2001.
The budget deficit during the first decades maintained an average of 1.4% (of GDP). In
2011 the State budget deficit stood at 1.1% or could be reduced 54% from 2001 to
reach 2.4%. The percentage of taxpayer is still low so the states must persuade all of
citizens to have more willingness to give their contribution in paying tax and realize
about their obligation that in turn will bring more revenue for the states itself.
3. There are two main labor policies in Indonesia which are minimum wages and
regulation of termination of contract. The keynesian theory works In Indonesia during
the period of 1990-1999 because of the Asian financial crisis. Despite the higher
nominal wages, employees get less real wages. The increased minimum wages in
Jakarta and Bekasi will create another problem, which is uneven distribution of
purchasing power because more people are getting less, some are getting more with the
assumptions of decreasing level of employment by ±5%.
4. Indonesia Central bank decides 5.62% of interest rate, 11.73% for working capital
lending rates and 11.35 for investment lending rates. The main source of financing in
Indonesia is bank loans and have dominant short-term activities than long term
activities. In case of capital market, it is just considered the long term which is Loans
for 4,497.02 Millions of US$ greater than Bonds and notes for 681.84 Millions of US$.
5. To face possibility of the worsening crise and maintain the stability of the country to
less affected by the crisis, Indonesia’s Government Policy directed to maintain the
market confidence, encouraging the external sector, strengthening the investment and
increase refinement the state budget. In Fact, with stability on monetary system, trade
and investment, Despite the European crisis Indonesia economy grew almost 3.5% in
third quarter of 2011.
18
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