Indonesia-U.S. Economic Relations

CRS Report for Congress
Indonesia-U.S. Economic Relations
Wayne M. Morrison
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Summary
Indonesia’s economy continues to struggle against the lasting effects of the 1997-
1998 Asian financial crisis and the political instability that resulted. Indonesia was one
of the hardest hit economies in Asia; real GDP fell by 13.2 % in 1998. Indonesian-U.S.
commercial ties were sharply diminished as well, caused in part by declining Indonesia
living standards and a loss of foreign investor confidence in Indonesia (due largely to
political instability). The Indonesian economy has improved over the past few years,
however, recent activities of terrorist elements in Indonesia and the rise of separatist
movements threaten to undermine further an already fragile economy. This report will
be updated as events warrant.
Indonesia is a unique country in that it consists of an archipelago of over 17,000
islands (about 6,000 of which are inhabited). With over 231 million people, Indonesia^th
has the world’s 4 largest population; it is also the world’s most populated Muslim nation
(about 86% of the population are Muslims). Indonesia is a major petroleum producer and
is the only Asian member of the Organization of Petroleum Exporting Countries (OPEC),
the international cartel that seeks to affect world oil prices.¹ The U.S. State Department
characterizes Indonesia as “the cornerstone of regional security in Southeast Asia and a
key trading partner.”² U.S. officials continue to encourage the Indonesian government to
implement policies that help induce healthy economic growth, lower unemployment, and
improve living standards as a means to promote democracy and political stability, combat
the rise of terrorist and separatist groups, and enhance bilateral commercial ties with the
United States.
The 1997 Asian Financial Crisis and Fall of the Suharto Regime
Indonesia, like many East Asian economies, suffered a severe economic shock when
the “Asian Financial Crisis” struck the country in mid-1997. Prior to this period,
Indonesia had enjoyed relatively healthy economic growth: from 1980-1989, real GDP

¹ Indonesia is a relatively minor supplier of U.S. petroleum imports, but it lies along major
shipping lanes for U.S. oil imports.
² U.S. Department of State, International Information Programs web site: [http://usinfo.state.gov].
Congressional Research Service ˜ The Library of Congress

growth averaged 5.5%, and from 1990 to 1996, it averaged 8.0% (one of the highest GDP
growth rates in the world). According to the World Bank, the proportion of people living
below poverty declined from 60% in 1970 to an estimated 11% by mid-1997.³
The 1997 economic crisis (which began in Thailand and quickly spread to Indonesia
and several other East Asian economies),⁴ resulted in a sharp depreciation of Indonesia’s
currency (the rupiah),⁵ large-scale capital flight, high inflation, widespread corporate
bankruptcies (caused in part by large short-term debt of many companies and corrupt
business practices), and a near collapse of the banking system.⁶ In 1998, real GDP
plunged by 13.2%; exports and imports fell by 8.6% and 34.5%, respectively, and living
standards (per capita GDP on a purchasing power parity basis) dropped by nearly 13%
(see Table 1). Finally , the poverty rate doubled between mid-August 1997 (pre-crisis)⁷
and late 1998/early 1999.
Political unrest followed the economic crisis, eventually leading to the resignation
in May 1998 of President Suharto (or Soeharto) who had ruled the country since 1967.
The collapse of the Suharto regime helped usher in a new era of democratic political
reforms in Indonesia, although the transition to democracy has not been easy and political
instability remains a problem. Indonesia’s near economic meltdown forced it to turn to
international lending institutions, such as the International Monetary Fund, the World
Bank, the Asian Development Bank, and foreign governments for billions of dollars in
loans, debt rescheduling, and economic aid.
Recent Economic Conditions
Indonesia has been somewhat successful in bringing the economy back to at least
pre-crisis levels, but several problems remain. On the positive side, real GDP from 2000-
2003 grew at a relatively healthy pace, averaging 4.0% (although it was half the average
level of real GDP growth during the early 1990s). In addition, Indonesia’s living
standards (measured according to per capita GDP in purchasing power parity) finally
reached and exceeded pre-crisis levels in 2002 ($3,320 in 2002 versus $3,201 in 1997).
Living standards improved by 12.7% in 2003. Finally, Indonesian exports (in dollar
terms) in 2003 were 6.6% higher than 1997 levels. On the negative side, Indonesian
imports in 2003 were 21.1% lower than pre-crisis levels, reflecting the effects of the sharp
devaluation of the rupiah. In addition, the stock of foreign direct investment (FDI) in
Indonesia dropped each year from 1997-2002. While the stock of FDI is estimated to

³ World Bank, World Bank and Indonesia: Country Brief, December 2002.
⁴ For additional information on the Asian Financial crisis, see CRS Report 98-434, The Asian
(Global?) Financial Crisis, the IMF, and Japan: Economic Issues, by Dick K. Nanto (September

3, 1998); and CRS Report RL30517, Asian Financial Crisis and Recovery: Implications for U.S.

Interests, by Richard Cronin (April 6, 2000).
⁵ In 1998 alone, the rupiah depreciated by 244% against the dollar (as compared to 1997 levels).
⁶ Indonesia’s economy was furthered weakened by a severe drought and falling oil prices.
⁷ The World Bank, Indonesia - Poverty Reduction in Indonesia : Constructing a New Strategy,

2001, p. iv.

have risen slightly in 2003, it is $14.8 billion (or 20.3%) lower than what it was in 1997.⁸
Finally, the rate of unemployment in Indonesia has steadily risen over the past few years,
from 6.1% in 2000 to 8.7% in 2003.
Table 1. Selected Economic Indicators for Indonesia’s Economy:
1997-2003

1997 1998 1999 2000 2001 2002 2003*

Average Exchange Rate2,90910,0147,8558,42210,2619,3128,571
(Indonesian rupiah per
$U.S.)
Real GDP Growth (%)4.5-13.20.84.93.53.64.1
GDP ($billions )21695141152145178215
GDP ($billions, PPP645571599640678711749
basis)*
Per Capita GDP ($PPP3,2012,7962,8993,0563,2003,3203,740
basis)*
Exports ($billions)53.448.848.762.156.357.259.8
Imports ($billions)41.727.324.033.531.031.332.9
FDI stock ($billions)68.868.565.260.657.453.954.8
Public Debt as a % of GDP 72.555.276.9102.490.178.170.7
Consumer inflation6.756.520.53.711.511.96.6
Unemployment Rate (%)4.65.56.46.18.18.38.7
^Source:^Econ^om^is^{t In}^tellig^en^{ce Un}^{it an}^{d g}^o^v^e^rn^m^eⁿ^t^of^In^don^es^{ia. Data f}^o^{r 2003 are es}^tim^ates^.
^*^PPP^da^t^a^a^r^e^m^e^a^s^u^r^e^m^eⁿ^t^s^of^f^o^r^eⁱ^gⁿ^da^t^aⁱⁿⁿ^a^tⁱ^oⁿ^a^l^c^u^r^r^eⁿ^cⁱ^e^s^c^oⁿ^v^e^r^t^e^dⁱⁿ^t^o^U^.^S^.^dol^l^a^r^s^ba^s^e^{d on}^a
^com^p^{arable lev}^e^{l of}^pu^rch^a^sⁱⁿ^g^pow^{er th}^es^{e data w}^o^u^l^{d h}^a^v^eⁱⁿ^th^{e Un}^{ited States}^.
The short-term economic prospects for Indonesia are relatively positive. For
example, Global Insight, an international forecasting firm, predicts that Indonesia’s real⁹
GDP will rise by 4.6% in 2004 and 5.0% in 2005. However, Indonesia faces a number
of challenges that threaten to undermine long-term growth prospects. These include¹⁰
widespread government corruption and a weak legal system, large public debt, extensive
government control of key economic sectors (such as oil and gas), a high level of
corporate non-performing loans, a weak banking system, uncertainties surrounding the
central government’s efforts to decentralize fiscal and political authority to local
governments, and failure by the government to provide adequate protection of intellectual
property rights (IPR). In addition, the existence and activities of several separatist

⁸ In many developing nations, the level of FDI can have a major impact on GDP growth.
⁹ Global Insight, Indonesia: Interim Forecast Analysis, February 2004.
¹⁰ According to Transparency International’s 2003 Global Corruption Report, Indonesia is one
of the most corrupt countries in the world (ranking 96 out of 102 countries surveyed in 2002).

movements and terrorist groups in Indonesia constitute major threats to political and
economic stability.¹¹ In October 2002, terrorists with reported links to Al Qaeda bombed
a club in Bali frequented by western tourists, killing over 200 people (including seven
Americans) and wounding hundreds more.¹² In August 2003, terrorists bombed a U.S.-
run hotel in Jakarta , killing 12 people and wounding 150. The bombings have had a
chilling effect on Indonesia’s tourism industry and raised major concerns over the safety
of foreign tourists and businesspeople in Indonesia. Ethnic, religious, and separatist
violence in the country has displaced 1.3 million Indonesians.¹³
Overview of Indonesian Trade and Investment Relations
According to the World Trade Organization, Indonesia was the world’s 28^th largest
exporter and the 39^th largest importer in 2002. Indonesian trade data indicate that Japan
was its largest trading partner in 2002, followed by the United States, Singapore, South
Korea, and China (see Table 2). The United States was Indonesia’s second largest export
market and its third largest source of imports. Major Indonesian exports included
petroleum and petroleum products, natural gas, and clothing and accessories. Its major
imports were petroleum and petroleum products, organic chemicals, and general industrial
machinery.¹⁴ According to Indonesian investment statistics (which record approved
investment, as opposed to actual investment), the top five foreign investors in Indonesia
are the United Kingdom, Japan, Singapore, China, and Malaysia. Major sectors for FDI
in Indonesia include chemicals, pharmaceuticals, paper; metal goods, transportation, and
real estate.¹⁵
Table 2. Indonesia’s Major Trading Partner’s: 2002
($billions)
TradingTotal TradeExportsImportsTrade Balance
Partner
J a pan 16.4 12.0 4.4 7.6
United States10.27.62.65.0
Singapore 9.4 5.3 4.1 1.2
South Korea5.74.11.62.5
China 5.3 2.9 2.4 0.5
^Source:^Un^{ited Nation}^s^C^oⁿ^f^eren^{ce on}^T^r^{ade an}^{d Dev}^e^lopm^en^t

¹¹ For additional information on terrorist and separatist groups in Indonesia, see CRS Report
RL31672, Terrorism in Southeast Asia, by Mark Manyin, Richard Cronin, Larry Niksch and
Bruce Vaugn; and CRS Report RS20572, Indonesian Separatist Movement in Aceh, by Larry
Niksch.
¹² See CRS Terrorism Briefing Book entry North and Southeast Asia (Excluding China).
¹³ U.S. Agency for International Development, Indonesia: Country Overview.
¹⁴ United Nations Statistics Division, Commodity Trade Statistics Database.
¹⁵ Indonesia Investment Coordinating Board.

U.S.-Indonesia Commercial Relations
U.S. data indicate that Indonesia is not a large U.S. trading partner. In 2003, U.S.
exports to, and imports, from Indonesia were $2.5 billion and $9.5 billion, respectively,
making Indonesia the 37^th largest U.S. export market and its 26^th largest source of imports.
As indicated in Table 3 and figure 1, U.S. exports to Indonesia declined sharply in 1998
and 1999 and have been relatively flat since. Overall, U.S. exports to Indonesia in 2003
were 44.4% lower than 1997 levels. U.S. imports from Indonesia grew slightly from
1997-2000, but have been relatively flat since. U.S. imports from Indonesia in 2003 were
only 3.6% higher than 1997 levels. The top three U.S. exports to Indonesia in 2003 were
soybeans, textile fibers, and animal feed, while the top U.S. imports from Indonesia were
clothing and apparel, telecommunications equipment (mainly audio and video
equipment), and crude rubber. According to U.S. investment data (which lists the value
of U.S. FDI on a historical cost basis, i.e., the cumulative book value of investment), U.S.
FDI in Indonesia stood at $7.5 billion at year-end 2002, down by $700 million from 2001
and by $1.4 billion from its peak in ($8.9 billion) in 2000. Currently, 77% of U.S. FDI
in Indonesia is in the mining sector (mainly oil and gas).¹⁶
Because Indonesia is a developing country and meets other criteria set in U.S. law,
$1.3 billion worth of its exports entered the United States duty-free under the Generalized
System of Preferences (GSP). In an effort to boost U.S.-Indonesian commercial
relations, promote political stability in Indonesia, and combat terrorism, the Bush
Administration on September 19, 2001 announced that the United States would add 11
products imported from Indonesia (valued at about $100 million) that would be eligible
for GSP treatment and pledged that the United States would provide up to $400 million
in financial aid and loan guarantees under U.S. trade programs operated by the Overseas
Private Investment Corporation (OPIC), the Export-Import Bank (Eximbank), and the
Trade and Development Agency (TDA), largely targeted at Indonesia’s oil and gas sector.
Indonesia has gradually reformed its trade regime over the past 10 years, reducing
its average un-weighted tariff from 20.0% in 1994 to 7.3% in 2003. In 1999, Indonesia
agreed to eliminate various discriminatory trade policies on auto trade after it lost a case
in the WTO dispute brought mainly by the United States and European Union.
Indonesia’s enforcement of U.S. IPR has been a major issue of concern for U.S. firms.
According to the International Intellectual Property Alliance (IIPA), piracy levels in
Indonesia are “among the highest in the world,” rivaling those of China and Vietnam.
IIPA estimates that IPR piracy in Indonesia cost U.S. firms $260 million in lost trade in¹⁷

2002.

¹⁶ U.S. Bureau of Economic Analysis, Foreign Direct Investment Position in the United States
on a Historical-Cost Basis, 2002.
¹⁷ IIPA, 2004 Special 301 Report: Indonesia.

Table 3. U.S. Trade With Indonesia: Selected Years
($millions)
¹⁹⁹⁷¹⁹⁹⁹²⁰⁰¹²⁰⁰³^1997-2003^%^C^h^an^ge
^T^o^tal^U^.^S^.^E^x^p^o^rts^{to I}ⁿ^d^oⁿ^e^sⁱ^a⁴^,532^1,939^2,499^2,520^-44.4
^M^a^j^o^{r U.S. Expo}^rt^{s t}^o^Indo^nesia
^{Oil s}^eeds^an^{d oleag}ⁱⁿ^ou^s^f^r^u^its^(m^ain^l^y²⁵⁵²⁰²²⁴⁵³²⁶^27.8
^so^y^b^e^aⁿ^s)
^T^e^x^{tile f}ⁱ^b^e^r^s⁽^o^th^er^th^an^w^o^o^l⁾²⁵²¹¹⁷²²⁰²⁷⁵⁹^.¹
^Aⁿ^im^{al f}^{eed (ex}^c^lu^din^g^uⁿ^m^{illed cereals}⁾⁹⁸³²²¹⁹¹⁹⁸^102.0
^T^o^tal^U^.^S^.^I^m^p^o^rts^from^Iⁿ^d^oⁿ^e^sⁱ^a⁹^,190^9,514^10,105^9,520^3.6
^M^a^j^o^{r U.S. Im}^po^rt^{s f}^r^o^m^Indo^nesia
^A^pparel^an^{d cl}^ot^hⁱⁿ^g^1,736^1,816^2,356^2,236^28.8
^T^e^lecom^m^uⁿⁱ^cation^s^an^{d s}^o^uⁿ^d^an^d^1,004^1,022^1,147⁸⁹²^-^11.2
^reprodu^ciⁿ^g^apparat^u^s^an^{d equ}ⁱ^pm^en^t
^C^r^u^d^{e ru}^bber⁷³⁵³⁷⁶³³¹⁵⁹⁷^-^18.8
^U^.^S^.^T^r^ad^{e Bal}^aⁿ^c^e^-^4,659^-7,575^-7.065^-7,000^—
^Source:^{U.S. I}ⁿ^terⁿ^atioⁿ^a^{l T}^r^ad^{e Co}^m^mⁱ^ssioⁿ^Dataw^e^b^.
^Source:^{U.S. I}ⁿ^terⁿ^atioⁿ^a^{l T}^r^ad^{e Co}^m^mⁱ^ssioⁿ^DataW^e^b^.