1 Interbank fund rates. 2 Period average.

1. General Policy Framework

Indonesia is an economic success story. In 1967, when President Soeharto took power, it was one of the world's poorest countries, with per capita GNP of $70 per person, half that of India and Bangladesh. In 1993, Indonesia's per capita GNP passed $700, triple that of Bangladesh and more than double India's. Life expectancy has risen dramatically-from 41 in 1967 to 63 in 1993-while infant mortality and illiteracy rates have plummeted.

Real GDP growth has averaged 6.7 percent per year over the last five years. Through a restrictive monetary policy and a conservative fiscal stance, the government has held inflation to the 5-10 percent range. With strong export performance and manageable import growth, the current account deficit dropped from $4.4 billion in 1991 to $1.9 billion in 1993.

Prospects for continued growth are good. Government and private sector projects are alleviating infrastructure shortages, particularly in telecommunications, electric power, and roads. The banking industry continues to adjust to the more stringent prudential regulations introduced in 1991 and modified in 1993; credit constraints began to ease in late 1993.

In 1994 Indonesia continued to take steps to open the economy. Indonesia ratified the Uruguay Round agreements and became a founding member of the World Trade Orgainization on January 1, 1995. Indonesia was the 1994 chairman of APEC (Asia Pacific Economic Cooperation); on November 15 President Soeharto hosted leaders of the APEC economies at a meeting in which they declared the goal of reaching free trade in the region by the year 2020.

In June 1994, the government issued another deregulation package aimed at improving the investment climate. This set of measures opened up several previously closed sectors to foreign investment and eliminated barriers to 100 percent foreignowned investment in most, but not all, sectors. Further progress is needed, however, to eliminate remaining barriers to foreign and domestic trade, to replace the outdated commercial code, and to establish clear and transparent accounting and auditing standards.

Indonesia's development is good news for U.S. business. U.S. exports to the country have doubled since 1988, totaling 2.8 billion dollars in 1993. The best prospects for U.S. exporters stem from the government's efforts to improve infrastructure; they include equipment for power generation, telecommunications, roads, harbors, and airports. U.S. exporters can also provide inputs for Indonesia's rapidly expanding manufacturing sector. For example, the United States already supplies about half of the textile industry's requirements for cotton.

2. Exchange Rate Policies

The government has maintained the convertibility of the rupiah since the 1960s. There have been no foreign exchange controls since 1972. The government follows a managed float based on a basket of major trading currencies, including the U.S. dollar. Current policy is to maintain the competitiveness of the rupiah through a gradual depreciation against the dollar, at a rate of about five percent a year. The exchange rate at the end of October 1994 was 2,170 rupiah per dollar.

3. Structural Policies

In general, the government allows the market to determine price levels. The government enforces a system of floor and ceiling prices for certain "strategic" food products such as rice. In some cases, business associations, with government support, establish prices for their products. Direct government subsidies are confined to a few goods such as fertilizers.

Individuals and businesses are subject to income taxes. The maximum rate is 35 percent of annual earnings in excess of rupiah 50 million (about $25,000), but the government has introduced legislation that would reduce the maximum rate to 30 percent. In 1985, a value-added tax (VAT) was introduced. Import duties are another important source of government revenue. Companies can apply for an exemption from or a rebate of import duties and VAT paid on inputs used to produce exports. A few products remain subject to export taxes, usually with the goal of job creation. For example, in October 1989 export taxes on sawn lumber were raised to prohibitive levels; and in May 1992 a previous export ban on logs was replaced by high export taxes. According to government officials, total tax compliance in Indonesia is about 55 percent.

4. Debt Management Policies

Indonesia's medium and long term foreign debt totals about $95 billion, with $60 billion owed by the state sector and $35 billion by the private sector. In 1994 Indonesia will pay approximately 31 percent of total export earnings in principal and interest payments on its foreign debt. The government is fully committed to meeting its debt service obligations and has no plans to seek a debt rescheduling.

The cabinet-level team set up by the government in September 1991 to oversee foreign borrowing has had a measurable effect on controlling public offshore debt. The team is charged with reviewing applications for foreign commercial credits to finance projects in which the government or a state-owned enterprise is involved. Financing for purely private projects is not directly affected. The team is also charged with prioritizing by project the use of offshore funds and with establishing borrowing ceilings. In October 1991 the team announced ceilings on public sector foreign commercial borrowing and guidelines for private sector borrowing through FY 1995/96 ranging from $5.5 to $6.5 billion total per year.

5. Significant Barriers to U.S. Exports

Import Licenses: Since 1986, import licensing requirements have been relaxed in a series of deregulation packages. Items still subject to import licensing include some agricultural commodities (rice, wheat, sorghum, sugar), alcoholic beverages, and some iron and steel products. Remaining import licensing requirements may be waived for companies importing goods to be incorporated into subsequent exports. In June 1993, the government lifted the previous ban on most types of completely built-up passenger vehicles, although the ban was replaced with high import duties and surcharges, totalling as much as 300 percent in many cases. Automotive imports have followed previous patterns, in which nontariff barriers such as bans and licensing requirements have been replaced with tariffs and surcharges.

Services Barriers: Services barriers abound, although there has been some loosening of restrictions, particularly in the financial sector. Foreign banks, securities firms, and life and property insurance companies are permitted to form joint ventures with local companies although they are not allowed to establish 100 percent foreign-owned subsidiaries or branches. In all cases, capitalization requirements for foreign joint venture firms are higher than for domestic firms. Foreigners may purchase up to 49 percent of a company's shares listed on the stock exchange.

Foreign attorneys may serve as consultants and technical advisors. However, attorneys are admitted to the bar only if they have graduated from an Indonesian legal facility or from an institution recognized by the government as equivalent. Foreign accountants may serve as consultants and technical advisors to local accounting firms. Air express companies are not permitted to own equity in firms providing courier services, although they may arrange with local firms to provide services in their name and second expatriate staff to the local firms.

Indonesia imposes a quota on the number of foreign films which may be imported in a given year. Films may be imported and distributed only by fully Indonesianowned companies. In November 1994 the government issued the final set of regulations necessary to allow U.S. video companies to work with Indonesian distributors to provide legal video and laser disc rentals and sales.

Standards, Testing, Labelling, and Certification: In May 1990 the Government of Indonesia issued a decree which stated that the Department of Health must decide within one year of receipt of a complete application for registration of new foreign pharmaceutical products. Under the national drug policy of 1983, a foreign firm may register prescription pharmaceuticals only if they both incorporate high technology and are products of the registering company's own research. Foreign pharmaceutical firms have complained that copied products sometimes become available on the local market before their products are registered.

Investment Barriers: By enacting a new deregulation package in June 1994, the government took a large step forward in improving Indonesia's investment climate. The package, known as PP 20, dropped initial foreign equity requirements and sharply reduced divestiture requirements. Indonesian law now provides for both 100 percent direct foreign investment projects and joint ventures with a minimum Indonesian equity of 5 percent. In addition, PP 20 opened several previously restricted sectors to foreign investment, including harbors, electricity generation, telecommunications, shipping, airlines, railways, roads and water supply. Some sectors, however, remain restricted or closed to foreign investment. For example, foreign investors may not invest in retail operations. They may, however, distribute their products at the wholesale level.

Most foreign investment proposals must be approved by the Capital Investment Coordinating Board (BKPM). Investments in the oil and gas, mining, banking and insurance industries are handled by the relevant technical ministries. While BKPM

seeks to function as a one-stop investor service, most investors will also need to work closely with various technical government departments and with regional and local authorities. There are limited provisions under which foreign nationals may exploit or occupy real property in Indonesia, but ownership is limited to Indonesian citizens. There are numerous restrictions on the employment of foreign nationals, and obtaining expatriate work permits can be difficult.

Government Procurement Practices: In March 1994 President Soeharto signed a decree which regulates government procurement practices and strengthens the procurement oversight process. Most large government contracts are financed by bilateral or multilateral donors who specify procurement procedures. For large projects funded by the government, international competitive bidding practices are to be followed. Under a 1984 Presidential Instruction ("Inpres-8") on government-financed projects, the government seeks concessional financing which meets the following criteria: 3.5 percent interest and a 25 year repayment period which includes 7 years grace. Some projects proceed, however, on less concessional terms. Foreign firms bidding on certain government-sponsored construction or procurement projects may be asked to purchase and export the equivalent in selected Indonesian products. Government departments and institutes and state and regional government corporations are expected to utilize domestic goods and services to the maximum extent feasible. (This is not mandatory for foreign aid-financed goods and services procurement.) An October 1990 government regulation exempts state-owned enterprises which have offered shares to the public through the stock exchange from government procurement regulations; as of November 1994 only two such enterprises had made a public offering.

6. Export Subsidies Policies

Indonesia joined the GATT Subsidies Code and eliminated export loan interest subsidies as of April 1, 1990. As part of its drive to increase non-oil and gas exports, the government permits restitution of VAT paid by a producing exporter on purchases of materials for use in manufacturing export products. Exemptions from or drawbacks of import duties are available for goods incorporated into exports. 7. Protection of U.S. Intellectual Property

Indonesia is a member of the World Intellectual Property Organization and is a party to certain sections of the Paris Convention for the Protection of Intellectual Property. It withdrew from the Berne Convention for the Protection of Literary and Artistic Works in 1959. Indonesia has made progress in intellectual property protection, but it remains on the U.S. Trade Representative's Special 301 "Watch List" under the provisions of the 1988 Omnibus Trade and Competitiveness Act.

Patents: Indonesia's first patent law came into effect on August 1, 1991. Implementing regulations clarified several areas of concern, but others remain, including compulsory licensing provisions, a relatively short term of protection, and a provision which allows importation of 50 pharmaceutical products by non-patent holders. The patent law and accompanying regulations include product and process protection for both pharmaceuticals and chemicals.

Trademarks: A new Trademark Act took effect on April 1, 1993. Under the new law, trademark rights will be determined by registration rather than first use. After registration, the mark must actually be used in commerce. Well-known marks are protected. However, there are some remaining problems with marks filed prior to 1991. Cancellation actions must be lodged within five years of the trademark registration date.

Copyrights: On August 1, 1989 a bilateral copyright agreement with the United States went into effect extending national treatment to each other's copyrighted works. Enforcement of the ban on pirated audio and video cassettes and textbooks has been vigorous, although software producers remain concerned about piracy of their products. The government has demonstrated that it wants to stop copyright piracy and that it is willing to work with copyright holders toward this end. Enforcement to date has significantly reduced losses from pirating, but leakages still exist.

New Technologies: Biotechnology and integrated circuits are not protected under Indonesian intellectual property laws. Indonesia has, however, participated in a World Intellectual Property Organization conference on the protection of integrated circuits and is considering introducing legislation.

Impact: It is not possible to estimate the extent of losses to U.S. industries due to inadequate intellectual property protection, but U.S. industry has placed considerable importance on improvement of Indonesia's intellectual property regime.

8. Worker Rights

a. The Right of Association.-Private sector workers, including those in export processing zones, are free to form or join unions without prior authorization. However, in order to bargain on behalf of employees, a union must register as a mass organization with the Department of Home Affairs and meet the requirements for recognition by the Department of Manpower. (In January 1994, a new government regulation authorized non-affiliated "Plant Level Unions" to be set up in individual plants and to negotiate binding collective signing agreements.) While there are no formal constraints on the establishment of unions, the recognition requirements are a substantial barrier to recognition and the right to engage in collective bargaining. The one union recognized by the Department of Manpower is the All Indonesia Workers Union (Serikat Pekerja Seluruh Indonesia, SPSD). Its membership is approximately 994,500, or about 1.4 percent of the total work force. However, if agricultural workers and others in categories such as self-employed and family workers who are not normally union members are factored out, the percentage of union members rises to approximately six percent.

Civil servants are not permitted to join unions and must belong to KORPRI, a nonunion association whose central development council is chaired by the Minister of Home Affairs. Teachers must belong to the Teachers' Association. Though technically possessing the same rights as a union, the PGRI has not engaged in collective bargaining.

All organized workers, with the exception of civil servants, have the right to strike. In practice, state enterprise employees and teachers rarely exercise this right. Before a strike can occur in the private sector, the law requires intensive mediation by the Department of Manpower and prior notice of the intent to strike. However, no approval is required.

b. The Right to Organize and Bargain Collectively.-Collective bargaining is provided for by law, but only recognized trade unions and "plant level unions" may engage in it. Once notified that 25 employees have joined a registered union, an employer is obligated to bargain with them. Before a company can register or renew its company regulations it must demonstrate that it consulted with the union or in its absence a committee consisting of employer and employee representatives.

Labor law applies equally in export processing zones. Regulations forbid employers from discriminating or harassing employees because of union membership, but in practice retribution against union organizers occurs.

c. Prohibition of Forced or Compulsory Labor.-Forced labor is forbidden by law. Indonesia has ratified ILO convention No. 29 concerning forced labor.

d. Minimum Age for Employment of Children.-Child labor exists in both industrial and rural areas. The Department of Manpower acknowledges that there is a class of children under the age of 14 who, for socioeconomic reasons, must work and legalizes their employment provided they have parental consent and do not engage in dangerous or difficult work. The workday is limited to four hours. Employers are also required to report in detail on every child employed, and the Department of Manpower carries out periodic inspections. Critics, however, charge that the inspection system is weak and that employers do not report when they employ children. e. Acceptable Conditions of Work.-The law establishes 7 hour workdays and 40 hour workweeks, with one 30 minute rest period for each 4 hours of work. In the absence of a national minimum wage, minimum wages are established for regions by area wage councils working under the supervision of the National Wage Council. Ministerial regulations provide workers with a variety of other benefits, such as social security, and workers in more modern facilities often receive health benefits and free meals. However, enforcement of labor regulations is limited and a number of employers do not pay the minimum wage or provide other required benefits. The failure to implement government regulations has been a significant cause of strikes. f. Rights in Sectors with U.S. Investment.-Working conditions in firms with U.S. ownership are widely recognized as better than the norm for Indonesia. Application of legislation and practice governing worker rights is largely dependent upon whether a particular business or investment is characterized as private or public. U.S. investment in Indonesia is concentrated in the petroleum and related industries, primary and fabricated metals (mining), and pharmaceuticals sectors.

Foreign participation in the petroleum sector is largely in the form of production sharing contracts between the foreign companies and the state oil and gas company, Pertamina, which retains control over all activity. All employees of foreign companies under this arrangement are considered state employees and thus all legislation and practice regarding state employees generally applies to them. Employees of foreign companies operating in the petroleum sector are organized in KORPRI. Employees of these state enterprises enjoy most of the protection of Indonesian labor laws but, with some exceptions, they do not have the right to strike, join labor orga

nizations, or negotiate collective agreements. Some companies operating under other contractual arrangements, such as contracts of work and, in the case of the mining sector, cooperative coal contracts, do have unions and collective bargaining agree

ments.

Regulations pertaining to child labor and child welfare are applicable to employers in all sectors. Employment of children and concerns regarding child welfare are not considered major problem areas in the petroleum and fabricated metals sectors.

Legislation regarding minimum wages, hours of work, overtime, fringe benefits, health and safety, etc. applies to all sectors. The best industrial and safety record in Indonesia is found in the oil and gas sector.

Extent of U.S. Investment in Selected Industries.-U.S. Direct Investment Position Abroad on an Historical Cost Basis-1993