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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