Effect of State Economic Intervention Policy and European Crisis to The Nation Economic: Case Study in Indonesia Economic

Environment

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 states 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.

Fuad Bismar Ibrahim Haidir Aulia Reizaputra Nieke Arista Melina Nur Khairusy Syakirin Rahma Dwigunawati Sheila Saraswati Fahrizal Tiara Pramudyawati Permatahari

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 3.3 Taxation Analysis in Indonesia ................................................................................. 12 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 1

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

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, governments intervention is inevitable. Intervention in the market is used to protect both producers and consumers. Biggest contributor in states 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 Indonesias 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.

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-Fullen.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

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

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 states 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 20052010 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 Indonesias economy.
5

World Investment Report 2011 Available at: http://www.unctad-docs.org/files/UNCTAD-WIR2011-Fullen.pdf 6 Prof. Firmanzah., P., 2012. Pajak Dalam Struktur Pendapatan Negara. Available at: http://www.setkab.go.id 7 Syafrianto, 2009. Tax Learning: Konsultasi Pajak Gratis: Batasan Pengusaha Kena Pajak. Available at: http://syafrianto.blogspot.fr].

2.3.3 Income Tax for Individual Taxable Income Level Up to Rp 50.000.000,00 Rp 50.000.000,00 - Rp 250.000.000,00 Rp 250.000.000,00 - Rp 500.000.000,00 Above Rp 500.000.000,00 Tariffs 5% 15% 25% 30%

Source: Anon., 2012. Seri PPH - Penghitungan Pajak Penghasilan Pasal 21 | Direktorat Jenderal Pajak. Available at: http://www.pajak.go.id Personal Exemption Receiver For the tax payer If the tax payer has been married If the tax payer has a child (max. 3) Per year Rp 15.840.000 Rp 1.320.000 @Rp 1.320.000 Per month Rp 1.320.000 Rp 110.000 @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 products price9. Determination of sales tax for consumer goods gives possibility to everyone to contribute in states revenue, although it could be something unfair when we count to the percentage of each persons salary which is contributed to consumer goods 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 9 Anon., n.d. Penjelasan Umum Tarif. Available at: http://www.tarif.depkeu.go.id/Bidang/?bid=pajak&cat=ppn.

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 goods 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/berita131-0-dalam-ppn-pajak-pertambahan-nilai.html.

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.
Kind of social charges Work injury insurance Coverage Carrying & checking costs Medicines and hospitalization Rehabilitation Compensation: 0.24% 1.74% of monthly wage Cemeteries Compensation: Rp14.200.000,00 For 55 years old ++ Total permanent disabilities Compensation: 5.7% of monthly wage o 3% paid by employers o 2.7% paid by employees Rp1.530.000,00 Rp3.080.000,00

Death insurance Insurance for old-age

Healthcare
12

See Wage and Employment Effects of Minimum Wage Policy in the Indonesian Urban Labor Market by SMERU Research Institute for details

2.4.4 Employment Level in Indonesia

Employment Level in Main Workfields

60,00 In millions 40,00 20,00 0,00 Feb '10 Aug '10 Feb '11 Aug '11 Feb '12

Workfields

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 9

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 markets 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.

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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. Grard, 2010. Indonesian experience in rice price stabilization reseaux.org/IMG/pdf/Indonesian_experience_in_rice_price_stabilization.pdf

Available at: http://www.inter-

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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 states 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
15 16

Mentari, R., 2008. Evaluasi Kebijakan. Issue 2008. Prof. Firmanzah., P., 2012. Pajak Available at: http://www.setkab.go.id
17

Dalam

Struktur

Pendapatan

Negara.

Post, T. Available

J., at:

2012. Jakarta workers ask for higher wages | The Jakarta Post. http://www.thejakartapost.com/news/2012/10/25/jakarta-workers-ask-higher-wages.html

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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/

13

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

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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. Europes 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 Indonesias 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 Indonesias 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.

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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 theres 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. World Commodity Price Index January 2005- November 2011 (Quarterly)

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-keuanganeropa--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/

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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 governments intervention, price stabilization, for instance, is purposed to prevent such substantial domestic markets price fluctuation. This intervention in price can be used as measurement in order to reshape the economy in the future. The increasing taxation revenues in the last decade have given an impact to the decrease of states 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. 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%. 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$. To face possibility of the worsening crise and maintain the stability of the country to less affected by the crisis, Indonesias 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.

2.

3.

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