MONETARY POLICY AND IMPLEMENTATION IN INDONESIA (CHAPTER 10) THE INTERNATIONAL MONETARY SYSTEM

As monetary authority, Bank Indonesia regulates and implements necessary monetary policy to achieve and maintain stability of the Rupiah value. The determination of policy direction is based on inflation rate targeting, by taking into consideration other macroeconomic targets for the short term, medium term and long term. The monetary policy is implemented by setting an operational target, the base money, and followed by close monitoring on the development of the indicators, which can affect the price and exchange rate of the Rupiah. Control over the indicators are conducted through indirect monetary instruments of Open Market Operations, discount rate setting and minimum reserve requirement setting. Such indirect monetary control has been conducted since 1983 utilising appropriate operational mechanism, adjusted to the dynamics of the domestic money market. Open Market Operation Open Market Operation (OMO) is conducted to influence the liquidity of the Rupiah in the money market, which in turn will influence interest rate. OMO is implemented either through sale offering of Bank Indonesia Certificates (SBI) or Rupiah Intervention. Sale of SBI is conducted through auction so that discount rate achieved truly reflects the liquidity condition of the money market; while the Rupiah Intervention by Bank Indonesia is aimed at adjusting money market condition, either the liquidity or the interest rate. Minimum Reserve Requirement This policy requires each bank to maintain cash reserve, in prescribed proportion of its own deposit liabilities. Currently, the Minimum Reserve Requirement is 5% of bank's third party liability, which must be kept in the respective bank's account in Bank Indonesia. If Bank Indonesia is of the view that there is a need to tighten up on the monetary policy, the Bank can increase the Minimum Reserve Requirement, and vice - versa. Bank Indonesia as Lender of the Last Resort Bank Indonesia also functions as Lender of the Last Resort. In performing this function, Bank Indonesia may grant loan or financing based on Sharia priciple to remedy short-term liquidity problem of banks due to mismatch arising out of funding management. The loan is of ninety days maximum tenor, inclusive extensions, and a recipient bank is required to put up liquid, high quality collateral to the value of, at the minimum, equal to the loan. Exchange Rate Policy Currency exchange value, commonly known as exchange rate, has a very important role in achieving monetary stability and supporting all economic activities. A stable exchange rate is needed to create a conducive climate to boost business activities. Indonesia, since 1970, has implemented three exchange rate systems: the fixed rate over 1970 to 1978, managed floating exchange rate system since 1978, and the free floating exchange rate system since August 14, 1999. The implementation of the last mentioned system means that the exchange rate of the Rupiah is determined solely by the market. Thus, the exchange rate reached reflects the interaction of supply and demand in the market. In order to maintain a stable exchange rate, Bank Indonesia performs sterilisation in foreign exchange market at a certain period of time, especially during an irregular fluctuation of exchange rate. Foreign Exchange Reserves Management Foreign exchange reserves are aggregate net foreign asset position of the Government and foreign exchange banks, to be managed for international transaction purposes. Bank Indonesia always conducts the reserves management with liquidity and security uppermost in mind, rather than high profit. However, Bank Indonesia always takes international market movements into consideration, and always has its options open to adjust the portfolio composition types in the placement of foreign exchange reserves. In managing the foreign exchange reserves Bank Indonesia implements diversification system, in both foreign currencies and types of securities. The calculation is that by relying on such method any drop in the value of a currency will be compensated by an increase in value of another currency, or by other investment giving better yield.

Programme Credit The status of Bank Indonesia as an independent monetary authority has consequently relieved Bank Indonesia from the duty to provide and administer subsidised programme credit. This task is now the responsibility of Government-appointed state-owned-institutions (BUMN). This is intended to enable Bank Indonesia to better focus on achieving monetary targets and establish a good and proper division of tasks between the Government and the Bank.

CULTURAL DIFFERENCES (chapter 3)

I have been aware of the importance of cultural differences for many years and have made it something of a mission to encourage and support cross-cultural understanding between the foreign companies working here in Indonesia, their expatriate and Indonesian employees, and the public sector. Sometimes, I think that this message falls on deaf ears. But every so often someone of great standing, a chief of business or high government official, comes along and reinforces this message for business. Mr. Dennis de Tray, former World Bank Country Director for Indonesia, recently addressed the Indonesian Forum of Economists in Jakarta. He, of course, has a primary focus on financial matters, but his comments are true for all international business here. Toward the end of that address he said: The final message of this experience for me is that culture matters. Now, of course, everyone knows this. We are taught to be sensitive to the different cultures. We've all read Culture Shock: Indonesia. But I am convinced that we really do not understand the implication of cultural differences in designing interventions, especially in times of crisis. I am sure that culture will be a part of the ultimate explanation of what happened in East Asia. Different cultures really do look on business relations differently. This is no more clearly illustrated than the area of conflict of interest. It is just not a concept that is in the people's vocabulary here in Indonesia. It is not understood. In fact, the opposite is true: it is my obligation to help you as a friend and colleague. Understanding cultural differences in Indonesia is more important and more difficult than understanding them in other countries. Americans working in Australia, Germans working in England, or South Africans working in Malaysia, will all have to understand how culture affects them. But here, Indonesian, and in particular Javanese, culture goes to the very heart of the business culture. Saving face, maintaining harmony, and showing respect will usually take precedence over job performance. Usually, but not always.

Many Indonesian Bapak have either been educated or worked in the west. The Indonesian government has been sending its personnel overseas to study for many years and some of those employees are now reaching high positions. Employees of western companies often undergo extensive training in Indonesia and abroad. Long serving Indonesian employees who have not been abroad have usually learned through experience and observation what is expected in an international office. Many if not most of your top managers will on a day-to-day basis put forward a serious and professional manner (in a western sense). However, as Mr. de Tray observed, cultural differences come out especially in times of crisis. When serious or unexpected problems occur in the workplace, many people naturally revert to their cultural roots. This is not only true for Indonesian employees but for expatriate employees also. It is easy for employees to get along together when everything is going well. However, as many international companies are finding out these days, in times of crisis, working relationships can deteriorate quickly and for many reasons. Mr. de Tray went on to say: In the negotiations that the international financial institutions have had here with the government, I have watched our technical people become extraordinarily frustrated because they can't impose their highly western, aggressive, conflictual program that requires people to admit their errors and be very open and transparent. These are antithetical to the cultural foundation of much of this country. That's a fact, it's not good or bad, just a fact. He is correct on many points in his statements, but two stand out here. First and above all, it's not good or bad, just a fact. Looking at any host country's culture in terms of good or bad is a major cross-cultural error. It can anger the host country nationals and frustrate you. The cultures are different. Some aspects you may want to incorporate into the job performance of your employees and others you may want to eliminate. But they should never be referred to in terms of Good Western Values or Bad Indonesian Values. The second point is frustration, like the kind felt by Mr. de Tray's technical people. In my opinion, this is the single most important cause of failed postings by expatriate employees and of failing work relationships in multicultural offices. I think that it is safe enough to say that any employee experiences frustration at some point in the performance of their jobs. The frustration that I am referring to here is that caused by the cultural barriers encountered in that job performance.

Frustration in cross-cultural situations is common. It is, however, one of the most easily remedied of the problems facing a multicultural work force. The remedy is knowledge. Knowledge of how the other parties in a multicultural work situation perceive themselves. Specific knowledge of the other's culture and what forces it exerts on him or her. Such knowledge comes from experience and personal observation accelerated by professional cross-cultural orientation and training programs. When frustration declines, efficiency goes up. I see this often in international companies in Indonesia. The lessons learned by the World Bank in Indonesia should have long ranging effects on their interventions in future crises. The lessons that you and your company learn in yoru current crisis should have the same long lasting influence; one of which is that culture matters. This article was generously contributed by George B. Whitfield, III when he was a Technical Advisor with Executive Orientation Services. ETHICS IN INTERNATIONAL BUSINESS (CHAPTER 4)
Business ethics is the applied ethics discipline that addresses the moral features of commercial activity. Enhanced reputation and goodwill, reduced risks, reduced costs, increased profits and sustained long term growth, increased international respects; are some of the benefits received by enterprises apply business ethics in their activities. Business ethics develops through 3 leading normative theories; the stockholder, stakeholder and social contract theories. In the past two decades business ethics becomes emerging global standards from number of business associations, stakeholder groups, and international institutions. Similar situation happens in the palm oil industry. The whole supply chains of palm oil demanded a sustainably produced palm oil, hence the formulation of RSPO (Roundtable of Sustainable Palm Oil) in 2004 which then developed a set of standard called the Principles and Criteria for sustainable palm oil production as the business ethics for those involved in palm oil business, not only for the growers, but also for processors, traders, financial investors, buyers up to the end consumer. Pressure on implementing business ethics in a sustainable palm oil industry has recently became stronger and globalized. As the number one producer and exporter of palm oil, Indonesia received lots of attention and critics from international media and parties, the case of PT. SMART Tbk, recently is a real example of that situation; it was proven that SMART did not implement the RSPO principles and criteria fully, even though on the other hand, it was not as extensive as accused by Greenpeace. Above all, applying business ethics is a must for all industry aiming for sustainable and prosperous business; business ethics guide companies to conduct business responsibly.

INTERNATIONAL TRADE THEORY ( CHAPTER 5)

Indonesias external trade improved in 2010, after declining in 2009 because of the global financial crisis. Both exports and imports have rebounded vigorously since 2009, with imports growing faster than exports. The export rebound was mainly driven by strong demand for commodities, especially from Asia, while the rebound in imports was driven by the strong growth of raw material imports. Export growth in 2011 may lower as economic growth in Indonesias trading partners is forecasted to be lower. But, import growth may be higher due to increases in domestic demand because of Indonesias own economic growth, forecasted to increase by 6.2 percent in 2011. Strong growth in exports was achieved in 2010 by almost all export commodities, especially the five biggest exports, which were 45 percent of Indonesias non-oil exports. Numerous other items that account for 40 percent of exports also contributed significantly, with growth at 30 percent. China and Indias strong economic expansion have boosted Indonesias exports of coal and palm oil, while the revival of car production in the US and elsewhere increased the export of rubber, rubber products and base metals. Even the export of electrical machinery and equipment not commodity exports grew a robust 30 percent as Indonesian manufacturers improved their capacity to supply parts to assembly plants in other countries. In terms of countries of destination, there has been a marked shift in the destination of exports, from developed countries (the US, EU countries and Japan) to others. The share of Indonesian exports to developed countries declined from 45 percent in 2004 to 30 percent in 2010. Because of its strong growth, Asia, especially ASEAN, China and India, is now receiving the bulk of Indonesian exports. Until September of this year, Indonesian non-oil exports to Asia, excluding Japan, accounted for 46 percent of total non-oil exports. Exports to China jumped by 55 percent and exports to ASEAN countries rose by 33 percent. India is emerging as a major market for Indonesian exports, likely to reach US$9 billion this year compared to only $2 billion in 2004. In 2009, when exports to most countries declined, exports to India rose 10 percent. The outlook for Indonesian exports in 2011 depends on the growth outlook of its trading

partners. According to the World Economic Outlook published by the IMF in October 2010, the advanced economies are projected to grow by 2.7 percent in 2010 and then decline to 2.2 percent in 2011. Recovery in the US continues to be weak, mainly due to the high rate of unemployment and sluggish personal spending. Growth in Europe is also weak and uneven, with growth at 1.7 percent in 2010 and 1.5 percent in 2011. Unsustainable fiscal policies that have resulted in debt crises in several European countries pose a threat to Europes continuing growth. Japans economic prospects remain weak given lackluster domestic demand and lack of fiscal room to further boost the economy. But the IMF said the probability of a sharp global slowdown, including stagnation and contraction, in advanced economies continues to be unlikely.

The outlook in emerging economies, especially in Asia, is better. Emerging Asian economies are showing resilience and strong growth. According to the IMF, growth in China and India in 2011 will be 9.6 percent and 8.4 percent respectively. The World Bank forecasted the growth of Indonesias major trading partners would decline from 6.5 percent in 2010 to 4.3 percent in 2011. The trend of Indonesian exports mostly going to Asias emerging markets is likely to continue next year, underscoring the growing importance of the Asian market for Indonesian products. The ASEAN market will remain the most important market for Indonesian exports. As Indonesias economy has further integrated with ASEAN economies, the value of Indonesian exports to ASEAN has doubled from $12.2 billion in 2004 to $25 billion this year. Exports to ASEAN are also the largest compared to other countries. China, India and South Korea have been accelerating their imports from Indonesia in recent years, because of their high demand for mineral fuel. China and India will remain the most important market for Indonesian palm oil. If the value of the dollar keeps declining because of loose monetary policies in the US, then prices for Indonesian commodities would strengthen. This would partly offset the lower volume of trade that might result from slower growth in China and India.

However, Indonesian exports may face some risks next year. Exigencies from unpredictable weather could disrupt the production of agricultural and mining products. Pressures on the Indonesian government from environmental groups to impose a moratorium on deforestation would adversely affect the production of palm oil and timber. But, the most serious risk would be the still unresolved currency and trade dispute among the G20 countries that could disrupt world trade. The increasing impulse for protectionism in advanced countries could threaten Indonesian exports with barriers. Indonesian exporters and the government should be ready to face more anti-dumping charges from importing countries. Imports have been growing more strongly than exports up to September this year, driven by robust increases in raw material imports. This conforms with data that shows the strong economic growth this year was mainly driven by private consumption. As private consumption would likely be sustained in 2011, the growth of imports would surpass the growth of exports, resulting in the shrinking of the Indonesian trade surplus. As Indonesia always experiences deficits in its service transactions, current accounts would likely experience deficits. Indonesian accounts have been in surplus for the last 10 years, so the deficit next year would mark a turning point, where a high level of economic growth needs to be supported and sustained by a large amount of imports. According to the World Bank, Indonesias current account surplus would drop from $10.7 billion in 2009 to $1.8 billion in 2010, and to a deficit of $1.2 billion in 2011. But the balance of payments would still be in surplus in 2011, because the current accounts deficit would be more than offset by a continuing surge in capital inflows that are still being attracted by strong economic fundamentals. Appropriate monetary policies are required to manage these inflows. The government has yet to devise innovative policies so that more capital flows into real sectors and infrastructures, without which, it would be hard to sustain the current rate of economic growth. The writer is an economist. NATIONAL DIFFERENCES IN POLITICA ECONOMY (CHAPTER 2)

Major Political Issues Affecting the Business Climate The government faces great challenges in consolidating Indonesia's democratic transition, restoring the country's economic momentum, and in bringing the benefits of development to all Indonesia's citizens. Among the key political issues with economic implications are periodic outbreaks of communal violence around the country, particularly in Central Sulawesi; demands for greater autonomy or independence in Papua; the presence of the regional terrorist organization Jemaah Islamiyah (JI); and deep-seated weaknesses in the rule of law at all levels throughout the country. In January 2001, the government began an ambitious and massive decentralization of political and economic authority to the districts. While well intentioned in theory, the implementation of decentralization has been uneven, and many issues involving power- and revenue sharing between the central and local governments remain unresolved. In light of these experiences, the government is discussing revisions to the regional autonomy laws. Continuing allegations of high-level corruption, especially in the judiciary, point to the need for comprehensive reform and implementation of good governance practices. In this regard, far more effective mechanisms will be required to enforce commercial, criminal, and administrative laws.

Much of the investment climate focuses on the national level. In an increasing number of countries this makes little sense, since the political drivers of change and conditions for investment and growth differ enormously between regions or localities. This applies in particular to Indonesia. It provides a unique opportunity to decipher some of the factors that contribute to better local governance and economic performance. The worlds fourth largest country has undergone a remarkable transition over the last 10 years. After the Asian crisis and General Suhartos resignation in 1998, Indonesias government put an end to thirty years of authoritarian rule and implemented far-reaching political and administrative reforms. In 1999, Indonesian citizens were called upon (for the second time in history) to elect their national and regional representatives in a truly democratic way. At the same time, the national government enacted decentralization laws that fully dispersed authority for local taxes and services to more than 400 district governments. This made Indonesia at least in administrative terms - one of the most decentralized countries in the world. This big bang decentralization presents an important opportunity for researchers interested in the political economy of the investment climate. Under Suhartos regime, policy reform was orchestrated, almost entirely, by a small group of national elites. This ensured coherence and certainty, but also suppressed public-private reform initiatives on local levels. Today, the situation is a completely different one. Indonesia's rapid regime change has created a large variation in political economy features including interest group constellations, leadership qualities, and local checks and balances. This pronounced district-level variation presents a rare opportunity to explore effects of different types of public-private cooperation on local investment and growth.