MACROECONOMICS (ECMBB 233)

ACKNOWLEDGEMENTS

First and foremost, we would like to thank Allah S.W.T. for giving us opportunity and
strength to accomplish our project paper on Government Spending on Energy in Indonesia.

We would like to express our profound gratitude towards our supportive lecturer, Sir Khudari
for his invaluable support, encouragement, supervision, and dazzling suggestions for our
research. We as ever, especially indebted to our parents, for their love and strong support
throughout our lives. Not forgotten, our sincere thanks and appreciations to our beloved
friends and colleagues, who shared their knowledge, brilliant ideas, and experiences with us.

We heartily thankful to all the people who helped us and to all my colleagues whose
encouragement, guidance and support from the initial to the final level enabled us to develop
an understanding of the subject. Last but not least, we offer our regards and blessings to all
the respondents and for those who supported us in any respect during the completion of this
project paper.

Thank you.

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CHAPTER 1 : INTRODUCTION

1.1 Project Objective :

Aim/Purposes of this Project

To study and understand the performance of Indonesia economies from 1980
until present.
To understand how the policies and strategies implemented by Indonesia can
stimulate its energy spending.
To study and understand the fluctuations of the Indonesia government spending
on energy.

1.1.1

Gross Domestic Product (GDP) Components

While calculating the GDP estimate, the Bureau first takes into account the sum of an
individuals personal consumption expenditures, that is, durable goods (such as furniture and
cars), non-durable goods (such as clothing and food), and services (such as banking,
education, and transportation).

Following personal consumption expenditures, the Bureau takes into account, sum of
investments in private housing purchases (or residential investment), and businesses
investment in non-residential structures, durable equipment, and computer software.
Inventories at all stages of production being treated as investment, changes in the inventory
levels are also added to GDP. The direction and course of investments in the housing and the
industrial sector is also reflected in the performance of real estate ETFs like the Vanguard
REIT ETF (VNQ) and the iShares Dow Jones US Real Estate Index Fund (IYR), and
industrials ETFs like the SPDR Industrial Select Sector Fund (XLI), which has companies
like General Electric Corporation (GE) and Boeing Corporation (BA) in its portfolio.

MACROECONOMICS (ECMBB 233)

Next, the GDP accounts for the amount of net exports. Net exports equal the sum of
exports less imports. Exports are the purchases of goods and services produced in the U.S.
made by foreigners. These add to the GDP. Imports represent domestic purchases of foreignproduced goods and services. So, they must be deducted from the calculation of GDP. In the
U.S., net exports are a drag on total GDP because the country regularly imports more than it
exports, that is, net exports are in deficit. The government component of the GDP accounts
for the central government expenditure in national defense and non-defense, as well as State
and local governments expenditure estimates. Government purchases of goods and services
are a compensation of government employees and purchases from businesses and abroad.
However, government outlays for transfer payments or interest payments are not included in
the GDP calculation.

Picture 1 : GDP Components

The component that we are going to use is Government Expenditure. Government

spending or expenditure includes all government consumption, investment, and transfer
payments. In national income accounting the acquisition by governments of goods and
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services for current use, to directly satisfy the individual or collective needs of the
community, is classed as government final consumption expenditure. Government acquisition
of goods and services intended to create future benefits, such as infrastructure investment or
research spending, is classed as government investment (government gross capital
formation). These two types of government spending, on final consumption and on gross
capital formation, together constitute one of the major components of gross domestic product.

Government spending can be financed by government borrowing, seigniorage, or taxes.

Changes in government spending is a major component of fiscal policy used to stabilize the
macroeconomic business cycle. We decided to choose it because it is related to the title that
has been given, thus, it will help us to gathering data and it will help us to accomplish to
finish this project successfully. And the countries that will be chosen is Indonesia.

1.1.2

COUNTRY BACKGROUND

Background, Population and Size of the Country

Indonesia, officially the Republic of Indonesia is a unitary sovereign state and

transcontinental country located mainly in Southeast Asia with some territories in Oceania.
Situated between the Indian and Pacific oceans, it is the world's largest island country, with
more than thirteen thousand islands. At 1,904,569 square kilometres (735,358 sq mi),
Indonesia is the world's 14th-largest country in terms of land area and world's 7th-largest
country in terms of combined sea and land area. It has an estimated population of over 260
million people and is the world's fourth most populous country, the most populous
Austronesian nation, as well as the most populous Muslim-majority country. The world's
most populous island of Java contains more than half of the country's population.

Thousands of islands scattered across the expanse between the Indian and Pacific
Oceans is hardly a likely candidate for a unified country. Yet this is the land (and water!) of
Indonesia. It is a country pieced together from more than 17,000 islands, more than 6,000 of
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which are inhabited. The arrangement of Indonesia is much like an island splatter pattern
running from east to west and located off the coast of Southeast Asia. The tyranny of distance
created by the water separating these islands adds many complexities for the people and
government of Indonesia. These challenges will be examined in this book. Indonesia often
brings to mind visions of a tropical island paradise, with palm trees swaying in the warm
breeze and sandy beaches that seem to stretch endlessly toward the sea and a picturesque
sunset. When the island of Bali is mentioned, it is often in the context of a dream destination
for travellers from Australia and the West.

Picture 2 : Indonesias Location

Indonesia's republican form of government includes an elected legislature and

president. Indonesia has 34 provinces, of which five have Special Administrative status. Its
capital and most populous city is Jakarta. The country shares land borders with Papua New
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Guinea, East Timor, and the eastern part of Malaysia. Other neighbouring countries include
Singapore, the Philippines, Australia, Palau, and the Indian territory of the Andaman and
Nicobar Islands. Despite its large population and densely populated regions, Indonesia has
vast areas of wilderness that support the world's second highest level of biodiversity. The
country has abundant natural resources like oil and natural gas, tin, copper and gold.
Agriculture mainly produces rice, palm oil, tea, coffee, cacao, medicinal plants, spices and
rubber. Indonesia's major trading partners are Japan, United States, China and the
surrounding countries of Singapore, Malaysia and Australia.

The Indonesian archipelago has been an important region for trade since at least the
7th century, when Srivijaya and then later Majapahit traded with China and India. Local
rulers gradually absorbed foreign cultural, religious and political models from the early
centuries CE, and Hindu and Buddhist kingdoms flourished. Indonesian history has been
influenced by foreign powers drawn to its natural resources. Muslim traders and Sufi scholars
brought the now-dominant Islam, while European powers brought Christianity and fought
one another to monopolise trade in the Spice Islands of Maluku during the Age of Discovery.
Following three and a half centuries of Dutch colonialism starting from Amboina and
Batavia, and eventually all of the archipelago including Timor and West Papua, at times
interrupted by Portuguese, French and British rule, Indonesia secured its independence after
World War II. Indonesia also take a part to support Africa and Asian nations to oppose against
any colonialism or neocolonialism.

Indonesia consists of hundreds of distinct native ethnic and linguistic groups. The
largest and politically dominant ethnic group are the Javanese. A shared identity has
developed, defined by a national language, ethnic diversity, religious pluralism within a
Muslim-majority population, and a history of colonialism and rebellion against it. Indonesia's
national motto, "Bhinneka Tunggal Ika" ("Unity in Diversity" literally, "many, yet one"),
articulates the diversity that shapes the country. The Indonesian economy is the world's 16th
largest by nominal GDP and the 8th largest by GDP at PPP, and considered as Emerging
markets and Newly industrialized country. Indonesia has been a member of the United
Nations since 1950. Indonesia was the founder of Non-Aligned Movement; and also the
founding member of Association of Southeast Asian Nations, Asia-Pacific Economic
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Cooperation, East Asia Summit, and Organisation of Islamic Cooperation. Indonesia is a

member of the G20 major economies, OPEC, and World Trade Organization.

Geography
Location
Indonesia lies between latitudes 11S and 6N, and longitudes 95E and 141E. It is the
largest archipelagic country in the world, extending 5,120 kilometres (3,181 mi) from east to
west and 1,760 kilometres (1,094 mi) from north to south. According to a geospatial survey
conducted between 2007 and 2010 by National Coordinating Agency for Survey and
Mapping (Bakosurtanal), Indonesia has 13,466 islands, about 6,000 of which are inhabited.
These are scattered over both sides of the equator. The largest are Java, Sumatra, Borneo
(shared with Brunei and Malaysia), New Guinea (shared with Papua New Guinea), and
Sulawesi. Indonesia shares land borders with Malaysia on Borneo, Papua New Guinea on the
island of New Guinea, and East Timor on the island of Timor. Indonesia shares maritime
borders across narrow straits with Singapore, Malaysia, the Philippines, and Palau to the
north, and with Australia to the south. The capital, Jakarta, is on Java and is the nation's
largest city, followed by Surabaya, Bandung, Medan, and Semarang. Indonesia average
population density is 134 people per square kilometre (347 per sq mi), 79th in the world,
although Java, the world's most populous island, has a population density of 940 people per
square kilometre (2,435 per sq mi).

At 4,884 metres (16,024 ft), Puncak Jaya in Papua is Indonesia's highest peak, and
Lake Toba in Sumatra its largest lake, with an area of 1,145 square kilometres (442 sq mi).
Indonesia's largest rivers are in Kalimantan, and include the Mahakam and Barito; such rivers
are communication and transport links between the island's river settlements. Indonesia's
location on the edges of the Pacific, Eurasian, and Australian tectonic plates makes it the site
of numerous volcanoes and frequent earthquakes. Indonesia has at least 150 active volcanoes,
including Krakatoa and Tambora, both famous for their devastating eruptions in the 19th
century. The eruption of the Toba supervolcano, approximately 70,000 years ago, was one of
the largest eruptions ever, and a global catastrophe. Recent disasters due to seismic activity
include the 2004 tsunami that killed an estimated 167,736 in northern Sumatra,[76] and the
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Yogyakarta earthquake in 2006. However, volcanic ash is a major contributor to the high
agricultural fertility that has historically sustained the high population densities of Java and
Bali.

Climate
Lying along the equator, Indonesia's climate tends to be relatively even year-round. Indonesia
has two seasonsa wet season and a dry seasonwith no extremes of summer or winter. For
most of Indonesia, the dry season falls between April and October with the wet season
between November and March. Indonesia's climate is almost entirely tropical, dominated by
the Tropical rainforest climate found in every major island of Indonesia, followed by the
Tropical monsoon climate that predominantly lies along Java's coastal north, Sulawesi's
coastal south and east, and Bali, and finally the tropical Savanna climate, found in isolated
locations of Central Java, lowland East Java, coastal southern Papua and smaller islands to
the east of Lombok. However, cooler climate types do exist in mountainous regions of
Indonesia 13001500 metres above sea level. The oceanic climate (Kppen Cfb) prevail in
highland areas with fairly uniform precipitation year-round, adjacent to rainforest climates,
while the subtropical highland climate (Kppen Cwb) exist in highland areas with a more
pronounced dry season, adjacent to tropical monsoon and savanna climates.

Some regions, such as Kalimantan and Sumatra, experience only slight differences in
rainfall and temperature between the seasons, whereas others, such as Nusa Tenggara,
experience far more pronounced differences with droughts in the dry season, and floods in the
wet. Rainfall in Indonesia is plentiful, particularly in West Sumatra, West Kalimantan, West
Java, and Papua. Parts of Sulawesi and some islands closer to Australia, such as Sumba is
drier. The almost uniformly warm waters that make up 81% of Indonesia's area ensure that
temperatures on land remain fairly constant. The coastal plains averaging 28 C (82.4 F), the
inland and mountain areas averaging 26 C (78.8 F), and the higher mountain regions, 23 C
(73.4 F). The area's relative humidity ranges between 70 and 90%.

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Winds are moderate and generally predictable, with monsoons usually blowing in from
the south and east in June through October and from the northwest in November through
March. Typhoons and large scale storms pose little hazard to mariners in Indonesia waters;
the major danger comes from swift currents in channels, such as the Lombok and Sape straits.

Geology

Tectonically, Indonesia is highly unstable. It lies on the Pacific Ring of Fire where the IndoAustralian Plate and the Pacific Plate are pushed under the Eurasian plate where they melt at
about 100 km deep. A string of volcanoes stretches from Sumatra to the Banda Sea. While the
volcanic ash has resulted in fertile soils, it makes agricultural conditions unpredictable in
some areas. The string of volcanoes runs through Sumatra, Java, Bali and Nusa Tenggara, and
then loops around through to the Banda Islands of Maluku to northeastern Sulawesi. Of the
400 volcanoes, approximately 150 are active.

The most massive supervolcano eruption was the Toba eruption that took place at the
present location of Lake Toba, about 75000 years Before Present. The supervolcano eruption
is believed to had caused volcanic winter and cooling of the climate, and subsequently led to
a genetic bottleneck in human evolution about 50,000 years ago.

Between 1972 and 1991, 29 volcanic eruptions were recorded, mostly on Java. The
two most violent volcanic eruptions in modern times occurred in Indonesia; in 1815 Mount
Tambora in Sumbawa erupted killing 92,000 people. Tambora produced the largest eruption
known on the planet during the past 10,000 years. Also the eruption created an umbrella of
volcanic ash which spread and blanketed Southeast Asia, plunging it into darkness for a
week, and made a whole world without a summer in 1815. The 1883 eruption of Krakatoa
was one of the deadliest and most destructive volcanic events in recorded history. Nearly
40,000 deaths are attributed to the eruption itself and the tsunamis it created. Significant
additional effects were also felt around the world in the days and weeks after the volcano's
destruction.

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Picture 3 : Sinabung Volcano in Indonesia

Biodiversity

Indonesia's size, tropical climate, and archipelagic geography, support the world's second
highest level of biodiversity after Brazil. Its flora and fauna is a mixture of Asian and
Australasian species. The islands of the Sunda Shelf (Sumatra, Java, Borneo, and Bali) were
once linked to the Asian mainland, and have a wealth of Asian fauna. Large species such as
the tiger, rhinoceros, orangutan, elephant, and leopard, were once abundant as far east as Bali,
but numbers and distribution have dwindled drastically. Forests cover approximately 60% of
the country. In Sumatra and Kalimantan, these are predominantly of Asian species. However,
the forests of the smaller, and more densely populated Java, have largely been removed for
human habitation and agriculture. Sulawesi, Nusa Tenggara, and Maluku having been long
separated from the continental landmasseshave developed their own unique flora and

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fauna. Papua was part of the Australian landmass, and is home to a unique fauna and flora
closely related to that of Australia, including over 600 bird species.

Indonesia is second only to Australia in terms of total endemic species, with 36% of
its 1,531 species of bird and 39% of its 515 species of mammal being endemic. Indonesia's
80,000 kilometres (50,000 miles) of coastline are surrounded by tropical seas that contribute
to the country's high level of biodiversity. Indonesia has a range of sea and coastal
ecosystems, including beaches, sand dunes, estuaries, mangroves, coral reefs, seagrass beds,
coastal mudflats, tidal flats, algal beds, and small island ecosystems. Indonesia is one of
Coral Triangle countries with the world's greatest diversity of coral reef fish with more than
1,650 species in eastern Indonesia only.

The British naturalist Alfred Russel Wallace described a dividing line between the
distribution of Indonesia's Asian and Australasian species. Known as the Wallace Line, it runs
roughly northsouth along the edge of the Sunda Shelf, between Kalimantan and Sulawesi,
and along the deep Lombok Strait, between Lombok and Bali. West of the line the flora and
fauna are more Asian moving east from Lombok they are increasingly Australian. In his
1869 book, The Malay Archipelago, Wallace described numerous species unique to the area.
The region of islands between his line and New Guinea is now termed Wallacea.

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Picture 4 : Amorphophallus Titanium that only can be found in Indonesia

Political System

The political system of Indonesia is a framework of a presidential representative democratic

republic. Indonesia is a unitary state with power concentrated in the national government. In
the Indonesian government, the powers is vested in the executive, which is exercised by the
government, legislative power is vested in both the government and the two Peoples
Representative Councils and the judiciary is independent of the executive and the legislature.

I.

The Constitutional System

The Indonesian constitution was first written in July and August 1945 at the end of World
War II but it was abolished by the Federal Constitution of 1949 and the Provisional
Constitution of 1950. Finally on 5th July 1959 the constitution was restored.

II.

Executive Branch

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The President of Indonesia is both head of state and head of government and of a multi-party
system. He is also the commander-in-chief of the Indonesian armed forces, and responsible
for domestic governance, policy-making and foreign affairs. The president and vice president
are both selected by the vote of the citizens for a term of five years. Previously prior to 2004
they were elected by the Peoples Consultative Assembly. Its also the president who heads the
United Indonesia Cabinet or the Kabinet Indonesia Bersatu and elects the council of
ministers.

III.

Legislative Branch

In the political system of Indonesia the highest representative body at national level is the
Peoples Consultative Assembly or the Majelis Permusyawaratan Rakyat (MPR). MPR also
has the power to impeach the President. It has two lower houses or chambers, viz the Peoples
Representative Council or the Dewan Perwakilan Rakyat (DPR) and the Regional
Representatives Council or the Dewan Perwakilan Daerah (DPD). The DPR has 550
members, elected for a five year term by proportional representation in multi-member
constituencies and the DPD has 168 members. All legislation is passed by the legislative
body DPR which also monitors the executive branch. After the 2004 election the MPR
became a bicameral parliament, with the DPD as its second chamber in an effort to increase
regional representation.

IV.

Judicial Branch

The highest level of judicial branch in Indonesia is the Supreme Court or the Mahkamah
Agung. The president appoints the judges of the Supreme Court. Besides Indonesia has a
different court for different matters. All civil disputes appear first before a State Court before
being heard in the High Court. Theres the Commercial Court to handle bankruptcy and
insolvency; a State Administrative Court to hear administrative law cases against the
government; a Constitutional Court to hear disputes concerning legality of law products,
dissolution of political parties, general elections and the scope of authority of a state
institution; and a Religious Court to deal with specific religious cases.

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V.

The Political Party

The main political parties of Indonesia are the Democratic Party (PD ) the Functional Groups
Party (Golkar), Indonesian Democratic Party-Struggle (PDIP), and Prosperous Justice Party
(PKS).

VI.

Administrative Divisions

Indonesia consists of 33 provinces, 4 of which have special status) including a special capital
region. Each of these provinces has its own political legislature and is headed by a governor.

VII.

Modern Political Culture

The major components of Indonesias modern political culture were derived from two central
goals of the New Order government: stability and development. If authority in the Suharto
era was based on ABRIs coercive support, the governments legitimacy rested on its success
in achieving sociopolitical stability and economic development. Indonesian political culture
in the early 1990s primarily reflected nontraditional, nonethnic, and secular values. Urban
centered, truly national in its scope, and more materialistically focused, Indonesias politics in
the 1990s were influenced by both domestic and international developments.

Like Islam, Indonesias modern political culture was not monolithic. In the early
1990s, there was a variety of subcultures: bureaucratic, military, intellectual, commercial,
literary, and artistic, each with its own criteria for judging politics, but all directed to the
successful operation of the modern political system. Perhaps the two most important modern
subcultures were the military and the intellectuals.

It was the military subculture that set the tone for the first two decades of the Suharto
government, both in terms of its ethos and in the direct participation of military officers at all
levels of government and administration. Although increasingly professional in a technical
sense, ABRI never lost its conception of itself as the embodiment of the national spirit,

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standing above the social, ethnic, and religious divisions of the country as a unifying
institution.

The concerns of academics, writers, and other intellectuals in the early 1990s were
different and they were more likely to be influenced by Western political values. It was from
these circles that the pressure for democratization came. Their outlet was not political parties
but cause-oriented nongovernmental organizations (NGOs), workshops, seminars, rallies,
and, occasionally, demonstrations. The government undertook a major effort to subsume all
of Indonesias political cultures, with their different and often incompatible criteria for
legitimacy, into a national political culture, an Indonesian culture based on the values set
forth in the Pancasila.

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Legal System

The civil law system in Indonesia is based on the Roman-Dutch model and influenced by
customary law. There are Islamic and family codes as well as criminal codes. Some laws date
back to the Dutch colonial era. Indonesia has made great improvements toward democracy
since the ouster of longtime dictator Suharto in 1998, but the judicial system needs some
work. Indonesia's court system is plagued with corruption, inefficiencies, poorly trained staff
and financial constraints. Reading verdict can take eight hours. Under Indonesian law any
piece of land for which there is no title belongs to the government by default.

Indonesias complex justice system evolved from three inherited sources of law:
customary or adat law, Islamic law (sharia), and Dutch colonial law. The judicial branch is
independent and coequal with executive and legislative branches, with Supreme Court and
Constitutional Court at apex of judicial system. There are four different court systems below
Supreme Court: courts of general civil and criminal jurisdiction, religious courts, state
administrative courts, and military courts. Adat (roughly meaning "traditional law") is a eyefor-eye code in which someone who commits a wrong or breaks a taboo is regarded as
subhuman and open to punishment. Many ethnic groups in Indonesia use adat as a means of
social control and employ it outside the Indonesian legal system.

The Indonesian judicial system is no longer under the administrative and political
control of the executive branch. The highest courts are Supreme Court or Mahkamah Agung
(51 judges divided into 8 chambers) and the Constitutional Court (consists of 9 judges).
Supreme Court judges are nominated by the Judicial Commission and appointed by president
with concurrence of parliament. These judges can serve until retirement age. Of the nine
Constitutional Court judges, three are nominated by president, three by Supreme Court, and
three by parliament. Many other judges are appointed by the president. Judges serve until
mandatory retirement at age 70. Subordinate courts including the High Courts of Appeal,
district courts and religious courts.

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The Indonesian legal system is extraordinarily complex, the independent state

having inherited three sources of law: customary or adat law, traditionally the basis for
resolving interpersonal disputes in the village environment; Islamic law (sharia), often
applied to disputes between Muslims; and Dutch colonial law. Adat courts were abolished in
1951, although customary means of dispute resolution are still in use in villages. The return
to the 1945 constitution in 1959 meant that Dutch laws remained in force except as
subsequently altered or found to be inconsistent with the constitution. A criminal code
enacted in 1981 expanded the legal rights of criminal defendants. The government in 2009
was still reviewing its legacy of Dutch civil and commercial laws in an effort to codify them
in Indonesian terms. The types of law recognized in MPR Decree No. 3 of 1999 include the
constitution, MPR decrees, statutes passed by the DPR and ratified by the president,
government regulations promulgated by the president to implement a statute, presidential
decisions to implement the constitution or government regulations, other implementing
regulations such as ministerial regulations and instructions, and local (provincial and district)
regulations. Obviously, the executive enjoys enormous discretion in determining what is law.

Many ordinary Indonesians have no confidence in the justice system and feel they
have no recourse under the law. When asked what justice meant to the average Indonesian,
Pramoedya Ananta Toer, Indonesia's best known novelist, told the Washington Post, "The
word adil, or "justice," came to Indonesia with the spread of Islam in the 14th century but to
this day, the word is not a reality for the common man. It is a concept even though it is
mentioned daily in relation to hukum, or law. Both justice and law are still a hope that has
been promised but never delivered in our history, not in our ancient kingdoms, not under
centuries of Dutch colonial occupation and not under Suharto's regime."

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Indonesias Judicial Branch and the Constitution

The judicial branch stands coequal with the executive and legislative branches. Justices of the
Supreme Court are nominated by the independent Judicial Commission for approval by the
DPR and formal appointment by the president. The chief justice and deputy chief justice are
elected by and from among the justices. Members of the Judicial Commission must have a
legal background or experience and are appointed and dismissed by the president with the
approval of the DPR.

Article 24 of the amended constitution states that judicial power shall be vested in the
Supreme Court, the Constitutional Court, and subordinate courts established by law, and that
the organization and competence of courts shall be established by law. In Sukarnos Guided
Democracy, the justice system became a tool of the revolution, and any pretense of an
independent judiciary was abandoned. Although in theory one of the goals of the New Order
was to restore the rule of law, in practice the judiciary remained both corrupt and a means for
suppressing political dissent. Judicial reform was thus a key demand of the 1998 student
movement and remains one of the most important items on the political-reform agenda.
Important steps were taken in this regard as part of the 19992002 constitutional-amendment
process.

A new body, the Constitutional Court, was established to review the constitutionality of
laws, resolve disputes among the various branches and levels of government, have final say
in the dissolution of political parties, and decide disputes over election results. The
Constitutional Court also plays a role in the presidential-impeachment process by issuing a
verdict on an indictment made by the DPR. The court has nine justices, three each nominated
by the Supreme Court, the DPR, and the president. Justices must be knowledgeable about the
constitution and may not be state officials. The Constitutional Court chief justice and deputy
chief justices are chosen by and from among the justices

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1.2

Gross Domestic Product (GDP) Performance

Indonesias Economy

Indonesia has a market economy in which the government plays a significant role. It is the
largest economy in Southeast Asia and a member of the G-20 major economies. Indonesia's
estimated gross domestic product (nominal), purchasing power parity aside for 2008 was
US$511.7 billion with estimated nominal per capita GDP was US$2,246, and per capita GDP
PPP was US$3,979 (international dollars). The services sector is the economy's largest and
accounts for 45.3% of GDP (2005). This is followed by industry (40.7%) and agriculture
(14.0%). However, agriculture employs more people than other sectors, accounting for 44.3%
of the 95 million-strong workforce. This is followed by the services sector (36.9%) and
industry (18.8%). Major industries include petroleum and natural gas, textiles, apparel, and
mining. Major agricultural products include palm oil, rice, tea, coffee, spices, and rubber.

Indonesia's main export markets (2005) are Japan (22.3%), the United States (13.9%),
China (9.1%), and Singapore (8.9%). The major suppliers of imports to Indonesia are Japan
(18.0%), China (16.1%), and Singapore (12.8%). In 2005, Indonesia ran a trade surplus with
export revenues of US$83.64 billion and import expenditure of US$62.02 billion. The
country has extensive natural resources, including crude oil, natural gas, tin, copper, and gold.
Indonesia's major imports include machinery and equipment, chemicals, fuels, and foodstuffs.
n the 1960s, the economy deteriorated drastically as a result of political instability, a young
and inexperienced government, and economic nationalism, which resulted in severe poverty
and hunger. Following President Sukarno's downfall in the mid-1960s, the New Order
administration brought a degree of discipline to economic policy that quickly brought
inflation down, stabilized the currency, rescheduled foreign debt and managed to attracted
foreign aid and investment. Indonesia is Southeast Asia's only member of OPEC, and the
1970s oil price raises provided an export revenue windfall that contributed to sustained high
economic growth rates. Following further reforms in the late 1980s, foreign investment
flowed into Indonesia, particularly into the rapidly developing export-oriented manufacturing
sector, and from 1989 to 1997, the Indonesian economy grew by an average of over 7%.
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Indonesia was the country hardest hit by the Asian financial crisis of 199798.
Against the US dollar, the rupiah dropped from about Rp. 2,600 to a low point of 14,000, and
the economy shrank by 13.7%.The Rupiah has since stabilised in the Rp. 8,000 to 10,000
range, and a slow but significant economic recovery has ensued. However, political
instability, slow economic reform, and corruption at all levels of government and business,
have slowed the recovery.

Transparency International ranked Indonesia 143rd out of 180 countries in its

2007 Corruption Perceptions Index. The rank rose to 111st out of 180 in 2009 GDP growth,
however, exceeded 5% in both 2004 and 2005, and is forecast to increase further. This growth
rate, however, was not enough to make a significant impact on unemployment, and stagnant
wages growth and increases in fuel and rice prices have worsened poverty levels. As of 2006,
an estimated 17.8% of the population was living below the poverty line, defined by the
Indonesian government as purchasing power parity of US$1.55 per day (household income).

According to the 2006 estimates, nearly half of the population was living on less than
US$2 per day. In recent years, the strongest growth rates since the Suharto years have helped
the unemployment rate decline to 8.46% in 2008, and in comparison to its neighbours,
Indonesia has been less affected by the recent global recession.

Indonesias Gross National Product (GDP)

The gross domestic product (GDP) is one of the primary indicators used to gauge the health
of a country's economy. It represents the total dollar value of all goods and services produced
over a specific time period; you can think of it as the size of the economy. Usually, GDP is
expressed as a comparison to the previous quarter or year. For example, if the year-to-year
GDP is up 3%, this is thought to mean that the economy has grown by 3% over the last year.

Measuring GDP is complicated (which is why we leave it to the economists), but at its
most basic, the calculation can be done in one of two ways: either by adding up what
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everyone earned in a year (income approach), or by adding up what everyone spent

(expenditure method). Logically, both measures should arrive at roughly the same total. The
income approach, which is sometimes referred to as GDP (I), is calculated by adding up total
compensation to employees, gross profits for incorporated and non incorporated firms, and
taxes less any subsidies. The expenditure method is the more common approach and is
calculated by adding total consumption, investment, government spending and net exports.

As one can imagine, economic production and growth - what GDP represents - has a
large impact on nearly everyone within that economy. For example, when the economy is
healthy, you will typically see low unemployment and wage increases as businesses demand
labour to meet the growing economy. A significant change in GDP, whether up or down,
usually has a significant effect on the stock market. It's not hard to understand why; a bad
economy usually means lower profits for companies, which in turn means lower stock prices.
Investors really worry about negative GDP growth, which is one of the factors economists
use to determine whether an economy is in a recession.

The Gross Domestic Product (GDP) in Indonesia was worth 861.93 billion US dollars
in 2015. The GDP value of Indonesia represents 1.39 percent of the world economy. GDP in
Indonesia averaged 228.00 USD Billion from 1967 until 2015, reaching an all time high of
917.87 USD Billion in 2012 and a record low of 5.98 USD Billion in 1967. Indonesia
recorded Current Account deficit of 2.06 percent of the country's Gross Domestic Product in
2015, narrowing from a deficit of 3.09 percent in 2014. Current Account to GDP in Indonesia
averaged -0.57 percent from 1980 until 2015, reaching an all time high of 4.80 percent in
2000 and a record low of -6.80 percent in 1983.

Between the years 1965 and 1997 the Indonesian economy grew at an average annual
rate of almost seven percent. This achievement enabled Indonesia to graduate from the ranks
of 'low income countries' into that of the 'lower middle income countries'. However, the Asian
Financial Crisis that erupted in the late 1990s caused a severe negative impact on the
Indonesian economy, resulting in a decline in gross domestic product (GDP) of 13.6 percent
in 1998 and limited growth of 0.3 percent in 1999. Between the years 2000 and 2004 a period
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of economic recovery took place with a combined average GDP growth of 4.6 percent
annually. Hereafter GDP growth accelerated (with the exception of 2009 when, amid global
financial turmoil and uncertainty, Indonesia's GDP growth fell to - a still admirable - 4.6
percent) and then peaked at 6.5 percent in 2011. However, after 2011 Indonesia's economic
expansion started to slow rapidly. Indonesia then managed to increased its GDP until now
throughout different ways of policies and strategies in order to generate more GDP.

Table 1 : Indonesias GDP by Sections

Chart 1 : Indonesia GDP

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Table 2 : Indonesias Tradings

GDP at purchaser's prices is the sum of gross value added by all resident producers in
the economy plus any product taxes and minus any subsidies not included in the value of the
products. It is calculated without making deductions for depreciation of fabricated assets or
for depletion and degradation of natural resources.

Figure 2 : Indonesias Gross Domestic Product (GDP) Growth Rate

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Fluctuation in the Business Cycle in Indonesia

Visible in the table above is that the global economic downturn brought on by the
global financial crisis in the late 2000s had a relatively small impact on the Indonesian
economy as compared to the impact on other countries. In 2009 Indonesia's GDP growth
dropped to 4.6 percent, which meant that the country was one of the top GDP growth
performers worldwide (and the third-highest among the G-20 group of major economies).

Despite sharply falling commodity prices, a falling stock market, higher domestic and
international bond yields and a depreciating exchange rate, the economy of Indonesia was
still able to grow decently. This success was mainly due to the relatively limited importance
of Indonesian exports towards the national economy, maintained high market confidence, and
sustained robust domestic consumption. Domestic consumption in Indonesia (in particular
private consumption) contributes around 55 percent to the country's total national economic
growth.

In 2010 the World Bank wrote that, amid robust economic growth, each year around
seven million Indonesians are added to the country's middle class. In 2012, this middle class
numbered around 75 million people (out a total Indonesian population of 240 million) and
research firms such as the Boston Consulting Group (BCG) and McKinsey stated that this
middle class will roughly have doubled by the years 2020-2030. Although the inflow into the
middle class has been curbed due to the country's economic slowdown that emerged after
2011, Indonesia contains a consumer force that drives the economy and has triggered
significantly increased domestic and foreign investment from 2010.

Reasons of Fluctuation
Sluggish Global Economic Growth - China in Focus
After rebounding from the global great recession (2007-2009), the pace of worldwide
economic growth slowed between 2010 and 2014. Particularly the rapidly moderating

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economy of China caused concern. The world's second-largest economy grew 7.3 percent
(y/y) in 2014, a 24-year low. Declining economic expansion of China has an immediate
impact on Indonesia as both countries are important trading partners (exports to China
account for nearly one-tenth of total Indonesian exports). It is estimated that for each one
percentage point decline in China's GDP growth, Indonesia's economic expansion will be
curbed by 0.5 percent.

Falling Commodity Prices

The recent global economic slowdown (and in particular China's economic slowdown)
resulted in commodity prices falling to multiple-year lows. Being a major commodity
exporter (and lacking a well developed downstream industry), Indonesia's export
performance is affected heavily in times of low commodity prices (such as coal and crude
palm oil). Low commodity prices are not only caused by weaker global demand but also
because of an oversupply. During the 2000s commodity boom and after the great recession in
the late-2000s (when institutions such as the World Bank and International Monetary Fund
released far too optimistic global growth projections) many firms entered the commodities
sector - or those existing companies invested to expand production capacity - causing a
supply glut hence putting more downward pressure on commodity prices.

Bank Indonesia's High Interest Rate Environment

A high interest rate environment curtails credit growth and thus curbs economic growth.
Starting in mid-2013 Indonesia's central bank (Bank Indonesia) raised its key interest rate (BI
rate) from the historic low of 5.75 percent gradually, yet aggressively, to 7.75 percent in late
2014. Bank Indonesia tightened its monetary policy in an effort to combat high inflation
(which accelerated sharply after several fuel subsidy reforms), curb the country's wide current
account deficit, and support the rupiah which has been plagued by heavy pressures amid
monetary tightening in the USA (as such, Bank Indonesia prefers financial stability over
higher economic growth). Massive capital outflows from emerging markets, including
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Indonesia, emerged in most of 2013 due to the looming winding down of the USD $85 billion
per month bond-buying program (US quantitative easing). In 2015 capital outflows from
emerging markets re-emerged as the world was preparing for higher US interest rates.

Politics of Indonesia

The year 2014 was a 'political year' for Indonesia as the country organized legislative and
presidential elections. These elections were basically a battle between PDI-P backed Joko
Widodo (the reform-minded market favorite) and Gerindra-backed Prabowo Subianto (a
controversial former army general as well as former son-in-law to Suharto). Although it was
expected to become an easy victory for Widodo, it turned out to be a close race (and even
required a verdict from the Constitutional Court to confirm the result of the presidential
election). For about five months, the year 2014 was plagued by severe political uncertainties
(due to these elections) and led to a slowdown in investment realization, hence curbing the
country's economic expansion.

In line with the 2009 Mining Law, Indonesia implemented the ban on exports of mineral
ore in January 2014. Although this ban was not implemented in full force immediately (some
miners could resume mineral ore exports provided they are committed to establish domestic
smelting facilities) and although the aim of this new policy is good (reducing the country's
reliance on highly volatile raw commodity prices), it also led to curbed export performance.

Another political issue that hampers Indonesia's economic expansion is slow government
spending. Due to red tape (bureaucracy) and weak coordination among governmental
institutions (both on the central and regional level), government spending remains sluggish.
Amid the global slowdown, analysts have high hopes for government-led infrastructure
development to boost the country's competitiveness, job market and economic growth.
However, a large chunk of allocated funds remain unused.

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CHAPTER 2 : INDONESIA GOVERNMENT SPENDING ON ENERGY

Energy in Indonesia

Energy in Indonesia describes energy and electricity production, consumption, import and
export in Indonesia. In 2009 Indonesia produced oil, coal, natural gas and palm oil, utilised
also as energy raw material in 2010. Renewable energy potential in Indonesia is high: solar,
wind, hydro and geothermal energy. Tropical rain forests and peat land areas have extensive
coal storage. Indonesia is geologically unstable country. According to IEA Indonesia was the
10th top natural gas producer in 2009: 76 billion cubics (bcm) 2.5% of world production of
which 36 bcm was exported. In 2009 Indonesia was the 5th top coal producer: 263 million
tonnes hard coal and 38 million tonnes brown. The majority of this, 230 Mt of hard coal, was
exported.

According to MEMR, Indonesia has coal resources at around 120.5 billion tons,
proven oil resources at around 3.69 billion barrels, and proven natural gas reserves at around
101.54 trillion cubic feet. This translates into about 23 remaining years of oil reserves, 59
years of gas, and 146 years of coal at current production rates. Indonesias renewable energy
sources are also considerable. The country is endowed with significant potential for
hydropower (75,000 MW), micro/mini hydropower (1,013 MW), solar (4.80 kWh/m2/day),
biomass (32,654 MW), and wind (3-6 m/s), and holds 40% of the worlds geothermal
reserves (28,000 MW).

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Table 3 : Energy in Indonesia

Energy by Sources
a) Fossil Fuel Energy Sources
-

Coal
Indonesia is well-supplied with medium and low-quality thermal coal. At
current rates of production, Indonesia's coal reserves are expected to last
for over 80 years. In 2009 Indonesia was the world's second top coal
exporter sending coal to, for example, China, India, Japan and Italy.
Kalimantan (Borneo) and South Sumatra are the centres of Indonesias
coal mining. In recent years, production in Indonesia has been rising
rapidly, from just over 200 mill tons in 2007 to over 400 mill tons in 2013.
Recently (December 2013), the chair of the Indonesian Coal Mining
Association said the production in 2014 may reach 450 mill tons.

Oil

Oil is a major sector in the Indonesian economy. During the 1980s,

Indonesia was a significant oil-exporting country. Since 2000, domestic
consumption has continued to rise while production has been falling, so in
recent years Indonesia has begun importing increasing amounts of oil.
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Within Indonesia, there are considerable amounts of oil in Sumatra,

Borneo, Java, and West Papua Province. There are said to be around 60
basins across the country, only 22 of which have been explored and
exploited.
-

Gas

There is growing recognition in Indonesia that the gas sector has

considerable development potential. In principle, the Indonesian
government is supporting moves to give increasing priority to investment
in natural gas. In practice, private sector investors, especially foreign
investors, have been reluctant to invest because many of the problems that
are holding back investment in the oil sector also affect investment in gas.

Shale
There is potential for tight oil and shale gas in northern Sumatra and
eastern Kalimantan. There are estimated to be 46 trillion cubic feet of shale
gas and 7.9 billion barrels of shale oil which could be recovered with
existing technologies. Pertamina has taken the lead in using hydraulic
fracturing to explore for shale gas in northern Sumatra. Chevron Pacific
Indonesia and NuEnergy Gas are also pioneers in using fracking in
existing oil fields and in new exploration. Environmental concerns and a
government-imposed cap on oil prices present barriers to full development
of the substantial shale deposits in the country. Sulawesi, Seram, Buru,
Irian Jaya in eastern Indonesia have shales that were deposited in marine
environments which may be more brittle and thus more suitable for
fracking than the source rocks in western Indonesia which have higher
clay content.

Coal Bed Methane

With 453 trillion cubic feet Coal Bed Methane (CBM) reserve mainly in
Kalimantan and Sumatra, Indonesia has potential to redraft its energy
charts as United States with its Shale Gas. But with low enthusiastic to
develop CBM project, the government only targeted 8.9 million metric
standard cubic feet per day (mmscfd) for 2015.
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b) Renewable Energy Sources

The contribution of renewable sources of energy to energy supply as a percentage of total
primary energy (potential) supply in 2010 was 34.5%. Renewable generation sources
supplied 5% to 6% of Indonesia's electricity in 2015. Indonesia has set a target of 26% of
electricity generation from renewable sources by 2025.
-

Biomass
An estimated 55% of Indonesia's population, i.e. 128 million people
primarily rely upon traditional biomass (mainly wood) for cooking.
Reliance on this source of energy has the disadvantage that poor people in
rural areas have little alternative but to collect timber from forests, and
often cut down trees, to collect wood for cooking.

Geothermal Energy
Indonesia uses some geothermal energy. According to the Renewable
Energy Policy Network's Renewables 2013 Global Status Report,
Indonesia has the third largest installed generating capacity in the world.
With 1.3 GW installed capacity, Indonesia trails only the United States (3.4
GW) and the Philippines (1.9 GW). However it leads Mexico (1.0 GW),
Italy (0.9 GW), New Zealand (0.8 GW), Iceland (0.7 GW), and Japan (0.5
GW). Current official policy is to encourage the increasing use of
geothermal energy for electricity production. Geothermal sites in
Indonesia include the Wayang Windu Geothermal Power Station and the

Kamojang plant, both in West Java.

The development of the sector has been proceeding rather more slowly
than hoped. Expansion appears to be held up by a range of technical,
economic, and policy issues which have attracted considerable comment in
Indonesia. However, it has proved difficult to formulate policies to respond

to the problems.
Solar Photovoltaic Electricity
The Indonesian solar PV sector is relatively underdeveloped but has
significant potential. However, for a range of reasons, it is unlikely that it
will be practical to expand electricity output from solar sources in
Indonesia quickly. A range of technical, financial, economic and social

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constraints are likely to be constraints on the rapid installation of solar

power in Indonesia, including in rural areas.

Output from the solar photovoltaic sector is almost exclusively set aside
for decentralised rural electrification. In 2011 the sector produced a
relatively small amount of electricityonly 22 MWh.

Hydroelectricity
Indonesia has set a target of 2 GW installed capacity in hydroelectricity,
including 0.43 GW micro hydro, by 2025.

POME Power Generator

A pilot project of Palm Oil Mill Effluent (POME) Power Generator with
capacity of 1 Megawatt has been inaugurated in September 2014.
Indonesia has many Palm Oil Mills.

Wind Power
A very small amount of (off-grid) electricity is generated using wind
power. For example, a small plant was established at Pandanmino, a small
village on the south coast of Java in Bantul Regency, Yogyakarta Province,
in 2011. However it was established as experimental plant and it is not
clear whether funding for long-term maintenance will be available.

2.1 The Performance of Government Expenditure on Energy

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Table 3 : Indonesia Government Spending

Government Spending refers to public expenditure on goods and services and is a major
component of the GDP. Government spending policies like setting up budget targets,
adjusting taxation, increasing public expenditure and public works are very effective tools in
influencing economic growth. Above Indonesia Government Spending actual values,
historical data, forecast, chart, statistics, economic calendar and news. Indonesia Government
Spending - actual data, historical chart and calendar of releases.

Table 4 : Indonesias Government Spending

Government Spending in Indonesia decreased to 187185.50 IDR Billion in the third
quarter of 2016 from 187557.43 IDR Billion in the second quarter of 2016. Government
Spending in Indonesia averaged 90337.18 IDR Billion from 2000 until 2016, reaching an all

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time high of 272591.10 IDR Billion in the fourth quarter of 2015 and a record low of
21713.30 IDR Billion in the third quarter of 2000.

Reasons of the Fluctuation

There are several reasons of the fluctuation and some of it may due to changes in policy
imperatives or economic conditions or government administration, which are often
unpredictable, may affect our revenues.

Changes and fluctuations in government spending priorities could adversely

affect the revenue.
Because a significant part of our overall business is generated either
directly or indirectly as a result of worldwide federal and local government
regulatory and infrastructure priorities, shifts in these priorities due to
changes in policy imperatives or economic conditions or government
administration, which are often unpredictable, may affect our revenues.

Increase in aggregate demand caused by :

An increase in consumption. This may be caused by a rise in income

levels, a decrease in interest rates, house price inflation.

A rise in the level of government spending.
A balance of payments surplus.

Increase in demand for imports.

This will worsen the balance of payments deficit.

Labour shortages.
If there are shortages of workers in specific areas it means that the
economy will not be able to utilise its resources efficiently and therefore
economic growth will slow.

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