INTRODUCTION

Indonesias international trade has undergone many transformations in the last 50 years.
Changes in its growth and structure have reflected changes in the countrys comparative
advantages and trade and development policies, as well as inconstant global circumstances and
the evolving rules of the multilateral, regional, and bilateral trade agreements in which Indonesia
has participated. This article traces these transformations across five phases, with an emphasis on
their coverage in this journal, the Bulletin of Indonesian Economic Studies (BIES).

196571: FROM CHAOS TO REHABILITATION

196566: End of the Old Order
During the Old Order (195065), the main objectives of trade policy were to raise public
revenue and control foreign-exchange earnings, combined with a growing emphasis on
increasing indigenous Indonesian control over all aspects of economic activity. Trade during the
Old Order was characterized by complex and continually changing regulations on exchange
rates, import and export duties, import prepayment schemes, and quantitative restrictions.
During the first three quarters of 1965, Indonesias exports declined sharply because of
low prices, increasing competition in world commodity markets, and a more discriminatory use
of preferential tariffs within competing economic blocs. As the situation worsened, foreign-
exchange shortages and other factors reduced industrial production to below 20% of capacity.
This period ended in chaos, marked by corruption, rampant smuggling, and current account and
budgetary deficits, which in turn led to money printing, hyperinflation, and a scarcity of goods.

196671: Beginning of the New Order

In 1966, Indonesia was led by President Soeharto and in his government, they
responded to the inherited chaos by substantially liberalizing trade and investment policies. Part
of a rehabilitation and stabilization program, these policies aimed to ration scarce foreign
exchange more effectively and influence the level and composition of imports.
In mid-1967, new foreign-exchange regulations gave additional incentives to exporters
and extra protection to import-competing industries. Then, in 1968, trade taxes were still used
mainly as a source of public revenue, accounting for 38% of government revenues.
According to Thomas and Panglaykim (1966, 89), in relation to Indonesias export
potential at this time, Indoensia needs to diversify and develop exports through an enlightened
and vigorous government policythat is, because of government dominance in rubber, oil
palm, and other agricultural production as well as through new investment, new farming
techniques, and replanting (especially of rubber trees and oil palms). Besides, they also said that
it needs pressing for improvements in transport and logistics in order to resume trade flows, after
the withdrawal of the Dutch interisland shipping company KPM in 1958.

197185: IMPORT SUBSTITUTION

In the period after rehabilitation and stabilization, Indonesias economic and political
circumstances were changed dramatically by an oil boom that alleviated foreign-exchange
shortages and increased public revenues.
Trade and other policies were introduced to foster import substitution in rice and in
manufacturing, beginning with consumer goods and followed by intermediate and capital goods.
Rising oil revenues allowed the government to increase its intervention in the economy, and new
state-owned enterprises were created in strategic industries such as cement, fertilizers, and
aircraft.
Tariffs and non-tariff barriers (NTBs) were the main instruments used to escalate
protection. Although international trade increased significantly during this period, non-oil
exports had few opportunities to facilitate development (Rice 1983): the protection regime that
promoted industrialization hindered exports. Import substitution and the protection of infant
industries fostered neither comparative advantages nor economic efficiency.
In 1978, several steps were taken to try to offset the declining competitiveness of non-oil
tradables compared with oil tradables, or Dutch disease, in anticipation of a fall in oil prices. The
rupiah was devalued by 50%, tariffs on around 1,000 goods were reduced by 50%, and import
taxes were reduced by 50%.
In 1979, however, oil prices rose rather than fell, halting the push for deregulation and
liberalization (Dick 1979). With monetary authorities unable to sterilize oil revenues, the effects
of Dutch disease created inflationary pressures and eroded the export price advantage gained by
the 1978 devaluation.
When oil prices finally began to fall, in 1981, in the wake of a global recession, the
government limited the impact by taking effective macroeconomic decisions in the fiscal and
financial sectors. These decisions included cutting government expenditure and devaluing the
rupiah by 28% in March 1983, introducing reforms to the banking system (Arndt 1983), and
reforming taxation (Booth 1984). The increase in protection during 198285 involved a range of
quantitative restrictions on imports and the establishment of an approved importer system (tata
niaga impor).
By the end of this period, protection and regulatory controls remained high, economic
growth and industrialization were still driven by government controls and state-owned
enterprises, and 80% of Indonesias exports and government revenues continued to be derived
from oil.