Indonesia’s government inherited a trade from colonial rulers. Indonesia’s trade policies have shifted over the last three decades. After independence in 1945, Indonesia joined GATT in 1950. Then, the history of Indonesia’s economy starts in the 1960s. Indonesia suffered an economic crisis during the early 1960s, which budget deficits increase and annual inflation reached 640 percent. Indonesia began the process of liberalization and restoration of stability macroeconomics after it suffered an economic crisis from 1967. Indonesia followed highly restrictive trade policies under President Soeharto. During this period, the Indonesian government adopted the Import Substitution Strategy to reduce imports and create jobs until the 1970s. The reforms have been shifted toward the inward-looking phase, and import substitution is an implication of the sudden increase in oil prices in 1973. The main goal of the reform was to protect the domestic market from foreign competition through tariffs and quota controls and increased an oil price. Economic growth weakened during this time. Those reforms helped to increase the average annual real GDP growth to 3.2 percent in the 1970s (Van der Eng, 2009)
Trade liberalization in Indonesia started effectively in the middle 1980s when Indonesia began a major policy reform including import liberalization, bureaucratic reform, and removal of Non-Trade Barriers (NTB). Starting in 1985, Indonesia replaced from import substitution to export orientation strategy after the fall in oil prices. At that time, the level of protection in Indonesia was still relatively high. Indonesia was less attractive for investment rather than any other developing country and characterized by larger cheap and very low skilled labor. To stimulate productivity around the workers, the government was introduced the ideology ‘Pancasila labor relations’ by President Suharto for the purpose of collaborative relations among workers, employers, and the government. That ideology formed the foundation for workers to share in the success of the domestic firm (Amiti and Davis, 2011). Deregulation was the most important in 1986 when oil prices fell and the government built trade reform by lowering tariff rates and converting several import licenses. Indonesia entered an era export orientation. (Basri and Soesatro, 2005).
The fourth phase of the policy in Indonesia is reducing tariff and non-tariff barriers to international trade in the 1990s. After Uruguay round in 1994, Indonesia became a member of the WTO and the levels of all tariffs were reduced to 40 percent over the following ten years (Amiti and Könings, 2007). Indonesia has also achieved a positive growth rate in GDP per capita until 1997 where the annual average real GDP growth rate was 7.1 percent. In particular, Indonesia still dominated by low skilled labor and a little gain market access. When Indonesia has a comparative advantage in unskilled labor-intensive goods, given high levels of unemployment and the country’s abundance of labor. The Heckscher‐Ohlin theory predicts that liberalizing trade would lead to an expansion in the demand for unskilled labor commodities driving the increase in wages and possibly employment for unskilled labor. Afterward, it would be decreasing income inequality and poverty. (Adha and Nahar,2018)
Trade liberalization has a positive and significant impact on economic growth in Indonesia and trade liberalization was a decline in poverty but income inequality has increased rapidly compared to other ASEAN countries (Watekhi, Nachrowi, Hartono, Damayanti, 2018). Indonesia is a country with rich a natural resources and labor. Imports and exports were dominated by mineral. Indonesia is an active partner of various multilateral free trade agreements with ASEAN, AFTA, WTO, and APEC in the 1990-2000s reform (Basri and Soesatro, 2005). In 1997 Indonesia was hit by the monetary crisis. The second round of tariff reductions followed in 1999 as part of an International Monetary Fund (IMF) conditionally package that came as a result of the 1997 monetary crisis.
After the Asian economic crisis in 1997, Indonesia reduces all of its bound tariffs to less than 40 percent within ten years. Amiti and Konings (2007) found that NTB measures had an insignificant effect on productivity. Trade liberalization in Indonesia has eliminated restrictions on imports, reduced tariff to 10 percent in 2001. Indonesia reduced its tariff barriers across all tradable sectors, with average import tariffs fell from 17.2 percent in 1993 to 6.6 percent in 2002 (Kiz Katos and Sparrow, 2011). Figure 1.1 shows the average reductions in tariffs from 1989 until 2015. The average tariffs dropped from 22,18 percent in 1989 to reach the lowest at 6,93 percent in 2015, while the average MFN tariffs dropped from 14,54 percent in 1989 to 5,67 percent in 2017. Figure 1.2 shows the reduction in the average MFN tariff.
Indonesia recorded remarkable economic success in the 1990s with a growth rate averaging 7 percent. After Asian crisis, Indonesia has experienced a stagnant growth annual of GDP at about 5 percent in the 2000s (Figure 1.4). This period of economic growth lead to improvements in employment, poverty, and income distribution. A report by World Bank stated that Indonesia has achieved record of poverty reduction. The levels of poverty declined from 71 percent in 1984 until 6,5 percent by 2017. But poverty has been unequally distributed across the country. Income inequality had on average during trade liberalization era, but slightly increased after Asian crisis in 1997. The Gini coefficient of income had jumped from 0,30 in 2000 to 0,40 percent in 2013 (Figure 1.3). The Gini coefficient of wage increased from 0,41 in 2001 to 0,45 in 2015 (Nachrowi,2012). Due to Asian crisis, Indonesia had full capacity unemployment, the spread of part time and temporary jobs, the widening of wage gap between skilled and unskilled workers and price changes.
