Managing Fortune "Export Boom"

In the 1990s the World Bank assessed that Indonesia was able to take advantage of oil revenues better than other countries. There are two things that are the key to Indonesia's success in managing export earnings. What are they?

The following article was translated using both Microsoft Azure Open AI and Google Translation AI.

I opine that one of the obligations of someone who has retired is to tell what they saw and experienced during their time to those who are serving in the future.

A kind of intergenerational information relay. Here I want to tell how our country managed the income from oil (the oil boom) which occurred about eight years starting in semester II-1973. I feel it is useful to tell this piece of history because at this time it is likely that Indonesia will receive a similar blessing. The prices of our main export commodities (nickel, copper, bauxite, coal, palm oil) strengthened.

How long this will last, we do not know. But, like the previous boom-boom, it will definitely come to an end and may even reverse direction. So, while the boom is going on, it needs to be utilized optimally. Don't let it evaporate without a trace. Need to be prepared if theboom ends or reverses.

In the 1990s the World Bank conducted a study comparing Indonesia's experience with other developing oil exporting countries, such as Nigeria, Venezuela and Mexico. In conclusion, Indonesia is making better use of its oil wealth than these countries.

I will not repeat the contents of those studies here. I want to convey my observations about the policies we took at that time and why we were considered successful.

So, while the boom is going on, it needs to be utilized optimally. Don't let it evaporate without a trace. Need to be prepared when the boom ends or reverses.

The key to success

According to my observations, the key to success lies in our ability to manage two things: (a) how do we manage to get the maximum share of the boom's fortunes and (b) how do we secure and use these funds effectively through the APBN process and Repelita to achieve national development goals.

First, regarding maximizing the country's share of oil wealth. At that time, we were a little lucky because we had to deal with world-class, reputable oil companies.

The content of our work contract with them is quite simple, including the formula for profit sharing and obligations. Underinvoicing is unlikely to occur because verification is easy to do, both in terms of price and volume. International oil prices can be checked at any time and oil exports are carried out through certain ports.

All funds that are the right of the government directly enter the State Budget as state revenue. As a note, leakage occurred at the beginning of the boom period when Pertamina, as the party at the very end of the process of receiving oil funds, was found to have used the funds improperly.

Although Pertamina is a state-owned enterprise that manages the oil sector, it does not have the authority to determine the use of the funds. Its task is to deposit the funds into the state budget. The government has taken swift action to close this loophole.

Furthermore, the funds are allocated to various activities through the APBN. There are project or activity proposals, there is an in-depth evaluation process by the Ministry of Finance and Bappenas.

How to determine which activities are approved? This is where the key role of Repelita and Bappenas documents comes in to ensure that the use of the funds complies with the mandated priorities within them. Proposals that deviate from the priorities in Repelita are immediately rejected from the outset.

The period of the oil boom covered the end of Repelita I, Repelita II, and the beginning of Repelita III. At that time the prominent development theme was agricultural development, especially food self-sufficiency programs, poverty alleviation, equity in education and health services and industry to support agricultural development and fulfillment of basic human needs. The results have been nothing short of amazing.

The following are some figures. Oil and gas revenue increased from 1.609 million tons (1973) to 14.390 million tons (1981). Rice production increased from 19.3 million tons (1970) to 32.7 million tons (1981).

The urban poverty rate in Java decreased from 41.7 percent (1970) to 13.1 percent (1981), and for rural areas, it decreased from 43.7 percent to 21.3 percent. For outside of Java, the urban poverty rate decreased from 39.4 percent to 17.7 percent, and the rural poverty rate decreased from 29.3 percent to 23.9 percent.

The illiteracy rate decreased from 45.2 percent in 1971 to 31.9 percent in 1980. The infant mortality rate also decreased from 132 per 1,000 live births in 1971 to 71 in 1985. Textile production increased from 450 million meters in 1971 to 2,402 million meters in 1984. Fertilizer production increased from 85,000 tons in 1969 to 4,427 million tons in 1984.

Therefore, it can be understood that Indonesia is considered successful in utilizing its oil resources.

Proposals that deviate from the priorities in the Repelita are immediately crossed out from the beginning.

Now let us underline and sharpen the principles that underlie the success of that policy. This time, the explanation is necessarily a little more technical because it involves basic principles in economics.

First, the sustenance from export boom is economic rent (economic rent). In principle, all economic rents must go to the state and be used for the benefit of the whole community, not just for sectors that are experiencing a boom.

Mastery of economic rent by the state will not disrupt production activities in that sector because producers will still receive reasonable business profits in the form of normal profits (normal profit).

Secondly, the best (and simplest) way to secure economic rents for the country is by imposing only one type of tax on profits and directly entering it as state revenue in the state budget. There must be no deviation or leakage along the way.

Only after being included in the state budget, the funds can be utilized/allocated for various purposes or programs through a standardized budgeting process. The cool term for it is that the economic rent is monetized and included in the "national pot".

Source : Boediono

Third, the export fortune funds are used according to the scale of national development priorities, not just the priority of the producing sector. For example, during the previous oil boom, oil revenues were not used for downstreaming the oil and gas sector, but for programs mandated by Repelita. The use of export earnings on an ad hoc basis will not provide optimal benefits for national development.

If these three conditions are met, we will get the first-best solution, the optimal or best policy in taking advantage of the export boom's sustenance.

Various obstacles

In our practice, we know that there are various obstacles to achieving those standards. In politics, there are pressures from interest groups to obtain benefits outside of national priorities, and in implementation, there are weaknesses in bureaucracy, resulting in policies that are no longer optimal in terms of substance and implementation.

That is indeed a reality that must be faced by every policy maker, not only in this country. However, therein lies the main challenge. They must not give up easily and must try their best to avoid or minimize the deviation from the optimal policy. For the progress of the nation.

Boediono The 11th Vice President of the Republic of Indonesia

Boediono