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OPINION of the committe on industry, external trade, research and energy for the Committee on Budgetary Control for the Committee on Foreign Affairs, Human Rights, Common Security and Defence Policy on the communication from the Commission to the Council and to the European Parliament on developing closer relations between Indonesia and the European Union(COM(2000) 50 – C5‑0288/00 – 2000/2152 (COS))
Draftsman Elly Plooij- van Gorsel

6 november 2000

PROCEDURE

At its meeting of 22 June 2000 the Committee on Industry, External Trade, Research and Energy appointed Elly Plooij van Gorsel draftsman.

It considered the draft opinion at its meeting of  6 November 2000.

At the last meeting it adopted the following conclusions by 27 votes to 1, with 1 abstention.

The following were present for the vote: Carlos Westendorp Y Cabeza, Chairman; Peter Michael Mombaur, Vice-Chairman, Gordon J. Adam (For Glyn Ford), Maria Del Pilar Ayuso Gonzalez (For Concepcio Ferrer), Giles Bryan Chichester, Nicholas Clegg, Dorette Corbey (For Claude J.-M.J. Desama), Francesco Fiori (For Renato Brunetta), Christos Folias, Jacqueline Foster (For Malcolm Harbour), Lisbeth Grönfeldt Bergman (For Anders Wijkman), Michel Hansenne, Philippe A.R. Herzog, Wolfgang Kreissl-Dörfler (For François Zimeray Pursuant To Rule 153 (2)), Werner Langen, Rolf Linkohr, Caroline Lucas, Marjo Tuulevi Matikainen-Kallström, Eryl Margaret Mcnally, Elizabeth Montfort, Reino Kalervo Paasilinna, Samuli Pohjamo (For Willy C.E.H. De Clercq), Paul Rübig, Astrid Thors, Antonios Trakatellis (For Umberto Scapagnini), Jaime Valdivielso De Cue, W.G. Van Velzen, Alejo Vidal-Quadras Roca, Myrsini Zorba.

SHORT JUSTIFICATIONS

1. Relations between the EU and Indonesia had been overshadowed during the last decades by the conflict over East Timor. After Indonesia renounced last year its territorial claims on East Timor and withdrew from the region , although under circumstances of civil unrest, the time has come to reconsider and to strengthen the political and economic relations with this country, which is of strategic importance for the stability in Southeast Asia. The end of the autocratic regime of former President Soeharto in May 1998, the organisation of free and fair presidential and parliamentary elections last year and the recent improvements in the respect of human rights and basic democratic principles have created a favourable climate for developing closer relations with Indonesia which should lead to a partnership of substance between both sides.

2. Indonesia is the world’s fourth most populated country with about 210 million inhabitants. It is a founding member of ASEAN and has taken part in the EU-ASEAN dialogue since its beginning in 1978. It is a signatory of the EC-ASEAN co-operation agreement of 1980 and plays an important role in the ASEM process and in the Asian Regional Forum. The Indonesian economy experienced during the 80’s and early 90’s a steady growth at 6% to 7% annually leading to a per capita income of about 2.700 US$ in 1997. However, the country was the hardest hit by the Asian financial crisis. The private banking system collapsed as around 80% of outstanding loans did not perform any longer. Indonesia’s Gross Domestic Product (GDP) fell by 14% in 1998 and stagnated in 1999. During the first six months of this year, however the economy recovered somewhat with a growth rate of 4% leaving production and income still below their pre-crisis levels. The recovery is mainly driven by booming exports due to a significant devaluation of the national currency, the rupiah, which lost from March to July 2000 about a quarter of its value against the US$, and to the increase of the oil prices in world markets. During the first half of this year oil and gas exports from Indonesia grew by 72%, compared with an overall increase in exports by 27%. As imports only expanded by 10%, Indonesia recorded a trade surplus of 14 billion $.

3. In order to restore the private banking system the Indonesian government set up the Indonesian Banking Restructuring Agency (IBRA). The previous dominant  state banks were recapitalised,  while IBRA had closed, recapitalised or reorganised most of the private banks. These operations were financed by issuing government bonds, the total costs of which are estimated at about 50% of GDP. This puts a huge burden on the public budget as the efforts of IBRA to privatise  restructured banks have so far been only partially successful. Debt servicing from the state budget will be over 40% of government revenues for the next years. Other expenditures as for infrastructure, health and education will remain therefore at low levels. In addition, subsides for food and gasoline might have to be reduced with the risk of social unrest like the riots in 1998 after the government announced increases in fuel prices. In the context of recapitalising the private banking system IBRA took over huge amounts of  shares of private enterprises outside the banking sector. It became sometimes even a 100% owner. Up to now IBRA has been hesitant to sell these assets. But the re-privatising of those companies is an important step in the process of restructuring the Indonesian economy. It would offer at the same time new investment opportunities for foreign investors.

4. Indonesia receives support from the IMF and the World Bank to overcome its financial problems. After signing  revised Letters of Intention with the IMF in May and July this year the Fund approved the disbursement of 372 m US$ from the extended fund facility. Indonesia had to accept strict deadlines for  a series of macroeconomic stabilisation measures, as, for instance, the reduction of the public debt ratio from 100% of GDP in 1999 to 80% end of this year, fiscal decentralisation by the end of 2002, recapitalisation and begin of privatisation of banks taken over by IBRA by the end of 2002, improvement of competition and conditions for foreign investors in the Telecom sector and a reform of the agricultural policy in the rice and sugar sector.

5. Although first signs of an economic recovery are visible, the situation in Indonesia remains fragile, namely because of internal political problems. The government is regarded as lacking of leadership even after a recent reshuffling of the cabinet, under which  Mr. Ramli was given the function as a co-ordinating Minister for economic affairs. The position of President Wahid is further weakened by institutional conflicts with the Parliament and by the public unrest in several regions of Indonesia. These regional conflicts, which concentrate in West Timor where the militias have not been disarmed after the conflict in East Timor, in the Moluccas where religious/ethnic tensions are escalating, in Irian Java and in Aceh with historical movements for independence, threaten Indonesia’s territorial integrity. In addition, they are a major disincentive for foreign investors to re-engage in this country. The widespread phenomenon of corruption and nepotism in the economic sector must also be addressed by the Indonesian authorities in order to improve the business climate.

6. The EU is a prime trading partner for Indonesia. The EU is the largest destination for Indonesia’s non-oil and gas export, whereas Japan is the most important buyer of oil and gas from Indonesia, and the first supplier of imported goods to Indonesia. The Union profited from the lasting boom of the Indonesian economy during the last fifteen years by exporting  mainly investment goods like machinery and transport equipment, whereas the EU mainly received raw materials, tropical timber, agricultural products and textiles. Since 1980 the bilateral trade expanded more than eight fold and was until 1997 more or less balanced. Due to a sharp decline in Indonesia’s import in 1998 and 1999 during the Asian financial crisis, the EU run a trade deficit with Indonesia of more than 5 b US$ each year. As the import of capital equipment to Indonesia remains low this year, a further trade deficit for 2000 is to be expected. This trade deficit can be regarded as an contribution from the EU to the economic recovery process of Indonesia, which is fully in line with the “trade pledge” the EU made at the last ASEM summit in April 1998. There is still a great potential for  expansion of bilateral trade  in goods and services, which could be used through further market openings. As concerns the trade in tropical timber, market liberalisation should be accompanied by further efforts from the Indonesian authorities to implement the principles of sustainable forest management of the International Tropical Timber Organisation (ITTO).

7. Indonesia was until 1998 the greatest beneficiary of the EU’s Generalised System of Preferences (GSP). In 1997 around 55% of its exports to the EU received GSP status. However, in 1998 Indonesia lost GSP status for three crucial product sectors – wood, footwear and animal oils and fats – according to the graduation mechanism, by which trade preferences should be focussed on the poorest countries. This decision was based on data for 1992 and 1993 and didn’t take therefore  into account the economic consequences of the Asian financial crisis. So Indonesia’s access to the EU markets deteriorated significantly during that crisis. In order to further support the recovery process, the EU should revise its GSP graduation mechanism in taking more recent data into account. This will most probably result in re-granting GSP status for virtually all important Indonesian export products.

8. The contractual relations between the EU and Indonesia are based on the co-operation agreement EU-ASEAN, concluded in 1980. This so-called second generation agreement provides for a wide range of economic co-operation between both sides within the scope of their respective competencies. It does not yet include a Human Rights clause laying down that the respect of human rights and democratic principles are the foundation for the co-operation. Such a clause have only been included in the so-called third generation agreements concluded with third countries since the second half of the 80’s. In addition, ASEAN has not yet made significant progress towards economic integration, although the idea of setting up a free trade area between its members has been discussed for several years. The competencies of ASEAN in the field of economic policy are, therefore, rather limited as compared with those of the EU. This is a further restriction for EU-Indonesia bilateral co-operation. The conclusion of a bilateral third generation co-operation agreement between the EU and Indonesia, as the EU did recently with other ASEAN member countries such as Cambodia and Vietnam, should be considered in order to overcome these shortcomings.

9. The Commission proposes in its Communication to establish a comprehensive political dialogue, to intensify its trade and investment relations for the support of the economic recovery. Central government and regional authorities should given assistance to improve their practices of good governance. The development co-operation should focus on poverty alleviation, the strengthening of civil society and the sustainable management of natural resources. All this should help raising the EU’s profile in Indonesia. In the area of trade policy both sides should co-operate closely in international fora such as ASEAN, ASEM and WTO in order to facilitate the launch of a new round of comprehensive trade negotiations. The EU should assist Indonesia in the implementation of its WTO obligations in the field of Intellectual Property Rights, and should make further efforts to improve market access for agriculture and textiles for Indonesian products. In the light of the limited resources available for development co-operation, for 1995 to 1999 less than € 98 m -  the focussing of EU assistance as proposed by the Commission seems to be reasonable and problem oriented.

CONCLUSIONS

The Committee on Industry, External Trade, Research and Energy calls on the Committee on Foreign Affairs, Human Rights, Common Security and Defence Policy, as the committee responsible, to incorporate the following points in its report:

1. having regard to the EU-Indonesia Joint Declaration of 14 June 2000 on the support for Indonesia's Territorial Integrity and Establishing a Political Dialogue,

1. is very concerned about the situation on the Moluccas, invites all sides to rely only on democratic conflict resolution, which could lead to a mutual beneficial status of autonomy for specific regions of Indonesia,

2. is equally concerned about the massacres in Irian Yayar and  about Western Timor, where the refugees from East Timor are under constant threat by the militias;

3. points out that securing political stability, respect for human rights and the principles of the constitutional state based on the rule of law are key requirements for Indonesia's economic recovery from the aftermath of the Asian financial crisis and are also preconditions for a closer co-operation between the EU an d Indonesia,

4. notes with satisfaction Indonesia's economic recovery in the first half of 2000 which is essentially the result of an increase in exports following the substantial devaluation of the rupiah and the significant increase in the price of crude oil, resulting in the losses of income in 1998 and 1999 largely being offset,

5. is, nevertheless, concerned about the still significant degree of corruption and nepotism in the economy of Indonesia, in which many members of the former ruling families still are involved and which are a major obstacle for economic recovery and social stability,

6. welcomes the contribution the EU has made as part of its financial support for the countries of Asia to alleviate the consequences of the financial crisis; is of the view that the EU assistance should be focussed on poverty alleviation, support for social groups suffering most from the impact of the Asian crisis, on the sustainable natural resource management and on implementing practices of good governance on central and regional level,

7. calls on the Commission to consider bringing Indonesia back into the EU's generalised system of preferences (GSP) in view of the fall in incomes in Indonesia in the last two years,

8. points out that an influx of investment capital from the industrialised countries is of  crucial importance for Indonesia's process of economic reforms,

9. stresses the importance of the restructuring  of the private banking system for the economic recovery in Indonesia, where the Indonesian Banking Restructuring Agency (IBRA) could up to now not yet sufficiently re-establish the lending capabilities of the commercial banks, invites the IBRA to privatise the enterprises, it became owner of in the course of the recapitalisation of the banking system, by encouraging foreign direct investment;

10. regards the recapitalisation of Indonesia's economy as an opportunity for doing greater justice to environmental aspects in the production and exploitation of natural resources,

11. invites Indonesia to make further efforts to implement the standards of the ITTO relating to sustainable management of  tropical forests,

12. calls on the Commission to examine the possibility of concluding a bilateral trade and co-operation agreement with Indonesia,

13. points to the advantages of closer regional economic co-operation between the ASEAN countries which could benefit above all from the creation of a  regional free trade area;

14. calls on the Commission to act jointly with Indonesia in the WTO in pressing for a speedy start to a comprehensive round of trade negotiations; asks Indonesia to make any effort to respect its obligations made in the Uruguay round agreement on Trade Related Intellectual Property rights by  adopting and implementing the appropriate legislation in this field,

15. welcomes the latest agreement on assistance for Indonesia by the IMF which will enable Indonesia to push ahead with its reform process and to reduce the burden by repaying foreign debts.