INTRODUCTION

Indonesia faces a number of important challenges both in the short run and in the longer run. The world economy is currently growing robustly but a number of uncertainties cloud the economic outlook. A strong global economy is being challenged by higher oil prices. The emergence of significant trade imbalances between East Asia and the United States will undoubtedly put pressure on economic and political relations between the major regions of global growth. At the same time as the global economy is providing short-term economic stimulus to Indonesia, there are a number of serious environmental problems that Indonesia needs to face. Key among these are depletion of natural resources, particularly the degradation of forests, and rising greenhouse gas emissions. Global policies to reduce greenhouse gas emissions will directly affect Indonesia, a major fossil fuel producer.

This chapter gives an overview of the current state of the global economy, with a focus on the three most important risks currently facing world growth: the impact of rising oil prices on the global economy, the resolution of trans-Pacific trade imbalances and, related to this, surprisingly low long-term real interest rates throughout the world. The chapter then focuses on two sets of longer-term issues currently facing Indonesia. The first concerns rising energy use, rising greenhouse emissions and the implications for Indonesia of serious global climate change policy. The second concerns the serious depletion of natural resources, particularly forests. I also suggest how we can deal with these two longer-term issues within a single framework that focuses on creating property rights and clear incentives to manage forests and greenhouse gas emissions.