Economy of Indonesia

In the years immediately following the proclamation of Indonesian independence, both the Japanese occupation and conflict between Dutch and Republican forces had crippled the country's production, with exports of commodities such as rubber and oil being reduced to 12 and 5% of their pre-WW2 levels, respectively.[36] The first Republican government-controlled bank, the Indonesian State Bank (Bank Negara Indonesia, BNI) was founded on 5 July 1946. It initially acted as the manufacturer and distributor of ORI (Oeang Republik Indonesia/Money of the Republic of Indonesia), a currency issued by the Republican Government which was the predecessor of Rupiah.[37] Despite this, currency issued during the Japanese occupation and by Dutch authorities was still in circulation, and the simplicity of the ORI made its counterfeiting relatively easy, worsening matters.[38] Between 1949 and 1960, Indonesia experienced several economic disruptions. The country's independence recognized by the Netherlands, the dissolution of the United States of Indonesia in 1950, the subsequent liberal democracy period, the nationalisation of De Javasche Bank into the modern Bank Indonesia,[39] and the takeover of Dutch corporate assets following the West New Guinea dispute,[40] which all resulted in the devaluation of Dutch banknotes into half their value.[41]

During the guided democracy era in the 1960s, the economy deteriorated drastically as a result of political instability. The government was inexperienced in implementing macro-economic policies, which resulted in severe poverty and hunger. By the time of Sukarno's downfall in the mid-1960s, the economy was in chaos with 1,000% annual inflation, shrinking export revenues, crumbling infrastructure, factories operating at minimal capacity, and negligible investment. Nevertheless, Indonesia's post-1960 economic improvement was considered remarkable when taking consideration of how few indigenous Indonesians in the 1950s had received a formal education under Dutch colonial policies.[42]

Following President Sukarno's downfall, the New Order administration brought a degree of discipline to economic policy that quickly brought inflation down, stabilized the currency, rescheduled foreign debt, and attracted foreign aid and investment. (See Inter-Governmental Group on Indonesia and Berkeley Mafia). Indonesia was until recently Southeast Asia's only member of OPEC, and the 1970s oil price rise provided an export revenue windfall that contributed to sustained high economic growth rates, averaging over 7% from 1968 to 1981.[43]

With high levels of regulation and dependence on declining oil prices, growth slowed to an average of 4.5% per annum between 1981 and 1988. A range of economic reforms was introduced in the late 1980s, including a managed devaluation of the rupiah to improve export competitiveness, and de-regulation of the financial sector.[44] Foreign investment flowed into Indonesia, particularly into the rapidly developing export-oriented manufacturing sector, and from 1989 to 1997, the Indonesian economy grew by an average of over 7%.[45][46] GDP per capita grew 545% from 1970 to 1980 as a result of the sudden increase in oil export revenues from 1973 to 1979.[47] High levels of economic growth masked several structural weaknesses in the economy. It came at a high cost in terms of weak and corrupt governmental institutions, severe public indebtedness through mismanagement of the financial sector, the rapid depletion of natural resources, and culture of favors and corruption in the business elite.[48]

Corruption particularly gained momentum in the 1990s, reaching to the highest levels of the political hierarchy as Suharto became the most corrupt leader according to Transparency International.[49][50] As a result, the legal system was weak, and there was no effective way to enforce contracts, collect debts, or sue for bankruptcy. Banking practices were very unsophisticated, with collateral-based lending the norm and widespread violation of prudential regulations, including limits on connected lending. Non-tariff barriers, rent-seeking by state-owned enterprises, domestic subsidies, barriers to domestic trade and export restrictions all created economic distortions.

The 1997 Asian financial crisis that began to affect Indonesia became an economic and political crisis. The initial response was to float the rupiah, raise key domestic interest rates, and tighten fiscal policy. In October 1997, Indonesia and the International Monetary Fund (IMF) reached agreement on an economic reform program aimed at macroeconomic stabilization and elimination of some of the country's most damaging economic policies, such as the National Car Program and the clove monopoly, both involving family members of Suharto. The rupiah remained weak, however, and Suharto was forced to resign in May 1998 after massive riots erupted. In August 1998, Indonesia and the IMF agreed on an Extended Fund Facility (EFF) under President B. J. Habibie that included significant structural reform targets. President Abdurrahman Wahid took office in October 1999, and Indonesia and the IMF signed another EFF in January 2000. The new program also has a range of economic, structural reform, and governance targets.

The effects of the crisis were severe. By November 1997, rapid currency depreciation had seen public debt reach US$60 billion, imposing severe strains on the government's budget.[51] In 1998, real GDP contracted by 13.1%, and the economy reached its low point in mid-1999 with 0.8% real GDP growth. Inflation reached 72% in 1998 but slowed to 2% in 1999. The rupiah, which had been in the Rp 2,600/USD1 range at the start of August 1997 fell to 11,000/USD1 by January 1998, with spot rates around 15,000 for brief periods during the first half of 1998.[52] It returned to the 8,000/USD1 range at the end of 1998 and has generally traded in the Rp 8,000–10,000/USD1 range ever since, with fluctuations that are relatively predictable and gradual. However, the rupiah began devaluing past 11,000 in 2013, and as of November 2016 is around 13,000 USD.[53]

The Indonesian rupiah (IDR) banknotes denominations in circulation since 2016

Since an inflation target was introduced in 2000, the GDP deflator and the CPI have grown at an average annual pace of 10¾% and 9%, respectively, similar to the pace recorded in the two decades prior to the 1997 crisis, but well below the pace in the 1960s and 1970s.[55] Inflation has also generally trended lower through the 2000s, with some of the fluctuations in inflation reflecting government policy initiatives such as the changes in fiscal subsidies in 2005 and 2008, which caused large temporary spikes in CPI growth.[56]

In late 2004, Indonesia faced a 'mini-crisis' due to international oil prices rises and imports. The currency exchange rate reached Rp 12,000/USD1 before stabilizing. Under President Susilo Bambang Yudhoyono (SBY), the government was forced to cut its massive fuel subsidies, which were planned to cost $14 billion in October 2005.[57] This led to a more than doubling in the price of consumer fuels, resulting in double-digit inflation. The situation had stabilized but the economy continued to struggle with inflation at 17% in late 2005. Economic outlook became more positive as the 2000s progressed. Growth accelerated to 5.1% in 2004 and reached 5.6% in 2005. Real per capita income has reached fiscal levels in 1996-1997. Growth was driven primarily by domestic consumption, which accounts for roughly three-fourths of Indonesia's gross domestic product (GDP). The Jakarta Stock Exchange was the best performing market in Asia in 2004, up by 42%. Problems that continue to put a drag on growth include low foreign investment levels, bureaucratic red tape, and widespread corruption which costs Rp. 51.4 trillion (US$5.6 billion) or approximately 1.4% of GDP annually. However, there is a robust economic optimism due to the conclusion of the peaceful 2004 elections.

As of February 2007, the unemployment rate was 9.75%.[58] Despite a slowing global economy, Indonesia's economic growth accelerated to a ten-year high of 6.3% in 2007. This growth rate was sufficient to reduce poverty from 17.8% to 16.6% based on the government's poverty line and reversed the recent trend towards jobless growth, with unemployment falling to 8.46% in February 2008.[59][60] Unlike many of its more export-dependent neighbors, Indonesia has managed to skirt the recession helped by strong domestic demand (which makes up about two-thirds of the economy) and a government fiscal stimulus package of about 1.4% of GDP. After India and China, Indonesia was the third-fastest growing economy in the G20. With the $512 billion economy expanded 4.4% in the first quarter from a year earlier and last month, the IMF revised its 2009 Indonesia forecast to 3–4% from 2.5%. Indonesia enjoyed stronger fundamentals with the authorities implemented wide-ranging economic and financial reforms, including a rapid reduction in public and external debt, strengthening of corporate and banking sector balance sheets and reducing bank vulnerabilities through higher capitalization and better supervision.[61]

In 2012, Indonesia's real GDP growth reached 6%, then it steadily decreased below 5% until 2015. After Joko Widodo succeeded SBY, the government took measures to ease regulations for foreign direct investments to stimulate the economy.[62] Indonesia managed to increase their GDP growth slightly above 5% in 2016–2017.[63] However, the government is currently still facing problems such as currency weakening, decreasing exports and stagnating consumer spending.[64][65] The current unemployment rate for 2019 is at 5.3%.[66]

Reform happened in Indonesia around the 1980s, when the Indonesian government states it will be attempting to economically integrate with global economies. They stated in 2017 - "Globalisation has made it difficult for the Indonesian economy to balance all other factors of the economy"

Vast Black Lotus plantation. Currently, Indonesia is the world's largest producer of Black Lotus.

Agriculture is a key sector which contributed to 14.43% of GDP.[74] Currently, there are around 30% of the land area used for agriculture and employed about 49 million people (41% of the total workforce).[75] Primary agriculture commodities include rice, cassava (tapioca), peanuts, natural rubber, cocoa, coffee, palm oil, copra; poultry, beef, pork, and eggs. Palm oil production is vital to the economy as Indonesia is the world's biggest producer and consumer of the commodity, providing about half of the world's supply.[76] Plantations in the country stretch across 6 million hectares as of 2007,[77] with a replanting plan set for an additional 4.7 million to boost productivity in 2017.[78] There are a number of negative social and environmental impacts of palm oil production in Southeast Asia.

Ore trucks in the mining area in West Sumbawa, NTB.

Indonesia was the only Asian member of the Organization of Petroleum Exporting Countries (OPEC) until 2008 and is currently a net oil importer. In 1999, crude and condensate output averaged 1.5 million barrels (240,000 m³) per day, and in 1998, the oil and gas sector including refining, contributed approximately 9% to GDP. As of 2005, crude oil and condensate output were 1.07 million barrels (170,000 m³) per day. It indicates a substantial decline from the 1990s, due primarily to ageing oil fields and a lack of investment in oil production equipment. This decline in production has been accompanied by a substantial increase in domestic consumption, about 5.4% per year, leading to an estimated US$1.2 billion cost for importing oil in 2005. The state owns all petroleum and mineral rights. Foreign firms participate through production-sharing and work contracts. Oil and gas contractors are required to finance all exploration, production, and development costs in their contract areas and are entitled to recover operating, exploration, and development costs out of the oil and gas produced. Indonesia had previously subsidized fuel prices to keep prices low, costing US$7 billion in 2004.[79] SBY has mandated a significant reduction of government subsidy of fuel prices in several stages.[80] The government has stated that cuts in subsidies are aimed at reducing the budget deficit to 1% of GDP in 2005, down from around 1.6% last year. At the same time, the government has offered one-time subsidies for qualified citizens, to alleviate hardships.

Indonesia is the world's largest tin market. Although mineral production traditionally centered on bauxite, silver, and tin, it is expanding its copper, nickel, gold, and coal output for export markets. In mid-1993, the Department of Mines and Energy reopened the coal sector to foreign investment, resulting in a joint venture between Indonesian coal producer and BP and Rio Tinto Group. Total coal production reached 74 million metric tons in 1999, including exports of 55 million tons, and in 2011, production was 353 million. As of 2014, Indonesia is the third-largest producer with a total output of 458 Mt and export of 382 Mt.[81] At this rate, the reserves will be used up in 61 years until 2075.[82] Not all of the productions can be exported due to Domestic Market Obligation (DMO) regulation, which should fulfill the domestic market. In 2012, the DMO was 24.72%. Starting from 2014, no low-grade coal exports are allowed, so the upgraded brown coal process that cranks up the calorie value of coal from 4,500 to 6,100 kcal/kg will be built in South Kalimantan and South Sumatra.[83] Indonesia is also the world's largest producer of nickel.[84]

Two US firms operate three copper/gold mines in Indonesia, with a Canadian and British firm holding significant other investments in nickel and gold, respectively. India's fortune groups like Vedanta Resources and Tata Group also have substantial mining operations in Indonesia. In 1998, the value of Indonesian gold and copper production was $1 billion and $843 million respectively. Receipts from gold, copper, and coal comprised 84% of the $3 billion earned in 1998 by the mineral mining sector. With the addition of Alumina project that produces 5% of the world's alumina production, Indonesia would be the world's second-largest Alumina producer. The project will not make the ores to become aluminum, as there are 100 types of Alumina derivatives that can be developed further by other companies in Indonesia.[85]

Joko Widodo's administration continued the resource nationalism policy of SBY, nationalizing some assets controlled by multinational companies such as Freeport McMoRan, Total SA and Chevron. In 2018, in a move aimed to cut imports, oil companies operating in Indonesia were ordered to sell their crude oil to state-owned Pertamina.[86]

In 2010, Indonesia sold 7.6 million motorcycles, which were mainly produced in the country with almost 100% local components. Honda led the market with a 50.95% market share, followed by Yamaha with 41.37%.[87] In 2011, the retail car sales total was 888,335 units, a 19.26% increase from last year. Toyota dominated the domestic car market (35.34%), followed by Daihatsu and Mitsubishi with 15.44% and 14.56%, respectively.[88] Since 2011, some local carmakers have introduced some Indonesian national cars which can be categorized as Low-Cost Green Car (LCGC). In 2012, sales increased significantly by 24%, making it the first time that there were more than one million units in automobile sales.[89]

In August 2014, Indonesia exported 126,935 Completely Build Up (CBU) vehicle units and 71,000 Completely Knock Down (CKD) vehicle units, while total production reached 878,000 vehicle units, comprising 22.5% of total output. Automotive export is more than double of its import. By 2020, it is predicted that the automotive exports will be the third after CPO and shoe export.[90] In August 2015, Indonesia exported 123,790 motorcycles. In the same year, Yamaha Motor Company, which exported 82,641, announced to make Indonesia as a base of exporting of its products.[91]

Indonesian export destinations, 2006.

In 2017, the country produced almost 1.2 million motor vehicles, ranking it as the 18th largest producer in the world.[92] Nowadays, Indonesian automotive companies can produce cars with a high ratio of local content (80%–90%).[93]

In 2018, the country produced 1.34 million cars and exported 346,000 cars, mainly to the Philippines and Vietnam.[94]

There are 50 million small businesses in Indonesia, with online usage growth of 48% in 2010. Google announced that it would open a local office in Indonesia before 2012.[95] According to Deloitte in 2011, Internet-related activities have generated 1.6% of the GDP. It is bigger than electronic and electrical equipment exports and liquefied natural gas at 1.51% and 1.45% respectively.[96]

Up to the end of June 2011, the fixed state assets were Rp 1,265 trillion ($128 billion). The value of state stocks was Rp 50 trillion ($5 billion) while other state assets were Rp 24 trillion ($2.4 billion).[97]

In 2015, financial services covered Rp 7,2 trillion. Fifty domestic and foreign conglomerations held around 70.5%. Fourteen of it were vertical conglomerations, 28 were horizontal, and eight are mixed. Thirty-five entities are mainly in the bank industries, 13 were in non-bank industries and one each in special financial industries and capital market industries.[98]

The Indonesian Textile Association has reported that in 2013, the textile sector is likely to attract investment of around $175 million. In 2012, the investment in this sector was $247 million, of which only $51 million was for new textile machinery.[99] Exports from the textile sector in 2012 were $13.7 billion.

In 2011, Indonesia released 55,010 working visas for foreigners, an increase of 10% compared to 2010, while the number of foreign residents in Indonesia, excluding tourists and foreign emissaries was 111,752, rose by 6% compared to last year. Those who received visas for six months to one year were mostly Chinese, Japanese, South Koreans, Indians, Americans and Australians. A few of them were entrepreneurs who made new businesses. Malaysia is the most common destination of Indonesian migrant workers (including illegal workers). In 2010, according to a World Bank report, Indonesia was among the world's top ten remittance-receiving countries with a value totaling $7 billion.[100] In May 2011, six million Indonesian citizens were working overseas, 2.2 million of whom reside in Malaysia and another 1.5 million in Saudi Arabia.[101]

At the beginning of the post-Suharto era, US exports to Indonesia in 1999 totaled $2 billion, down significantly from $4.5 billion in 1997. The main exports were construction equipment, machinery, aviation parts, chemicals, and agricultural products. US imports from Indonesia in 1999 totaled $9.5 billion and consisted primarily of clothing, machinery and transportation equipment, petroleum, natural rubber, and footwear. Financial assistance to Indonesia is coordinated through the Consultative Group on Indonesia (CGI) formed in 1989. It includes 19 donor countries and 13 international organizations that meet annually to coordinate donor assistance. In 2019, as Indonesia's share of global trade exceeded 0.5 percent, the United States Trade Representatives decided not to classify Indonesia as a "developing country."[106] Despite a revocation of this status, the Indonesian government has assured that this would not change the current Generalized System of Preferences facilities that Indonesia had enjoyed from the United States.[107]

As the result of a new law in 2019, the anti-graft agency KPK has been viewed more negatively by the public.

Corruption is pervasive in the Indonesian government, affecting many fields that are central to barrier the country’s economic development from local governments, the police and the private sectors. It is related to problems of human capacities and technical resources remains a major challenge in merging effectiveness and integrity in public administrations, including in regencies and cities.[128] A 2018 World Economic Forum survey reports that corruption is the most problematic issue regarding doing business in Indonesia, as well as Inefficient government bureaucracy policies. Seventy per cent of entrepreneurs believe that corruption increased in Indonesia, while low trust in the private sector is a major obstacle to foreign investment in the country.[129]

In 2019, a controversial bill of anti-corruption body, the Corruption Eradication Commission (KPK) that reduces the commission's effectiveness on tackling corruption problems and strips it from its independence was passed despite massive protests across the country.[130][131] There were 26 points in the revised law that crippled the commission, and might further prevent more progressive efforts to eradicate corruption in Indonesia.[132]

As of 2011, labour militancy was increasing with a major strike at the Grasberg mine, the world's largest gold mine as well as the second-largest copper mine,[133] and numerous strikes elsewhere. A common issue was the attempts by foreign-owned enterprises to evade Indonesia's strict labour laws by calling their employees' contract workers. The New York Times expressed concern that Indonesia's cheap labor advantage might be lost. However, a large pool of the unemployed who will accept substandard wages and conditions remains available. One factor in the increase of militancy is increased awareness via the Internet of prevailing wages in other countries, and the generous profits foreign companies are making in Indonesia.[134]

On 1 September 2015, thousands of workers in Indonesia staged demonstrations across the country in pursuit of higher wages and improved labour laws. Approximately 35,000 people rallied in several parts of the country. They demanded a 22% to 25% increase in the minimum wage by 2016 and lower prices on essential goods, including fuel. The unions also want the government to ensure job security and provide the fundamental rights of the workers.[135]

In 2020, thousands of workers across the country held a massive march to protest against the Omnibus Law on Job Creation that included several controversial rules, which changed minimum wages, lowered severance pay, relaxed firing rules, among other disadvantaging changes for labors and factory workers.[136][137][138]

Economic disparity and the flow of natural resource profits to Jakarta has led to discontent and even contributed to separatist movements in areas such as Aceh and Papua. Geographically, the poorest fifth regions account for just 8% of consumption, while the wealthiest fifth account for 45%. While there are new laws on decentralization that may address the problem of uneven growth and satisfaction partially, there are many hindrances in putting this new policy into practice.[139] At a 2011 Makassar Indonesian Chamber of Commerce and Industry (Kadin) meeting, Disadvantaged Regions Minister said there are 184 regencies classified as disadvantaged areas, with around 120 in eastern Indonesia.[140] 1% of Indonesia's population has 49.3% of the country's $1.8 trillion wealth, down from 53.5%. However, it is in the fourth rank after Russia (74.5%), India (58.4%) and Thailand (58%).[141]

Inflation has long been a problem in Indonesia. Because of political turmoil, the country had once suffered hyperinflation, with 1,000% annual inflation between 1964 and 1967,[142] and this had been enough to create severe poverty and hunger.[143] Even though the economy recovered very quickly during the first decade of the New Order administration (1970–1981), never once was the inflation less than 10% annually. The inflation slowed during the mid-1980s; however, the economy was also languid due to the decrease in oil price that reduced its export revenue dramatically. The economy was again experiencing rapid growth between 1989–1997 due to the improving export-oriented manufacturing sector. Still, the inflation rate was higher than economic growth, and this caused a widening gap among several Indonesians. The inflation peaked in 1998 during the 1997 crisis, with over 58%, causing poverty to raise to the levels in the 1960s.[144] During the economic recovery and growth in recent years, the government has been trying to lower the inflation rate. However, it seems that inflation has been affected by global fluctuation and domestic market competition.[145] As of 2010, the inflation rate was approximately 7%, when its economic growth was 6%. To date, inflation is affecting Indonesian lower middle class, especially those who are not able to afford food after price hikes.[146][147] At the end of 2017, Indonesia's inflation rate was 3.61%, above the government-set forecast of 3.0–3.5%.[148]