#KYR: Indonesia - EconomyBy The Cove November 18, 2021
The ‘Know Your Region’ series is designed to support unit and individual professional military education on the South East Asian region. It’s important for all serving members of our military to have a foundational knowledge of the countries and issues in the Indo-Pacific.
INDONESIA – ECONOMY
On this page:
- Economy and GDP
- Trade Policies
- Trade with Australia
The Indonesian archipelago has been a valuable region for trade since the 7th century when Srivijaya and later Majapahit traded with entities from mainland China and the Indian subcontinent. This was the start of a long history of trade fuelling Indonesia's economy and wealth, especially as a global hub for the lucrative spice trade. The country now sits at the nexus of international trade where the Indian Ocean meets the South China Sea and the Pacific.
Over time, the structure of the economy has changed considerably. Historically, it has been weighted heavily towards agriculture, reflecting both its stage of economic development and government policies in the 1950s and 1960s to promote agricultural self-sufficiency. A gradual process of industrialisation and urbanisation began in the late 1960s and accelerated in the 1980s as falling oil prices saw the government focus on diversifying towards manufactured exports. Indonesia was the hardest hit by the 1997 Asian financial crisis. The growth of the previous decades halted, and the economy was severely impacted – including a 13.1% real GDP contraction in 1998. The economy reached its low point in mid-1999 with only 0.8% real GDP growth. It brought popular discontent with then President Suharto, which together with corruption and suppression of political opposition contributed to the Suharto’s administration’s end. The crisis still informs the financial services industry’s cautious approach to growth, with the Government continuing to prioritise and achieving strong macro-economic stability. The next video traces Indonesia's economic history to ask whether it will become a South-East Asian powerhouse.
As the only G20 member state in Southeast Asia, the country has the largest economy in the region and is classified as a newly industrialised country. Indonesia has made enormous gains in poverty reduction by cutting the poverty rate by more than half since 1999, to 9.78% in 2020. However, in late 2020, Indonesia fell into its first recession in 22 years because of the COVID-19 pandemic. Between March and September 2020, official statistics reported an increase in the national poverty rate from 9.78% to 10.19%, translating into an increase in the number of poor from 26.42 million to 27.55 million, out of a population of 270.2 million – turning back three years of progress in poverty reduction. Indonesia is predicted to be the 4th largest economy in the world by 2045 and a population of 309 million. Noting these figures, promoting human capital is an important priority for Indonesia.
- The Jakarta Post | Current state of Indonesian spice trade: We're not a global leader anymore
- The Jakarta Post | Indonesia's debt jumps as government ramps up virus spending
- Bretton Woods Project | World Bank's plans for Indonesia: Delayed action on climate and continued coal and gas support
- TechXplore | Indonesia could harvest solar energy from 10 billion panels, but where do we put them?
Economy and GDP
Indonesia has a mixed economy in which both the private sector and government play vital roles. Since 1999, the economy has recuperated, and growth has accelerated to over 4-6% in recent years. Making the economy of Indonesia the world's 16th largest by nominal GDP and the 7th largest by Proportional Power Parity. Private consumption makes up 60% of GDP. Yet development is largely centralised in the Java region. The labour force is just under 130,000 million and split between the main sectors of agriculture, industry, and services. Agriculture continues to be a key sector and employs 49 million people to cultivate on 30% of the archipelago’s land area. The following video puts Indonesia's economy into context and explores the sub-growth trends.
Indonesia’s economic forecasting follows a 20-year development plan, spanning from 2005 to 2025. It is segmented into 5-year medium-term plans, called the RPJMN (Rencana Pembangunan Jangka Menengah Nasional) each with different development priorities. The current medium-term development plan and final phase of the long-term plan runs from 2020 to 2024. It aims to further strengthen Indonesia’s economy by improving competitiveness in the global market.
After Joko ‘Jokowi’ Widodo succeeded President Susilo Bambang Yudhoyono (commonly referred to by his initials SBY), the government took measures to ease regulations for foreign direct investments to stimulate the economy. However, the Government remains wary of globalisation's impact on the domestic market. Jokowi's administration continued the resource nationalism policy of its predecessor, nationalising some assets controlled by multinational companies such as Freeport McMoRan, Total SA, and Chevron. Infrastructure development is underway with a focus on road and railway expansion, seaports and airports development, and irrigation. In 2016, the state budget allocated IDR 290 trillion (US$22 billion) for infrastructure, the biggest in Indonesian history. However, the Indonesian rupiah (IDR) has weakened during Jokowi's administration, sinking to a low of IDR 16,700 per US dollar in 2020. Indonesia's sound macroeconomic policies and strong fundamentals continue to ensure solid economic growth.
There are four key challenges facing the economy of Indonesia. The first is ongoing allegations of embezzlement and corrupt bureaucracy in Government, which discourages foreign investment. Next are issues of major labour unrest. It is common for foreign-owned enterprises to evade the Indonesia's strict labour laws by calling their employees' contract workers. The Government attempted to address this red tape issue with the Omnibus Law on Job Creation passed in 2020 but was met with massive marches in protest of the weakening of labour and environmental protections, such as revised minimum wages, lowered severance pay, and relaxed firing rules. Third is inequality and economic disparity between the regions. The flow of natural resource profits to Jakarta has led to widespread discontent and even contributes to separatist movements in areas such as Aceh and Papua. Last is inflation, which has long been a problem in Indonesia with a history of hyperinflation (peaking at 58% in 1998) down to 6.4% in 2015. Although the inflation rate last year was 2% it still impacts the majority of Indonesians ability to afford food after price hikes.
For more information on Indonesia’s economy and GDP, see the following resources:
- In-depth Creative | Economic Challenges - with Economist Faisal Basri
- Lowy Institute | Quick comment: M Chatib Basri on Indonesian economic and politics
- Foreign Policy Talks | FP in 5 Mins EP #2 Jokowi's Economic Ideology: The Pit Between Openness and Protectionism
- Foreign Policy Talks | EP #48 Assessing Indonesia’s Economic Diplomacy under President Jokowi’s administration
- CFR | Indonesia's Labor Protests and Omnibus Law: Some Progress, But Dangers Ahead
- JACOBIN | Indonesia Is in the Middle of a New Protest Wave
- The Business Times | Indonesia clings to coal despite green vision for economy
- Reuters: Macro Matters | Indonesia c.bank seen holding rates steady as economy gradually reopens
- Eurasia News | China Is Benchmark For Indonesia’s Economy, But There Are Concerns – OpEd
- Antara News | Indonesia's economic growth feel short of potential since 2014
Although a reduction in trade barriers took place in the mid-1980s and made the economy more open, Indonesia is not highly integrated into the world economy. The introduction of trade-related structural reforms centre on improving the business environment, attracting foreign investment and developing infrastructure, as well as efforts to improve transparency and address corruption. Despite the recent downturn, the strength of the country's consumer economy – and the digital sector in particular – remains appealing to foreign investors. Moreover, while President Jokowi’s administration has set itself a considerable investment reform task, the ambition and drive evident across key ministries suggests progress will be made. Indonesia has considerable unrealised potential, and although there can be substantial costs and time barriers involved in investing and trading in the country, the returns are commensurate with the effort required to navigate them.
Indonesia has abundant natural resources like oil and natural gas, coal, tin, copper, gold and nickel. With agriculture producing rice, palm oil, tea, coffee, medicinal plants, spices, and rubber. These commodities make up a large portion of the country's exports, with palm oil (half the world's supply) and coal briquettes as the leading export commodities. In addition to refined and crude petroleum as the primary imports: telephones, vehicle parts and wheat cover most additional imports. China, the United States, Japan, Singapore, India, Malaysia, South Korea and Thailand are Indonesia's principal export markets and import partners.
Indonesia is a party to the region-wide Association of Southeast Asian Nations (ASEAN) Free Trade Area. ASEAN, and by extension Indonesia, also has preferential trade agreements with Australia, China, Hong Kong, India, Japan, Korea, and New Zealand – and concluded text-based negotiations of the Regional Comprehensive Economic Partnership in November 2019. Indonesia has signed bilateral free trade agreements (FTAs) with Australia, Chile, Mozambique as well as with Iceland, Liechtenstein, Norway, and Switzerland under the European Free Trade Association; however, as of the end of 2019 none of these FTAs were yet in force except with Chile. Indonesia recently concluded negotiations with Korea on a Comprehensive Economic Partnership Agreement. Indonesia is negotiating other FTAs with the European Union (EU), India, Tunisia, and Turkey as well as reviewing its trade agreements with Japan and Pakistan.
Australia has a strong position as an agribusiness supplier to Indonesia and has leading market positions in the provision of grains and meat. Australia’s capabilities in the development of infrastructure and resources are highly relevant to the growth challenges facing Indonesia. The relationship has been characterised by growing mutual trade of A$17.8 billion in 2018-19 – an increase of 6.9% over the previous year – in addition to close links in government, education, and security – the latter under the Lombok Treaty. For more information on Australia's trade links to Indonesia see Austrade's breakdown of the market profile with infographics and deep dives into economic relations.
For more information on Indonesia’s trade policies, see the following resources:
- Oxford Business Group | Investment reform and trade agreements in Indonesia
- Indonesia at Melbourne | Can Australia's declining Indonesia literacy survive Covid-19 cuts?
- Antara News | Minister optimistic of rebound in Indonesia-Australia trade
- Eurasia Review | Indonesian G20 Presidency Promises To Put A ‘Battle For The Soul Of Islam’ On The Front Burner – Analysis
- Indonesia is a key member of ASEAN and maintains free trade agreements with numerous other nations. Has Indonesia reached its full economic potential? What areas can it look to capitalise on? How can Australia benefit or enhance Indonesia’s position in the association?
- As a G20 member, Indonesia is in a strong global economic position relative to other regional nations. Has Indonesia reached its full potential as a regional leader? What more could it do to become a regional powerhouse? Does it even have such ambitions?
- The trade relationship between Australia and Indonesia is focused on predominantly agricultural products. Are there other commodities that the two nations could look to trade with? Consider things like Defence and Education, and where they may provide opportunities for mutual growth.