6 December 2016 (closed)
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Between the years 1965 and 1997 the Indonesian economy grew at an average annual rate of almost seven percent. This achievement enabled Indonesia to graduate from the ranks of 'low income countries' into that of the 'lower middle income countries'. However, the Asian Financial Crisis that erupted in the late 1990s caused a severe negative impact on the Indonesian economy, resulting in a decline in gross domestic product (GDP) of 13.6 percent in 1998 and limited growth of 0.3 percent in 1999. Between the years 2000 and 2004 a period of economic recovery took place with a combined average GDP growth of 4.6 percent annually. Hereafter GDP growth accelerated (with the exception of 2009 when, amid global financial turmoil and uncertainty, Indonesia's GDP growth fell to - a still admirable - 4.6 percent) and then peaked at 6.5 percent in 2011. However, after 2011 Indonesia's economic expansion started to slow rapidly.
This section discusses the economic performance of Indonesia, Southeast Asia's largest economy, since the late 2000s and zooms in specifically on the economic slowdown that occurred since 2011. For an analysis of Indonesia's economic growth during the New Order government or an analysis of the causes and consequences of the Asian Financial Crisis, click on the aforementioned links.
Indonesia Gross Domestic Product (GDP) Statistics:
| Average Annual
GDP Growth (%)
|1998 – 1999||- 6.65|
|2000 – 2004||4.60|
|2005 – 2009||5.62|
|2010 – 2014||5.80|
(in billion USD)
(annual % change)
|GDP per Capita
The base year for computing the economic growth rate shifted from 2000 to 2010 in 2014, previous years have been recalculated
Source: World Bank
Visible in the table above is that the global economic downturn brought on by the global financial crisis in the late 2000s had a relatively small impact on the Indonesian economy as compared to the impact on other countries. In 2009 Indonesia's GDP growth dropped to 4.6 percent, which meant that the country was one of the top GDP growth performers worldwide (and the third-highest among the G-20 group of major economies).
Despite sharply falling commodity prices, a falling stock market, higher domestic and international bond yields and a depreciating exchange rate, the economy of Indonesia was still able to grow decently. This success was mainly due to the relatively limited importance of Indonesian exports towards the national economy, maintained high market confidence, and sustained robust domestic consumption. Domestic consumption in Indonesia (in particular private consumption) contributes around 55 percent to the country's total national economic growth.
In 2010 the World Bank wrote that, amid robust economic growth, each year around seven million Indonesians are added to the country's middle class. In 2012, this middle class numbered around 75 million people (out a total Indonesian population of 240 million) and research firms such as the Boston Consulting Group (BCG) and McKinsey stated that this middle class will roughly have doubled by the years 2020-2030. Although the inflow into the middle class has been curbed due to the country's economic slowdown that emerged after 2011, Indonesia contains a consumer force that drives the economy and has triggered significantly increased domestic and foreign investment from 2010.
However, after peaking in 2011 Indonesia's GDP growth started to slow. There are several factors that explain this economic slowdown:
• Sluggish Global Economic Growth; China in Focus
After rebounding from the global great recession (2007-2009), the pace of worldwide economic growth slowed between 2010 and 2014. Particularly the rapidly moderating economy of China caused concern. The world's second-largest economy grew 7.3 percent (y/y) in 2014, a 24-year low. Declining economic expansion of China has an immediate impact on Indonesia as both countries are important trading partners (exports to China account for nearly one-tenth of total Indonesian exports). It is estimated that for each one percentage point decline in China's GDP growth, Indonesia's economic expansion will be curbed by 0.5 percent.
• Falling Commodity Prices
The recent global economic slowdown (and in particular China's economic slowdown) resulted in commodity prices falling to multiple-year lows. Being a major commodity exporter (and lacking a well developed downstream industry), Indonesia's export performance is affected heavily in times of low commodity prices (such as coal and crude palm oil). Low commodity prices are not only caused by weaker global demand but also because of an oversupply. During the 2000s commodity boom and after the great recession in the late-2000s (when institutions such as the World Bank and International Monetary Fund released far too optimistic global growth projections) many firms entered the commodities sector - or those existing companies invested to expand production capacity - causing a supply glut hence putting more downward pressure on commodity prices.
• Bank Indonesia's High Interest Rate Environment
A high interest rate environment curtails credit growth and thus curbs economic growth. Starting in mid-2013 Indonesia's central bank (Bank Indonesia) raised its key interest rate (BI rate) from the historic low of 5.75 percent gradually, yet aggressively, to 7.75 percent in late 2014. Bank Indonesia tightened its monetary policy in an effort to combat high inflation (which accelerated sharply after several fuel subsidy reforms), curb the country's wide current account deficit, and support the rupiah which has been plagued by heavy pressures amid monetary tightening in the USA (as such, Bank Indonesia prefers financial stability over higher economic growth). Massive capital outflows from emerging markets, including Indonesia, emerged in most of 2013 due to the looming winding down of the USD $85 billion per month bond-buying program (US quantitative easing). In 2015 capital outflows from emerging markets re-emerged as the world was preparing for higher US interest rates.
• Politics of Indonesia
The year 2014 was a 'political year' for Indonesia as the country organized legislative and presidential elections. These elections were basically a battle between PDI-P backed Joko Widodo (the reform-minded market favorite) and Gerindra-backed Prabowo Subianto (a controversial former army general as well as former son-in-law to Suharto). Although it was expected to become an easy victory for Widodo, it turned out to be a close race (and even required a verdict from the Constitutional Court to confirm the result of the presidential election). For about five months, the year 2014 was plagued by severe political uncertainties (due to these elections) and led to a slowdown in investment realization, hence curbing the country's economic expansion.
In line with the 2009 Mining Law, Indonesia implemented the ban on exports of mineral ore in January 2014. Although this ban was not implemented in full force immediately (some miners could resume mineral ore exports provided they are committed to establish domestic smelting facilities) and although the aim of this new policy is good (reducing the country's reliance on highly volatile raw commodity prices), it also led to curbed export performance.
Another political issue that hampers Indonesia's economic expansion is slow government spending. Due to red tape (bureaucracy) and weak coordination among governmental institutions (both on the central and regional level), government spending remains sluggish. Amid the global slowdown, analysts have high hopes for government-led infrastructure development to boost the country's competitiveness, job market and economic growth. However, a large chunk of allocated funds remain unused.
Indonesia's Quarterly GDP Growth 2009–2016 (annual % change):
||Quarter II||Quarter III||Quarter IV|
Source: Statistics Indonesia (BPS)
Future Forecasts for Indonesia's Economic Growth
Future forecasts for Indonesia's economic development are still positive but have been revised down by all international organizations as well as the Indonesian government due to prolonged global uncertainty. The Masterplan for the Acceleration and Expansion of Indonesia’s Economic Development (MP3EI), spanning the years 2011 to 2025 and which designates six regions as main economic corridors, aims to place Indonesia inside the top ten of biggest global economies by 2025. This Masterplan implies major investments in infrastructure - something that has been hampering Indonesia's economic growth - and is supposed to result in GDP growth reaching eight or nine percent annually. However, these growth rates seem far too ambitious for the near future. Authoritative international institutions (World Bank, IMF and Asian Development Bank) project Indonesia's annual GDP growth in the range of 4.5 to 5.5 percent for the period 2015 to 2016. These organizations stress that sufficient political and economic reform, in combination with large investments in infrastructure, are important ingredients to boost growth.
Indonesia's GDP per Capita and Unequal Income Distribution
Indonesia's GDP per capita has risen rapidly over the past decade (see table above) although it has weakened over the past two years amid the economic slowdown. However, one can question whether per capita GDP is an appropriate measurement for Indonesia as Indonesian society is characterized by a high degree of inequality with regard to income distribution. In other words, there exists a gap between statistics and reality as the wealth of the 43,000 richest Indonesians (who represent only 0.02 percent of the total Indonesian population) is equivalent to 25 percent of Indonesia's GDP. The 40 richest Indonesians account for 10.3 percent of GDP (which is the same amount as the combined wealth of the 60 million poorest Indonesians). These numbers indicate a huge concentration of wealth within the small elite. Moreover, this income distribution gap is estimated to widen in the foreseeable future.
Indonesian per capita GDP has been rising steadily in the 2000s and beyond. Initially, the World Bank had forecast Indonesia to hit the USD $3,000 mark around the year 2020 but the country managed to reach this level a decade earlier. Reaching the GDP per capita level of USD $3,000 is considered an important step because it should result in accelerated development in a number of sectors (such as retail, automotive, property) because of rising consumer demand, thus being a catalyst for economic growth.
Composition of Indonesia's GDP; Agriculture, Industry and Services
The table below shows a remarkable development in the composition of Indonesia's GDP. Indonesia changed from being an economy highly dependent on agriculture into a more balanced economy in which the share of manufacturing (a type of industry) exceeds that of agriculture. This also implies that Indonesia lessened its traditional dependency on primary exports. It should be noted, however, that all three main sectors underwent expansion throughout the indicated period.
Sources: World Bank and CIA World Factbook
It is assumed that the industry sector will strengthen its share of GDP at the expense of the agriculture and services sectors because manufacturing is currently Indonesia's most popular sector in terms of foreign direct investment. Moreover, for specific innovative industries the Indonesian government grants tax incentives, while downstream processing industries are being developed in the mining sector through the 2009 Mining Law.
A remarkable characteristic of Indonesia is that the western part of the country has a significant larger share with regard to its contribution to GDP growth. Java (especially the greater Jakarta area) and Sumatra, together, account for more than eighty percent to Indonesia's total GDP. Primary reason for this situation is that western Indonesia is located close to Singapore and Malaysia. Together these three parts have historically functioned as the center of economic activity in Southeast Asia. The eastern part of Indonesia, however, is positioned in a more-or-less economic vacuum and is much less densely populated.
Indonesia's GDP in Global Perspective
The table below puts Indonesia's per capita GDP and real GDP in global perspective by comparing it to two important economic powers: the United States (USA) and China.
|GDP per Capita (USD)|| Real GDP Growth (%)
Source: World Bank
Looking at GDP per capita it is immediately visible that Indonesia still has a long road ahead compared to the more developed nations. In fact, Indonesia has one of the lowest per capita GDP of any nation in the world. Through a number of government development plans, the Indonesian government intends to raise this figure to around USD $14,250 - $15,500 by 2025 but whether this ambitious target will be realized remains doubtful and - as mentioned above - this indicator does not reflect the (equal) distribution of income or wealth in the Indonesian society. Effective government policy is needed to provide more Indonesian children with education and adults with employment opportunities.
In recent years, emerging market assets have been investors' darling (as US dollars were cheap and emerging market assets higher-yielding). Emerging markets contain great potential due to the presence of abundant natural resources, large and fast-growing populations, low labor and production costs and, lastly, relatively stable political environments. However, in the second half of 2015, forecasts for economic growth in emerging markets have turned gloomy due to the impact of slowing economic growth in China, low commodity prices and heavily depreciating emerging market currencies amid looming monetary tightening in the USA.
It is also interesting to analyze the extent to which certain features of Indonesian cultures (in particular the dominant Javanese culture) limit GDP growth (as compared to the influence of, for example, Chinese culture toward China's GDP growth). For more information on this topic, please visit our Indonesian Business Culture section.
Updated on 7 November 2016