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 increased to an annual average of at least six percent with the exception of 2009 and 2013 when, amid global financial turmoil and uncertainty, Indonesia's GDP growth fell to - a still admirable - 4.6 percent and 5.8 percent respectively.
| Average Annual
GDP Growth (%)
|1998 – 1999||- 6.65|
|2000 – 2004||4.60|
|2005 – 2009||5.64|
|2010 – 2013||6.15|
(in billion USD)
(annual percent change)
|GDP per Capita
Sources: World Bank, International Monetary Fund (IMF) and Statistics Indonesia (BPS)
Visible from 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 its 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, Indonesia was still able to grow significantly. This success was mainly due to 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 two-thirds to the country's national economic growth. With annually around seven million people being added to its middle class, Indonesia contains a consumer force that drives the economy and has triggered significantly increased domestic and foreign investments from 2010 onwards. Slowing economic growth in 2013 (5.78 percent) was caused by a combination of severe global uncertainty due to the looming end of the Federal Reserve's monthly USD $85 billion bond-buying program (quantitative easing) resulting in significant capital outflows from emerging economies, and internal financial weaknesses: a record high current account deficit, high inflation (after the government raised prices of subsidized fuels in June 2013) and a sharply depreciating rupiah exchange rate. In order to tackle these troubles and safeguard the country's financial stability, Indonesia's central bank raised the country's benchmark interest rate significantly, at the expense of further economic growth.
Future forecasts for Indonesia's economic development are still positive but have been revised down by all international organizations and the Indonesian government due to prolonged global uncertainty. The recently unveiled Masterplan for the Acceleration and Expansion of Indonesia’s Economic Development (or, 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 too ambitious for the near future (2014 to 2017). Authoritative international institutions (World Bank, IMF and Asian Development Bank) project Indonesia's annual GDP growth in the range of 5.3 to 6.0 percent for the period 2014 to 2017. These organizations stress that sufficient political and economic reform, in combination with large investments in infrastructure, will add one or two percentage points to current GDP growth forecasts.
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.
Indonesia's GDP per Capita and Unequal Income Distribution
GDP per capita has currently reached its highest level in Indonesian economic history and is forecast to grow higher. 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.
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 will grant tax holidays, while it is also preparing incentives to stimulate national industries by banning exports of raw materials by 2014 (in the mining industry). This measure forces industries to build smelters and processing facilities to produce value-added products.
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 contribute 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 intention will be realized remains doubtful and - as mentioned above - this indicator does not reflect the (unequal) distribution of income or wealth in the Indonesian society. Effective government policy is needed to provide more Indonesian children with education as well as to stimulate job creation in order to absorb a growing workforce.
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 this level of USD $3,000 is considered as being an important step because it will 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. The Indonesian government has set the target of reaching USD $5,000 by the year 2015.
Real GDP growth shows a promising perspective. While the developed world in Europe and the United States - plagued by public debts - will grow modestly for some time to come, emerging economies in South America and Asia show robust economic growth. These countries share certain characteristics such as the presence of abundant natural resources, large and fast-growing populations, low labor and production costs and, lastly, relatively stable political environments. One of these countries is Indonesia. But to reach impressive growth rates such as China during the last two decades, it needs to invest heavily in its infrastructure and focus on more political, economic and social reforms.