Economy of Indonesia
Indonesia is a country that contains great economic potential; a potential that has not gone unnoticed to part of the global community. Indonesia - Southeast Asia's largest economy - contains a number of characteristics that put the country in a great position for newly advanced economic development. Moreover, in recent years there is strong support from the central government to curb Indonesia's traditional reliance on (raw) commodity exports, while raising the role of the manufacturing industry within the economy. Infrastructure development is also a key goal of the government, and one that should cause a multiplier effect within the economy.
Indonesia was often mentioned as an appropriate candidate to be included in the BRIC countries (Brazil, Russia, India and China). Another set of emerging economies - grouped under the acronym CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) - also gained attention as its members have reasonably sophisticated financial systems and fast-growing populations. Several years ago the combined gross domestic product (GDP) of the CIVETS was predicted to account for half the global economy by 2020. However, since the prolonged global economic slowdown after 2011 we rarely hear the terms BRIC and CIVETS anymore.
Another important example of international recognition regarding Indonesia's economy are the recent upgrades of the country's credit ratings by international financial services companies such as Standard & Poor's, Fitch Ratings and Moody's. Resilient economic growth, low government debt and prudent fiscal management have been cited as reasons for the upgrades and are key in attracting financial inflows into Indonesia: both portfolio flows and foreign direct investment (FDI). These FDI inflows, which had been relatively weak for Indonesia during the decade after the Asian Financial Crisis had seriously shaken up the foundations of the country, showed a steep increase after the global financial crisis of 2008-2009 (although somewhat weakening after 2014 due to Indonesia's prolonged economic slowdown in the years 2011-2015).
Although Indonesia is eager to reduce its traditional reliance on raw commodity exports and boost the manufacturing industry (for example through the 2009 New Mining Law), it is a difficult path particularly because the private sector remains hesitant to invest. This transformation is important because falling commodity prices after 2011 (which are the result of stalling economic growth of China) has impacted drastically on Indonesia. Indonesia's export performance weakened significantly, implying fewer foreign exchange earnings and reduced purchasing power, hence causing an economic slowdown.
The Indonesian government under the leadership of Joko Widodo (who was inaugurated as Indonesia's seventh president in October 2014) has implemented several structural reforms that aim at long-term growth but cause some short-term pain. For example, the majority of fuel subsidies have been scrapped successfully, a remarkable accomplishment (as fuel subsidy cuts have always caused outrage among the population) aided by the globe's low crude oil prices. Moreover, the government places high priority on infrastructure development (evidenced by the sharply rising government infrastructure budget) and on investment (evidenced by deregulation and fiscal incentives that are offered to private investors).
But back to the basics: what are Indonesia's strengths that explain structural macroeconomic growth?
• Abundant and diverse natural resources
• Young, large and burgeoning population (rapidly expanding middle class)
• Political stability (relatively)
• Prudent fiscal management since the late 1990s
• Strategic location in relation to the giant economies of China and India
• Low labour costs
• Being an emerging market, there is a lot that needs to be built/developed
Indonesia is a market economy in which the state-owned enterprises (SOEs) and large private business groups (conglomerates) play a significant role. There are hundreds of diversified privately-held business groups in Indonesia (a tiny fraction of the total amount of companies active in Indonesia) that - together with the SOEs - dominate the domestic economy. As such, wealth is concentrated at the top of society (and not unoften there are close links between the corporate and political top of the country).
Indonesia’s micro, small and medium sized enterprises, which together account for 99 percent of the total amount of enterprises that are active in Indonesia, are important too. They account for about 60 percent of Indonesia’s gross domestic product (GDP) and create employment to nearly 108 million Indonesians. This implies that these micro, small and medium sized companies are the backbone of the Indonesian economy.
There are signs that Indonesia's economic growth is starting to accelerate again after the economic slowdown in the years 2011-2015. As such we may be at the beginning of what can become another period of substantial economic growth. However, it should also be pointed out that Indonesia is a complex country that contains certain risks for investments and experiences difficulties due to the nation's unique dynamics and context. In order to be aware of the risks involved we advise you to read our Risks of Investing in Indonesia section and to keep track of Indonesia's latest economic, political and social developments through our News section, Business section and Finance section.
This section provides an outline of the current state of the Indonesian economy and discusses a number of important chapters in the economic history of Indonesia:
General Economic Outline
This section offers a detailed account regarding Indonesia's current economic structure and composition based on recent macroeconomic indicators, developments and achievements. It also presents an introduction to the three main economic sectors of Indonesia (agriculture, industry and services) and expounds on the contribution of these three sectors to Indonesia's national economy.
Read more about Indonesia's General Economic Outline
New Order Miracle
President Suharto's New Order government (1966-1998) was characterized by rapid economic growth and a remarkable reduction in absolute poverty. Both these achievements were reason that Indonesia became known to the West as an 'Asian Miracle' in the 1980s and 1990s. This section puts the spotlight on the New Order's economic development, while not losing sight of some negative aspects of Suharto's prolonged authoritarian rule.
Read more about the New Order Miracle
Asian Financial Crisis
The Asian Financial crisis in the late 1990s was one of the biggest watersheds in Indonesian history. Starting out as a financial crisis it quickly expanded to become a social and political one which marked the end of Suharto's rule (that was legitimized by economic development). Indonesia would become the country that was hit hardest by this crisis and it reversed much of the economic progress made under the New Order regime.