Indonesia is the largest economy in Southeast Asia and the 16th largest economy in the world. It has a population of more than 270 million people, with a GDP of US$ 1.0 trillion and a per capita income of US$ 3,852 as of 2019. Indonesia is an upper-middle-income country that has seen rapid economic growth over the past two decades, driven largely by strong domestic consumption, investment and government expenditure.
According to cheeroutdoor, Indonesia’s main sources of economic growth are its manufacturing sector and services sector. The manufacturing sector accounts for around one-third of GDP, driven by exports of oil & gas products, rubber & plastics, textiles & apparel and wood products. The services sector accounts for around two-thirds of GDP and includes tourism, finance & banking, telecommunications, transportation and trade.
The Indonesian government has implemented various policies to promote economic growth such as tax incentives for foreign investors; liberalization of trade regulations; deregulation; privatization initiatives; investments in infrastructure development; improved access to financing; improvement in education system etc., These policies have helped attract foreign direct investment (FDI) into Indonesia which was estimated at US$ 31 billion in 2019.
The Indonesian economy is also supported by its agricultural sector which employs around 40% of the population and contributes 13% to GDP. Major crops grown include rice, cassava, soybeans, corn maize and rubber while major livestock products include poultry meat & eggs, beef and dairy products. Indonesia’s large fishing industry also contributes significantly to the economy with fisheries exports estimated at US$ 11 billion in 2018.
The Indonesian government has also taken steps to improve social welfare through initiatives such as providing free healthcare for all citizens; increasing access to education through scholarships etc., These efforts have helped reduce poverty levels from 15% in 1999 to 10% in 2018 according to World Bank estimates.
In conclusion, Indonesia’s economy has seen impressive growth over the last two decades due to pro-growth policies such as tax incentives for foreign investors; deregulation; privatization initiatives etc., This growth has been further supported by its large agricultural sector which provides employment opportunities for many people while also contributing significantly towards overall economic output. Furthermore improvements in social welfare initiatives have helped reduce poverty levels within the country thus making it an attractive destination for both domestic and foreign investors alike.
Business
The country’s economic development started during the latter part of the 1960s. Under Suharto’s regime came a series of five-year development plans, Repelita I-VI, which provided guidelines for Indonesia’s economic and social development and for state investment and, in addition, information for private investors. During the 30 years of Repelite planning, annual GDP growth was between just over 5 percent and just over 8.5 percent, which was very high figures in an international comparison. The first five-year plans focused on agricultural development in order to achieve self-sufficiency with rice and also on the expansion of the infrastructure. The following plans emphasized labor-intensive industrialization, including to provide employment for the rapidly growing population. Crude oil and natural gas became completely dominant export goods, which provided much of the capital for continued industrialization. During the 1990s, the planning goals were set particularly high in order to reduce unilateralism in exports and to expand a modern industrial sector.
The financial crisis in Southeast Asia hit Indonesia particularly hard and GDP fell by just over 13 percent in 1998. The country had large borrowing abroad and companies and banks were forced into bankruptcy. The situation was further aggravated by serious structural problems in society and by widespread corruption. The world’s confidence in Indonesia’s economy disappeared and unemployment and poverty increased dramatically. In the following years, the banking sector was restructured and monetary policy was implemented strictly. Business was gradually liberalized and foreign investors were given greater opportunities in the country. Domestic policy conditions stabilized after 2004. GDP growth in 2007 and 2008 was just over 6 percent per year, and despite the subsequent global crisis, it remained at about the same level in 2010. The domestic market is relatively large;
A large part of the labor force in the country is in the informal sector and is engaged in various forms of service. Underemployment is likely to be a growing problem.
The extraction of fossil fuels and minerals stagnated during the 00s, except for the coal mining. But domestic and foreign investment in both mining and manufacturing industries increased during the latter part of the decade. The reform of the financial and tax system has continued and the country’s credit rating has been strengthened. However, there is still a great lack of capital, especially for the necessary improvements to the transport systems and other infrastructure. Major efforts are also needed to reduce environmental degradation and to have different businesses follow the rules that exist to achieve sustainable development.
There are large differences in the distribution of resources between the different parts of the country and they are likely to increase, mainly between Java and the rest of the country. Increases are also likely to make the differences in wealth between different categories of residents. Calculations of the Human Development Index (HDI) for 2017 showed that Indonesia was ranked 116th among 189 countries.
- Paulsourcing: Top 10 tips for doing business in Indonesia, covering country profile and market entry requirement.
Agriculture
In 2017, agriculture, including forestry and fisheries, contributed 14 percent to GDP and accounted for just over 38 percent of employment in Indonesia. Approximately one quarter of the export income comes from agriculture (this does not include exports of fossil fuels).
Rice is the basic food and during the 1960s, 70s and early 80s, the most important goal in the country’s development policy was to achieve self-sufficiency with rice. Agriculture was traditionally run with complicated ownership and farming conditions and mainly by small farmers on farms that rarely covered more than 1 hectare. The rapid increase in population demanded increased food production and a large number of state measures resulted in increased acreage, improved irrigation, double harvests and increased area yield. In 1985, the country was self-sufficient with rice. Thereafter, the rice crops continued to increase, but they varied widely between years. One reason for this is that the country is repeatedly hit by drought as a result of the weather phenomenon of El Niño, another that agriculture has for some years been affected by pest and plant diseases. Agricultural policy has also varied with periods of high import duties or import bans on rice. This has resulted in high rice prices, which have been used as a means of getting the farmers to increase the cultivation of rice. Complementary foods are corn, cassava, sweet potatoes, soybeans and peanuts. Such cultivation has not received a corresponding government stimulus and the harvests have not shown the same positive tendency.
Since the mid-19th century, small farmers in Indonesia have also grown export crops, and during the colonial era large plantations were established. In the 1980s and 1990s, the state encouraged export-oriented agricultural production to counter the risks of oil’s strong dominance in foreign trade. Since then, many export crops have shown a sharp increase, which has had the effect of raising the standard of living in some well-located rural areas. In 2008, the country was the world’s largest producer of spices of many kinds and came second in terms of natural rubber, palm oil and cocoa. Three-quarters of the raw rubber is produced by small farmers, while the palm oil comes from plantations, in both cases mainly on Sumatra and Kalimantan. Harvests increased significantly during the latter part of the 1990s and new oil palm plantations have been established. This has attracted criticism from the outside world as it has cut down large areas of tropical rainforest. Indonesia ranks fourth in terms of coffee and tropical fruit exports, and tea is also exported. In addition, Indonesia is a world leader in the production of coconuts. They come from small farmers and are raw materials for the production of coconut oil, which is used mainly in the country.
Around 1990, the state sought to stimulate the production of meat and milk through the importation of breeding animals. But such animal husbandry requires the import of expensive feed and livestock breeding is still relatively small. Poultry is traditionally the most important livestock. In 2003-04, the entire region was affected by the “bird flu” and the infection remains in Indonesia. The animals are vaccinated, but the amount of animals has decreased.
Forestry
Next to Brazil, Indonesia has the world’s largest area of tropical forest. In 2005, 76 percent of the land area was designated as forest land, but a significant part of it had become unproductive as a result of the prey harvest of the last decades. Nearly a quarter of the forest land consists of original rainforest and much more is secondary forest, ie. regrowth after harvesting.
More than a third of the forest land has been set aside as a reserve, partly to protect the large variety of plants and animals, and partly to protect steep forested slopes from erosion. Most of the productive forest is located in Papua and Kalimantan and is largely used by forest companies. They are harvested according to an agreement with the state, which requires replanting or allocation to a state replanting fund in order for forestry to be sustainable. Illegal logging has been common both in the periphery of the reserve and in other forest areas. Particularly during the first years of the 1990s, much of the harvesting took place without permission. It yielded low quality timber and replanting was ignored. Thereafter, the total harvest fell sharply, partly because the productive forest area decreased, partly because several companies are no longer active for various reasons. The state has succeeded in halting some illegal activities and has also restricted the harvesting permits. It now seeks to carry out environmental certification for all forestry in order for the country’s forest products to compete on the world market. Significant areas of rainforest disappear in the event of forest fires, both legal and illegal. They are set to start partly to gain new agricultural land for the growing rural population, and partly to get land for plantations, especially for the cultivation of oil palm trees. The original rainforest decreased annually by 6,850 km2 during the period 2005-10.
Exports of timber were prohibited during the 1980s to stimulate the growth of a domestic forest industry. During the 1990s, the ban was replaced with high export duties, but these were removed in the early 1990s. Nowadays, timber production is not enough to meet the need for raw materials at the domestic sawmills and plywood factories. Already in the mid-00s they could only use half their capacity. The pulp and paper industry grew in the 1990s on Sumatra. There, the raw material is mainly fast-growing acacia and eucalyptus from tree plantations, and therefore this industry has not suffered from raw material shortages.
Fishing
Coastal fishing is traditionally of great local importance and, together with freshwater fishing, accounts for the majority of the animal protein in the population’s diet. In 1982, all the water between Indonesia’s islands was declared as Indonesian territorial water and as its economic zone, thus giving the country control over the large fish stocks in the shallow inlets. The state encouraged private investment, even from abroad, for a modern, large-scale fishery to grow with the catch of mainly tuna and shrimp for export. In addition, fishing licenses were sold to foreign fishing companies.
In the western part of the island world fishing increased sharply from Malaysian and especially Thai vessels and the pressure on the fish stock has become fierce. Illegal fishing has caused ever greater environmental problems and this also means a significant loss of income for the state. Indonesian deep sea fishing has developed slowly and still has low productivity. Despite its extensive fishing waters, Indonesia accounts for only a small portion of the sea fishery in the world.
The state has also sought to promote freshwater fishing, especially fish farming, to meet the domestic need for fish and to increase exports. But consumers in other countries have proven skeptical of seafood and fish from Indonesian farms as a result of reports of widespread use of antibiotics as protection against animal diseases.
Mineral
Abbreviated as INA by abbreviationfinder.org, Indonesia has significant assets on several important minerals. Extraction mainly takes place in large open-pit mines in peripheral parts of the country and entails serious environmental impacts with deep wounds in the landscape, ruined water and health problems for the local population. The mining companies provide large revenues to the state while very little will benefit the local population. For many years, serious conflicts have occurred between the state, mining companies, local people and environmental groups. The state has had an unclear and varying policy in the contradiction between protecting the rainforest and promoting mining, and has granted mining permits in nature-protected areas.
Indonesia is second only to China, the world’s largest producer of tin and its largest exporter. Tin is mainly extracted on the islands of Bangka and Billiton off the east coast of Sumatra. State PT Timah is the world’s largest company in the mining and melting of tin. Tin production rose almost continuously until the mid-00s, mainly as a result of the streamlining of the state-owned enterprise and the opening of a more liberal mining law to some 30 small, private companies that produced without a license. It has been estimated that these annually extracted almost as much tin as the legal activities. These companies paid no mining and export duties to the state and they were not included in the statistics; ore quality was lower and their exports were banned in 2007. Since 2006, tin mining has declined every year, including in Timah.
In western Kalimantan and the Riauaripa law south of Singapore, bauxite is mined while nickel is mined at several locations on Sulawesi. Copper is exclusively produced by a US-owned company, PT Freeport Indonesia, in a controversial, large-scale operation in Grasberg in western Papua. Gold and silver are also mined, mainly in connection with the copper mining in Grasberg. The production of metals increased continuously until the end of the 1990s, but since then it has fluctuated and in many cases decreased significantly. This is mainly due to the complex conditions encountered by the international mining companies, with legal ambiguities and local contradictions. In addition, the safety of the mines also had shortcomings. In some cases, the occurrences sinks without any new occurrences being found.
Energy
The presence of oil and natural gas has been of great importance for the country’s economic development, and fossil fuels were the dominant commodity group in exports during the 1970s and 1980s. Oil recovery increased notably between 1967 and 1977 when a number of agreements were signed between the Indonesian state and multinational oil companies. Subsequently, OPEC’s production quotas meant that the extraction stagnated and gradually decreased until 2007. The large oil companies also found that investment conditions were less favorable in Indonesia. At the same time, domestic use of oil increased, which helped to reduce the importance of oil in exports.
A more generous oil company from the beginning of the 1990s facilitated the operations of foreign oil companies in the country, and thereafter investments increased. Since 2009, Indonesia is no longer a member of OPEC. Oil extraction takes place mainly on Sumatra, outside eastern Kalimantan and outside northwest Java. Through an active energy policy, the government seeks to get the transport sector to use biofuels instead of fossil fuels.
Since the 1970s, natural gas has been extracted on a large scale on the northern coast of Sumatra and off the east coast of Kalimantan. With Japanese capital, liquefied natural gas (LNG) management was developed and until 2006 Indonesia was the world’s largest exporter of LNG, with long-term contracts primarily with Japan but also with South Korea and Taiwan. However, more and more natural gas is stopping within the country for use in industry. The occurrences of natural gas are declining in the earliest fields, but high hopes are associated with occurrences on the Natuna Islands in the South China Sea. Investors are also looking for new fields outside Papua.
In 1980, oil and natural gas accounted for 95 percent of electricity in Indonesia. The consistent energy policy has meant that the share in 2006 was only 44 percent. Instead, the role of coal has been strengthened, and this accounted for an equal share. More than 7 percent of the electricity came from hydropower and the remainder from biofuels and geothermal plants. Since the 1990s, plans have been in place for a nuclear power plant in central Java.
Coal production has risen sharply since 1980, mainly in coal fields in eastern Kalimantan. There is one of the world’s largest coal mines, Kaltim Prima. Coal exports have also increased, and Indonesia was the world’s second largest coal exporter in 2006. In recent years, more and more investments have come from domestic companies as well as from countries in East Asia, primarily China. In Kalimantan there are also significant deposits of low-grade lignite.
Industry
In the mid-1960s, the country’s manufacturing industry accounted for less than 10 percent of GDP, and apart from a small textile industry, commodity production took place by hand. Then, in various ways, the state promoted industrialization to reduce the need for imports, create jobs and eventually increase export earnings and supplement one-sided exports of fossil fuels. Both large state companies and businesses with shared state and private ownership grew and investments also came from abroad. An important principle was to process raw materials before export, for example at metal smelters, cement factories, timber industries and petrochemicals.
The rapid growth was reversed during the 1997 financial crisis, but the manufacturing industry recovered quickly. Annual growth in 2000-08 averaged 4.7 percent, but the pace slowed somewhat thereafter.
Particularly low-tech, labor-intensive production of clothing and footwear for export has increased over the past decade as multinational companies have moved parts of their manufacturing from China and Vietnam to Indonesia.
The state still plays an important role in driving large-scale, capital-intensive manufacturing of agricultural machinery, steel and metal products, vessels, fertilizers, petrochemical products and cement and, for strategic reasons, high-tech manufacturing of aircraft and communications equipment. Privately owned Indonesian companies produce food, tobacco and textile products, radios and TVs, plywood, furniture and other wood products, also together with foreign companies. The manufacturing industry is located mainly in the metropolitan areas of Java. In addition, an extensive timber industry has emerged in eastern Kalimantan. Large plants are also an aluminum smelter on northern Sumatra, a tin smelter on the island of Banka and an oil refinery in central Java. Alongside the larger companies, there are extensive small industries and crafts,
Foreign trade
During the first half of the 1980s, three-quarters consisted of exports of crude oil and natural gas. Thereafter, the regime’s goal was to broaden exports, and ten years later the share of fossil fuels was less than a quarter.
- COUNTRYAAH: Find major trading partners of Indonesia, including major exports and major imports with latest trade value and market share as well as growth rate.
Imports mainly consist of semi-finished products for the manufacturing industry and also machinery and equipment for the mining industry and construction as well as refined oil products. The proportion of food and consumer goods to households has been steadily declining since the mid-1980s, but during years of poor harvesting, large imports of rice are required. China, Japan, Singapore and the United States are Indonesia’s most important trading partners.
Indonesia’s merchandise trade has always shown a surplus, but its size has varied as a result of fluctuating world market prices of crude oil in particular. Foreign currency also comes to the country in the form of money that guest workers abroad, especially in the Middle East, send home to the family. In addition, tourism contributes to currency inflows.
Tourism and gastronomy
Tourism is a fast growing part of the Indonesian economy. With its enormous surface, the country has a great variety in terms of nature and culture. The country consists of a large number of islands, from Sumatra and Sulawesi to small coral islands. There are also volcanoes, jungles, large mountain areas and pristine beaches. The large ethnic mix of the population also offers a wide variety of languages, food, building styles and traditions. In 2015, Indonesia received 10.4 million foreign visitors. The main destinations/attractions are the islands of Bali and Lombok, the cities of Jakarta and Yogyakarta, the shrine of Borobudur and the wildlife.
Note: the capital city of Indonesia is Jakarta with a population of 10,500,000 (UN estimate 2018). Other major cities include Surabaya with a population of 2,900,000, Bandung with a population of 2,500,000, Medan with a population of 2,300,000, Semarang with a population of 1,800,000, Palembang with a population of 1,700,000, Ujung Pandang (Makassar) with a population of 1,500,000 (UN estimate 2018).
Indian and Chinese influence is noticeable in Indonesian cuisine, which in turn has affected the food bills in the Netherlands and thus also in South Africa. Rice is the cornerstone of the diet, except possibly in the Moluccas where sago (fairy tale flour) or sago grits are more common. This is flavored with heavily seasoned sauces and dried out with meat or fish in small quantities. It is precisely the sauces and spices that characterize Indonesian cuisine. Sambal for example is the basis for endless variations. Rijsttafel and nasi goreng are parade numbers on the menu. Both are based on the rice, small pieces of preferably chicken or steak, shrimp, eggs and spicy sauces. Satay is a skewer of lamb, chicken, shrimp or pork dipped in the obligingly strong sauce or in a peanut sauce. Fresh fruits abound to complement the diet circle and cool the palate.
