Indonesia Country Analysis Report For Emerging Markets Economics Essay
Published: Mon, 5 Dec 2016
The report on Indonesia is a country analysis report which touches upon all the important macro and micro economic factors that contribute to a country and also includes all about the country with explanations and details on the history and economy prevalent there.
The structure followed throughout the report is PESTLN structure, going in the same order beginning with Politics and history of Indonesia, Economic situation and history, its Society and Culture, Technological developments, functioning of the Legal system and the Natural environment of Indonesia.
The report offers a broad perspective of all the above mentioned parameters and various reports published by the Indonesian government have been referred to. All the facts and figures mentioned are the very recent ones and any past facts or figures have been indicated with the last year of estimation.
By 2025, Indonesia is likely to become one of the world’s top 10 economies. But the only factors inhibiting it are the poor roads, lack of water supply, and street lighting. A survey conducted by the Government of Indonesia covering almost 90 percent of all districts found that there is a big opportunity for entrepreneurs in Infrastructure sector. Thirty eight percent of 12,391 private firms which consisted mostly of small and medium enterprises said that poor infrastructure is creating tremendous costs and reducing competition. People experienced blackouts three times a week and interruptions to water supply almost twice a week. Conditions are still worse in less developed region. Local governments are helped through budget advocacy to focus their priorities on investments that will ensure quicker and stable economic growth. Of course, infrastructure improvements alone are not enough. Unnecessary levies are still being imposed on farmers for transporting produce across district borders, in addition to illegal charges faced by traders and transporters along the supply chain. Therefore regulatory reforms are currently being promoted that will foster business investment and enterprise development. Hence, national investment in the infrastructure needed for business growth, coupled with a stronger emphasis on improving economic governance, is critical if Indonesia is to continue outperforming its neighbours.
The history of Indonesia can be split into three different eras with each era having the dominance of one specific force.
This era, dated from 1512-1949 is when the Dutch and Portuguese merchants came in to Indonesia to establish trade centres as the land was abundant in spices. Prized for their flavour, spices such as cloves, nutmeg and mace were also believed to cure everything from the plague to venereal disease, and were literally worth their weight in gold. The Dutch eventually took control of the spice trade from Portuguese, and the tenacious Dutch East India Company (known by initials VOC) established a spice monopoly in 1602 and it lasted well into the 18th century. During the 19th century, the Dutch began sugar and coffee cultivation on Java, which was soon providing three-fourths of the world supply of coffee. Even though the Dutch created a racial divide with their dominance, they developed the infrastructure as Indonesia served as the trading port and base to all their business activities.
POST INDEPENDENCE ERA
The three centuries of oppressive colonial rule led to a nationalist stirring by the turn of the 20th century and people began to challenge the Dutch presence in Indonesia. With the help of Japan, a four-year guerrilla war led by nationalists against the Dutch on Java after World War II helped bring about independence. The Republic of Indonesia proclaimed independence on August 17th, 1945 .They gained sovereignty four years later. Sukarno who had gained control of the situation was then appointed as the President.
The unifying struggle to secure Indonesia’s independence gave birth to divisions in the society. There were regional differences in customs, religion, the impact of Christianity and Marxism, and fears of Javanese political domination. The new country now suffered from poverty, a ruinous unstable economy, very low educational levels, low skills levels, and authoritarian traditions.
Reforms were made in the Constitution which mandated a parliamentary system of government and an executive body responsible to the parliament. The long postponed parliamentary elections were held in 1955 and the Indonesian Nationalist Party (PNI) (Sukarno’s party) topped the poll. Since the Communist Party of Indonesia (PKI) too had strong support, short lived coalitions were formed.
By 1956, Sukarno was openly criticising parliamentary democracy and he was stating that it was “based upon inherent conflict” which ran counter to Indonesian notions of harmony as being the natural state human relationships. Instead, he sought a system based on the traditional village system of discussion and consensus, under the guidance of village elders. He proposed a threefold blend of nasionalisme (‘nationalism’), agama (‘religion’), and komunisme (‘communism’) into a co-operative ‘Nas-a-Kom’ government. This was intended to appease the three main factions in Indonesian politics – the army, Islamic groups, and the communists. With the help of military, Sukarno then conquered Parliament and formed ‘Guided Democracy’. It was more of an authoritarian rule where he dared to take on the West who were actually providing them aid. He instigated a large number of infrastructure projects and monuments celebrating Indonesia’s identity which were criticised as substitutes for real development in a deteriorating economy. The military in itself was divided into left wing and right wing forces. Following a coup attempt to murder Sukarno, there were aggressions which eventually led to deaths of 500,000 people and Sukarno was dethroned from power. Suharto, who was then the Army General, assumed position as President in 1968.
FREE ORDER ERA OR THE NEW ORDER
Suharto’s era came to be commonly known as Free Order Era or Reform Era. His New Order government worked assiduously to create the image of political stability and communal harmony that earned the country the reputation of a safe haven for foreign capital. Even though this led to economic growth of Indonesia, Suharto enriched himself and his family through business dealings and widespread corruption. In 1996, when PDI tried to protest against Sukarno and his policies, he resorted to killing many people in order to silence them and their opposition. Suharto’s regime was more like an autocratic rule where no one was allowed to oppose him and even if they did so, they were brutally murdered.
The downfall of his regime began with the Asian Financial Crisis in 1998 because of which Indonesia got badly hit. Suharto was severely scrutinized by international lending institutions, mainly the World Bank, International Monetary Fund (IMF) and the United States, for long time embezzlement of funds and other policies. In December, Suharto’s government signed a letter of intent to the IMF, pledging to enact austerity measures, including cuts to public services and removal of subsidies , in return for receiving the aid of the IMF and other donors. The prices for household goods (kerosene and rice) and fees for public services including education rose dramatically. The effects were exacerbated by widespread corruption. People started losing the domestic confidence with his regime as the austerity measures approved by him began to erode thereby leading to popular protests. Following the protests and loss in the subsequent elections, he had to resign as President. It was then that the Reformation Era began during which the country was more democratic and open to elections.
Indonesia has made significant progress toward institutionalizing its democracy and more firmly establishing civil society. Since the Suharto era, which ended abruptly in 1998, civil society has expanded, and a vigorous and open media has emerged. The political framework of Indonesia is presidential representative democratic republic where the President acts as both the head of the state and the government. In addition to the direct election of the President, the military no longer has seats in Parliament and the police have been separated from the military. Indonesia’s Parliamentary elections in April 2004, and the Presidential elections of July and September 2004, were deemed by international observers to be free and fair, and they did much to instil confidence in Indonesia’s democratic process. The parliamentary and presidential elections of 2009 further consolidated the democratic process in Indonesia.
Date of Independence: August 17, 1945
Current Indonesian Ambassador to the United States: Dino Patti Djalal
Current Indonesian Ambassador to the United States: HE.Mr .Hasan Kleib
The principal decision making branches are:
Current President: Susilo Bambang Yudhoyono – DPD party – Since 2004
Vice-president: Boediono – Non-Party – Since 2009
Selected by vote of citizens for 5 year terms.
President is head of state, commander-in-chief of Indonesian armed forces and responsible for domestic governance, policy-making and foreign affairs.
People’s Consultative Assembly (Majelis Permusyawaratan Rakyat-MPR) – Bicameral Parliament – Members of both DPR and DPD – Responsible for passing constitutional amendments and conducting presidential impeachments.
People’s Representative Council or House of Representatives (Dewan Perwakilan Rakyat-DPR) – Consists of 550 members elected for 5 year term by proportional representation in multi-member constituencies – Primary role in passing laws.
Regional Representatives Council or House of Regional Representatives (Dewan Perwakilan Daerah-DPD) – Consists 132 members who are elected directly.
Supreme Court – Main governing body-Judges appointed by the President
State Court – For civil disputes
Commercial Court- For bankruptcy and insolvency issues
State Administrative Court – Administrative law cases against government
Constitutional Court – For disputes concerning legality of law products, dissolution of political parties, general elections and scope of authority of a state institution.
Religious Court – For religious cases
Main Political Parties
Crescent Moon and Star Party or PBB
Democratic Party or PD
Functional Groups Party or Golkar
Suffrage:17 years; universal suffrage, married persons regardless of age
5 July 1971 – First election after establishment of New Order
Elections in the New Order were always won by Golkar headed by Suharto. Only 3 parties were allowed to contest (Golkar, PPP, and PDI) and all other minor parties had to join either PPP or PD. Many illegal tactics like coercion, multiple voting, vote rigging etc were followed to ensure the victory of Golkar.
7 June 1999 – First election after collapse of New Order and first free election since 1955
Official Currency : Indonesian Rupiah (IDR)
Relation to US currency(current rate): 10,000 IDR = 1.05 USD
Members of: ASEAN,G-20,APEC,WTO,IOR-ARC
Indonesia is the largest econoomy in the Southeast Asia and is one of the emerging economies The economy of Indonesia is market- based in which the government plays a significant role. The country possesses more than 164 state-owned enterprises and administers prices on several basic goods like fuel, rice and electricity.Following the Asian Finanacial Crisis in 1997-98, the national economy has recovered and undergone another period of rapid economic growth since 2004.
Before Suharto took over in 1968, the economy decreased drastically as a result of political instability, a young and inexperienced government , and economic nationalism, which inturn resulted in severe poverty and hunger. By the end of Sukarno’s downfall there was 1000% annual inflation, decreasing export revenues, crumbling infrastructure, factories operating at minimum capacity, and negligible investment. Once Suharto took over, he brought discipline into the economy by bringing down the inflation, stabilizing the currency, rescheduling foreign debt and inviting foreign aid and investments.
Indonesia, being the only Southeast Asia’s member of OPEC during 1970s provided an export revenue windfall in oil prices that contributed to sustained high economic growth rates, averaging over 7% from 1968 to 1981.Due to high levels of regulation and a dependence on declining oil prices, growth slowed to an average of 4.3% per annum between 1981 and 1988. A range of economic reforms were introduced in the late 1980s including a managed devaluation of the rupiah to improve export competitiveness, and de-regulation of the financial sector.Foreign investment flowed into Indonesia, particularly into the rapidly developing export-oriented manufacturing sector, and from 1989 to 1997, the Indonesian economy grew by an average of over 7%. GDP per capita grew by 545% from 1970 to 1980 as a result of the sudden increase in oil export revenues from 1973 to 1979.
ECONOMY UNDER SUHARTO – CRONY CAPITALISM
Even though there was economic growth during Suharto’s period, there was inequality in the distribution of benefits. The government’s acssociation with the businessmen differed with the size of the business and the ethnicity of the business operators. Big businesses were largely associated with Chinese Indonesian businessmen and their association with the government was typically characterised by the term ‘crony capitalism’. By contrast, small and medium enterprises, whilst still involving Chinese Indonesians, were typically seen to be operated by Indonesian businessmen and, historically, have not had as close a relationship with the government. In addition to this, the Indonesian military also operated businesses, and sources further suggest that they had a different relationship altogether with the government. Individual businessmen may have had a different association with the government based upon the size of their business, their ethnicity, their relationship with government members, and their relationship with the Indonesia military.
Suharto provided all the lucrative business opportunities to his friends and family of government officials. For over three decades, Suharto successfully assembled a pyramid of power where he put himself at the top together with his family, close relatives and loyal cronies. At the lower level, the military and top technocrats ran the government and managed the economy. At the third level business giants, including successful Chinese tycoons, earned privileges by running daily economic activities. At the lower levels, the bulk of the population, including ordinary people and an independent middle class were out of power, but retained their resentment against the malpractice of power.
The pyramid of power ran from the apex down to the local village level. The military became a vanguard of the pyramid, securing it from opponents. Suharto also established tight control over the bureaucracy to ensure that all levels of the pyramid would implement his initiatives. The Golkar party played a strategic role in establishing and simultaneously displaying the legitimacy of the regime which was more autocratic.
Suharto’s pyramid of power produced the determinant role of the military in politics, the politicised and corrupt bureaucracy, Golkar, the uneasy relationship between the central and local governments, a malfunctioning check and balance system and the absence of a credible legal system and law enforcement.
The crony businessmen received an assortment of benefits, including operating without partners, lucrative distribution and supply deals with state-owned companies, no-questions-asked financing from state banks, special interest rates, preferential consideration on government-funded infrastructure projects, and monopolies on importing, exporting, or distributing agricultural commodities like wheat, palm oil, soybeans, or sugar. In the 1990s, hardly a single major infrastructure contract has been awarded without a Suharto relative having a piece of it.
The bureaucracy and the state banks were also under the control of Suharto. Technocrats were dependent upon Suharto’s personal support to implement policy initiatives, and these initiatives were often overridden or ignored for political reasons. The financial sector remained dominated by the state banks, state-owned enterprises. Many companies in the financial sector was headed by members of Suharto’s family and came to dominate large sectors of the economy, and the native Indonesian entrepreneurs remained sidelined in the political process. If a company wanted to exploit Indonesia’s natural resources, they had to enlist the aid of a Suharto crony who usually turned out to be one of his children. In return, the cronies expected an equity stake in the enterprise, without putting forth any monetary capital.
ASIAN FINANCIAL CRISIS AND ITS EFFECTS ON INDONESIA
The Asian Financial Crisis began in July 1997 and gripped much of Asia .It started in Thailand with the financial collapse of the Thai Baht after the Thai government was forced to float the baht due to the lack of foreign currency to support its fixed exchange rate, cutting its peg to the U.S. dollar, after exhaustive efforts to support it in the face of a severe financial overextension that was in part real estate driven. At the time, Thailand had acquired a burden of foreign debt that made the country effectively bankrupt even before the collapse of its currency. As the crisis spread, most of Southeast Asia and Japan saw slumping currencies, devalued stock markets and other asset prices, and a precipitous rise in private debt. Although most of the governments of Asia had seemingly sound fiscal policies, the International Monetary Fund (IMF) stepped in to initiate a $40 billion program to stabilize the currencies of South Korea, Thailand, and Indonesia, economies particularly hard hit by the crisis. No reforms could stabilize the domestic situation in Indonesia. After 30 years in power, President Suharto was forced to step down on 21 May 1998 in the wake of widespread rioting that followed sharp price increases caused by a drastic devaluation of the rupiah. The effects of the crisis lingered through 1998.
Low inflation, a trade surplus of more than $900 million, huge foreign exchange reserves of more than $20 billion, and a good banking sector were all prevalent previously in the country. But a large number of Indonesian corporations had been borrowing in U.S. dollars. During the preceding years, as the rupiah had strengthened respective to the dollar, this practice had worked well for these corporations; their effective levels of debt and financing costs had decreased as the local currency’s value rose.
In July 1997, when Thailand floated the baht, Indonesia’s monetary authorities widened the rupiah currency trading band from 8% to 12%. The rupiah suddenly came under severe attack in August. On 14 August 1997, the managed floating exchange regime was replaced by a free-floating exchange rate arrangement. The rupiah dropped further. The IMF offered to help and came forward with a rescue package of $23 billion, but the rupiah was sinking further amid fears over corporate debts, massive selling of rupiah, and strong demand for dollars. Before the crisis, the exchange rate between the rupiah and the dollar was roughly 2,600 rupiah to 1 USD. The rate plunged to over 11,000 rupiah to 1 USD on 9 January 1998, with spot rates over 14,000 during January 23-26 and trading again over 14,000 for about six weeks during June-July 1998. On 31 December 1998, the rate was almost exactly 8,000 to 1 USD. Indonesia lost 13.5% of its GDP that year. Inflation reached 77% in 1998.The stock market went down by 90% and the public debt amounted to 97% of the GDP.
The other major factors that led to the contraction of the Indonesian economy during the crisis were:
Excess reliance on exports
Excess FII inflow
Devaluation of Chinese Yuan
Rise in American interest rates
Due to the downward pressure on Indonesian Rupiah, there was expensive debt servicing as they needed monetary aid to overcome their problem which in turn led to capital flight as the foreign investors did not want to take risk in an economy that was badly suffering due to the crisis. This again put more pressure on the Indonesian currency thereby resulting in a never ending vicious circle.
EFFORTS TO SURVIVE THE CRISIS
Regulation of banking sector
Conglomerates were not allowed to own banks as combining lender and the debtor under one roof is in itself a major debt crisis. Many big Indonesian conglomerates are now out of the bank business and are working hard to build clean balance sheets and professional corporate governance. The newly independent banks are very careful about whom they make loans to and the companies are very careful about where they invest.
Decentralization of power outside Jakarta
Under Suharto, the capital city of Jakarta was the focus of all political and business attention but now a lot of new cities are opening up. The current president Susilo was one of the movers behind a key 2001 law that began the decentralization process and as president he has given second cities confidence that they will be left free to flourish. Decentralization is also creating a vibrant new business culture outside of Java. The rise of provincial power has brought a surge in construction and investment. Employment and minimum wages are rising much faster in the hinterlands too, attracting a flood of internal migration.
Prudent policy makers
Leaders like Susilo have made a change to suffering economy and have pulled it from its severe downfall through many policies and reforms. When others believe that the passage of land acquisition bill would speed up the pace of development in Indonesia, Susilo did not push his people more aggressively as he did not want to remind anyone of the Suharto regime by ramming through business deals. This indicates that he wanted to build institutional credibility and not focus on his own power and rule.
Microeconomic reforms were implemented wherein the government intervened in the economic ownership structure .The leaders have come to accept the new normal and are not taking dangerous steps in an attempt to return to the unusually high growth rates of the last decade. As a result, Indonesia now has less of a post-crisis debt problem and has the required savings to increase investments in the economy. What Indonesia has not reinvested it has saved thereby paying down public debt.
Indonesia is now by far the best-run large commodity economy. A large population and wealth of natural resources which was once considered a curse, a source of easy money that a sapped a nation’s will to produce and excel, are now seen as providing competitive advantage, benefitting countries such as Brazil and Russia. The country has a large enough domestic market to generate demand even when global demand is weak and also has vast untapped reserves of crude oil, coal, palm oil and nickel. It is the only Southeast Asian country in which investments contribute to 32% of GDP and them primarily being in the commodity sector. It has a large internal market with two-thirds of consumption of goods being internal.
Red Tapism and Deep rooted ‘Efficient Corruption’
Weak institutional framework and law enforcement
Maintaining cohesion cross ethnicities
GDP per capita: US$3,542.9
GNP per capita: US$3441.9
Contribution to GDP: 14.7% (includes livestock, forestry and fishery)
Main Products: Palm Oil, Rubber, Coca, Cassava, Coffee, Tea, Tobacco, Rice
Main Export Markets: China, USA, Japan, Singapore, Korea, EU
The food processing industry is heavily reliant upon imported grains (wheat), soya bean, meat (beef) and dairy.
Indonesia is the world’s largest producer of palm oil as well as a leading global producer of other high value commodities such as cocoa, rubber and coffee. The country is rich in fertile land ideal for growing a diverse range of crops for both export and domestic consumption. However, it is export crops that have come to dominate land use and employment to take advantage of peaks in global commodity prices. The country is still depend on reliant on imports for staple goods such as wheat, soybeans and sugar which has actually raised the issue of food security on the national agenda as world food prices have continued to climb. The agricultural sector is highly fragmented made up of state owned estates called PT Perkebunan Nusantara (PTPN), large scale private plantations and small hold farmers.
Mining and Quarrying:
Contribution to GDP: 11.9%
Oil and gas, bauxite, silver, tin, copper, gold, and coal
Indonesia is the world’s largest tin market. Although mineral production traditionally centred on bauxite, silver, and tin, Indonesia is expanding its copper, nickel, gold, and coal output for export markets.
Contribution to GDP: 24.3%
Textile and Textile Product, Food & Beverages, Leather & Footwear, electronic goods,
furniture, paper products etc.
Manufacturing was a key driver of the Indonesian economy from the 1980s and continues to be a major source of employment for the country by employing 14.4 million people ( as per the end of 2010). Indonesia’s manufacturing sector is highly diverse and stands as a reflection to the vast array of natural resources at the country’s disposal. This ready availability of valuable commodities has been to the detriment of the development of value added manufacturing processes and products.
Major Imports: Natural Gas, Plywood, Textile, Rubber, Bauxite, Silver, Tin to Japan, Europe, US, Singapore.
Major Exports: Machinery and Equipment, Chemicals, Fuels, Foodstuffs from Singapore, China, Japan.
Labour Intensive Industries
Small and Medium Industries
Capital Goods Industries
Natural Resource-Based Industries
High Growth Industry
Special Priority Industry
To encourage the increased competitiveness of national industries, the government will use 4 supporting instruments as follows:
Provision of industrial estates infrastructure
Administrative support as well as inviting private sector role in the development with
Public Private Partnership (PPP) scheme.
Jakarta is the largest FDI destination with a value of 4.8 billion USD.
Opportunities for investors in transportation, irrigation, drinking water, waste management, telecommunications, private power and distribution of oil and gas.
The World Bank has disbursed a total of US$650 million in infrastructure development policy loans (I-DPL) to support efforts to increase the level and effectiveness of infrastructure financing.
SUMATRA ECONOMIC CORRIDOR – Production and Processing of crops
JAVA ECONOMIC CORRIDOR – Industrial and National Services
KALIMANTAN ECONOMIC CORRIDOR – Mining and National energy barn
SULAWESI ECONOMIC CORRIDOR – Agriculture, Fisheries, O&G mining
BALI-NUSA TENGGARA ECONOMIC CORRIDOR – Tourism
PAPUA-MALUKU ECONOMIC CORRIDOR – Abundant natural resources and a centre development of food, fisheries, energy and mining.
SOCIETY AND CULTURE
Indonesia has a large number of forms of music. It is an integral part of its art and cultural. ‘Gamelan’ is the traditional music originating from Java and Bali. ‘Dangdut’ is a popular music style, accompanied by free style dancing. This form of music is used in political campaigns.
The traditional dances reflect the episodes from the Ramayana and Mahabharata. Mythological events of Indonesia are also depicted.
The most popular sports in Indonesia are badminton and soccer. Tennis has also gained a growing following. Several forms of martial arts, including forms that use sticks and knives, are popular in Java and Sumatra.
DRAMA & THEATRE
‘Wayang Kulit’ is a puppet theatre show that displays mythological events. Music, singing, dance, drama and the silat martial art are all incorporated together and are based on stories of legends. A traditional folk theatre, Randai of the Minangkabau people of West Sumatra is performed during religious ceremonies and festivals.
The cuisine is highly influenced by the Chinese, Indians, Europeans and people from Middle East. The staple food is a rice dish served with meat and vegetables. The fundamental ingredients are spices, chilli and coconut, fish and chicken.
Some of the most popular dishes are:
Sambal: it is a chili based sauce and is always kept on the table during all meals.
Nasi goreng: it is called Indonesia’s national dish. It is an Asian version of fried rice..
Gado-gado: it means “mix-mix,” in the local language; the term gado-gado is used to describe situations that are all mixed up — Jakarta, is a gado-gado city. It is one of Indonesia’s best-known dishes. It is bathed in the country’s famous ‘peanut sauce’
Bakso: this is a meatball noodle soup that is a hit amongst the youngsters. It gained international fame when U.S. President Barack Obama remembered it as one of his favorite dishes during a visit to Jakarta.
Most men and women wear western clothes. Locally, there are many styles of traditional dress, but most women wear a sarong (wraparound skirt or dress) and a kebaya, a fitted blouse. Men wear a batik shirt and a sarong skirt, along with a songkok, a black Muslim cap during ceremonies.
Lomban Festival – celebrated in the month of January. The fishermen celebrate this festival to thank the sea for whatever has been caught by them throughout the year.
Bali Arts Festival of Indonesia – celebrated in the month of September and goes on for one full month. Lot of cultural programs, exhibitions, contests, fairs take place during this festival.
Kasada Festival – celebrated in the month of March. It is celebrated to pay tribute to their ascendants. In this festival, they offer flowers, chicken and fruits.
Java Jazz Festival – world famous and celebrated in May every year. Jazz artists from all over the world take part in the festival.
MUST SEE PLACES
This is the largest temple compound dedicated to Shiva in Indonesia. There are three temples that are decorated with reliefs which depict the Ramayana and are dedicated to Shiva, Vishnu and Brahma. Prambanan Temple is a complex consistin
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