Economy of Indonesia
In the 1960s, the economy deteriorated drastically as a result of political instability, a young and inexperienced government, and economic nationalism, which resulted in severe poverty and hunger. By the time of Soekarno's downfall in the mid-1960s, the economy was in chaos with 1,000% annual inflation, shrinking export revenues, crumbling infrastructure, factories operating at minimal capacity, and negligible investment. Following President Soekarno's downfall in the mid-1960s, the New Order administration brought a degree of discipline to economic policy that quickly brought inflation down, stabilized the currency, rescheduled foreign debt, and attracted foreign aid and investment.. Indonesia was until recently Southeast Asia's only member of OPEC, and the 1970s oil price raises provided an export revenue windfall that contributed to sustained high economic growth rates, averaging over 7% from 1968 to 1981. 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 545% from 1970 to 1980 as a result of the sudden increase in oil export revenues from 1973 to 1979.
High levels of economic growth from 1987â€"1997 masked a number of structural weaknesses in Indonesia's economy. Growth came at a high cost in terms of weak and corrupt institutions, severe public indebtedness through mismanagement of the financial sector, the rapid depletion of Indonesia’s natural resources, and a culture of favors and corruption in the business elite. Corruption particularly gained momentum in the 1990s, reaching to the highest levels of the political hierarchy as Suharto became the most corrupt leader according to Transparency International's corrupt leaders list. As a result, the legal system was very weak, and there was no effective way to enforce contracts, collect debts, or sue for bankruptcy. Banking practices were very unsophisticated, with collateral-based lending the norm and widespread violation of prudential regulations, including limits on connected lending. Non-tariff barriers, rent-seeking by state-owned enterprises, domestic subsidies, barriers to domestic trade and export restrictions all created economic distortions.
The Asian Financial Crisis that began to affect Indonesia in mid-1997 became an economic and political crisis. Indonesia's initial response was to float the rupiah, raise key domestic interest rates, and tighten fiscal policy. In October 1997, Indonesia and the International Monetary Fund reached agreement on an economic reform program aimed at macroeconomic stabilization and elimination of some of the country's most damaging economic policies, such as the National Car Program and the clove monopoly, both involving family members of President Soeharto. The rupiah remained weak, however, and President Soeharto was forced to resign in May 1998. In August 1998, Indonesia and the IMF agreed on an Extended Fund Facility (EFF) under President B.J Habibie that included significant structural reform targets. President Abdurrahman Wahid took office in October 1999, and Indonesia and the IMF signed another EFF in January 2000. The new program also has a range of economic, structural reform and governance targets.
The effects of the financial and economic crisis were severe. By November 1997, rapid currency depreciation had seen public debt reach US$60 bn, imposing severe strains on the government's budget. In 1998, real GDP contracted by 13.1%. The economy reached its low point in mid-1999 and real GDP growth for the year was 0.8%. Inflation reached 72% in 1998 but slowed to 2% in 1999.
The rupiah, which had been in the Rp 2,600/USD1 range at the start of August 1997 fell to 11,000/USD1 by January 1998, with spot rates around 15,000 for brief periods during the 1st half of 1998. It returned to 8,000/USD1 range at the end of 1998 and has generally traded in the Rp 8,000â€"10,000/USD1 range ever since, with fluctuations that are relatively predictable and gradual.
In late 2005 Indonesia faced a 'mini-crisis' due to international oil prices rises and imports. The currency reached Rp 12,000/USD1 before stabilizing. The government was forced to cut its massive fuel subsidies, which were planned to cost $14 billion for 2005, in October. This led to a more than doubling in the price of consumer fuels, resulting in double-digit inflation. The situation had stabilized, but the economy continued to struggle with inflation at 17% in 2005.
For 2006, Indonesia's economic outlook was more positive. Economic growth accelerated to 5.1% in 2004 and reached 5.6% in 2005. Real per capita income has reached fiscal year 1996/1997 levels. Growth was driven primarily by domestic consumption, which accounts for roughly three-fourths of Indonesia's gross domestic product. The Jakarta Stock Exchange was the best performing market in Asia in 2004 up by 42%. Problems that continue to put a drag on growth include low foreign investment levels, bureaucratic red tape, and very widespread corruption which causes 51.43 trillion Rupiah or 5.6573 billion US Dollar or approximately 1.4% of GDP to be lost on a yearly basis. However, there is very strong optimism with the conclusion of peaceful elections during the year 2004 and the election of the reformist president Susilo Bambang Yudhoyono.
The unemployment rate was 9.75%. Despite a slowing global economy, Indonesia’s economic growth accelerated to a ten-year high of 6.3% in 2007. This growth rate was sufficient to reduce poverty from 17.8% to 16.6% based on the Government’s poverty line and reversed the recent trend towards jobless growth, with unemployment falling to 8.46% in February 2008. Unlike many of its more export-dependent neighbors, it has managed to skirt the recession, helped by strong domestic demand (which makes up about two-thirds of the economy) and a government fiscal stimulus package of about 1.4% of GDP, announced earlier this year. After India and China, Indonesia is currently the 3rd fastest growing economy in the Group of Twenty (G20) industrialized and developing economies. The $512 billion economy expanded 4.4% in the 1st quarter from a year earlier and last month, the IMF revised its 2009 forecast for the country to 3-4% from 2.5%. Indonesia enjoyed stronger fundamentals with the authorities implemented wide-ranging economic and financial reforms, including a rapid reduction in public and external debt, strengthening of corporate and banking sector balance sheets and reducing bank vulnerabilities through higher capitalization and better supervision.
The current unemployment rate of Indonesia for 2012 is at 6% as per Vice-President of Indonesia Dr. Boediono.
Since the late 1980s, Indonesia has made significant changes to its regulatory framework to encourage economic growth. This growth was financed largely from private investment, both foreign and domestic. U.S. investors dominated the oil and gas sector and undertook some of Indonesia's largest mining projects. In addition, the presence of US banks, manufacturers, and service providers expanded, especially after the industrial and financial sector reforms of the 1980s. Other major foreign investors included India, Japan, the United Kingdom, Singapore, the Netherlands, Qatar, Hong Kong, Taiwan and South Korea.
The economic crisis made continued private financing imperative but problematic. New foreign investment approvals fell by almost two-thirds between 1997 and 1999. The crisis further highlighted areas where additional reform was needed. Frequently cited areas for improving the investment climate were establishment of a functioning legal and judicial system, adherence to competitive processes, and adoption of internationally acceptable accounting and disclosure standards. Despite improvements in the laws in recent years, Indonesia's intellectual property rights regime remains weak; lack of effective enforcement is a major concern. Under Suharto, Indonesia had moved toward private provision of public infrastructure, including electric power, toll roads, and telecommunications. The financial crisis brought to light serious weaknesses in the process of dispute resolution, however, particularly in the area of private infrastructure projects. Although Indonesia continued to have the advantages of a large labor force, abundant natural resources and modern infrastructure, private investment in new projects largely ceased during the crisis.
As of 28 June 2010, the Indonesia Stock Exchange had 341 listed companies with a combined market capitalization of $269.9 billion. As at November 2010, two thirds of the market capitalization was in the form of foreign funds and only around 1% of the Indonesian population have stock investments. Efforts are further being made to improve the business and investment environment. Within the World Bank's Doing Business Survey, Indonesia rose to 122 out of 178 countries in 2010, from 129 in the previous year. Despite these efforts, the rank is still below regional peers and an unfavourable investment climate persists. For example, potential foreign investors and their executive staff cannot maintain own bank accounts in Indonesia, unless they are tax-paying local residents.
From 1990 to 2010, Indonesian companies have been involved in 3,757 mergers and acquisitions as either acquiror or target with a total known value of $137bn. In 2010, 609 transactions have been announced which is a new record. Numbers had increased by 19% compared to 2009. The value of deals in 2010 was 17 bil. USD which is the 2nd highest number ever. In the entire year of 2012, Indonesia realised total investments $32.5 billion, surpassing its annual target $25 billion, Investment Coordinating Board reported on January 22. The primary investments were in the mining, transport and chemicals sectors.
In 2011, the Indonesian government announced a new Masterplan. The aim of the Masterplan was to encourage increased investment, particularly in infrastructure projects across Indonesia.
U.S. exports to Indonesia in 1999 totaled $2.0 billion, down significantly from $4.5 billion in 1997. The main exports were construction equipment, machinery, aviation parts, chemicals, and agricultural products. U.S. imports from Indonesia in 1999 totaled $9.5 billion and consisted primarily of clothing, machinery and transportation equipment, petroleum, natural rubber, and footwear. Economic assistance to Indonesia is coordinated through the Consultative Group on Indonesia, formed in 1989. It includes 19 donor countries and 13 international organizations that meet annually to coordinate donor assistance.
The U.S. Agency for International Development has provided development assistance to Indonesia since 1950. Initial assistance focused on the most urgent needs of the new republic, including food aid, infrastructure rehabilitation, health care, and training. Through the 1970s, a time of great economic growth in Indonesia, USAID played a major role in helping the country achieve self-sufficiency in rice production and in reducing the birth rate.
USAID's current program aims to support Indonesia as it recovers from the financial crisis by providing food aid, employment generating activities, and maintaining critical public health services. USAID is also providing technical advisers to help the Indonesian Government implement economic reforms and fiscal decentralization and is supporting democratization and civil society development activities through non-governmental organizations.
This is a chart of trend of gross domestic product of Indonesia at market prices by the IMF with figures in millions of rupiah.
| For purchasing power dollar is exchanged at | parity comparisons, the US 3,094.57 rupiah only. |
| Mean wages were $2.32 | per manhour in 2009. |
| Source: Indonesian production data. | Statistics Bureau, annual - |
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