History
Under the "New Order"
GDP per capita grew 545% from 1970 to 1980 as a result of the sudden increase in oil export revenues from 1973 to 1979. However, in the 1980s oil glut, the GDP per capita shrank 20% from 1980 to 1990 and by 13% from 1990 to 2000. [7]During the thirty years of president Suharto's "New Order" government, Indonesia's economy grew from a per capita GDP of $70 to more than $1,000 by 1996. Through prudent monetary and fiscal policies, inflation was held between 5%–10%, the rupiah was stable and predictable, and the government avoided domestic financing of budget deficits. Much of the development budget was financed by concessional foreign aid.
In the mid-1980s, the government began eliminating regulatory obstacles to economic activity. The steps were aimed primarily at the trade and finance sectors and were designed to stimulate employment and growth in the non-oil export sector. Annual real GDP growth averaged nearly 7% from 1987–1997, and most analysts recognized Indonesia as a newly industrialized economy and emerging market.
High levels of economic growth from 1987–1997 masked a number of structural weaknesses in Indonesia's economy. 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.
Asian Financial Crisis
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 (IMF) 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 Suharto. The rupiah remained weak, however, and President Suharto 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.[8] In 1998, real GDP contracted by 13.7%. The economy reached its low point in mid-1999 and real GDP growth for the year was 0.3%. Inflation reached 77% 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 first half of 1998[9]. It returned to 8,000/USD1 range at the end of 1998 and has generally traded in the Rp 8,000–10,000/USD1 range ever since, with fluctuations that are relatively predictable and gradual.
Post Suharto
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.[10] This led to a more than doubling in the price of consumer fuels, resulting in double-digit inflation. The situation has stabilized, but the economy continues to struggle with inflation at 17% in 2005. To mitigate consequent economic hardship, the government has offered one-time subsidies to eligible citizens, effectively becoming Indonesia's first significant government-funded social security benefit scheme.[citation needed]
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.[11] 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.
Global Financial Crisis
Indonesia has been less affected by the crisis compared to many other Asian nations. The GDP of Indonesia grew 4.4% for the first quarter of 2009. [12] Furthermore, in a recent bloomberg article, Nicholas Cashmore claims that Indonesia may now position itself alongside China and India in what is called as "Chindonesia" and "the next growth triangle". [13]Investment
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.
The stock market capitalization of listed companies in Indonesia was valued at $81,428 million in 2005 by the World Bank. [14] Even though the Indonesian Investment Coordinating Board (www.bkpm.go.id) likes to project the impression that foreign direct investment is welcome in the country, many of the country's laws and regulations are tilted against foreign investors. For example, potential foreign investors and their executive staff cannot maintain own bank accounts in Indonesia, unless they are tax-paying local residents (paying tax in Indonesia for their worldwide income)[citation needed].
Economic relations with the United States
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 (CGI), formed in 1989. It includes 19 donor countries and 13 international organizations that meet annually to coordinate donor assistance.
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.
Macro-economic trend
This is a chart of trend of gross domestic product of Indonesia at market prices [15] by the IMF with figures in millions of rupiah.| Year | GDP | USD exchange (rupiah) | Inflation index (2000=100) | Per Capita Income (as % of USA) |
|---|---|---|---|---|
| 1980 | 60,143,191 | 626.98 | 12 | 5.25 |
| 1985 | 112,969,792 | 1,110.58 | 20 | 3.47 |
| 1990 | 233,013,290 | 1,842.80 | 29 | 3.01 |
| 1995 | 502,249,558 | 2,248.60 | 44 | 4.11 |
| 2000 | 1,389,769,700 | 8,396.33 | 100 | 2.32 |
| 2005 | 2,678,664,096 | 9,705.16 | 155 | 3.10 |
Structure of the economy
Agriculture, livestock, forestry and fishery
Statistics Indonesia provisionally valued food crop yields at 213,529,700 million rupiahs in 2006 thus registering over 35% growth since 2003. [16] Badan Pusat Statistik provisionally valued estate crop yields at 62,690,900 million rupiahs in 2006 thus registering over 34% growth since 2003. [16] Badan Pusat Statistik provisionally valued livestock and its derivative products at 51,276,400 million rupiahs in 2006 thus registering over 37% growth since 2003. [16] Badan Pusat Statistik provisionally valued forestry at 30,017,000 million rupiahs in 2006 thus registering over 63% growth since 2003. [16] Badan Pusat Statistik provisionally valued fishery at 72,979,900 million rupiahs in 2006 thus registering over 60% growth since 2003. [1]Mining and quarrying
Badan Pusat Statistik provisionally valued the oil and gas mining industry at 187,893,200 million rupiahs in 2006 thus registering over 97% growth since 2003. [2]Indonesia was the only Asian member of the Organization of Petroleum Exporting Countries (OPEC) outside of the Middle East until 2008 and is currently a net oil importer. In early As of 2005[update], Indonesian crude oil and condensate output was 1.07 million barrels per day. This is a substantial decline from the 1990s, due primarily to aging oil fields and a lack of investment in oil production equipment. In 1999, Crude and condensate output averaged 1.5 million barrels (240,000 m³) per day, and in the 1998 calendar year the oil and gas sector, including refining, contributed approximately 9% to GDP. This decline in production since the 1990s has been accompanied by a substantial increase in domestic consumption, about 5.4% per year, leading to an expected US$1.2 billion cost for importing oil in 2005.
The state owns all petroleum and mineral rights. Foreign firms participate through production-sharing and work contracts. Oil and gas contractors are required to finance all exploration, production, and development costs in their contract areas; they are entitled to recover operating, exploration, and development costs out of the oil and gas produced.
Indonesia's fuel production has declined significantly over the years, owing to aging oil fields and lack of investment in new equipment. As a result, despite being an exporter of crude oil, Indonesia is now a net importer of oil and had previously subsidized fuel prices to keep prices low, costing US$ 7 billion in 2004 [3]. The current president has mandated a significant reduction of government subsidy of fuel prices in several stages [4]. In order to alleviate economic hardships, the government has offered one-time subsidies to qualified citizens. The government has stated the cuts in subsidies are aimed at reducing the budget deficit to 1% of gross domestic product (GDP) this year, down from around 1.6% last year.
Non-oil and gas mining
Badan Pusat Statistik provisionally valued the non-oil and gas mining industry at 130,861,000 million rupiahs in 2006 thus registering over 145% growth since 2003. [5]Indonesia is the world's largest tin market. Although mineral production traditionally centered on bauxite, silver, and tin, Indonesia is expanding its copper, nickel, gold, and coal output for export markets. In mid-1993, the Department of Mines and Energy reopened the coal sector to foreign investment, with the result that the leading Indonesian coal producer now is a joint venture between UK firms - BP and Rio Tinto. Total coal production reached 74 million metric tons in 1999, including exports of 55 million tons. Two US firms operate three copper/gold mines in Indonesia, with a Canadian and British firm holding significant other investments in nickel and gold, respectively. In 1998, the value of Indonesian gold production was $1 billion and copper, $843 million. Receipts from gold, copper, and coal comprised 84% of the $3 billion. Earned in 1998 by the mineral mining sector.India fortune groups like Vedanta Resources and Tata Group have significant mining operations in Indonesia.
Quarrying
Badan Pusat Statistik provisionally valued the quarrying industry at 35,872,700 million rupiahs in 2006 thus registering over 87% growth since 2003. [6]Manufacturing
Oil and gas manufacturing
Badan Pusat Statistik provisionally valued the petroleum refinery industry at 119,833,900 million rupiahs in 2006 thus registering over 139% growth since 2003 [7] while the liquefied natural gas industry was valued at 53,791,300 million rupiahs in 2006 thus registering over 94% growth since 20Non-oil and gas manufacturing
Badan Pusat Statistik provisionally valued the food, beverage and tobacco industry at 213,173,300 million rupiahs in 2006 thus registering over 38% growth since 2003. [8]
Textile, leather products and footwear industry was valued at 90,871,700 million rupiahs in 2006 thus registering over 34% growth since 2003.
Wood and wood products industry was valued at 44,410,400 million rupiahs in 2006 thus registering over 48% growth since 2003.
Paper and printing products industry was valued at 39,968,900 million rupiahs in 2006 thus registering over 43% growth since 2003.
Fertilizers, chemicals and rubber products industry was valued at 95,765,000 million rupiahs in 2006 thus registering over 68% growth since 2003.
Cement and non-metallic quarry products industry was valued at 29,015,100 million rupiahs in 2006 thus registering over 50% growth since 2003.
Iron, steel and other basic metals industry was valued at 20,492,200 million rupiahs in 2006 thus registering over 52% growth since 2003.
Transport equipment, machinery and apparatus industry was valued at 221,891,800 million rupiahs in 2006 thus registering over 87% growth since 2003.
Other manufacturing industries were valued at 7,148,300 million rupiahs in 2006 thus registering over 67% growth since 2003.
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