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Economy of Indonesia

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Economy of Indonesia
Jakarta, the financial capital of Indonesia.
CurrencyRupiah (IDR)
Calendar year
Trade organizations
APEC, WTO, G-20, IOR-ARC, RCEP, others
Statistics
GDPIncrease $895.677 billion (2015 est.) by nominal
Increase $2.840 trillion (2015) by PPP
GDP rank16th (nominal) / 8th (PPP)
GDP growth
Increase 4.79% (PPP)(2015)[1]
GDP per capita
$11,135 (PPP, 2015 est.)
GDP by sector
agriculture: 13.7%, industry: 42.9%, services: 43.3% (2014 est.)
3.35% (2015 est.)
Population below poverty line
11.3% (2014)[2]
38.1 (2011)[3]
Labour force
119.5 million (2012 est.)
Labour force by occupation
Agriculture: 38.9%, industry: 22.2%, services: 47.9% (2012 est.)
Unemployment5.9% (2014)[4]
Main industries
Petroleum and natural gas, textiles, apparel, footwear, mining, cement, chemical fertilizers, machinery, electronics, hardware, software, telecommunications, plywood, rubber, food, tourism
External
Exports$199.1 billion (2012 est.)[5]
Export goods
Oil and gas, cement, food, electrical appliances, construction, plywood, textiles, rubber
Main export partners
Japan 13.1%
China 10%
Singapore 9.5%
United States 9.4%
India 7%
South Korea 6%
Malaysia 5.5% (2014 est.)[6]
Imports$185 billion (2012 est.)
Import goods
machinery and equipment, chemicals, fuels, foodstuffs
Main import partners
China 17.2%
Singapore 14.1%
Japan 9.6%
Malaysia 6.1%
South Korea 6.7%
Thailand 5.5%
United States 4.6% (2014 est.)[7]
FDI stock
$255 billion (2014)[8]
$187.1 billion (31 December 2012 est.)
Public finances
Positive decrease 23.9% of GDP (2012 est.)[9]
Revenues$140.8 billion (2012 est.)
Expenses$160.6 billion (2012 est.)
Standard & Poor's:[10]
BB+ (Domestic)
BB+ (Foreign)
BBB- (T&C Assessment)
Outlook: Stable
Moody's:[11]
Baa3
Outlook: Stable
Fitch:[11]
BBB-
Outlook: Positive
$110.30 billion (October 2012)[12]
All values, unless otherwise stated, are in US dollars.


Indonesia has the largest economy in Southeast Asia and is one of the emerging market economies of the world. The country is also a member of G-20 major economies and classified as a newly industrialised country.[13] It is the sixteenth largest economy in the world by nominal GDP and is the eighth largest in terms of GDP (PPP). Indonesia still depends on domestic market, and government budget spending and its ownership of state-owned enterprises (the central government owns 141 enterprises) and the administration of prices of a range of basic goods including, rice, and electricity plays a significant role in Indonesia market economy, but since the 1990s, 80 percent of the economy has been controlled by private Indonesians and foreign companies.[14]

In the aftermath of the financial and economic crisis that began in mid-1997 the government took custody of a significant portion of private sector assets through acquisition of nonperforming bank loans and corporate assets through the debt restructuring process and the companies in custody has been sold out by privatization several years later. Since 1999 the economy has recovered and growth has accelerated to over 4–6% in recent years.[15]

In 2012 Indonesia replaced India as the second-fastest-growing G-20 economy, behind China. However, in 2014 India regained the second spot.

History

Main article: Economic history of Indonesia

In the 1960s, the economy deteriorated drastically as a result of political instability. They had a young and inexperienced government, which resulted in severe poverty and hunger. By the time of Sukarno'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.

Economy in the New Order era

Following President Sukarno's downfall the New Order administration brought a degree of discipline to economic policy that quickly brought inflation down, stabilised the currency, rescheduled foreign debt, and attracted foreign aid and investment. (See Berkeley Mafia). 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.[16]

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,[17] 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%.[18][19]

GDP per capita grew 545% from 1970 to 1980 as a result of the sudden increase in oil export revenues from 1973 to 1979.[20]

Suharto, the 2nd president of Indonesia. Under his New Order administration, the country enjoyed sustained economic development from the 1970s to 1996.

High levels of economic growth from 1987 to 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 favours and corruption in the business elite.[21]

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.[22][23] 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.

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 stabilisation 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.[24] 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 first half of 1998.[25] 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 2004 Indonesia faced a 'mini-crisis' due to international oil prices rises and imports. The currency reached Rp 12,000/USD1 before stabilising. The government was forced to cut its massive fuel subsidies, which were planned to cost $14 billion for 2005, in October.[26] This led to a more than doubling in the price of consumer fuels, resulting in double-digit inflation. The situation had stabilised, 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.[27] 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 (in February 2007) was 9.75%.[28] 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.[29][30] Unlike many of its more export-dependent neighbours, 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 third fastest growing economy in the Group of Twenty (G20) industrialised and developing economies. The $512 billion economy expanded 4.4% in the first 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 capitalisation and better supervision.[31]

The current unemployment rate of Indonesia for 2012 is at 6% as per Vice-President of Indonesia Dr. Boediono.[4]

Investment

See also: List of main infrastructure projects in Indonesia

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. US 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 labour 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 capitalisation of $269.9 billion.[32] As at November 2010, two-thirds of the market capitalisation was in the form of foreign funds and only around 1% of the Indonesian population have stock investments.[33] Efforts are further being made to improve the business and investment environment. Within the World Bank's Doing Business Survey,[34] 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 their own bank accounts in Indonesia, unless they are tax-paying local residents (paying tax in Indonesia for their worldwide income).[citation needed]

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.[35] 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 second 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 (BKPM) reported on 22 January. The primary investments were in the mining, transport and chemicals sectors.[36]

In 2011, the Indonesian government announced a new Masterplan (known as the MP3EI, or Masterplan Perceptatan dan Perluasan Pembangunan Ekonomi Indonesia, the Masterplan to Accelerate and Expand Economic Development in Indonesia). The aim of the Masterplan was to encourage increased investment, particularly in infrastructure projects across Indonesia.[37]

Investment Grade

Indonesia regained its investment grade rating from Fitch Rating in late 2011, and from Moody's Rating in early 2012, after losing its investment grade rating in December 1997 at the onset of the Asian financial crisis, during which Indonesia spent more than Rp450 trillion ($50 billion) to bail out lenders from banks.[citation needed] Fitch raised Indonesia's long-term and local currency debt rating to BBB- from BB+ with both ratings is stable. Fitch also predicted that economy will grow at least 6.0% on average per year through 2013, despite a less conducive global economic climate. Moody's raised Indonesia's foreign and local currency bond ratings to Baa3 from Ba1 with a stable outlook.[38]

Economic relations with the United States

A proportional representation of Indonesia's exports.

US exports to Indonesia in 1999 totalled $2.0 billion, down significantly from $4.5 billion in 1997. The main exports were construction equipment, machinery, aviation parts, chemicals, and agricultural products. US imports from Indonesia in 1999 totalled $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 organisations that meet annually to co-ordinate donor assistance.

The US Agency for International Development (USAID) 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 decentralisation and is supporting democratisation and civil society development activities through non-governmental organisations.

Macro-economic trend

This is a chart of trend of gross domestic product of Indonesia at market prices[39] by the IMF with figures in millions of rupiah.

Year GDP USD exchange
(rupiah)		 Inflation index
(2007=100)		 Nominal per capita GDP
(as % of US)		 PPP Per capita GDP
(as % of USA)
1980 60,143.191 627 10 5.25 5.93
1985 112,969.792 1,111 11 3.47 5.98
1990 233,013.290 1,843 16 3.01 6.63
1995 502,249.558 2,249 24 4.11 8.14
2000 1,389,769.700 8,396 53 2.32 6.92
2005 2,678,664.096 9,705 83 3.10 7.51
2010 6,422,918.230 8,555 121 6.38 9.05

For purchasing power parity comparisons, the US dollar is exchanged at 3,094.57 rupiah only.

Mean wages were $2.32 per person-hour in 2009.

Inflation

In 2011, Indonesia's inflation rate was 3.79 percent, below the government-set target of 5.65 percent.[40] It was the lowest inflation rate since 1998.[citation needed]

Economic structure

Structure of the Indonesian economy, 2006 data[41]

Sector Subsector Output 2006
(Rp trillion)		 Increase since 2003
(%)
Agriculture, etc.
Food crops 223 35
Estate crops 63 34
Livestock, etc. 51 27
Forestry 30 63
Fisheries 73 60
Mining
Oil and gas 188 97
Non oil and gas 131 145
Quarrying 36 87
Manufacturing
Oil and gas manufacturing
Petroleum refining 120 139
Natural gas 54 94
Quarrying 213 35
Non oil and gas
Food, tobacco, beverages 213 38
Textiles, footwear, etc. 91 34
Wood, wood products 44 48
Paper, printing 40 43
Fertilisers, chemicals, rubber 96 68
Cement, non-metallic quarry 29 50
Iron, steel, basic metals 20 52
Transport equipment, machinery 222 87
Other manufacturing 7 67
Electricity, gas, water
Electricity 21 51
Gas 5 119
Water supply 4 43
Construction
Construction, building 249 98
Trade, hotels, restaurants
Trade, wholesale and retail 387 48
Hotels 17 52
Restaurants 92 45
Transport, communication
Transport
Road 81 106
Sea 16 43
Rivers, ferries 5 54
Air transport 15 96
Other 2 49
Communication
Communications 88 123
Finance, real estate, business
Banking 98 31
Non-bank finance 27 87
Associated services 2 82
Real estate 98 72
Business services 47 71
Other services
Public sector'
Government, defence 104 63
Private sector
Social services, community services 60 92
Amusement, recreation 10 46
Personal, household services 100 69

Source: Indonesian Statistics Bureau (Biro Pusat Statistik), annual production data.

Agriculture, livestock, forestry and fishery

Main article: Agriculture in Indonesia

Agriculture is a key sector which contributed to 14.43 percent of nation's GDP.[42] Currently there are around 30 percent of Indonesian land area that is used for agriculture purpose, and employed around 49 million Indonesians (41% of total Indonesian work force).[43] Indonesia's important agricultural commodities are palm oil, natural rubber, cocoa, coffee, tea, cassava, rice and tropical spices.[43]

Hydrocarbons

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 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. As of 2005, Indonesian crude oil and condensate output was 1.07 million barrels (170,000 m3) per day. This is a substantial decline from the 1990s, due primarily to ageing oil fields and a lack of investment in oil production equipment. This decline in production has been accompanied by a substantial increase in domestic consumption, about 5.4% per year, leading to an estimated 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 ageing 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 products. It had previously subsidised fuel prices to keep prices low, costing US$7 billion in 2004 .[44] The current president has mandated a significant reduction of government subsidy of fuel prices in several stages .[45] 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. At the same time, to alleviate economic hardships, the government has offered one-time subsidies to qualified citizens.

Ore trucks in the mining area in West Sumbawa, NTB.

Non-oil and gas mining

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.

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. 2011 coal production was 353 million tons. As of 2014, Indonesia is the third largest producer with a total production of 458 Mt and export of 382 Mt.[46] At this production rate, the reserves will be used up in 61 years, i.e. around the year 2075.[47] Not all of the productions can be exported due to there are Domestic Market Obligation (DMO) regulation which should fulfill the domestic market. In 2012, the DMO is 24.72%. And starting 2014, there are no low-grade coal exports allowed, so the upgraded brown coal process which crank up the calorie value of coal from 4,500 kcal/kg to 6,100 kcal/kg will be built in South Kalimantan and South Sumatra.[48]

See also: List of countries by coal production and Bunyu

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.

April 2011: With additional of Tayan, West Kalimantan Alumina project which produce 5% of the world's alumina production, Indonesia will be the world's second largest Alumina producer. The project will not make the ores to become Aluminium due to there are 100 types of Alumina derivatives which can be developed further by other companies in Indonesia.[49]

Non-oil and gas manufacturing

In 2010, Indonesia sales 7.6 million motorcycles, which mainly produce in Indonesia with almost 100% local components. Honda led the market with a 50.95% market share, followed by Yamaha with 41.37% market share.[50]

In 2011, the retail car sales total was 888,335 units, a 19.26% increase from last year. Toyota dominated the domestic car market by 35.34%, followed by Daihatsu and Mitsubishi with 15.44% and 14.56%, respectively.[51] Since 2011, some origin local car makers have introduced some Indonesian national cars which can be categorised as Low Cost Green Car (LCGC). In 2012, significant increased by 24.8 percent made automobile sales broke 1 million units with 1.116 million units.[52]

Indonesian Textile Association has reported that in 2013, the textile sector is likely to attract investment of around $175 million. In 2012, the investment in this sector was $247 million, of which only $51 million was for new textile machinery.[53] Exports from the textile sector in 2012 was $13.7 billion.

Electricity, gas and water supply

See also: Perusahaan Listrik Negara, Geothermal power in Indonesia, Energy in Indonesia, and Nuclear power in Indonesia

Main statistics on output in 2006 are provided in the table above.

Indonesia has expressed interest recently in possible use of nuclear plants. Indonesia has run 3 research reactors.

Garuda Indonesia airline at Adisutjipto International Airport, Yogyakarta.

Transportation and communication

Main article: Transport in Indonesia

According to Deloitte, in 2011 Internet-related activities in Indonesia have generated 1.6% of the nation's gross domestic product (GDP). This is bigger than electronic and electrical equipment exports and liquified natural gas at 1.51% and 1.45% respectively.[54]

Finance, real estate and business services

In 2015, Indonesia financial services covered Rp 7,289 trillion, 70.5 percent held by 50 conglomerations (domestic and/or foreign ownerships) which 14 of it were vertical conglomerations, 28 were horizontal conglomerations and 8 are mixed conglomerations. 35 mainly entities are in bank industries, 1 was in capital market industries, 13 were in non-bank industries, and 1 was in special financial industries.[55]

Debt Service Ratio

At end of June 2011, Indonesia's debt service ratio was 21.6%, well below the dangerous threshold of 30%.[56]

Small businesses

There are 50 million small businesses in Indonesia with online usage growth of 48% in 2010, so Google will open a local office in Indonesia before 2012.[57]

Exports

Indonesian export destinations, 2006.
Automotive

Year to date August 2014, Indonesia export 126,935 Completelety Build Up (CBU) vehicle units and 71,000 Completely Knock Down (CKD) vehicle units, while the total production is 878,000 vehicle units, so the export is 22.5 percent of total production. Automotive export is more than double of its import. Prediction, by 2020 the automotive export will be the third after CPO export and shoes export.[58]

While year to date August 2015, Indonesia export 123,790 motorcycles. The dominant manufactures, export 83,641 motorcycles and announced to make Indonesia as a base of exporting country of its products.[59]

Other services

General government, Private services

Up to end of June 2011, the fixed state assets was Rp 1,265 trillion ($128 billion), while the value of state stocks was Rp 50 trillion ($5.0 billion) and other state assets was Rp 24 trillion ($2.4 billion). .[60]

Indonesian migrant workers

The most common destination of Indonesian migrant workers is Malaysia (including illegal workers). In 2010, according to a World Bank report, Indonesia was among the world's top ten remittance receiving countries with value of totalling $7 billion.[61]

May 2011: There are 6 million Indonesian citizens working overseas, 2.2 million of whom reside in Malaysia and another 1.5 million in Saudi Arabia.[62]

Expatriate workers

In 2011, Indonesia released 55,010 foreigners working visas, increased by 10% compared to 2010, while the number of foreign residents in Indonesia, excluding tourists and foreign emissaries was 111,752 persons, rose by 6% to last year. Those who received visas for 6 months to one year were mostly Chinese, Japanese, South Korean, Indian, American and Australian. A few of them were entrepreneurs who made a new businesses.

Public expenditure

Since the Asian financial crisis in the late 1990s which contributed to the end of the Suharto regime in May 1998, Indonesia's public finances have undergone a major transformation. The financial crisis caused a huge economic contraction and a commensurate decline in public spending. Debt and public subsidies increased dramatically while development spending was sharply curtailed.

Now, one decade later, Indonesia has moved out of crisis and into a situation in which the country once again has sufficient financial resources to address its development needs. This change has come about as a result of prudent macroeconomic policies, the most important of which has been very low budget deficits. Also, the way in which the government spends money has been transformed by the 2001 "big bang" decentralisation, which has resulted in over one-third of all government spending being transferred to sub-national governments by 2006. Equally important, in 2005, spiraling international oil prices caused Indonesia's domestic fuel subsidies to run out of control, threatening the country's hard won macroeconomic stability. Despite the political risks of major price hikes in fuel driving more general inflation, the government took the brave decision to slash fuel subsidies.

This decision freed up an extra US$10 billion for government spending on development programs.[63] Meanwhile, by 2006 an additional US$5 billion had become available thanks to a combination of increased revenues boosted by steady growth of the overall economy, and declining debt service payments, a hangover from the economic crisis.[63] This meant that in 2006 the government had an extra US$15 billion to spend on development programs.[63] The country has not seen "fiscal space" of such magnitude since the revenue windfall experienced during the oil boom of the mid-1970s. However, an important difference is that the 1970s oil revenue windfall was just that: a lucky and unforeseen financial boon. In contrast, the current fiscal space has been achieved as a direct result of sound and carefully thought through government policy decisions.

However, while Indonesia has made significant progress in freeing up financial resources for its development needs, and this situation is set to continue in the next few years, subsidies continue to place a heavy burden on the government’s budget. The 2005 reductions on subsidies notwithstanding, total subsidies still accounted for close to US$30 billion in government spending in 2012, or over 15% of the total budget.[63]

One of the results of the Habibie government (May 1998 to August 2001) to decentralise power across the country in 2001 was that increasingly high shares of government spending have been channelled through sub-national governments. As a result, provincial and district governments in Indonesia now spend around 40% of total public funds, which represents a level of fiscal decentralisation that is even higher than the OECD average.

Given the level of decentralisation that has occurred in Indonesia and the fiscal space now available, the Indonesian government has a unique opportunity to revamp the country’s neglected public services. If carefully managed, this could allow the lagging regions of eastern Indonesian to catch up with other more affluent areas of the country in terms of social indicators. It could also enable Indonesian to focus on the next generation of reforms, namely improving quality of public services and targeted infrastructure provision. In effect, the correct allocation of public funds and the careful management of those funds once they have been allocated have become the main issues for public spending in Indonesia going forward.

For example, while education spending has now reached 17.2% of total public spending ─ the highest share of any sector and a share of 3.9% of GDP in 2006, compared with only 2.0% of GDP in 2001 ─ in contrast total public health spending remains below 1.0% of GDP.[63] Meanwhile, public infrastructure investment has still not fully recovered from its post-crisis lows and remains at only 3.4% of GDP.[63] One other area of concern is that the current level of expenditure on administration is excessively high. Standing at 15% in 2006, this suggests a significant waste of public resources.[63][64]

Economic challenges

It was only until changes in government in 1965 that triggered off essential progress in lowering the country's poverty rate. From a steep recession in 1965 with an 8% decline in GDP, the country began to develop economically in the 1970s, earning much benefit from the oil shock. This development continued throughout the 1980s and into the 1990s despite the oil counter-shocks. During these periods, GDP level rose at an average rate of 7.1%. Indonesia saw consistent growth, with the official poverty rate falling from 60% to 15%.[65] Despite this development, an estimated 13.33% of the population (2010 estimate) remains below the poverty line.[66]

Labor unrest

As of 2011 labour militancy was increasing in Indonesia with a major strike at the Grasberg mine and numerous strikes elsewhere. A common issue was attempts by foreign-owned enterprises to evade Indonesia's strict labour laws by calling their employees contract workers. The New York Times expressed concern that Indonesia's cheap labour advantage might be lost. However, a large pool of unemployed who will accept substandard wages and conditions remains available. One factor in the increase of militancy is increased awareness via the internet of prevailing wages in other countries and the generous profits foreign companies are making in Indonesia.[67]

On 1 September 2015, thousands of workers in Indonesia staged demonstrations across the country in pursuit of higher wages and improved labour laws. Approximately 35,000 people rallied in several parts of the country. They demanding 22 to 25 per cent increase in minimum wage by 2016 and lower prices on essential goods, including fuel. The unions also want government to ensure job security and provide the basic rights of the workers.[68]

Inequality

Economic disparity and the flow of natural resource profits to Jakarta has led to discontent and even contributed to separatist movements in areas such as Aceh and Irian Jaya. Geographically, the poorest fifth regions account for just 8% of consumption, while the richest fifth account for 45%. While there are new laws on decentralisation that may address the problem of uneven growth and satisfaction partially, there are many hindrances in putting this new policy into practice.[65]

At the Indonesian Chamber of Commerce and Industry (Kadin) meeting at Makassar on April 2011, Disadvantaged Regions Minister said there are 184 regencies classified as disadvantaged areas in Indonesia with around 120 regencies were located in the eastern part of Indonesia.[69]

Inflation

Inflation has long been another problem in Indonesia. Because of political turmoil, the country had once suffered hyperinflation, with 1,000% annual inflation between 1964 and 1967,[70] and this had been enough to create severe poverty and hunger.[71] Even though the economy recovered very quickly during the first decade of New Order administration (1970–1981), never once was the inflation less than 10% annually. The inflation slowed during the mid-1980s, however, the economy was also languid due to the decrease of oil price that reduced its export revenue dramatically. The economy was again experiencing rapid growth between 1989–1997 due to the improving export-oriented manufacturing sector, still the inflation rate was higher than economic growth, and this caused widening gap among several Indonesians. The inflation peaked in 1998 during the Asian financial crisis, with over 58%, causing the raise in poverty level as bad as the 1960s crisis.[72] During the economic recovery and growth in recent years, the government has been trying to decline the inflation rate. However, it seems that Indonesian inflation has been affected by the global fluctuation and domestic market competition.[73] As of 2010, the inflation rate was approximately 7%, when its economic growth was 6%. To date, inflation is affecting Indonesian lower middle class, especially those who can't afford food after price hikes.[74][75]

Best performance

Based on the regional administration implementation performance evaluation of 2009, by an order the best performance were:

Based on JBIC Fiscal Year 2010 survey (22nd Annual Survey Report) found that in 2009, Indonesia has the highest satisfaction level in net sales and profits for the Japanese companies.[77]

High-net-worth individuals

According to Asia Wealth Report, Indonesia has the highest growth rate of high-net-worth individuals (HNWI) predicted among the 10 most Asian economies.[78]

The Wealth Report 2015 by Knight Frank reported that in 2014: there are 24 individuals with wealth at least one billion US Dollar. 18 of them live in Jakarta and the others spread among big cities in Indonesia. 192 persons can be categorised as centa millionaire with wealth at least 100 million US Dollar and 650 persons can be categorised as high-net-worth individual with wealth at least 30 million US Dollar.[79]

Other data

Agriculture – products: rice, cassava (tapioca), peanuts, rubber, cocoa, coffee, palm oil, copra; poultry, beef, pork, eggs

Exchange rates: Indonesian rupiah (IDR) per US dollar – 9,698.9 (2008), 9,143 (2007), 9,159.3 (2006), 9,704.7 (2005), 8,938.9 (2004)

See also

References

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Further reading

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