Ambitious development plans in the works in Indonesia after the 2014 election

While the Republic of Indonesia is less than seven decades old in its current form, the South-east Asian nation of more than 17,500 islands has had a much longer history under other names. In fact, the name “Indonesia” was first used in 1850 by British anthropologist James Richardson Logan when he referred to the extensive group of islands widely known at the time as the Indian or Malay Archipelago.

History

Archaeological evidence indicates that the ancestors of modern humans lived on the archipelago as far back as 1.9m years ago, while evidence of modern humans goes back 40,000 years. By 2000 BCE, the islands were inhabited by a diverse group of peoples known as the Austronesians. These people exhibited impressive maritime skills and took full advantage of the archipelago’s location, engaging in extensive inter-island trading. Such burgeoning trade helped prompt the rapid development of agricultural techniques, particularly for the cultivation of rice, that facilitated pockets of growth.

Islam first entered the region around the 8th century CE, although meaningful conversions did not occur until the 14th century, beginning in Samudera Pasai (North Sumatra) and continuing in Makassar and central Java in the 17th century. By this time, Islam had become the archipelago’s principal religion.

National Identity

Pancasila constitutes the original philosophical foundation of the republic and consists of two Sanskrit words, sila meaning “principle”. These five interrelated principles, which were first articulated in a speech delivered by Indonesian nationalist leader Sukarno, include nationalism, humanitarianism, representative democracy, social welfare and monotheism. These principles became a sort of blueprint for the growth and development of the nation, and they remain significant today, despite variations in their interpretation and order over the course of the 20th century.

The flag of Indonesia features two equal horizontal bands of red (at the top) and white (at the bottom). The colours are derived from the banner of the Majapahit empire of the 13-15th centuries; red symbolises courage and white, purity.

Towards Independence 

Dutch colonialism was well established in Java by the mid-18th century, and the Dutch continued to consolidate their power over the following two centuries. However, the first 30 years of the 20th century saw a rise in the popularity of the notions of independence and nationalism amongst the region’s local population.

The Second World War brought with it the Japanese invasion and ensuing occupation, which signalled the end of Dutch colonial rule and was a catalyst for the previously suppressed Indonesian independence movement. As such, when the Japanese occupation finally came to an end and Japanese forces surrendered in the Pacific, it was only two days before the country’s first president, Sukarno, declared Indonesian independence on August 17, 1945.

Following this declaration, it took six weeks for the Allied Dutch and British forces to arrive, by which time Indonesian nationalist forces had established themselves. The conflict that followed was a final attempt by the Dutch to re-establish their authority.

However, with the British withdrawing towards the end of 1946, and following four years of intermittent fighting and consistently fierce criticism of the Dutch by the UN, the Netherlands formally recognised the sovereignty of a federated Republic of the United States of Indonesia on December 27, 1949. Subsequently, on August 17, 1950, precisely five years after the proclamation of independence, Sukarno proclaimed a single unitary Republic of Indonesia.

The Path to Democracy

While the first democratic elections were held in 1955, the years that followed were fraught with political, economic and social volatility. In 1957 Sukarno declared and implemented a system of “Guided Democracy”, declaring himself president for life in September of 1963. He presided over a raging political sea within which the civilian nationalist leadership, the Islamic leadership, the Indonesian Communist Party (PKI) and the army were all opposed to each other. However, the situation reached a breaking point on September 30, 1965 through an attempted PKI coup against Sukarno’s government. Following the impromptu formulation of a “New Order” coalition, comprising students, Muslim communities and army factions, the PKI coup was swiftly and brutally defeated in the following months.

By this point, however, Sukarno was in failing health and he was replaced by an army officer largely responsible for halting the coup, Major General Suharto. Assuming power in March 1967, Suharto remained in office for seven consecutive five-year terms, during which time a system of highly centralised governance was put in place, including transmigration policies and forced resettlement of many Javanese people – the legacy of which remains today in the form of ethnic tensions. During this period, the annexation of both West Papua and East Timor sparked international condemnation, while the population started to express its frustration with the widespread corruption and Suharto’s brand of authoritarianism.

When the Asian financial crisis of 1997-98 prompted the currency to plummet and inflation to soar, students took to the streets to voice their grievances, supported by the greater population. Eventually, under widespread pressure to resign, Suharto left office on May 21, 1998. His position was filled by his vice-president, Bucharuddin Jusuf Habibie, who restored order by regaining IMF support for economic stabilisation programmes and beginning a period of considerable government change under the banner of Reformasi.

Political Landscape

In 1999 Indonesia’s first freely contested parliamentary elections since 1955 were held, with Abdurrahman Wahid, a well-known intellectual and leader of Indonesia’s largest Muslim organisation, Nahdlatul Ulama, sweeping to victory. His leadership style, however, was less popular, and unrelenting questions concerning his competency and health meant he was dismissed in July 2001 in favour of his vice-president, Megawati Sukarnoputri. Though head of the Indonesian Democratic Party of Struggle (PDI-P) and Sukarno’s eldest daughter, Megawati’s tenure was also short-lived and she was defeated in the September 2004 election by retired army general and Democratic Party candidate Susilo Bambang Yudhoyono. Widely referred to as SBY, Yudhoyono served as the first democratically elected president in the country’s history and was subsequently re-elected for a second five-year term in 2009.

Fresh presidential elections took place in July 2014, marking the end of SBY’s presidential career and the beginning of that of PDI-P candidate Joko Widodo, a former furniture maker who entered into politics as the mayor of his hometown of Solo and then became the governor of Jakarta.

Regional Involvement

In terms of Indonesia’s greater regional involvement, after chairing ASEAN in 2011, the country remains an increasingly influential member. In recent years, Indonesia has continued strengthening its diplomatic relations with neighbouring countries, including Malaysia, Singapore and the Philippines, while also boosting long-term cooperation with Japan. In fact, Japan continues to be a top investor in Indonesia today. Indonesia has also occupied an integral role in assisting the resolution of territorial disputes between Thailand and Cambodia.

The next objective for the regional bloc is the implementation of the ASEAN Economic Community (AEC), which is likely to create numerous opportunities for investors, given the bloc’s combined GDP of around $2.3trn. The AEC is designed to allow the free movement of goods, services, investment, skilled labour and capital throughout the region.

Human Capital

Indonesia’s young and growing population is one of its strongest assets, as is its middle class, which continues to expand. The government has maintained its focus on the promotion of creative industries, areas that have seen considerable success in neighbouring states such as Thailand. At present, more than 8m people work within these industries, which contribute approximately 8% to Indonesia’s GDP. Local and foreign corporations are increasingly investing in Indonesia, realising its potential. Moving forward, the country is targeting the provision of improved vocational training opportunities for graduates. Such a focus fits well with Indonesia’s continued support for and encouragement of the development of value-added industries.

Foreign Investment

Through inviting targeted investment and adapting existing regulatory frameworks, the government has taken significant steps to facilitate foreign investment and the development of value-added industries. One such step has been the Indonesia Investment Coordinating Board’s One-Stop Service, a centralised online portal through which investors can submit and track investments made in the different economic sectors of the country.

While the exact impact of the portal is not yet known, the fact that the government is working to streamline investment procedures – particularly for foreign investors – has been well received by the international community. Investment currently accounts for some 32% of GDP. While Indonesia’s natural resources are plentiful, by channelling foreign direct investment into the right areas the government is helping to ensure that the country’s true potential, in terms of value added, is realised.

Resources

Indonesia is well known for its abundance of natural resources, including oil, gas, coal, nickel, tin, copper, gold and silver. The country produced 852,000 barrels per day (bpd) of crude oil in 2014, according to BP’s “Statistical Review of World Energy 2015”, down 3.5% from the previous year’s 882,000 bpd and in line with a broader trend of falling production. Indonesia had proven oil reserves of 3.7bn barrels as of the end of 2014, according to BP, while it imported around 480,000 bpd during 2013 due to consistently increasing domestic demand for fuel.

The country is also a major producer of gas, which it exports in the form of liquefied natural gas. As of the end of 2014, it had proven reserves of 2.9trn cu metres of gas, and it produced 73.4bn cu metres in 2014, giving it a reserves-to-production ratio of 39.2 years at current output levels. Its 2014 production was equivalent to 2.1% of the global total, making it the second-largest producer in Asia.

Indonesia remains the world’s largest exporter of thermal coal, exporting 355.7m tonnes in 2013 to countries such as Japan, South Korea, China and India. The country’s coal resources total 28bn tonnes and are estimated to last 67 years at current production rates, according to BP, with the three largest deposits located in Kalimantan. Approximately 60% of Indonesian coal is lower quality or sub-bituminous coal. According to BP, coal production reached 458m tonnes in 2014, up 2% from 2013. Other minerals produced in the country include tin, nickel, gold and silver.

Palm Oil

The production of palm oil continued to increase in 2013, reaching 27m tonnes, up from 26.5m tonnes in 2012 and 23.5m tonnes in 2011, according to figures from the Indonesian Palm Oil Association. The majority of this was exported, with 21.2m tonnes shipped in 2013. The US Department of Agriculture projected total 2014 output of around 31m tonnes. The total area of oil palm cultivation in Indonesia was estimated at 8.2m ha, an increase of more than 100,000 ha over 2011. This number is expected to reach 13m ha by 2020. The plantations are concentrated in Sumatra, Kalimantan and Sulawesi.

While there has been talk of a reduction in export taxes, this has yet to materialise, and lower tax levels in Malaysia continue to give that country an advantage over Indonesia. Higher taxes have also been applied to crude palm oil as opposed to downstream products made from crude palm oil as part of a government-initiated shift to promote the development of downstream industries.

Concerns over the deforestation of rainforests remain a major issue, although they are being addressed, and many Indonesian companies have joined the Roundtable for Sustainable Palm Oil, an organisation established in 2004 to promote the growth and use of certified sustainable palm oil.

Energy Sources

Approximately 86% of Indonesia’s energy comes from conventional thermal sources, with hydroelectric power accounting for 9%, and geothermal and other alternative energy sources accounting for 5%. The government recently set an ambitious target of reaching 90% of its national electricity coverage by 2020. The country is keen to develop nuclear power, and in early 2014 the government announced that a 30-MW nuclear power plant would be built in the western part of Java. In terms of alternative energy sources, Indonesia is focusing on solar power, with the government planning to build 36 new solar power plants, especially in isolated and border areas.

Due to the rapidly increasing demand for power, a 10,000-MW “fast-track” plan has been under way since 2004 in a bid to boost output, predominantly through the construction of coal-fired thermal power plants. The completion date for the plants has been pushed back from 2014 to 2020, and it is being followed by a second power transmission development project, which aims to further stabilise the power system in Java and Bali, while also expanding the supply of power to the eastern and western areas. State-owned energy distribution company Perusahaan Listrik Negara is leading the projects and accounts for approximately 85% of generated power.

A 2009 Electricity Law aims to reduce the state-owned firm’s monopoly on distribution and encourage the participation of private firms in the power sector. Shortly after taking office following the 2014 presidential elections, Widodo announced a master plan to generate 35,000 MW of energy by 2019.

Population

With a population of approximately 250m, made up of more than 300 different ethnic groups, Indonesia is the third-largest democracy in the world as well as the world’s most populous majority-Muslim nation. It is currently the world’s 16th-largest economy, while Jakarta is the country’s largest city, with more than 10.2m inhabitants living within an area of 740 sq km. Other major cities in Indonesia include Surabaya, Bandung, Medan and Semerang. Java is the most populous island in the world with 141m people spread over 128,298 sq km, which is equal to just 7% of Indonesia’s total land mass.

The population has more than doubled since 1971, when it was 119.2m, while it continues to grow at a rate of 1% per year. It is estimated that by 2050, the country’s population will exceed 420m. The largest ethnic groups, according to the 2009 census, are the Javanese (41.7%), Sundanese (15.4%) and Malay (4.1%), closely followed by Madurese (3.3%), Batak (3%), Bugis (2.9%), Minangkabau (2.7%) and Betawi (2.5%).

Geography

Indonesia has a total landmass of 1.9m sq km, spread over an archipelago of more than 17,500 islands, some 6000 of which are inhabited. With a coastline of 54,716 km, Indonesia has 1107 km of land boundaries with its neighbour Malaysia, 820 km of borders with Papua New Guinea and 288 km of boundaries with East Timor. The archipelago acts as a meeting place between the Pacific and the Indian Oceans, while also bridging the Asian and Australian continents. This unique position has been influential in the country’s cultural, social and political makeup.

Language

Indonesian is an Austronesian language stemming from the country’s various cultural and linguistic groupings, the majority of which are ethnically Malay. As part of Indonesia’s independence movement during the 1930s, the language – a standardised form of Malay – officially became Bahasa Indonesia and has since become the dominant language in terms of government and media communication, education and business. Local dialects and languages such as Balinese, Javanese and Sundanese are still used in certain areas of the archipelago. The popularity of the English language has also grown, with this likely stemming from the fact that the middle and upper classes frequently send their children to schools where English is the main language of instruction.

Religion

The Indonesian constitution guarantees freedom of religion, with the government currently recognising six religions, namely Islam (86.1%), Protestantism (5.7%), Catholicism (3%), Hinduism (1.8%), Buddhism (around 1%) and Confucianism (less than 1%). On the island of Bali, unlike the rest of the country, more than 93% of the population practises Balinese Hinduism, while in certain rural areas of the country, animism is still practised.

Climate

Due to its proximity to the equator, Indonesia’s tropical climate is accompanied by average temperatures of between 28°C and 34°C in coastal areas, and 23°C in the mountain areas. Temperatures remain similar year round, with little variation from one season to the next. The dry season lasts from June to October, while the rainy season runs from December to March. The country’s relative humidity remains between 70% and 90%. Located over the Ring of Fire, the meeting place of tectonic plates, Indonesia can be subject to earthquakes and volcanic eruptions.