How is Indonesia reaching its development goals?

While the Republic of Indonesia is just over seven decades old in its current form, the South-east Asian nation of more than 17,000 islands has a history that dates back much longer. The name Indonesia was first used in 1850 by the British anthropologist James Richardson Logan in reference to the extensive group of islands that was known at the time as the Indian or Malay Archipelago.

Origins

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 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. This helped prompt the rapid development of agricultural techniques – particularly regarding the cultivation of rice – that facilitated pockets of growth. Islam arrived in the region in the 8th century CE, though meaningful conversions did not occur until the 14th century, beginning in Samudera Pasai (North Sumatra) and continuing into Makassar as well as Central Java in the 17th century. By that time, Islam had become the archipelago’s principal religion.

Geography & Climate

Indonesia is spread over more than 17,000 islands, some 6000 of which are inhabited. The archipelago sits 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 make-up. Due to its proximity to the equator, Indonesia’s tropical climate is accompanied by average temperatures of between 28°C and 34°C around the coast, and 23°C in mountainous areas. Temperatures show little variation from season to season. The dry season lasts from June to October, while the rainy season runs from December to March. The country’s relative humidity varies between 70% and 90%. Given its location over part of the Ring of Fire, a near-continuous series of volcanic arcs, belts and tectonic plate movements, Indonesia has been subject to natural disasters such as earthquakes, tsunamis and volcanic eruptions.

Population

With a population as of 2019 of approximately 268.1m, made up of more than 300 different ethnic groups, Indonesia is the world’s third-largest democracy and the most populous Muslim-majority nation. The population is expected to grow further, reaching 270m by 2025, according to the UN. It is currently the 16th-largest economy in the world. Having more than 10.4m inhabitants living within an area of 740 sq km, Jakarta is the country’s largest city. Other major cities in Indonesia include Surabaya, Bandung, Medan and Semarang.

Java is the most populous island in the world, with approximately 148m people spread over 128,298 sq km. It is a densely populated island, only accounting for 7% of Indonesia’s total land mass. The country’s population has more than doubled since 1971, when it was 119.2m, and it is continuing to grow at a rate of approximately 1% per year. The largest ethnic groups, according to the last census of 2010, are the Javanese (41.7%), Sundanese (15.4%), Malay (4.1%) and Chinese Indonesians (4%), which are closely followed by Madurese (3.3%), Batak (3%), Bugis (2.9%), Minangkabau (2.7%) and Betawi (2.5%).

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 form of communication in the realms of government, media, 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 in recent years, with this likely stemming from the fact that members of 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 faiths, namely Islam (86.1% of the population), Protestantism (5.7%), Catholicism (3%), Hinduism (1.8%), Buddhism (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.

National Identity

Pancasila constitutes the original philosophical foundation of the republic and consists of two Sanskrit words, panca meaning five and sila meaning principle. These five interrelated principles, which were first articulated in a speech delivered by Indonesian nationalist leader Sukarno, are nationalism, humanitarianism, representative democracy, social welfare and monotheism. These principles became a blueprint for the growth and development of the nation, and they remain significant for the country today, despite variations in their interpretation and order over the course of the 20th century. Indonesia’s flag features two equal horizontal bands of red at the top and white at the bottom. The colours derive from the banner of the Majapahit Empire of the 13th-15th centuries. The red symbolises courage and the white purity.

Towards Independence

Dutch colonialism was well established by the mid-18th century, and the country continued to consolidate its power over the following 200 years, with the Dutch East India Company expanding from Java and Batavia – the city now known as Jakarta. The first 30 years of the 20th century saw a rise in the popularity of notions of independence and nationalism among the region’s local population. However, it would be some time before the nation was successful in establishing its independence. The Second World War brought with it the Japanese invasion and ensuing occupation in March 1942, which signalled the end of Dutch colonial rule and was a catalyst for the previously suppressed Indonesian independence movement.

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 over six weeks for the allied Dutch and British forces to arrive, by which time the Indonesian nationalist forces had managed to establish themselves on the territory. The conflict that followed was a final attempt by the Dutch to re-establish their authority. However, with the British withdrawing from the conflict 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. On August 17, 1950, precisely five years after the initial proclamation of independence, Sukarno once again proclaimed a single unitary Republic of Indonesia.

Path to Democracy 

While the first democratic elections were held in 1955, the following years were fraught with political, economic and social volatility. In 1957 Sukarno implemented a system of “Guided Democracy”, declaring himself president for life in September 1963. He presided over a complex political sea, in which the civilian nationalist leadership, the Islamic leadership, the Indonesian Communist Party (PKI) and the army were all opposed to each other. The fraught 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, which comprised students, Muslim communities and army factions, the PKI coup was swiftly and brutally defeated in the following months. By this point Sukarno’s health was failing and he was replaced in March 1967 by Major General Suharto – an army officer who had been largely responsible for halting the coup.

Suharto remained in office for the next seven consecutive five-year terms, during which time a highly centralised system of governance was put in place, including various transmigration policies and the forced resettlement of many Javanese people – the legacy of which remains today in the form of ethnic tensions. During this period the annexation of West Papua and Timor-Leste sparked widespread international condemnation.

Meanwhile, the population started to express its frustration with the widespread corruption and Suharto’s brand of authoritarianism. When the 1997-98 Asian financial crisis prompted the currency’s value to plummet and inflation to soar, students took to the streets to voice their grievances, which were largely supported by the greater population. Eventually, under widespread pressure to resign, Suharto left office on May 21, 1998. Suharto’s position was filled by his vice-president, Bacharuddin Jusuf Habibie, who was able to restore order by regaining the support of the IMF, and utilised the funding in the country’s numerous economic stabilisation programmes. Habibie began to enact a period of considerable government change under the banner of Reformasi, or reform.

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. He took over a country beset with inter-ethnic and inter-religious violence, which had long been suppressed under Sukarno and Suharto. This was particularly acute in Kalimantan, Sulawesi, Aceh and Maluku. Some 10,000 people are thought to have been killed between 1999 and 2002.

Partly to address the existing tensions across the country, the government pushed through a policy of decentralisation and democratisation. Despite the move, Wahid’s leadership style was unpopular, and unrelenting questions concerning his competency and health meant he eventually handed power to his vice-president, Megawati Sukarnoputri, in July 2001.

Although she was head of the Indonesian Democratic Party of Struggle (PDI-P) and Sukarno’s eldest daughter, Sukarnoputri’s tenure as Indonesia’s first female president was fairly short-lived, and she was defeated in the September 2004 election by Susilo Bambang Yudhoyono, a Democratic Party candidate. The country’s first democratically elected president, Yudhoyono was re-elected for a second five-year term in 2009. Fresh presidential elections took place in July 2014, marking the end of Yudhoyono’s presidential career and the beginning of PDI-P candidate’s Joko Widodo, better known as President Jokowi, who had entered into politics as the mayor of his hometown – Surakarta in Java – and subsequently became the governor of the Special Capital Region of Jakarta. In 2019 President Jokowi comfortably won re-election with 55.5% of the national vote. Central to his new administration is the ambition to move the capital of Indonesia from Jakarta to the province of East Kalimantan, which could prove to be his biggest challenge and lasting legacy.

Head of State

According to the 1945 constitution, the president is the head of state, head of government and commander-in-chief of the Indonesian National Armed Forces. However, several key amendments were made to the constitution between 1999 and 2002. One of these was to limit the president to a maximum of two consecutive five-year terms. Another was to change the selection process for the president. Previously, heads of state had been elected by the People’s Consultative Assembly (MPR) – the Parliament – while under the new system he or she is to be elected by popular vote. In 2004 Yudhoyono became the first president to be elected in this manner.

The president, as the head of government, has the power to appoint members of the Cabinet, while as executive, he or she has the right to propose bills to the People’s Representative Council (DPR), the lower and more important house of Parliament. In emergencies the president may also issue regulations in lieu of laws. The post-holder also has the authority to sign treaties, appoint ambassadors, issue legal pardons and make appointments to the judiciary.

Legislative Powers

The MPR is a bicameral institution, composed of a lower house, the DPR, and an upper house, the Regional Representative Council (DPD). The DPR is chaired by a speaker and four deputy speakers elected from among the membership. The speaker comes from the party that holds the most seats in the house and so, too, the deputies. The current speaker is Puan Maharani of the PDI-P, the first female DPR speaker.

The DPR has legislative, budgeting and oversight functions, with chief goals including the drafting and passing of laws, approving government regulations and offering provisional oversight to the DPD. Alongside the president, it is responsible for the annual budget and has the right to question the decisions of the executive branch. For the 2019-24 session the ruling coalition, Kabinet Indonesia Maju, holds 427 of the 575 seats.

Bills from the DPD must gain DPR approval; however, the DPD has no power to revise or reverse DPR decisions. The DPD consists of 136 seats, with the total number limited to not more than one-third of the DPR. This allows some flexibility in the number of provinces, which has grown since the decentralisation push in 1999 from 26 to 34. DPR and local elections are held simultaneously every five years. According to the constitution, DPD members must serve as individuals rather than party members, although they may have party connections. The DPD has the power to submit bills to the DPR on regional issues and has an oversight function regarding government activities in the regions.

Local Government

Since decentralisation, Indonesia’s 34 provinces have received a much greater degree of control over local affairs and finances. Of these provinces, 33 have their own provincial legislative assemblies, and these had a total of 2207 elected seats in the 2019 elections. Provinces are further subdivided into regions or municipalities, with each of the 514 local authorities also having their own District Legislative Assemblies.

In total, some 17,610 seats in the assemblies are filled by elections every five years. Following a 2017 change to the electoral law, all parties are required to receive at least 4% of the national vote to qualify, potentially limiting the range of local and ethnically based parties that can prevail. Before the 2019 elections, local, national assembly and council elections were traditionally held around the same time, with the country’s 190m eligible voters voting again three months later for the president. The regions and municipalities have control over local education, health and infrastructure, with budgets provided both centrally and by local revenue raising.

Law & Order

The highest court in Indonesia is the Supreme Court (SC), which has oversight of 68 high courts, 31 general courts, four military courts and four administrative courts. The SC is the final court of appeal. Its chief justice is currently Muhammad Syarifuddin, who was elected by the 48 justices in April 2020 following the retirement of his predecessor, Muhammad Hatta Ali.

On constitutional matters, the SC defers to the Constitutional Court (CC), which consists of nine justices. The CC rules on motions to impeach the president, which if passed are then forwarded to the MPR, and it also has the final say in disputes over elections, the dissolution of political parties and conflicts between government agencies.

Another key legal body is the Corruption Eradication Commission (KPK), which has successfully investigated a number of local politicians and businesspeople, leading to arrests. There have been some political tensions around the KPK. A series of mass student-led demonstrations erupted throughout the country in September 2019 when members of Parliament sought to pass a bill revising the abilities of the KPK to operate and perform its investigative duties. The protests developed into the largest student movement since the 1998 demonstrations that brought down the Suharto regime.

2019 General Elections

The April 2019 general elections saw the president, vice-president, members of the MPR and local legislative bodies elected on the same day, a first in the country’s history. More than 154m voters cast their ballots, a record turnout of over 80%. A total of 16 parties participated in the election, with the two main parties, the PDI-P and the opposition Gerindra Party, securing 128 and 78 seats in the DPR, respectively. President Jokowi secured re-election by a margin of 55.4%. He led a coalition of 10 parties, having chosen an independent, Ma’ruf Amin, as his running mate.

On October 23, 2019 President Jokowi announced his new cabinet. Indicating the government’s pro-business leanings, tech entrepreneur and founder of Gojek, Nadiem Makarim, was appointed minister of education and culture, businessman Erick Thohir was named minister of state-owned enterprises and Sri Mulyani Indrawati was reappointed minister of finance. Prabowo Subianto, President Jokowi’s 2019 rival for the office of the president and former general, was appointed minister of defence. At the same time, President Jokowi identified five key priority areas for his second term: maturation of human resources; infrastructure development; regulatory simplification; the easing of bureaucracy; and the transformation from an economy dependent on natural resources to one that is typified by value-added manufacturing.

Regional Involvement

In terms of greater regional involvement, the country remains ASEAN’s largest member state and an increasingly influential one. In recent years Indonesia has continued to strengthen its diplomatic relations with neighbouring countries, while also boosting long-term cooperation with Japan, China and South Korea. Additionally, Indonesia has occupied an integral role in assisting with the resolution of territorial disputes between neighbouring 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 $2.6trn and almost 640m people. The AEC is designed to allow the free movement of goods, services, investment, skilled labour and capital throughout the region. The AEC Blueprint 2025 was adopted at the 27th ASEAN summit in Kuala Lumpur in November 2015, and lays out goals for the community to achieve between 2016 and 2025.

Resources

As of 2019 Indonesia was responsible for 4.7% of the world’s natural gas production, with proven reserves of 96trn cu feet in 2018. These figures positioned the country well, as Indonesia is ranked 11th in the world in gas production and 13th in terms of reserves. Indonesia’s total primary production – including oil, gas, coal and renewable energy – totalled 411.6m tonnes of oil equivalent in 2018, according to the Secretariat-General of the National Energy Council (DEN). Approximately 64% of this figure, or 261.4m tonnes of oil equivalent, was exported. Crude oil production ticked downwards between 2009 and 2018, from 949,000 barrels per day (bpd) to 778,000 bpd. Meanwhile, gas production reached 2.9m standard cu feet in 2018.

Policy changes and increasing domestic demand have contributed to decreasing exports. In 2019 the oil and gas industry contributed Rp159.8trn ($11.3bn) to state revenue, or 7.4% of the total. As a percentage of total Indonesian exports, oil and gas dropped from a high of 17% in 2011 to just over 8% of total exports by 2018. The country’s oil import dependency ratio fell from 45% in 2016 to 35% in 2018. Accordingly, investment levels in the upstream segment increased. In 2018 the sector benefitted from $10.9bn worth of investment, with inflows trending upwards. In the first half of 2019 investment rose by 16% year-on-year to $5.2bn.

The country remains among the world’s largest exporters of coal. Of the 557m tonnes produced in 2018, 63% – or 357m tonnes – was exported, mostly to China and India. The government set a production target of 550m tonnes for 2020, a figure that was down from 2019’s realised levels due to falling demand for coal worldwide. Meanwhile, coal consumption in 2019 was down from the projected 121m tonnes, at 115m tonnes, which the DEN attributes to the opening of several steam power plants.

Indonesia had an estimated 99bn tonnes of coal reserves at the end of 2017, 13.3bn tonnes of which were proven. At the current rate of production, it is expected that these reserves will be depleted in mid-2040. Approximately one-third of Indonesian coal is lower quality or sub-bituminous coal. Indonesia also produces tin, nickel, copper, gold and silver.

Palm Oil

Indonesia is the world’s largest producer of palm oil, with plantations concentrated in Sumatra, Kalimantan, Sulawesi and Papua. According to Statistics Indonesia (BPS), the production of crude palm oil in large estates rose from 20.5m tonnes in 2015 to 29.6m tonnes in 2019. Much of the expansion happened between 2017 and 2018, during which production increased from 21.7m tonnes to 27.6m tonnes. Smallholders’ production also grew from 10.4m tonnes in 2015 to 16.2m tonnes in 2019.

As the domestic production of palm oil rose, so did the volume of exports. Indonesia exported 29.5m tonnes of palm oil in 2019, up from 28.8m tonnes in 2017 and 27.7m tonnes in 2015, according to BPS. However, the value of palm oil exports dropped over this period, starting at $16.4bn in 2015, and peaking at $20.3bn in 2017 before falling to $15.6bn in 2019. That year the main destinations were China (5.8m tonnes) India (4.6m tonnes), Pakistan (2.2m tonnes) and Bangladesh (1.4m tonnes). The country also exported sizeable volumes to customers in the Netherlands, the US, Spain, Egypt, Italy and Singapore.

Domestic consumption increased 44% in the first eight months of 2019, as demand for biodiesel rose due to a government regulation making it mandatory for diesel used in transportation to contain biodiesel. As of August 2019 consumption had hit 11.6m tonnes and the national crude palm oil stock was estimated at 3.8m tonnes.

Energy Sources

In 2018 approximately 50% of Indonesia’s energy was generated by coal, with natural gas contributing 29% to the mix, while oil provided 7% and renewable energy sources 14%, according to the Ministry of Energy and Mineral Resources. While there are currently no nuclear power plants in the country, the Indonesia National Atomic Energy Agency is keen to develop them.

Indonesia is currently focusing on developing solar and hydropower. At the end of 2019 the country had 197.5 MW of cumulative solar photovoltaic and 5616 MW of renewable hydropower generation capacity. Due to the 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. However, the completion date for the plants was pushed back from 2014 to 2020. This is accompanied by a 1040-MW hydroelectric plant, which aims to increase power generation capacity in Java and Bali.

Indonesia has a total renewable energy potential of 442 GW for power plants, as well as 200,000 bpd of biofuel and biogas for transport, household, commercial and industrial use, according to the DEN. Indeed, the number of renewable energy-based power plants is expected to increase by around 700 MW to reach 10,843 in 2020. In 2018 renewables accounted for approximately 14% of the 64.5 GW of electricity produced in the country. The National Energy Policy targets increasing renewables’ contribution to 23% of the energy mix by 2025 by capping the use of oil at 25% of the total and implementing energy-efficiency measures.

State-owned electricity distribution company Perusahaan Listrik Negara accounts for the majority of the country’s power output. The Electricity Law of 2009 aimed to reduce the firm’s monopoly on distribution to encourage the participation of private firms in the power sector.

Foreign Investment

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

Another central initiative is the omnibus bills, which President Jokowi submitted to the DPR in early 2020. The wide-ranging bills aim to improve the business climate, attract investment, boost economic growth and create jobs. They cover 11 areas, including the easing of labour laws, the creation of a land bank to allocate space to investors, immigration, intellectual property rights and taxation. As of May 2020 the laws were still under deliberation. If they are properly implemented, the proposed labour, investment and tax reforms will boost the economy and help Indonesia escape the middle-income trap.

Human Capital 

Indonesia’s young and growing population is one of its strongest assets, as is its middle class, which has continued to expand in recent years. Economic growth averaging 5.6% a year between 1970 and 2019 led to a significant decrease in the poverty rate and enabled the country to gain middle income status, according to the World Bank. As of 2020 around 20% of the population – or 52m individuals – were financially secure, and 115m Indonesians were in the aspiring middle class. This has helped to fuel overall economic growth, with the middle class accounting for around half of the country’s total consumption.

Outlook

While Indonesia is expected to face headwinds in the short term due to the fallout from the Covid-19 pandemic, its economic stability will help it to maintain momentum in the medium to long term. President Jokowi continues to be popular after re-election, but the government’s response to both the pandemic and the resulting economic slowdown may put this to the test.

President Jokowi’s legacy could end up being the move to the new capital, a project that he announced shortly after his re-election. The government intends for the first ministries to relocate to East Kalimantan by 2025, although the project has been placed on hold as funds were redirected to Covid-19 relief. Jakarta, overcrowded and vulnerable to the effects of climate change, will instead be positioned as a the country’s commercial capital, as well as a regional centre for business and finance.