Indonesia enacts major reforms in strategic areas

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 much longer history under other names. The name Indonesia was first used in 1850 by British anthropologist James Richardson Logan in referring to the extensive group of islands that was 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 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 for 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 in Makassar as well as 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, 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 Dutch continued to consolidate their power over the following two centuries, with the Dutch East Indies Company expanding from Java and Batavia – the city they founded now known as Jakarta.

The first 30 years of the 20th century saw a rise in the popularity of the 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.

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 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 raging 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 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 was in failing health 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 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 East Timor sparked 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, Bucharuddin Jusuf Habibie, who was able to restore order by regaining the support of the IMF, and used funding in the country’s various 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, Megawati’s tenure 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, who had entered into politics as the mayor of his hometown – Surakarta in Java – and subsequently became the governor of Jakarta.

REGIONAL INVOLVEMENT: In terms of greater regional involvement, the country remains ASEAN’s largest member and an increasingly influential one. In recent years Indonesia has continued strengthening 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 the resolution of territorial disputes between Thailand and Cambodia. Indonesia has also been involved in the Rohingya issue with Myanmar lately.

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.

GEOGRAPHY: Indonesia has a total landmass of 1.9m sq km, spread over an archipelago of more than 17,000 islands, some 6000 of which are inhabited. With a coastline of 54,716 km, Indonesia also has 1107 km of land boundaries with its neighbour Malaysia, 820 km of borders with Papua New Guinea and 288 km of boundaries with Timor-Leste. 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.

CLIMATE: 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 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 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 can be subject to earthquakes and volcanic eruptions.

RESOURCES: Indonesia ended years of oil production decline in 2016, with production increasing by 6% from 841,000 barrels per day (bpd) in 2015 to 881,000 bpd. However, output fell once again in 2017 to reach 787,800 bpd in March 2017, against the target of 815,000 bpd, as stated by the oil and gas regulator SKK Migas. According to BP’s “Statistical Review of World Energy 2017” report, Indonesia held proven oil reserves of some 3.6bn barrels at the end of 2016; however, Indonesia has remained a net oil importer since 2004.

The country is also a major producer of gas, which it exports as liquefied natural gas (LNG). As of the end of 2016, it had proven reserves of 2.9trn cu metres and had produced 69.7bn cu metres during the year, according to BP. Its 2016 production was equivalent to 2% of the global total, making it the second-largest producer in the Asia Pacific region after Australia. In 2016 the country exported 21.2bn cu metres of gas, 41% of which was exported to Japan, followed by South Korea with 26.9% and China (17.5%). SKK Migas reported that for the first quarter of 2017 Indonesia produced 183.7m standard cu metres per day, which was the equivalent to 101% of the government’s target for the period.

The country remains the world’s largest exporter of coal, shipping 369m tonnes in 2016, according to Statistics Indonesia (BPS), to countries such as Japan, South Korea and China. Estimates of the country’s coal reserves, which had previously been put at 32.3m tonnes, should be revised down by 30-40%, and the reserves may only last until 2032-36, according to a study conducted by PwC for the Indonesian Coal Mining Association. At the start of 2016 the country had 25.5bn tonnes of coal reserves. Approximately 60% of Indonesian coal is lower-quality or sub-bituminous coal. Indonesia’s mineral production also includes tin, nickel, gold and silver.

PALM OIL: Indonesia is the world’s largest producer of palm oil, with plantations concentrated in Sumatra, Kalimantan and Sulawesi. According to data from the UN Development Programme, in 2013 the total plantation area for palm oil production was estimated at 10m ha. Production has risen consistently in recent years, from 31.5m tonnes in 2014 to 32.5m tonnes in 2015 and 35.6m in 2016, according to the Indonesian Palm Oil Association and the Ministry of Agriculture. The majority of output is exported, with 26.6m tonnes shipped in 2016. Although there has been some talk of a reduction in export taxes, this has yet to materialise. Meanwhile, the lower tax levels in Malaysia continue to provide stakeholders there with a market advantage.

There have also been higher tax rates applied to crude palm oil, as opposed to the 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 on 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 is generated by conventional thermal sources, with hydroelectric power contributing 9% to the mix, while geothermal and other alternative energy sources provide 5%.

While there are currently no nuclear power plants in the country, the Indonesia National Atomic Energy Agency is keen to develop this power. To this end, in March 2017 the nuclear regulatory bodies of Indonesia and Russia signed a memorandum of understanding to cooperate on a range of issues related to nuclear safety and security.

In terms of exploring alternative energy sources, Indonesia is currently focusing on developing solar and hydropower. In 2016 Indonesia announced plans to have annual solar power capacity of at least 5 GW by 2020. 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. However, the completion date for the plants has been pushed back from 2014 to 2020. This is being accompanied by a second development project, a 1040-MW hydroelectric plant, which aims to increase the capacity of the power generation system in Java and Bali. 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 in order to encourage the participation of private firms in the power sector. Shortly after taking office following the 2014 presidential elections, President Widodo announced a master plan to generate an additional 35,000 MW of energy by 2019.

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 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 different economic sectors of the country. This has been well received by the business community, and, although the impact is still to be measured, there has been a clear improvement in reducing licensing times. Investment currently accounts for some 32% of GDP.

While Indonesia’s natural resources are plentiful, they remain largely untapped. 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.

POPULATION: With a population of approximately 260m – which is made up of more than 300 different ethnic groups – Indonesia is the world’s third-largest democracy and the most populous Muslim-majority nation. It is currently the 16th-largest economy in the world. Having more than 10.2m 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 one of the most populous islands in the world, with approximately 141m people spread over 128,298 sq km. It is a densely populated island, with Java 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 census of 2010, are the Javanese (41.7%), Sundanese (15.4%) and Malay (4.1%), which are closely followed by Madurese (3.3%), Batak (3%), Bugis (2.9%), Minangkabau (2.7%) and Betawi (2.5%).

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. According to a Boston Consulting Group report published in 2013, Indonesia’s middle and affluent class is set to double by 2020, reaching 141m, with more than 9m people likely to enter the consumer class each year. The UN has estimated that the population will exceed 270m by 2025 and 290m by 2045. According to a 2015 estimate by the UN, the median age of the population is around 28 years, with 28.1% of the population under the age of 15, and 16.9% between 15 and 24.

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, 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% 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.

HEAD OF STATE: According to the 1945 constitution, the president is the head of state, head of the 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 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 elected by popular vote. In 2004 Yudhoyono became the first president to be elected in this manner. The president, as head of government, has the power to appoint members of the Cabinet, while as executive, the post-holder 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. He or she can also sign treaties, appoint ambassadors, issue pardons and make judicial appointments.

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 has 560 seats, and deputies are elected by an open-list, proportional representation system introduced in 2009. Of the 12 political parties declared by the Indonesian Election Commission as eligible to take part in the 2014 ballot, 10 are currently represented.

Some 48 parties took part in 1999, with the reduction partly coming as a result of increasingly stiff requirements for eligibility, including the necessity of having regional chapters in every province – except for parties based in the northern province of Aceh. In 2014 the party that emerged with the largest number of seats was the PDI-P, which won 109 seats. The PDI-P is headed by Sukarnoputri, and Widodo was the party’s presidential candidate.

The PDI-P leads the ruling coalition in the DPR, known as the KP3. The other parties in this are the Party of the Functional Groups (Golkar), with 91 seats; the National Mandate Party (PAN, 48 seats); the National Awakening Party (47 seats); the United Development Party (39 seats); the National Democratic Party (36 seats); and the People’s Conscience Party (16 seats). The KP3 had 386 seats as of October 2017, more than the 281 needed for a majority.

The government had already strengthened its power base by gaining a majority when PAN joined the coalition in September 2015, followed by Golkar in May the following year. Since then, it has been easier to pass reforms, with the two Cabinet reshuffles in August 2015 and July 2016 helping the government to further consolidate its power.

COALITIONS: Following the entrance of Golkar, the government coalition includes seven out of the 10 parties in the DPR, with the opposition – the Red and White Coalition – formed by the Great Indonesia Movement Party, with 73 seats, and the Prosperous Justice Party (40 seats) for a total of 113. The Democratic Party, led by Yudhyono, is neutral and has 61 seats. Proposed laws from the president and the government must be approved by the DPR, which can also propose legislation of its own. Bills from the DPD must also gain DPR approval, though the DPD has no power to revise or reverse DPR decisions.

The DPD consists of 132 seats currently, 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 1999 to 34. DPR and local elections are held at the same time 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 the 34 provinces have had much more control over local affairs and finances. Of these, 33 have their own provincial legislative assemblies, with a total of 2112 elected seats. Provinces are divided into regions or municipalities, with 497 of the 508 of these also having their own District Legislative Assemblies. In total some 16,895 seats in these are filled by elections every five years. At this level, national rules requiring a party to receive at least 3.5% of the national vote to qualify are waived, allowing a much greater range of local and ethnically based parties.

Local, national assembly and council elections are held at the same time, with the country’s 190m eligible voters traditionally voting again three months later for the president. However, elections will be conducted simultaneously for the first time in 2019.

The regions and municipalities have control over local education, health and infrastructure, with budgets provided both centrally and by local revenue raising. In February 2017 several regions – including Jakarta, West Kalimantan, Bali, Papua and East Java – had gubernatorial elections.

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 and its chief justice is currently 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 different government agencies. Another key legal body is the Corruption Eradication Commission. It has scored a number of successes in recent years.

ELECTIONS: The first half of 2017 was marked by the gubernatorial election in Jakarta, contested by the incumbent governor Basuki Tjahaja Purnama – commonly known as “Ahok” – and Anies Baswedan. Purnama was the deputy governor of Jakarta and became governor when Joko Widodo became president in 2014. Anies Baswedan, who ultimately won the election and started his term on October 16, 2017, was the minister of education in Widodo’s Cabinet from 2014 until the second reshuffle in July 2016. While Purnama is seen as a close ally of President Widodo, Baswedan was backed by Prabowo Subianto, Widodo’s rival in the 2014 presidential election. Before the second round of voting, the campaign was marked by political and social tension that drew international attention when Purnama – who is a Christian of Chinese descent – was accused of blasphemy after mentioning a verse of the Quran at a rally. This caused hundreds of thousands of people to take to the streets in protest, raising concerns about the country’s stability and the risks of mixing politics and religion. In May 2017 Purnama was sentenced to two years in prison for the charges.

POPULARITY: Although some saw this election as a test of President Widodo’s popularity and a threat to his chances of winning the 2019 election, the president tried to unite the country, meeting his political opponents – including Subianto and his predecessor, former president Susilo Bambang Yudhoyono – for discussions. As of September 2017, Widodo’s popularity was at 51%, even higher than at the beginning of his term in early 2015.

OUTLOOK: In a fast changing political landscape, 2018 will be a key year for President Widodo to take advantage of his high popularity ratings, majority in Parliament and consolidated Cabinet to accelerate the implementation of his administration’s strategic goals, which include infrastructure development, reducing bureaucracy and increasing transparency.