Republic of Indonesia

V

Economy

Prior to independence, Indonesia’s economy was oriented to providing raw materials to The Netherlands. Subsistence agriculture, primarily the production of rice, was the mainstay of most of the population, but the economy also relied on plantation agriculture, including the production of sugar and rubber. Industry was not promoted so as to avoid competing with The Netherlands. The first few decades after independence were marked by economic mismanagement. The government of President Sukarno focused on unifying the country politically, not on rebuilding Indonesia’s crumbling infrastructure or improving the economy. In contrast, President Suharto’s “New Order” government gave much more priority to the economy, instituting a series of five-year plans (Repelita) starting in 1969. The aims of Suharto’s economic policy were to expand foreign investment and increase trade. When export revenues from oil declined in the early and mid-1980s, Indonesia was forced to expand other exports. To make these exports more competitive internationally, the government deregulated parts of the economy such as coastal transportation, finance, and banking.

Indonesia’s economy grew impressively during the 1980s and much of the 1990s, largely on the strength of its natural resources, which include a large population, solid energy reserves, substantial mineral deposits, and fertile farmland. Indonesia’s gross domestic product (GDP) was $287.2 billion in 2005. Its GDP per capita was $1,302.20. Between 1985 and 1995 the GDP grew by about 95 percent, while annual inflation remained below 10 percent. Between 1980 and 2005 there were significant shifts in the structure of the Indonesian economy. Agriculture shrank from 24 to 13 percent of the GDP. Industry as a whole remained stable, but manufacturing, the largest component of industry, grew from 13 to 28 percent of the GDP.

In mid-1997 an economic crisis developed in Asia when investors lost confidence in certain debt-laden economies. As the crisis spread to Indonesia, the value of the Indonesian currency plummeted, which threatened the capacity of the government, banks, and businesses to repay their foreign debts. In October the government negotiated an aid package with the International Monetary Fund (IMF). In exchange for massive loans, Indonesia agreed to implement austerity measures such as reducing government spending and reforming the financial sector. The crisis deepened in 1998 when the IMF halted funds, claiming that the Suharto regime had failed to abide by IMF terms, and as social unrest began to spread. By late May 1998 the economic and social crisis had caused President Suharto to resign. Indonesia was more seriously affected by the Asian economic crisis than were its neighbors. The GDP fell 13.2 percent in 1998 and shrank again in 1999. Nearly half of all corporations were insolvent in 1999, and unemployment increased. After the authoritarian Suharto regime ended, the IMF agreed to resume a multimillion-dollar loan program with the Indonesian government.

A

Labor

In 2005 Indonesia had a total labor force of 107 million people, up from 60 million in 1980. More than 2 million new jobs are required each year to employ all of the new entrants to the labor market. Agriculture employs 44 percent of Indonesia’s workers, services 38 percent, and industry 18 percent. An estimated 37.9 percent of the labor force was female in 2005, up from 36 percent in 1980.

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Trade unions have been active in Indonesia since 1908. Under Suharto, the government recognized only one national union, the All-Indonesia Union of Workers (Serikat Pekerja Seluruh Indonesia), founded in 1973. The union is a federation of 13 national industrial unions with a 1992 membership of 2.8 million, or about 3 percent of the workforce. Wages in Indonesia are regulated through arbitration, and the 40-hour workweek is standard throughout the country. The labor code of 1948 and later laws set standards regarding child labor, women in industry, work conditions, and vacations. There are enormous problems with enforcing the labor laws, however, especially in new manufacturing firms. As the economy has grown rapidly, workers have become increasingly dissatisfied with labor conditions and the effectiveness of official unions. The Suharto government kept a tight grip on union activities. In 1992 the Indonesian Prosperous Labor Union (Serikat Buruh Sejahtera Indonesia) was formed to provide an independent forum for labor problems, although Suharto’s regime denied the union official recognition and imprisoned its leader, Muchtar Pakpahan. After Suharto’s resignation, interim president Baharuddin Jusuf (“B. J.”) Habibie ratified a convention enshrining the right of workers to join labor associations of their choice and bargain freely. Pakpahan was subsequently released from prison and the ban on his labor union lifted. The Indonesian Prosperous Labor Union has about 250,000 members.

B

Agriculture

The agriculture sector led the Indonesian economy in output until 1991, when it was overtaken by manufacturing. In 2005 agriculture accounted for 13 percent of the GDP. Annual output grew by 3 percent per year during the early and mid-1990s. Some 20 percent of all land is under cultivation for field crops or used for plantations. Small farms produce most of the subsistence crops but also contribute substantial proportions of the nation’s rubber and tobacco. Plantation estates produce rubber, tobacco, sugar, palm oil, coffee, tea, and cacao, mostly for export.

Food crops accounted for 59 percent of the agricultural GDP in 1993. Rice is the major staple food of the country, and the yield in 2005 was 54 million metric tons. Indonesia was once a larger importer of rice, but in the late 1960s and 1970s the government introduced improved varieties of rice, increased the use of fertilizers and pesticides, provided better infrastructure for irrigation, and improved the systems of farm credit. As a result, rice production grew annually by 5 percent between 1969 and 1984. Most of the rice is grown on Java.

Other important crops are cassava, maize, sweet potatoes, coconuts, sugarcane, soybeans, peanuts, tea, tobacco, and coffee. Rubber is also an important crop. Livestock raised include cattle, buffalo, pigs, goats, sheep, and poultry. Indonesia’s chief agricultural exports include coffee, tea, cocoa, spices, and natural rubber, but together they account for less than 10 percent of the country’s total exports. Large quantities of food are still imported.

C

Manufacturing

In the 1960s Indonesia manufactured little more than handicrafts and a few textiles, but by the mid-1990s Indonesia was producing manufactures that ranged from traditional crafts to aerospace products. Manufacturing in 2005 accounted for 28 percent of the GDP, up from 13 percent in 1980. Labor-intensive consumer exports, such as footwear and glassware, in particular have grown quickly.

Indonesia’s main manufactures include food and beverages, tobacco products, textiles and garments, motor vehicle parts, and electrical appliances. Most of these manufactures are produced by joint-venture companies backed by foreign and local investors. The main manufactured exports include wood products (veneers, plywood, and furniture), textiles, clothing, and footwear. In 2004 manufactured exports accounted for 56 percent of Indonesia’s total exports, up from just 2 percent of total exports in 1980.

Much of the new manufacturing is located on Java, especially in Jakarta and the surrounding parts of West Java province. Despite Jakarta’s congestion and other problems caused by rapid growth, it remains a very attractive location for manufacturers. The city and surrounding villages provide a large supply of labor, and the city’s roads, airport, and port are the best in the country. During the 1980s the government attempted to direct foreign investment away from Jakarta and Java, but the policy was mostly unsuccessful and has since been relaxed.

D

Services

Services are an important part of Indonesia’s economy, producing 41 percent of the GDP in 2005. During the 1990s services expanded at a rate of 8.6 percent per year, more than twice as fast as agriculture. Services are made up of trade; restaurants and hotels; government services; transport, storage, and communications; and finance, insurance, real estate, and business services.

Indonesia’s service sector is complemented by its other economic sectors. Air transportation, financial, and insurance service have increased rapidly to keep up with the expanding manufacturing sector. Hotel development has been boosted by the growth of tourism. In 2005, 5 million tourists visited Indonesia. Most visitors were from Singapore, Japan, Taiwan, Malaysia, Australia, Germany, and the United States.

Many workers are involved in informal service occupations. These workers include riders of trishaws (three-wheeled cycles with a seat for a peddler and a separate compartment for passengers), people selling food at markets, itinerant hawkers of various wares, and garbage recyclers. The workers are generally poor and the jobs are often unregulated and unrecorded in official statistics; nonetheless, informal occupations provide employment for a large proportion of the labor force in the larger cities.

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