Republic of Indonesia

IV

Economy

Indonesia is a rapidly industrializing country with a mixed economy in which the state plays an important role. Today, as in the past when it was the focus of the lucrative spice trade, Indonesia’s wealth is derived largely from exports of raw materials. Now, however, minerals—dominated by oil and natural gas—have replaced agricultural products as the main source of export income. Agricultural exports still include spices, but are otherwise the plantation products that came to sustain the economy under Dutch colonial rule, including rubber, coffee, tea, and quinine; timber production is also important.

In the early 1960s, under the leadership of Sukarno, the government nationalized foreign-owned enterprises as part of moves to institute a planned economy. Sukarno’s aggressive anti-Western stance was reversed in the late 1960s by his successor, Suharto. Under Suharto’s New Order, a liberal market economy was introduced with an expanding private sector, supported by oil and natural gas revenues, large-scale foreign aid and investment, and state economic planning. The Indonesian economy had verged on bankruptcy in 1966, with annual inflation running at almost 700 per cent and foreign debts of almost US$2,500 million. In the years since 1970, however, it has shown remarkable recovery. Inflation is under 6 per cent, and real economic growth has averaged 7 per cent a year over the period—although the growth rate has slowed since 1980 due to the decline in world commodity prices. There has been major investment in education, infrastructure, agriculture, and manufacturing capacity. Since 1980 the priorities have been economic diversification, more jobs, higher food production, and more equitable income distribution. The emphasis on economic diversification has intensified in the 1990s to provide an alternative to oil export revenues, which look set to decline as a result of rapidly rising domestic energy demand.

Indonesia’s hitherto steady growth was suddenly undermined by the Asian financial crisis of the late 1990s. The healthy economic growth rate of 7.5 per cent in 1996 slumped in 1997, as international investment was withdrawn from Indonesia. Investors became concerned over structural problems in the economy, while currency speculators attacked the Indonesian rupiah, forcing its value to drop dramatically. The International Monetary Fund (IMF) rescue plan set up to bolster the economy had stringent reform provisions attached, which the government sought repeatedly to renegotiate. By January the rupiah’s value had dropped dramatically and the Indonesian financial sector appeared ready to collapse. The economic crisis, and especially the withdrawal of subsidies on food prices in line with IMF terms, was the catalyst for the violence and political change of May 1998.

The service sector—including financial services, social services, government departments, trade, and transport and communications—is the largest single sector, accounting for over 42 per cent of gross domestic product (GDP) and about 34 per cent of employment in 1993. Of this total, trade, hotels, and restaurants are the largest contributor, with 17 per cent of GDP.

Notwithstanding the many positive changes since 1970, Indonesia continues to face a number of challenges. The majority of the population remains largely dependent on agriculture and average income levels are relatively low. According to statistics supplied by the World Bank, Indonesia is still grouped as a low-income country. In 2004 Indonesia’s gross national product (GNP) was estimated at US$248 billion (World Bank), giving an average income per head of about US$1,420. And, despite government aims to improve income distribution, economic development has largely been concentrated on the main islands focused around Java. Many of the more peripheral regions, such as Papua and northern Sumatra, remain impoverished. Indonesia’s foreign debt, estimated at US$96,500 million in 1994, is also still a problem; repayments eat up almost one third of export revenues and are a heavy drain on the budget. By law, the Indonesian budget must balance, although in practice there is often a deficit; the revenue and expenditure for 1997-1998 were estimated at about US$41,500 million.

A

Agriculture, Forestry, and Fishing

About 20 per cent of Indonesia is under cultivation. Intensive cultivation, especially of wetland rice, is largely restricted to Java, Bali, Lombok, and certain areas of Celebes and Sumatra. In most of Sumatra and the outlying islands cultivation is extensive and either for subsistence or plantation-based cash crops; almost 50 per cent of the plantation area is on Sumatra. Agriculture (including forestry and fishing) contributes about 12.9 per cent of GDP, and is the source of most non-mineral export earnings. About 45 per cent of the country’s labour force (1994 figures) is engaged in agriculture, either as small-scale farmers or as labourers on plantations. The small farms produce most of the subsistence crops, as well as a substantial proportion of the nation’s rubber and tobacco crops, and lesser amounts of other cash crops. Plantation estates produce rubber, tobacco, sugar, palm oil, coffee, tea, and cacao, mostly for export. Indonesia is one of the world’s largest producers of rubber, coffee, cacao, soya beans, and rice.

Rice is the major staple food of the country. The output of rice, and other food crops, has risen dramatically since the 1970s, helped by the provision of subsidized fertilizers and insecticides. Annual rice production in 2006 was about 54.4 million tonnes. Most of the rice is grown on Java. Other important crops (2006 figures) are cassava (19.9 million tonnes), maize (11.6 million tonnes), sweet potatoes (2 million tonnes), coconuts (1994; 14.8 million tonnes), sugar cane (30.1 million tonnes), soya beans (1 million tonnes), peanuts (14,700,000 tonnes), tea (171,410 tonnes), tobacco (141,000 tonnes), and coffee (652,668 tonnes). About 1.3 million tonnes of rubber were produced in 1994. In 2006 the country had about 14.1 million goats, 11.2 million cattle, 9 million sheep, 2.43 million water buffalo, 7.09 million pigs, and 1,401 million poultry. Increases in production have also been encouraged by the development of farm cooperatives and agricultural banks. Large quantities of food, however, including rice, must still be imported, mainly because of Indonesia’s high population growth. High population growth is also causing problems in land ownership and the size of holdings. In the most densely populated islands, like Java, there is not enough land to go round, while the practice of dividing holdings among sons is creating sub-economic plots, incapable of sustaining a family.

About two thirds of Indonesia is covered with forest and woodland, most of which is concentrated in Borneo, Sumatra, and eastern Indonesia. Almost all forest land is owned by the state. Roundwood production totalled about 98.8 million cu m (3.49 billion cu ft) annually in 2006. Almost all the timber harvest is made up of hardwoods, around 80 per cent of which is used for fuel. In addition, valuable industrial woods are produced in significant quantities, including teak, ebony, bamboo, and rattan. Timber is now Indonesia’s largest single export, after oil and natural gas; the country is the world’s top exporter of plywood.

Although about one third of the forest area has been scheduled for preservation for national parks and watersheds, there has been a rapid increase in the loss of forest cover since the 1970s. Commercial logging, often by foreign-owned firms is the main cause of this loss—particularly on Sumatra and Kalimantan, where the loss of all lowland forest by about 2010 has been predicted by conservationists. Large numbers of trees are also being cut down for fuelwood, and to clear land for agriculture and industrial and housing developments. In an attempt to counter the depletion, the government has initiated a reforestation programme.

Fish is vital to the Indonesian diet, with much of the annual catch brought in by those who fish part-time at a subsistence level. In 2005, the sea fisheries catch was about 5.27 million tonnes; the total fish catch was about 6.51 million tonnes. The chief fish caught include carp, tuna, mackerel, scad, and sardines. Shrimp and prawns are also important to the fishing industry.

B

Mining

Mining employs less than 1 per cent of the labour force, but contributes more than 10 per cent of GDP, and more than two thirds of export earnings. Oil, natural gas, tin, bauxite, nickel, copper, coal, manganese, and iron ore are Indonesia’s principal mineral resources. Oil has been exploited in Indonesia for some 30 years. Production increased dramatically after 1970 and today Indonesia is ranked among the world’s leading oil producers. Output in 1995 was about 586 million barrels; proven reserves were about 8,500 million barrels. Sumatra is the main oil-producing area of Indonesia; other fields are located on Kalimantan and offshore Java. The output of natural gas was approximately 74.2 billion cu m (2.62 trillion cu ft) in 2003. Production began in 1976 and Indonesia is now the world’s largest exporter of liquefied natural gas (LNG).

Indonesia also remains, with Brazil, the largest producer of tin in the world, with production amounting to about 65,772 tonnes in 2004. The estimated annual output of other economically important minerals in 2004 was: 1.33 million tonnes of bauxite, 120 million tonnes of coal, 2.5 million tonnes of nickel ore (1995), 0.84 million tonnes of copper, and 51,000 tonnes of iron ore. Tin production is concentrated on Bangka, Belitung, and Singkap islands near Sumatra; nickel on Celebes, Papua, and in the Moluccas. Bauxite is mined in the Riau Islands, east of Sumatra, and in western Kalimantan. Coal is mined in southern and western Sumatra; copper in Papua.

C

Manufacturing

Manufacturing in Indonesia contributed more than 28 per cent of GDP in 2006 and employed about 11 per cent of the population in 1993. Industrial expansion and diversification remain a major goal of government development programmes. The majority of enterprises are devoted to processing local raw materials, like the petroleum-refining, tobacco, plywood, and food-processing industries, or to import substitution. Industries in this latter category include textiles and clothing, chemicals and fertilizers, radios and television sets, and motor vehicles; almost all rely heavily on imported inputs. Manufacturing is concentrated on Java, and dominated by large, state-owned firms. However, the number of small- and medium-size privately owned companies is growing rapidly, and is responsible for a significant proportion of manufacturing.

D

Tourism

Helped by heavy government investment in hotels and transport networks, tourism developed into one of Indonesia’s most important and fastest-growing economic sectors during the late 1980s. Between 1986 and 1995 the number of visitors increased by an average 24 per cent a year, to more than 4.3 million. Earnings from tourism brought in around US$5,200 million in 1995. About 30 per cent of visitors come from Singapore and 13 per cent from Japan; the most popular destinations are Java, Bali, and Sumatra.