Since the Asia crisis struck Indonesia in 1997, it has undergone exceptional development. As a stable democracy following a sustained growth path with outstanding rates, the country has become an economic powerhouse and a crucial player both in the region and globally. This development is enhanced by the fact that Indonesia is by far the largest economy in the Association of Southeast Asian Nations (ASEAN), a intergovernmental organization that aims to deepen the economic, political cultural relationship between its members. More specifically, Indonesia’s recent economic performance placed as the second fastest growing G20 economy in 2013 after China, with a real GDP growth of 5.8% 1.
Furthermore, the country is likely to play an even greater role in the global economic system if it manages to live up to the ambitions set out in its Master Plan for the Acceleration and Expansion of Indonesia’s Economic Development (MP3EI), a comprehensive roadmap announced in 2011 by the Indonesian government. The aim is to make Indonesia one of the top ten economies in the world by 2025 through a per capita GDP increase to $15.0002 from $3.000.
With a large domestic market, a sizeable young work force, abundant natural resources and sound macroeconomic fundamentals, Indonesia is likely to further thrive and keep up with its economic dynamics – leaving ample room for business opportunities for European Companies.
Table1: Selected social, political and economic indicators (year 2013 unless otherwise specified)
Republic of Indonesia
Jakarta (9.121 million)4
Ø GDP growth 2007-2013
Government debt to GDP ratio
Muslim (86.1%), Christian (8.7%), Hindu (1.8%), other (3.4%)13
The Republic of Indonesia was founded under the values of respect for diversity, reflected in the official motto of the Republic: Bhinneka Tunggal Ika, or “Unity in Diversity”. This founding statement reflects a political will to create a national identity comprising of a wide diversity of culture, people and geography in a country which dimensions are illustrated below.
The 4th most populous country in the world, having a population of around 250 million people;
The 3rd largest democracy in the world following its transition into a stable and thriving democracy since 1998;
The largest Muslim country in the world with over 80% of the Indonesian population following the Muslim Faith;
The biggest archipelago in the world consisting of over 17.000 islands spanning three time zones.
With around 250 million people, social diversity is an omnipresent topic when discussing the culture and people of Indonesia, reflected in almost all aspects of society.
The constitution of Indonesia guarantees religious freedom and recognizes six religions: Islam (86.1% of the population), Protestantism (5.7%), Catholicism (3%), Hinduism (1.8%), Buddhism (about 1%) and Confucianism (under 1%)24. Both in the academic realm and in popular discourse, the Islam practiced in Indonesia is said to be inclusive and tolerant2526, as illustrated in a survey conducted in Indonesia by the Indonesia Survey Circle in 2012, which found that 88.84% of the respondents favored equality among all religious groups27.
Indonesia’s population stands at around 250 million inhabitants, and the country records a population growth rate of around 1% per year28. Already the 4th most populated country in the world, Indonesia’s ethnically diverse population has been and still is constantly growing. It is estimated that the nation will consist of 265 million inhabitants in 2020 and some 306 million by 205029. Moreover, Indonesia, especially when compared to most European states, is still a relatively young nation in terms of its population age, with more than 43% of the population below 25 years30.
Indonesia is not only a large country in terms of its population but also in terms of its geographical area. It consists of more than 17,000 islands, totaling a land area of 1,904,569 km² 31, almost equal to the combined land area of France, Spain, Germany, Italy and the UK32. However, only around 1,200 of the 17,000 islands are permanently inhabited, and more than half of Indonesia’s population lives on the Island of Java. Not surprisingly, the three biggest cities of the country are located on this island. The largest is Jakarta (9.121 million inhabitants and a metropolitan area of more than 28 million inhabitants)33, which is also the capital and main financial and business centre of Indonesia. The next largest is Surabaya (2.509 million), followed by Bandung (2.412 million). These three urban centers contribute Java’s claim as one of the most densely populated areas on Earth34. The urban share of the population in Indonesia is around 50%, which contributes around 74% to the national GDP35, with an almost 2.5% annual rate of change per year36. The literacy rate (defined as persons older than 15 years who are able to read and write) was 92.8%37 in 2013.
The fact that Indonesia is an extremely diverse country is also reflected by the 350 spoken languages in existence on the archipelago. Nonetheless, since Independence in 1945, the vast majority of Indonesians speak the official language of the country, Bahasa Indonesian. In bigger cities such as Jakarta, Bandung and Surabaya, it is easier to find English speakers.
The history of Indonesia has been shaped by its strategically important position along the seaway connecting India with the Orient. For centuries, the territory has been a place of trade, firstly among the peoples of East Asia, then setting a perimeter for intense trade competition between colonizing powers, attracted by its richness of natural resources.
The country was first colonized by the Portuguese in the 16th century and later by the Dutch. Their dominance prevailed from the mid-18th century, lasting more than two centuries, and ceasing only during the Second World War, when the Japanese invaded and occupied the territory. With the Japanese surrender, Muhammed Hatta and Sukarno (born Kusno Sosrodihardjo) declared Indonesia’s independence on August 17th 1945. Sukarno was Indonesia’s first President, remaining in office until 1965, the year when he was superseded by General Suharto, following political turmoil and an attempted coup d’état. General Suharto’s regime, the so-called “New Order”, lasted until 1998, when the pressures of the Asian crisis forced him to step down, clearing the way for elections and reforms and leading to a genuine and thriving democracy.
Politics & government today
Since 1998, Indonesian politics has undergone a formidable transition from authoritarian rule to a healthy, vibrant and thriving38 democracy with recognized political stability39. Both the President and the Vice-President are elected by direct popular vote, with the former being Chief Executive, the Head of State and Commander-in-Chief of the Armed Forces40. The highest authority is the People’s Consultative Assembly (MPR), which meets annually to hear accountability reports from the President and government agencies, and provides policy guidance. The MPR consists of two chambers: The People’s Representative Council (DPR), also frequently referred to as the House of Representatives and the Regional Representative Council (DPD). Both members of the MPR and the President are elected for five-year terms.
The current president (2009-2014) is Susilo Bambang Yudhoyono (often abbreviated to SBY), who was first elected in 2004 then re-elected in 2009. His two government terms have been considered stable and reform-minded41, promoting fiscally conservative policies, which have lowered the government debt-to-GDP ratio. New elections for both the MPR and the Presidency are to be held in 2014. Since SBY has already served his maximum of two terms, these elections will result in a new president.
Within Indonesia’s political system, a significant amount of power lies within the governments of the regional provinces. The so-called “big bang decentralization”, a reform introduced in the immediate years after Suharto’s “New Order” was established, was a response to a call for more self-sufficiency in many provinces: as a result, the 34 provinces gained a high degree of political autonomy42. Each province has its own legislative body and governor, elected for a duration of five years. Presently, a significant amount of power and administrative responsibilities lie within these provincial governments. For instance, the minimum wages are set by the respective governor province-wide. Also, they have the autonomy to control the provincial investment policy, reflected, for example, in the frequent obligation when investing in certain provinces to obtain additional licenses beyond those required by the Indonesian Investment Coordinating Board.
There are five provinces that enjoy a special status and consequently have decision power in an even wider range of topics: Aceh (in implementing, for instance, the Sharia law as regional law), Yogyakarta, Papua, West Papua and Jakarta.
Economy of Indonesia
Since the Asian crisis struck Indonesia in 1998, resulting in the subsequent downfall of Suharto’s regime, the country has not only undergone a formidable political shift from an authoritarian state to a stable and thriving democracy, but it has also developed into an economic-powerhouse, with an impressive macroeconomic performance. A look at the macroeconomic fundamentals of the country shows that it is economically stable and following a sustained growth path. As such, not even the impacts of the global financial crisis in 2008 were able to significantly harm the growth of Indonesia. In 2009 it still grew by more than 4%, thus gaining momentum and growing by more than 6% in the following year, resulting in an average real GDP growth rate of 6% between2007-2013 (IMF data).
Figure 1, 2 & 3: Development of real GDP, inflation and government gross debt
Source: IMF, World Economic Outlook Database April 2014, retrieved 18.04.2014 from www.imf.org
The reason for the immunity of Indonesia to unfavorable economic environments is its domestic consumer base, contributing the lion’s share of its GDP. With a growing population and an ever-expanding middle class, this “locomotive” pulling Indonesia’s GDP growth has bestowed impressive economic development on Indonesia.
Economic development has also been underpinned by sound economic policies. On the fiscal side, the government of Indonesia promoted fiscally conservative policies reducing the gross government debt-to-GDP ratio from more than 90% in 2000 to less than 30% in 2013. Also, monetary authorities have carefully tried to contain inflation43, which has been on a stable level, especially since 2007.
In the light of former, it should not come as a surprise that Indonesia’s sovereign credit rating has been upgraded by Fitch in late 2011 and Moody’s in early 201244. For 2013-2014, Moody’s, Standard & Poors and Fitch foresee a stable outlook for the country, motivating even higher inbound investment flows45.
Indonesia is not completely immune from global economic trends, showing a particular vulnerability in regards to the slowdown of the Chinese economy, which makes up much of the demand for Indonesia’s natural resources46 and could weaken Indonesia’s growth. However, the main engine of growth for the Indonesian economy is its large domestic consumer base. The latter is estimated to continue growing, both in terms of population growth rate and a continuous rise of the middle class47.
In conclusion, Indonesia is likely to keep up its economic dynamics. In 2012, the business consultancy McKinsey, projected a base of 5-6% GDP growth per year until 2030.
Unlike Indonesia’s neighbours, the so-called “Asian Tigers” such as Thailand and Malaysia, the growth of the Indonesian economy is not export-driven. In 2013 the Indonesian Bureau of Statistics estimated that exports accounted for only 19% of the GDP. Even though the Indonesian government is aiming at moving up the value chain by promoting policies for processing natural resources mined in the country, the main share of these exports is still in the commodities field48. Indonesia is rich in petroleum, tin, natural gas, nickel, timber, bauxite, copper, fertile soils, coal, gold and silver49. Consequently, the main export commodities of Indonesia are oil & gas, plywood and rubber. On the manufacturing side, the main export products are electrical appliances and textiles50.
The share of exports contributing to the overall GDP is low when compared to other emerging economies, which has helped to shield Indonesia from the global financial crisis. As mentioned above, its large domestic consumption has still resulted in growth, made possible through the vast population (around 250 million people), of which an estimated 15% belong to the middle class (defined as spending between 4$ - 20$ per day)51.
Sector contribution to overall GDP
Figure 6: Sector contribution to overall GDP in Indonesia, 2013
Source: Indonesian Bureau of statistics, preliminary figures, retrieved 28.03.2014 from www.bps.go.id/eng/tra
Even though some 38.9% of the population is employed in agriculture52, this sector only contributes around 12% of the national GDP. Having exhibited rising productivity growth rates over the past few years53, the biggest share of the GDP is contributed by the manufacturing sector, mainly food and beverages, chemicals, automotive equipment and tobacco54.
Figure 7 and 8: Indonesian export destination and import origins, 2013
The relationship between the EU and Indonesia has historically been close and positive, and over the past few years other countries have also been able to increase their economic ties with Indonesia. Presently, the EU28 ranks 4th with a share of 7.38%, behind China, Singapore and Japan in terms of the countries from which Indonesia imports. Conversely, the EU28 is the 3rd biggest export destination for Indonesian products making up 9.5% of Indonesia’s total exports.
Trade and Investment Climate
As the fastest growing G20 economy second only to China, Indonesia is a land of opportunity for business, allowing benefits to those trading with and investing in the country. Indonesia’s general characteristics can be summarized as having:
Impressive growth rates
Fiscal, monetary and political stability
An abundance in natural resources
A large domestic market
A young expansive labor force
These general elements may help to explain why Indonesia is a highly attractive destination for doing business. This is verifiable when analyzing the Global Competitiveness Index (GCI), which ranks countries according to their global competitiveness on the basis of various indicators, such as Infrastructure, labor and goods market efficiency and macroeconomic environment. The GCI is published annually by the World Economic Forum. In 2013, Indonesia ranked 38th out of 148 countries, a significant improvement since 2012, when Indonesia placed 50th out of 144.
This was the biggest progression of all the G20 economies in 201355 and can mainly be attributed to improvements in infrastructure and labor market efficiency (despite beginning from a low position). Increased spending on infrastructure by the Indonesian government, as a result of the aforementioned Master Plan for Acceleration and Expansion of Indonesia’s Economic Development (MP3EI), has therefore produced its first fruitful results56. The overall positive performance seen on the GCI is also due to Indonesia’s large market size (ranking 15th globally) as well as its sound macroeconomic environment (ranking 26th globally), offering historically low inflation rates57. Despite the aforementioned improvements in labor market efficiency, this area, together with weak institutional performances as a result of high levels of corruption, remain the weakest links in Indonesia’s competitive performance.
Table 2: Country comparison of Indonesia with neighbors and BRIC countries (2013)
Real GDP growth
Govern-ment Debt/ GDP ratio (%)
GCI overall rank
Sources: IMF, retrieved 17.04.2013 from www.imf.org and
In contrast to many industrialized countries, Indonesia is a young nation., with 43.7% of the population younger than 24 years58. Furthermore, with wage levels still significantly lower than in neighboring or BRIC countries, Indonesia offers great opportunities in industry and production.
Abundance of Natural resources
Rich in natural resources such as petroleum, tin, natural gas, rubber, nickel, bauxite, copper, coal gold and silver, the country is not only attractive as a production base, but also as trading partner.
Large domestic market
The population of Indonesia, standing at around 250 million people with an estimated consuming class of 15%, not only drives Indonesian growth, but also great market opportunities. The consuming class is also expected to grow to some 135 million people by 2030, as estimated by the McKinsey Global Institute.
Figure 9: Population development prediction
“Consuming class” is defined as persons with an annual net income of above 3,600$ at 2005 purchasing power parity. Predictions for 2020 and 2030 based on an annual GDP growth of 5-6%
Source: McKinsey Global Institute, The archipelago economy: Unleashing Indonesia’s potential, 2012
“Consuming class” is defined as population group with an annual net income of above $3,600 at 2005 purchasing power parity. Predictions for 2020 and 2030 are based on an annual GDP growth of 5-6%
Source: McKinsey Global Institute, The archipelago economy: Unleashing Indonesia’s potential, 2012
Indonesia as a gateway to ASEAN
While Indonesia alone constitutes a high potential business country, its alliance with ASEAN further increases its prospects. Indonesia, together with nine other member states, form an economic block with a total market size of almost 600 million people and a progressively more integrated economic area, moving towards the realization of an ASEAN Economic Community (AEC) in 2015. Therefore, long-term investors in Indonesia are offered the opportunity expand their horizons beyond the Indonesian market.
While Indonesia offers a lot of business opportunities, some challenges still remain. The following are the most cited issues raised by respondents of the Global Competitiveness Report:
The most cited problem of respondents in a survey among business executives by the World Economic Forum (Global Competitiveness Report 2013-2014) is corruption. However, recent political action in Indonesia has contributed towards lowering corruption levels. New legal mechanisms and a strong and independent Corruption Eradication Commission (KPK) have already led to several success59 stories. This is reflected by the country’s recent performance in the Perceived Corruption Index, published by Transparency International. Over roughly the last decade, Indonesia has improved its 2001 score of 19, making it the 3rd most corrupt country in the world, to a significantly better score of 32 in 2013. It was ranked 114th out of 177 countries, which are attributed scores ranging from 0 (highly corrupt) to 100 (very clean).60.
Excessive bureaucracy and regulatory uncertainties61
Especially since the “big bang decentralization” reform was implemented in the years following Suharto’s “New Order”, regulations related to business and administrative procedures have proved burdensome. Legal uncertainty arises from a lack of legal clarity, which leaves much room for interpretation and often lacks technical guidelines. Furthermore, an overlap of regulations at the local, provincial and central level can occur626364.
Infrastructure underinvestment, resulting in high transportation costs, bottlenecks65, congested road networks and over-utilized ports and airports, has been a problem in Indonesia. As a result, the government has been taking proactive steps to improve the situation. For example, 45% of total investment in the aforementioned comprehensive policy plan MP3EI relates to infrastructure investments66. Given the active promotion of infrastructure investment in terms of Private-Public-Partnerships, this also offers many opportunities for European companies.
Indonesia's Economic Master Plan
The Master Plan for Acceleration and Expansion of Indonesia’s Economic Development (MP3EI) is a comprehensive policy roadmap announced by the Indonesian Government in 2011. It aims to help Indonesia become one of the ten largest economies in the world by increasing the per capita GDP from $3000 to $15,000 by 202567.
This will be achieved by three methods: firstly, identifying six distinct economic corridors in Indonesia, based on respective comparative advantages; secondly, by improving human resources, science and technology; and thirdly, by increasing the connectivity within Indonesia and throughout the ASEAN region by investing in infrastructure68. The implementation of the MP3EI will be coordinated by the “Committee on Economic Development, Acceleration and Expansion of Indonesia 2011-2025 (KP3EI)”, a newly established body.
The implementation of the plan is split into the three phases shown in the flowchart below:
Figure 10: Implementation phases of the MP3EI
Based on: Coordinating Ministry for Economic Affairs Republic of Indonesia, Masterplan for Acceleration and Expansion of Indonesia Economic Development, 2011
Six economic corridors
The MP3EI divides Indonesia into six distinct economic corridors, according their comparative strength. These corridors and their respective advantages are as follows.
Figure 11: Economic Corridors according to MP3EI
Source: Coordinating Ministry for Economic Affairs Republic of Indonesia, Masterplan for Acceleration and Expansion of Indonesia Economic Development, 2011, p. 36
Table 3: Economic Corridor Purposes according to MP3EI
Java Economic Corridor
Driver for National Industry and Service Provision
Kalimantan Economic Corridor
Centre for Production and Processing of National Mining and Energy Reserves
Sulawesi Economic Corridor
Centre for Production and Processing of National Agricultural, Plantation, Fishery, Oil & Gas and Mining
Bali-Nusa Tenggara Economic Corridor
Gateway for Tourism and National Food Support
Papua-Kepulauan Maluku Economic Corridor
Centre for Development of Food, Fisheries, Energy, and National Mining
Sumatra Economic Corridor
Centre for Production and Processing of National Mining and Energy Reserves
Infrastructure development: opportunities for EU companies
In order to increase connectivity within Indonesia, investments in physical infrastructure are planned, taking up approximately 45% of the MP3EI investments69. Of these, only 7% are foreseen to be provided directly by the government, while much bigger shares are expected to come from State-Owned Enterprises (25%), the private sector (22%) and PPPs (Public-Private Partnerships) (19%)70.
These PPPs provide infrastructure through a cooperation agreement between a governmental body and a business entity responsible for construction, management activities and maintenance71. Therefore, infrastructure development under the MP3EI offers ample opportunities for private entities.