A major year of reforms in store for Indonesia

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 eighth century CE, though meaningful conversions did not occur until the 14th century, starting in Samudera Pasai (North Sumatra) and continuing in Makassar and 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 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.

However, 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. The Second World War brought with it the Japanese invasion and ensuing occupation, 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 six weeks for the Allied Dutch and British forces to arrive, by which time Indonesian nationalist forces had managed to establish themselves on the territory. The conflict that followed was a final attempt by the Dutch to reestablish their authority.

However, with the British withdrawing 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 proclamation of independence, Sukarno 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 declared and 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.

However, the 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, comprising 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 transmigration policies and 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, while the population started to express its frustration with the widespread corruption and Suharto’s brand of authoritarianism.

When the Asian financial crisis of 1997-98 prompted the currency to plummet and inflation to soar, students took to the streets to voice their grievances, 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 restored order by regaining IMF support for the country’s various economic stabilisation programmes and beginning 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 this tension, the government pushed through a policy of decentralisation and democratisation.

Despite this 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.

Though head of the Indonesian Democratic Party of Struggle (PDI-P) and Sukarno’s eldest daughter, Megawati’s tenure was also 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 that of PDI-P candidate Joko Widodo, who had entered into politics as the mayor of his hometown, Solo, and subsequently became the governor of Jakarta.

Regional Involvement 

In terms of Indonesia’s greater regional involvement, after chairing ASEAN in 2011 the country remains its largest member and an increasingly influential one.

In recent years Indonesia has continued strengthening its diplomatic relations with neighbouring countries, including Malaysia, Singapore and the Philippines, while also boosting long-term cooperation with Japan, China and South Korea. Indonesia has also occupied an integral role in assisting the resolution of territorial disputes between 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 $2.3trn and over 622m 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 in the 27th ASEAN summit in November 2015 in Kuala Lumpur and provides directions for the AEC from 2016 to 2025.

Human Capital 

Indonesia’s young and growing population is one of its strongest assets, as is its middle class, which continues to expand. 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 estimates the population to 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 aged up to 14 years old and 16.9% between 15 and 24.

Foreign Investment 

Through inviting targeted investment and adapting existing regulatory frameworks, the government has taken significant steps to facilitate foreign investment and 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 the 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 clear improvement in reducing licensing times. Investment currently accounts for some 32% of GDP.

While Indonesia’s natural resources are plentiful, 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.

Resources 

Indonesia is well known for its abundance of natural resources, including oil, gas, coal, nickel, tin, copper, gold and silver. The country produced 833,000 barrels per day (bpd) of crude oil during the period from January to March 2016, according to the oil and gas regulator SKK Migas.

Indonesia ended years of oil production decline in 2016, with production increasing by 6% from 786,000 bpd in 2015 to 834,000 bpd in July 2016. According to PwC, the country holds proven oil reserves of 3.7bn barrels; however, Indonesia has been a net oil importer since 2004.

The country is also a major producer of gas, which it exports as liquefied natural gas. As of the end of 2014, it had proven reserves of 2.9trn cu metres of gas, and it produced 73.4bn cu metres in 2014, giving it a reserves-to-production ratio of 39.2 years at current output levels. Its 2014 production was equivalent to 2.1% of the global total, making it the second-largest producer in Asia.

Indonesia remains the world’s largest exporter of thermal coal, exporting 408m tonnes in 2014 according to the World Coal Association, 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, have been revised down by 40%, and the reserves may only last until 2032, according to a study by PwC for the Indonesian Coal Mining Association. Approximately 60% of Indonesian coal is lower quality or sub-bituminous coal. Other minerals produced in the country include tin, nickel, gold and silver.

Palm Oil 

Indonesia is the world’s largest producer of palm oil. According to data from the UNDP, in 2013 the total plantation area for palm oil production was estimated at 10m ha.

The production of palm oil continued to increase in 2015, reaching 32.5m tonnes, up from 31.5m in 2014 and 30m in 2013, according to the Indonesian Palm Oil Association and the Ministry of Agriculture. The majority of this was exported, with 26.4m tonnes shipped in 2015. According to Franky Oesman Widjaja, chairman of Sinar Mas Agribusiness & Foods, crude palm oil production could drop to 5-10% year-on-year in 2015 because of the impact of El Niño. The plantations are concentrated in Sumatra, Kalimantan and Sulawesi.

While there has been talk of a reduction in export taxes, this has yet to materialise, and lower tax levels in Malaysia continue to give that country an advantage over Indonesia.

Higher taxes have also been applied to crude palm oil as opposed to 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 for 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 comes from conventional thermal sources, with hydroelectric power accounting for around 9%, and geothermal and other alternative energy sources contributing 5%.

The country is keen to develop nuclear power, and in early 2014 the government announced that a 30-MW nuclear power plant would be built in western Java. In terms of alternative energy sources, Indonesia is focusing on solar power, with the government planning to build 36 new solar plants, especially in isolated and border areas.

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. The completion date for the plants has been pushed back from 2014 to 2020.

This is being followed by a second development project, which aims to further stabilise the power system in Java and Bali, while also expanding the supply of power to the eastern and western areas.

State-owned energy distribution company Perusahaan Listrik Negara is leading the projects and accounts for around 85% of generated power. The 2009 Electricity Law aims to reduce the firm’s monopoly on distribution and encourage the participation of private firms in the power sector. Shortly after taking office following the 2014 presidential elections, Widodo announced a master plan to generate 35,000 MW of energy by 2019.

Population 

With a population of around 250m, made up of more than 300 different ethnic groups, Indonesia is the world’s third-largest democracy and the most populous majority-Muslim nation. It is the 16th-largest economy in the world, while Jakarta is the country’s largest city, with more than 10.2m inhabitants living within an area of 740 sq km. Other major cities in Indonesia include Surabaya, Bandung, Medan and Semarang.

Java is the most populous island in the world with 141m people spread over 128,298 sq km, which is equal to just 7% of Indonesia’s total land mass. The population has more than doubled since 1971, when it was 119.2m, while it continues to grow at a rate of 1% per year. It is estimated that by 2050, the country’s population will exceed 420m.

The largest ethnic groups, according to the 2009 census, are the Javanese (41.7%), Sundanese (15.4%) and Malay (4.1%), closely followed by Madurese (3.3%), Batak (3%), Bugis (2.9%), Minangkabau (2.7%) and Betawi (2.5%).

Geograpghy 

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 East Timor. The archipelago acts as a meeting place 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.

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 language in terms of government and media communication, 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 (around 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.

Climate 

Due to its proximity to the equator, Indonesia’s tropical climate is accompanied by average temperatures of between 28°C and 34°C in coastal areas, and 23°C in the mountain areas. Temperatures remain similar year round, with 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 remains between 70% and 90%. Located over the Ring of Fire, the meeting place of tectonic plates, Indonesia can be subject to earthquakes and volcanic eruptions.

Consolidating Power

Two years into the Widodo administration, despite the first months being marked by optimism, the general feeling is that the administration still has a long way to go to overcome some significant challenges, such as infrastructure development. The Cabinet has already been through two major reshuffles, in August 2015 and July 2016, after facing some issues regarding coordination between ministers.

The new Cabinet in the second reshuffle saw former World Bank managing director Sri Mulyani Indrawati become minister of finance, charged with increasing tax collection and tax revenue. The former minister of finance, Bambang Brodjonegoro, became minister of national development planning, and the former minister of trade, Thomas Lembong, became chairman of the Indonesian Investment Coordinating Board. Other changes included Luhut Binsar Pandjaitan becoming the coordinating minister of maritime affairs, and Wiranto the new coordinating minister for political, legal and security affairs.

The government is making significant efforts to streamline regulations and improve economic competitiveness, especially through the 13 economic policy packages that were issued in August 2016. Nonetheless, there is a gap between these policies and their implementation. In an effort to tackle this, the government has created the Task Force for the Acceleration and Effective implementation of Economic Policy.

Regional Role 

The external challenges are also significant. Disputes over territorial boundaries in the South China Sea look set to continue, requiring effective diplomacy between Indonesia and its friends and allies – some of which find themselves on opposite sides in these territorial disputes.

ASEAN took a giant leap forward with the implementation of the AEC in 2016. The AEC offers significant potential for Indonesian companies, but it will also increase the importance of Indonesia managing domestic concerns regarding competition against the regional neighbours.

In 2016 the government gained a majority in parliament, allowing greater ease in passing reforms. After the two reshuffles 2017 will be a year of consolidation of power, with the government’s pursuit of its priorities expected to be accelerated.

Head Of State 

According to the 1945 constitution, the president is 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 amendment was to limit the president to a maximum of two consecutive five-year terms. Another was to change the selection process for president. Previously, he or she had been elected by the People’s Consultative Assembly (MPR) – parliament – while under the new system the president 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 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, while Widodo was the PDI-P’s candidate for the presidency.

The PDI-P heads the ruling government 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). This gives the KP3 380 seats by August 2016, more than the 280 constitutionally needed for a majority.

The government strengthened its power base when PAN joined the government coalition in September 2015, followed by the Golkar in May 2016, reaching the majority, in what represented a significant change from the previous year when the ruling coalition did not have this majority.

Coalitions 

After this development, the government coalition includes seven out of the 10 parties in the DPR, with the opposition – the Red and White Coalition – being formed by the Great Indonesia Movement Party (Gerindra), with 73 seats, and the Prosperous Justice Party, with 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. Elections are held every five years, at the same time as those for the DPR and the local elections. According to the constitution, DPD members must serve as individuals, rather than party members, although they may have some 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 have a total of 2112 elected seats.

Provinces are then divided into regions or municipalities, with 497 of the 508 of these that currently exist 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.

All the local and national assembly and council elections are held at the same time, with the country’s 190m eligible voters then voting again three months later for the president. The regions and municipalities have control over local education, health and infrastructure, with a budget provided partly centrally and partly by local revenue raising. In February 2017 several regions – including Jakarta, West Kalimantan, Bali, Papua and East Java – will have 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 Hatti 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, although as 2015 got under way the arrest of its deputy chairman highlighted the scale of the task facing it.

Outlook 

The year ahead will likely be a challenging one for the new Widodo administration, as it attempts to roll out a major programme of public works and regulatory reforms.

With the new majority position in the DPR, the government will have more strength in Parliament, allowing Widodo to push through the needed reforms. Adding this to the second reshuffle that took place in July 2016 and a high level of popularity, and it is clear that Widodo will need to take advantage of the current momentum to accelerate both reforms and infrastructure development.

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This article is from the Country Profile chapter of The Report: Indonesia 2017. Explore other chapters from this report.