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Economic situation in the Sukarno era

In the first years after independence, agricultural production was of paramount importance to the Indonesian economy. Nevertheless, prestige projects (such as the Conference of the Non-Aligned States in Bandung in 1955) faced targeted efforts to build up the economy.

Economic development in the Suharto era

The economic turnaround came under Suharto when he finally took power as president in 1967.

The framework conditions for economic development included, among other things, the facilitation of foreign investments, a financial policy that got inflation under control, the expansion of infrastructure and the promotion of food production. With international help, numerous development programs have also been successfully implemented.

Opening the country to foreign capital and drawing up five-year plans were the main factors behind economic consolidation.

Enormous riches in oil and natural gas secured the foreign exchange income that was necessary for the gradual development of the country.

Suharto's successes in economic development are undisputed. Indicators (such as GNP) point to steady economic growth during Suharto's reign. Among other things, he achieved self-sufficiency with rice and a falling quota of people living below the poverty line.

The diversification of economic sectors and state deregulation measures to create an investor-friendly climate were important foundations of state economic policy in Suharto's reign. An annual labor force that is growing by 2 million people and cheaper production countries such as China and Vietnam are important reasons that led to this economic policy.

Effects of Suharto's economic policy

The essential basic economic data seemed to indicate sustainable success for Indonesia's economic development, especially since the late 1980s. Nonetheless, there was criticism, increasingly directed against the growing economic influence of Suharto's family in the early 1990s. In the meantime, the large domestic market, falling poverty, increasing technical skills of the Indonesian workforce and government investment facilitation led to ever larger flows of capital. These capital flows were one of the main triggers for the onset of economic depression in the context of the Asian crisis of 1997.

Economic crisis 1997/1998 and its consequences

While in July 1997 one received around 2,700 rupiah for one dollar, the exchange rate rose in 1998 to up to 15,000 rupiah. The prices for all imported goods and domestic products now rose while wages remained at the old level. In a short time real per capita income had fallen by three quarters. The financial sector was particularly hard hit. There, the ineffective banking supervision took massive revenge.

The causes are extremely complex: State liberalization measures in the late 1980s and early 1990s were partly responsible. At that time, many major Indonesian entrepreneurs had taken their chance and founded their own house banks with only small capital contributions. With these house banks, they then used themselves with large loans, for which they - relieved by opaque corporate conglomerates - had deposited embellished collateral. This created a great financial bubble of fictional capital.
Due to the rapid decline in the rupiah, the IMF has now decreed a reduction in the currency in circulation. As a result, the Indonesian central bank raised the key interest rate from 20% to 70.8%. As a result, many borrowers were unable to repay their loans. The result was the collapse of many banks. Several factories and other businesses had to close and unemployment rose dramatically within a few months. Around 40 million people were affected. The supply situation of the poor sections of the population became more and more critical.

In the big cities, especially in May 1998, bloody riots broke out, the main victims of which were the economically powerful Chinese minority. Not only did many rich Chinese transfer their money abroad - many of the favorites of the old regime also transferred billions abroad. Foreign investors also fled in droves in this uncertain situation.

Attempts to get the financial crisis under control through grants from the IMF failed because the IMF demanded far-reaching reforms, such as the privatization of many state-owned companies, the release of the rupiah rate, liberalization measures in trade, the abolition of monopolies and cartels and serious anti-corruption measures. But since a large part of the ruling elite was involved in cartels, monopolies and corruption, these demands had no chance of serious implementation right from the start.

After the fat years through which Indonesia wanted to make the leap to become an industrial nation, the country suddenly faced ruin in the Asian crisis. Suharto, the father of development and economic success, could not get the crisis under control and had to abdicate.

poverty

In the course of the 1997/1998 Asian crisis, poverty in the country worsened dramatically. At that time around 48% of the population had to get by on less than US $ 1.25 per day - now it is only 18%. Significantly more dramatic values ​​were achieved regionally.

The average monthly wage in 2018 was € 179.

But Indonesia still has a massive problem of poverty. According to World Bank standards, around 50% of Indonesians are considered poor, although significantly higher values ​​can be achieved depending on the region. The sharp rise in food prices since 2008 has exacerbated the situation of the poor. 11.7% lived below the national poverty line in 2017.

Poverty, however, continues to vary greatly from region to region, as recent poverty studies show. The richest provinces therefore have a budget more than ten times higher than that of the poorest provinces.

The inequality is growing, because on the other hand there are also more and more rich Indonesians. Indonesia currently has around 40,000 dollar billionaires and, according to the Forbes 2018 list, a total of 30 dollar billionaires. The number of dollar billionaires has more than doubled in the last 10 years. According to the Forbes list, the wealth of the 40 richest people in Indonesia rose from US $ 92 billion to US $ 119.2 billion between 2015 and 2017 alone.

Economic development since 2004

President Susilo Bambang Yudhoyono, who was elected in October 2004, and his cabinet initially sparked a new spirit of optimism in the country, despite the tsunami disaster and some unpopular decisions.

Since the Indonesian parliament passed important investment protection laws in 2007, the general conditions for the economy have improved significantly. Since then, foreign investments have also increasingly contributed to an improvement in the current economic situation. The laws make it easier, for example, to acquire land, grant access to international arbitration tribunals and generally equate domestic and foreign investors.

Economic growth in 2008 was 6.4 percent. However, Indonesia also felt the effects of the financial crisis clearly. Nevertheless, analysts put economic growth from 2009 at 4.5%, although exports in particular had slumped dramatically in the first few months of the financial crisis. At 4.5%, Indonesia was still one of the few Asian countries whose economy had grown at all. Since the financial crisis, Indonesia has achieved economic growth of between 4.8 and 6.5% every year. In 2014, 5.3% was achieved, mainly because in the last few years of President Susilo Bambang Yudhoyono's reign, foreign investors were more reluctant to invest due to increasingly protectionist national economic policies. In 2015 economic growth fell to 4.8%, in 2016 it was 4.9%, and from 2016-2019 between 5.0 and 5.2%

As a result of the Covid-19 pandemic, Indonesia's economic output is expected to shrink for the first time in 20 years (as of December 2020).

The government of President Joko Widodo is trying to reduce energy costs, increase value creation in the country and simplify investments. Furthermore, the regulations for work permits for foreigners are to be relaxed and the acquisition of land is to be simplified significantly.

Compared to his predecessor, President Joko Widodo is taking a more protectionist course. Among other things, he wants to increase the vertical range of manufacture in his own country and the manufacture of industrial products in Indonesia. Measures to stimulate the internal market are also expected.

As a first economic policy measure, shortly after his inauguration, he abolished the gasoline subsidies, which had been a heavy burden on the state budget for many years. As a result, many additional billions of dollars are available per year, which are obviously intended to be used primarily in the health sector and for improving the infrastructure - especially for large ports.

Between 2005 and 2018, Indonesia rose significantly in the ranking of the Global Competitiveness Report of the World Economic Forum (from 56th to 45th place out of 140 countries). In 2011 the rating agency Fitch awarded "Investment Grade" for the first time since 1998, and in 2012 the rating agency Moodys also awarded it.

The heavy weight of the large Indonesian domestic market, which protects against economic fluctuations in difficult times, also has a positive effect on growth.

The banking sector coped with the financial crisis of 2008/2009 exceptionally well, which is largely due to a large number of reforms in this area. The national debt could be reduced from 130% of the economic output (1998) to approx. 29.2% (2018) (in comparison to Germany 2019: 59%). The inflation rate was 2.7% in 2019. Between mid-February and the beginning of April, the Indonesian rupiah suddenly lost a sixth of its value compared to the euro in the wake of the corona crisis.

Due to its economic policy, Indonesia was one of the few countries in which the economy continued to grow despite the financial crisis of 2008/2009. The main factors that contributed to Indonesia's comparatively good economic situation were the population's stable consumption, a government stimulus package of around US $ 7 billion and interest rate cuts by the central bank.

As the largest regional economy, Indonesia is currently benefiting greatly from the AFTA free trade area, which was created in January 2010 and to which the ASEAN members Indonesia, Malaysia, Singapore, Thailand, Brunei and the Philippines belong.

In 2018, Indonesia was upgraded from the "Lower Middle-Income-Country" category to the "Emerging Market and Middle Income Economics" category by the IMF.

Economic consolidation is currently closely linked to the political confidence-building process. Domestic political conflicts, political destabilization, the growing radical Islamism, the still strong corruption and fears of secession are among the main problem areas that are hindering the process of consolidation.

Fundamental prerequisites must be created to solve the country's economic problems.

The unreliable power supply (especially in Jakarta), which is due to a lack of investment in the energy sector, is currently also hampering the economy. At the same time, hardly any other country in the world has such good opportunities to cover its electricity needs using renewable energies (especially geothermal energy).

9% of the energy comes from hydropower plants, 85% from fossil energies.

In the electricity sector there is an extensive monopoly of the state electricity supplier PLN.

In October 2015, Indonesia signed a treaty with Russia on the peaceful development of nuclear energy. According to the author, however, it can be doubted whether this will actually lead to nuclear power plants being completed in Indonesia in a few years. Earlier projects to develop nuclear energy in Indonesia have already failed due to the resistance of the local population, who argued, among other things, with the high risk of earthquakes.

The only wind turbine to date is in South Sulawesi.

The poor condition of the transport infrastructure is also having a negative impact on the economic situation. Its expansion is a central theme of President Joko Widodo's economic policy. However, its economic policy is also becoming increasingly protectionist. This can be seen, for example, in the restriction of the fields of activity of international investors and the regulations that have been in force since July 2015 that 10 local workers must be employed per expatriate and that all payment transactions in Indonesia are only permitted in rupiah.

Internet companies that offer their services in Indonesia should in future also pay taxes in Indonesia, otherwise they run the risk of reducing their bandwidth or being completely blocked. However, it remains to be seen whether this can be implemented in practice.

As a result of the ongoing efforts to restructure the banking sector since the Asian crisis, the Indonesian financial market suffered comparatively little from the global financial crisis in 2008/2009.

The Indonesian banking system has a good capital base and is fundamentally stable. For some years now, however, the proportion of bad loans has been increasing. As a result, the focus is increasingly on credit quality. There are also risks that particularly affect companies that suffer from debt denominated in foreign currencies.

Foreign trade boomed for many years (until 2020) although the declining growth figures in China since 2015 are increasingly burdening the foreign trade balance sheet. According to the Indonesian statistical office BPS, imports increased by more than 20% annually in 2011-2014, and exports by as much as 30.7%. The rapidly increasing number of tourists also contributes to economic growth.

According to the World Bank, the Indonesian economy will continue to recover due to the currently relatively stable political situation. Since 2010 economic growth has been between 4.8 and 6.4% annually. This growth will probably continue in principle in the next few years, but according to the World Bank it will slow down somewhat. As a result of the Covid-19 pandemic, Indonesia's economic output will decline for the first time since 2020.

In recent years, the importance of the digital economy has increased significantly thanks to Indonesian startups such as Gojek and Bukalapak.

Nevertheless, the alarm signals are also increasing. Many analysts, including the Indonesian government, view the unchecked property speculation with great concern.

The current upswing is also largely due to the significant increase in raw material prices in recent years. The share of the manufacturing industry, on the other hand, shrank to less than a quarter of the gross domestic product.

Overall, economic consolidation, combined with a decline in unemployment figures and increasing opportunities for income, are often given greater priority than political freedom and environmental issues. Trade unions therefore had little influence on labor market policy in the first post-Suharto decade. However, since 2011 the trade unions have gained influence and have already contributed to a significant increase in minimum wages in many regions. The political elite are also increasingly realizing that solidarity with the trade unions can bring important votes.

In October 2020 there were violent street protests against a labor market reform promoted by President Joko Widodo, with which the labor market is to be significantly deregulated.

Child labor is widespread in some areas of the economy.

The military continues to play an important economic role and is in part also, largely unmolested by the judiciary, active in areas beyond legality.

Oligarchs play an important role in Indonesian politics. Often they finance the election campaigns of future rulers at the national and subnational levels.

In the context of economic consolidation, the development and expansion of small and medium-sized industries and the tertiary sector play a major role.

For a long time after the Asian crisis, the German economy was very reluctant to make direct investments in Indonesia. Mostly Asian companies recognized the opportunities of the huge Indonesian domestic market earlier.

Business contacts

Around 300 German companies were represented in Indonesia in 2019.

In Indonesia, important business contacts and information can be obtained from the German-Indonesian Chamber of Commerce and Industry (Ekonid). Ekonid represents around 500 German and Indonesian member companies and promotes bilateral trade and investments between Indonesia and Germany. Ekonid offers a wide range of services for German companies.As a business development agency, Germany Trade & Invest (GTAI) advises Indonesian companies that intend to expand their business activities into the German market.

The main supplier countries for Indonesia are currently China (24.1%), Singapore (11.4%), Japan (9.5%) and Thailand (5.9% (2019)

The German Center also supports German companies that want to invest in Indonesia with infrastructure - an offer that is particularly popular with small and medium-sized companies. The East Asian Association also offers extensive support for German entrepreneurs. The German embassy publishes a list of the German companies operating in Indonesia. The number of German companies that have branches in Indonesia has increased significantly in recent years.

German direct investment in Indonesia in 2015 amounted to US $ 57 million, a mere 0.2% of total foreign direct investment. In 2018, Germany ranked 9th in the ranking of the most important countries for goods imports.

Indonesia has a trade deficit with Germany. According to the Indonesian Ministry of Commerce, Indonesia imported goods worth US $ 3.54 billion from Germany in 2017, while Indonesia exported goods worth US $ 2.67 billion to Germany.

In the last 10 years in particular, Chinese investments in Indonesia have increased significantly, especially in the infrastructure sector.

A project by Heidelberg Cement to build a cement plant on Java in Java is currently encountering considerable resistance from civil society and international human rights environmental associations because of possible environmental damage.

Despite significant human rights violations in crisis areas where German weapons are used, Germany is currently one of Indonesia's most important arms suppliers. This was particularly true during the reign of General Suharto. The purchase of 39 German ships from the NVA navy in 1993 caused a major domestic political scandal that is still discussed today. The first ship already sank during the transfer.

Critical coverage of this sale resulted in Suharto banning three of the largest news magazines in 1994. At that time, German armaments companies also supplied helicopters, submarines and submachine guns to Indonesia.

In addition, Germany agreed further arms exports with Indonesia. In 2013, 104 Leopard tanks were delivered, among other things. Due to the heavy weight of the tanks, the low load-bearing capacity of the bridges and the swampy and mountainous terrain in Kalimantan, these tanks cannot be used for defense at national borders. Many Leopard tanks are therefore supplied to the military in a version that is particularly suitable for street combat ("Revolution" type). In 2012, Indonesia signed a memorandum of understanding with Germany on military cooperation, including in the areas of military training, research, development and military logistics. In 2019, the Federal Security Council again approved the delivery of armaments to Indonesia.

In addition to the embassy, ​​Indonesian interests are represented in Germany by consulates in Kiel, Bremen, Munich, Hamburg and Stuttgart.

development

With regard to the achievement of the Millennium Development Goals, UNDP Indonesia saw the country "on the way" to achieve the goals - but at the same time points out that the prospects for achieving them are different in the individual provinces. In general, it can be doubted that it is not possible to achieve the goals for the time being on the national average. The Human Development Report currently ranks Indonesia 116th out of 187 countries. In the area of ​​poverty alleviation, successes were undoubtedly achieved in places; nevertheless, the number of poor is increasing overall.

Governance problems and the lack of legal certainty mean that Indonesia's great potential is poorly used. However, President Susilo Bambang Yudhoyono's anti-corruption policy has resulted in Transparency International's Corruption Perception Index initially showing significant improvements. In recent years, the Indonesia in the index had deteriorated again, which was mainly due to some spectacular scandals in which high-ranking politicians were involved. Indonesia is now in 89th place in the ranking.

President Joko Widodo had already proven during his tenure as Mayor of Solo and Governor of Jakarta that he is willing to take decisive action against corruption. He also proved this with the selection of his first cabinet, whose candidates he had previously screened by the anti-corruption authority. Four candidates were then dropped.

The participation of civil society institutions in national development planning is still low. The Indonesian Poverty Reduction Strategy Paper (PRSP) currently only provides very imprecise information on this topic.

Bilateral development cooperation

Indonesia is a priority partner country for German development cooperation. For Indonesia, Germany is the second largest bilateral partner after Japan with a total volume of 3 billion euros (since 1961). In recent years, following the government negotiations, there have been profound changes in German development cooperation with Indonesia.

The German-Indonesian cooperation focuses on three priority areas:

  • energy
  • environmental Protection
  • Vocational education / economic development

Cross-cutting issues are good governance and cooperation with the private sector.

In the international cooperation of the BMU, Indonesia plays an important role due to its importance for climate protection and the preservation of biodiversity.

Statutory health insurance was introduced in 2014 and is expected to cover the entire population of over 250 million by 2019. The planning of the new social security system was closely accompanied by advice from the German side.

Advice is also provided for a project by the Indonesian government that aims to merge public transport into an integrated transport system in order to reduce private passenger transport.

At the government negotiations in November 2015, Germany and Indonesia pledged the previous record sum of 555 million euros for development cooperation.

In November 2020, Indonesia received a KfW loan of 550 million euros to fight the Covid-19 pandemic

The link with regional processes within ASEAN is also increasingly playing a role in bilateral cooperation.

A homepage of the German embassy introduces key players in German development and economic cooperation with Indonesia. GIZ, KfW and Sequa, among others, have their own offices in Jakarta.

Numerous other organizations such as B. Bread for the World and AGEH also have projects in Indonesia.

Representations of German party-affiliated foundations (KAS, FES, HSS, FNS) maintain offices in Jakarta and provide information on their work in Indonesia on the Internet.

Numerous German associations, such as the DAAD, also endeavor to promote scientific exchange between Germany and Indonesia. The Goethe-Institut is also represented in Jakarta.

Multilateral development cooperation

The UN works in Indonesia primarily in four areas:

  • MDG Monitoring and Advocacy
  • Crisis Prevention and Recovery
  • Environmental Sustainability
  • Democratic Governance

There are also special programs in the areas of HIV / AIDS and gender mainstreaming.

In its development strategy, the EU focuses on poverty reduction, the promotion of economic growth through trade and investment and the promotion of good governance through improved law enforcement. The environment, conflict prevention, gender issues and human rights are also named as cross-cutting issues.

The World Bank cites promoting macroeconomic stability, strengthening the financial sector, promoting a competitive private sector, improving infrastructure and creating income opportunities for poor households as priorities.

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