Submitted By

Aditya Ramachandran

PGDM1400005

Under The Guidance Of

Prof. M H Sharieff

Study on Indonesia With Respect To

Economy, Culture & Politics

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INDONESIA

Indonesia is a chain of over 17 000 islands that lie between the Indian and Pacific oceans.

This chain stretches for approximately 5000 kilometres, all the way from Malaysia in the

west to Papua New Guinea in the east. A chain of islands is also known as an archipelago

and Indonesia is the world's largest archipelago. Only about 6000 of them are inhabited by

people.

Indonesia is a multicultural society. Indonesia is

made up of more than 300 different ethnic

groups. Many of these have their own

languages, religious beliefs and cultural

customs. For this reason, life in Indonesia can

vary greatly from one island to the next.

Indonesia has the largest economy in

Southeast Asia and is one of the emerging

market economies of the world. The country is

also a member of G-20 major economies and

classified as a newly industrialized country. It has a market economy in which the

government plays a significant role through ownership of state-owned enterprises (the

central government owns 141 enterprises) and the administration of prices of a range of

basic goods including fuel, rice, and electricity. In the aftermath of the financial and

economic crisis that began in mid-1997 the government took custody of a significant portion

of private sector assets through acquisition of non performing bank loans and corporate

assets through the debt restructuring process. Since 1999 the economy has recovered and

growth has accelerated to over 4%-6% in recent years.

Indonesia regained its investment grade rating from Fitch Rating in late 2011, and

from Moody's Rating in early 2012, after losing its investment grade rating in December

1997 at the onset of the Asian financial crisis which Indonesia spent more than Rp450

trillion ($50 billion) to bail out lenders from banks. Fitch raised Indonesia's long-term and

local currency debt rating to BBB- from BB+ with both ratings is stable. Fitch also predicted

that economy will grow at least 6.0% on average per year through 2013, despite a less

conducive global economic climate. Moody’s raised Indonesia's foreign and local currency

bond ratings to Baa3 from Ba1 with a stable outlook. In the year 2012, Indonesia edged out

India to emerge as second fastest G-20 major economy just behind China.

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History of Indonesia in perspective of economy influenced by politics

1) The Majapahit Empire.

2) The Dutch Era.

3) Post-Independence as a sovereign state in 1945.

History of Indonesia after her independence as a sovereign state in 1949 can be

further divided into five periods:

1949- Parliamentary Democracy

1959- Guided Democracy

1966- Suharto-Regime Consolidation Period

1985- Suharto-Regime Transfiguration Period

1998-Post-Suharto Period

4) Present Indonesia

Majapahit Empire

Majapahit was an Indianized kingdom based in eastern Java from 1293 to around 1500. Its

greatest ruler was Hayam Wuruk, whose reign from 1350 to 1389 marked the empire's

peak, when it dominated other kingdoms in the southern Malay Peninsula, Borneo,

Sumatra, Bali, Kalimantan and eastern Indonesia, and the Philippines. For Indonesians in

later centuries, Majapahit became a symbol of past greatness.

The memory of its greatness remains in Indonesia, and is sometimes seen as a precedent for

the current political boundaries of the Republic .Many of modern Indonesian national

symbols derive from Majapahit Hindu-Buddhist elements. The Indonesian national flag

"Sang Merah Putih" ("Red and White") or sometimes called "Dwiwarna" ("The bicolor"), is

derived from Majapahit royal colours. The Indonesian Navy flag of red and white stripes also

has a Majapahit origin. The Indonesian coat of arms, Garuda Pancasila, derives from

Javanese Hindu elements. The statue and relief of Garuda, a depiction of king Airlangga as

an incarnation of Vishnu riding Garuda, has been found in many temples in Java such

as Prambanan from the ancient Mataram era, and Panataran (also Sukuh) temple dating

from Majapahit era. Majapahit had a momentous and lasting influence on Indonesian

architecture. The description of the architecture of the capital's pavilions in

the Nagarakertagama invokes the Javanese Kraton and also the Balinese temples and

compounds of today.

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Economy during this era:

The Majapahit Empire was the last of the major Hindu empires of the Malay Archipelago

and is considered one of the greatest states in Indonesian history. Majapahit society

developed a high degree of sophistication in both commercial and artistic activities. Its

capital was inhabited by a cosmopolitan population among whom literature and art

flourished. It had a thriving cash economy, based on rice cultivation and trade, which

supported a wide variety of industries and professions. This era is known as the Golden Age

of Indonesia.

In the Majaphit kingdom, taxes and fines were paid in cash. Java's economy had bean at

least partly monetized since the late eighth century, with the use of gold and silver coins. In

about the year 1300, during the reign of Majapahit's first king, an important change took

place: The indigenous coinage was completely replaced by imported Chinese copper coins.

The reason for this is not given in any source, but most scholars assume it was due to the

increasing complexity of Javanese economy and a desire for a currency system that used

much smaller denominations suitable for everyday market transactions. This was a role for

which gold and silver are not well suited.

Majapahit inscriptions mention a large number of occupational specialties, ranging from

gold and silver smiths to drink vendors and butchers. Although many of these occupations

had existed in earlier times, the proportion of the population earning an income from non-

agrarian pursuits seems to have become even greater during the Majapahit era.

The prosperity of Majapahit was probably due to two factors. The northeast lowlands of

Java were suitable for rice cultivation, and during Majapahit's prime numerous irrigation

projects were undertaken, some with government assistance. Also, Majapahit's ports on the

north coast were probably significant stations along the route to obtain the spices of

Maluku, and as the spices passed through Java they would have provided an important

source of income for Majapahit. They had even passed a rule according to which no land is

to be kept vacant. It was to ensure that people are self-sufficient and make a living for

themselves.

The states attracted foreign merchants from far and wide, including Indians, Khmers,

Siamese, and Chinese among others. A special tax was levied against some foreigners,

possibly those who had taken up semi-permanent residence in Java and conducted some

type of enterprise other than foreign trade

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The Dutch Era

Centuries before Europeans arrived, the Indonesian archipelago supported various states,

including commercially oriented coastal trading states and inland agrarian states. The first

Europeans to arrive were the Portuguese in the late fifteenth century. Following disruption

of Dutch access to spices in Europe, the first Dutch expedition set sail for the East Indies in

1595 to access spices directly from Asia. When it made a 400% profit on its return, other

Dutch expeditions soon followed. Recognizing the potential of the East Indies trade, the

Dutch government amalgamated the competing companies into the United East India

Company

A capital was established in Batavia (now Jakarta), they had monopolies on, peppers,

cloves and cinnamon but later the colonial administrations introduced non-indigenous cash

crops like coffee, tea, cacao, tobacco, rubber, sugar and opium, and safeguarded their

commercial interests by taking over surrounding territory.

From the arrival of the first Dutch ships in the late sixteenth century, to the declaration of

independence in 1945, Dutch control over the Indonesian archipelago was always tenuous.

Although Java was dominated by the Dutch, many areas remained independent throughout

much of this time, including Aceh, Bali, Lombok and Borneo.

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Economy during this era:

The economic history of the colony was closely related to the economic health of the

mother country. Despite increasing returns from the Dutch system of land tax, Dutch

finances had been severely affected by the cost of the Java War and the Padri War, and the

Dutch loss of Belgium in 1830 brought the Netherlands to the brink of bankruptcy. In 1830,

a new Governor-General, Johannes van den Bosch, was appointed to make the Indies pay

their way through Dutch exploitation of its resources. With the Dutch achieving political

domination throughout Java for the first time in 1830, it was possible to introduce an

agricultural policy of government-controlled forced cultivation. According to this farmers

were required to deliver, as a form of tax, fixed amounts of specified crops, such as sugar or

coffee. Much of Java became a Dutch plantation and revenue rose continually through the

nineteenth century which were reinvested into the Netherlands to save it from

bankruptcy between 1830 and 1870, 1 billion guilders were taken from Indonesia, on

average making 25 % of the annual Dutch Government budget. The Cultivation System,

however, brought much economic hardship to Javanese peasants, who suffered famine and

epidemics in the 1840s. The colonial exploitation of Indonesia's wealth contributed to the

industrialisation of the Netherlands, while simultaneously laying the foundation for the

industrialisation of Indonesia.

Their expertise in waterways helped Indonesia to develop their irrigation and created

various infrastructure like dams, canals, storm water drains etc.

Cultural influence during this era:

When the French occupied Holland between 1806 and 1815 these possessions were

transferred to the British. After Napoleon's defeat at Waterloo it was decided that most

parts of the archipelago would return to the Dutch

During this era the people of Indonesia weren’t allowed to learn until 1900. This was to

ensure that everyone is involved in agriculture & prevent them from revolting, but after the

liberalisation in the 1900’s the people started getting education and realised that they are

being exploited.

In 1914 communism was bought into Indonesia by Dutch national , In late 1920’s the

communists revolted against imperialists, but were supressed by force. Later they re-

emerged in 1940s and they declared independence by 1945.

During the Dutch period Chinese started migrating and started setting up their own

business. Today 90% of trade in Indonesia is controlled by people of Chinese origin.

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Post Declaration of Independence

Changes in political system

The first was a Democratic system adopted in the parliamentary democracy period of the

1950s under the 1950 Provisional Constitution. This Constitution inherited the contents of

the Constitution of the Republic of the United States of Indonesia, which was prepared and

approved by the Hague Round Table Conference in 1949. The 1950 Provisional Constitution

embodied West European constitutionalism and democracy as basic thought. It provided for

separation of powers under the representative polity and included detailed clauses

guaranteeing basic human rights. It was entirely different from the 1945 Constitution

promulgated with the Proclamation of Independence on 17 August 1945, which imparted

strong powers to the president based on the Indonesian (Javanese to be more precise)

traditional thought. On the basis of the 1950 Provisional Constitution, the parliamentary

party politics flourished in the 1950s.

The second was the authoritarian system President Sukarno introduced during the Guided

Democracy period. Learning that the attempt of party politics in the 1950s brought nothing

but political instability and gave rise to local insurgencies, Sukarno threw away the idea of

parliamentary democracy. He suspended the 1950 Provisional Constitution and decided to

return to the 1945 Constitution by his 5 July 1959 Presidential Decree. In fact this was the

first time the 1945 Constitution was fully enforced, as it was anomalously implemented in

the period of independence struggle.

Indonesia’s second president, Suharto, inherited this Sukarno’s authoritarian system and

elaborated it to a political institution. Suharto innovated on the system in three ways.

Firstly, he diluted the personal aspect of the system and institutionalized it by introducing

democratic formalities like DPR, People’s Consultative Assembly (MPR) and general

elections. This was to allow him to claim that he was not ruling as a charisma but as a

president elected by the people in a parliamentary system. But in reality, he created a

mechanism of control so that the ruling governmental party without fail won general

elections and MPR invariably elected him. Secondly, he upheld the national goal of

development, or economic development, that his predecessor obviously failed to attain. By

the logic that political stability was the prerequisite of economic development, Suharto

justified his authoritarian rule. Thirdly, Suharto achieved social stability by establishing

unitary control on society and depoliticizing it.

The third is the democratic system in the period of reform that drastically departed from the

preceding authoritarian system after the downfall of the Suharto government. The currency

crisis cancelled the achievement of development that had justified the Suharto’s

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authoritarian rule. Popular movements for reform then arose, asking to reform the negative

aspects of the rule and leading President Suharto’s step down.

Following his resignation, the setup of political institutions that had underpinned the

Suharto regime were completely renovated within a year or so. Under the new political

laws, a free general election was carried out and Indonesia’s president was elected for the

first time by vote at the newly organized MPR in October 1999. With these events, it can be

judged that Indonesia shifted from authoritarian system to democratic system.

The Openness and Its Impact to Indonesian Economy:

Openness will cause a country to be more vulnerable towards shock coming from outside

country as well as towards the incapability in competing with developed countries. Like

other countries, Indonesia has faced various problems in its economy especially in relation

with the impact of openness. Trade openness through export import transactions has

succeeded in supporting economic growth. The capital inflows through foreign direct

investment had also enhanced the economic growth of Indonesia during the period of end

of 1980s to 1996. During that period Indonesia’s annual average growth reached 8 percent

and this had made Indonesia as one of the developing countries with highest growth rate

(Asian Tigers) and Indonesia had always been the case study of a country with a success in

implementing liberalization.

Economic openness was the cause of the fall of Indonesian economy at the time of the crisis

in 1997/1998 and the impact of this crisis still exists up to now. Economic crisis originated

from foreign exchange crisis has disturbed the structure of Indonesian economy as shown in

a deep economic contraction in 1998. This crisis has given impact not only to the economic

aspect but to social aspect as well. Compared to the other Asian countries also touched by

this crisis, such as South Korea and Thailand, who, after crisis, have reached above potential

economic growth of 8 percent, Indonesia still has to face a growth of 4 to 6 percent., which

has led to an increase in poverty and unemployment.

The result of trade openness may be robust since lack of preparation to anticipate trade

openness lead to weaken competitiveness of Indonesian products relative to foreign

products and finally lower output. The financial openness finding also is quite robust since

the more financial openness leads Indonesian economy to be more vulnerable to capital

reversal, which then endanger economic performance.

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Cultural influence during this era:

After 1960 the Chinese were forced to start their own business as they weren’t allowed to

work in government offices, this was during the period of Suharto. During this period the

Chinese community prospered in Indonesia.

In 1970’s when the economy was liberalised, it encouraged people from various countries to

set up their business in Indonesia. The country prospered but in the meantime corruption

also grew.

During this period the per capita income had gone up and people were less unemployed.

This ensured that people became more modernised & accepted the western culture.

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The Present Indonesia

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Present Economic situation’

Indonesia’s economy consolidated considerably between 2011 and 2013. Indonesia’s GDP

passed the $1 trillion threshold during the period, marking a milestone in the country’s

economic development. On the basis of most economic indicators, Indonesia performed

exceptionally well: GDP growth has been above 6% for eight consecutive quarters between

2010 and 2012; poverty and unemployment has declined; the government debt to GDP ratio

decreased to 25%; the stock market reached record heights in 2011 and 2012 and foreign

direct investment (FDI) flooded the country. However, the economic boom encouraged

Indonesia to adopt an increasingly protectionist posture. In a series of policy decisions heavily

criticized by foreign investors, the government issued regulations that imposed new import

and export taxes, limited economic freedoms, and strengthened the role of the state in key

areas of the economy. In addition, the government has been slow to address the country’s

most serious economic deficiency, an aging and underdeveloped infrastructure. Overall, then,

Indonesia’s political system has remained stagnant, while its economy has struggled to

accommodate the country’s rapid growth.

Corruption and abuse of power remain endemic in Indonesia. However, in contrast to the

early post-Suharto period, many officeholders are now prosecuted for their actions. Between

2004 and early 2012, a total of 1,737 members of local parliaments have been investigated

for abuses ranging from corruption (29% of cases), physical harassment (11%), document

forgery (11%) and fraud (11%). Over the same period, the president authorized the legal

prosecution of 173 local government heads. Many of these prosecutions have resulted in

prison terms for the accused, especially in those cases handled by special corruption courts

in the capital Jakarta.

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PESTEL Analysis

Political

Democracy is still young, however stable.

Political system is still stable but a work in progress.

Corruption & bureaucracy.

Economic

Major destination for FDI in Asia.

Leading exporter in coal, textile coffee & furniture’s.

Robust banking industry profits

Free trade zones.

Social

World’s 3rd largest young democracy.

Worlds 4th most populated country.

Literacy rate 90.4%.

Unemployment rate 6.25%.

High crime rate.

Technology

Supply chain mechanism

Effective & highly developed transport system.

Environmental

High risk to natural disasters due to its location.

Water pollution.

Deforestation.

Legal

Judicial system.

Barriers to imports.

Smuggling involved in exports.

Discriminatory attitude towards foreign investors.

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“Note: This data is as on November 2014”.

COUNTRY INDONESIA INDIA CHINA USA

POPULATION Rank

252,164,800 4

1,263,300,000 2

1,368,200,000 1

319,185,000 3

FOREX RESERVE

(US $ Million) Rank

111,164

22

313,841 9

4,055,812 1

134,980

18

GNI per capita $3,580 $1,570 $6,560 $53,670

GDP

$868.3 (Billion)

$1.877 (Trillion)

$9.240 (Trillion)

$16.80 (Trillion)

BALANCE OF TRADE 20 ($Million)

-13,350 ($Million)

454.05 ($100 million)

-43,030 ($Million)

AVERAGE MONTHLY DISPOSABLE INCOME

AFTER TAX

$304 $452 $731 $3258

POPULATION BELOW POVERTY LINE

(% Of the population))

11.7% 29.5% 13.4% 15.1%

SIGNIFICANT INTERNATIONAL MEMBERSHIPS

ASEAN, NAM, OIC, APEC, WTO, G20,

IORA, RCEP

ASEAN, NAM, EAS, WTO, APEC, G20,

SAARC, IORA, BIMSTEC, BRICS

ASEAN, NAM, EAS, WTO, APEC, SCO, G20, G77, Zangger

Committee

WTO, G20, APEC, ARF, G5,

G7, G8, G10, NAFTA, NATO, PIF, Zangger Committee

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Abbreviations:

APEC Asia-Pacific Economic Cooperation

ARF Association of southeast Asian Regional Forum

ASEAN Association of Southeast Asian Nations

BIMSTEC Bay of Bengal Initiative for Muti-Sectoral Technical & Economic Cooperation.

BRICS Brazil Russia India China & South Africa Group

EAS East Asia Summit

IORA Indian Ocean Rim Association

NAFTA North American Free Trade Agreement

NAM Non-Aligned Movement

NATO North Atlantic Treaty Organization

OIC Organisation of Islamic Cooperation

PIF Pacific Islands Forum

RCEP Regional Comprehensive Economic Partnerships

SAARC South Asian Association for Regional Cooperation

SCO Shanghai Cooperation Organisation

WTO World Trade Organisation

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Reference

Friend, Theodore. 2003. Indonesian Destinies. Cambridge, MA: Belknap Press of Harvard

University Press. ISBN 9780674011373.

Mason, Colin. 2000. A Short History of Asia Stone Age to 2000 C.E.. New York: St.

Martin's Press. ISBN 9780312230593.

Muljana, Slamet. 1976. A Story of Majapahit. Singapore: Singapore University Press.

Pameran Kemegahan Majapahit. 2006. Majapahit Trowulan. Jakarta: Indonesian

Heritage Society. ISBN 9789799563460.

Ricklefs, M. C., and M. C. Ricklefs. 2001. A History of Modern Indonesia Since

c.1200. Basingstoke: Palgrave. ISBN 9780333800997.

Taylor, Jean Gelman. 2003. Indonesia Peoples and Histories. New Haven: Yale University

Press. ISBN 9780300097092.

www.heritage.org

www.Infoplease.com

www.nationmaster.com

Data.worldbank.org