Main Sectors of Industry

Indonesia is a market economy with abundant natural resources, a young, large and burgeoning population (277.7 million), a labor force of 135 million people in 2022, and political stability. The country changed from being an economy that was highly dependent on agriculture into a more balanced economy which is lessening its traditional dependency on primary exports. The agricultural sector contributes to 13.3% of the country’s GDP and employed 29% of the active population in 2022 (World Bank, 2023). Indonesia is the second-largest natural rubber producer in the world. Other major crops include rice, sugarcane, coffee, tea, tobacco, palm oil, coconuts and spices. Besides, the country is the world's biggest nickel ore producer and has become a major exporter of stainless steel. Indonesian land area used for agriculture has been growing, and is currently around 30%. This is mainly due to the establishment of large-scale plantations - in particular for palm oil production (second-largest export). Indonesia is the only Asian country to have been a member of the OPEC, although its membership is frozen since December 2017 because it would not agree to production cuts mandated by OPEC.

Industry contributed approximately to 39.9% of GDP and employed over 23% of the labour force in 2022 (World Bank, 2023). The industrial sector includes manufacturing of textiles, cement, chemical fertilisers, electronic products, rubber tyres, clothing and shoes (most of these are for the American market). Wood processing is also a major activity as the country is one of the world's largest timber producers. The implementation of the Indonesian-EU Forest Law Enforcement, Governance and Trade (FLEGT) to combat illegal logging is making progress and Indonesia has become the first country in the world to receive an exemption from screening to ensure its timber is sourced in accordance with EU regulations. Over 3 million hectares of Indonesian forests are certified, and over 2.2 million hectares among then are natural production forest concession.

The service sector (financial institutions, transportation and communications) contributes to 42.8% of the GDP and employed around 48% of the active population in 2022 (World Bank, 2023). The banking sector is well developed and the Islamic bank Syaria has expanded rapidly in recent years. Tourism is a major source of revenue, although the sector has suffered from terrorist threats and natural catastrophes in the past few years. The government was expecting the country to become a leading Asian and World tourism destination by 2045 with 73 million tourists. The country is still waiting for the positive effects of world's borders opening.

Global economic activity is experiencing a broad-based and sharper-than-expected slowdown, with inflation higher than seen in several decades. The cost-of-living crisis, tightening financial conditions in most regions, Russia’s invasion of Ukraine, and the lingering COVID-19 pandemic all weigh heavily on the outlook.  Global growth is forecast to slow from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023, the weakest growth profile since 2001 except for the global financial crisis and the acute phase of the COVID-19 pandemic. Global inflation is forecast to rise from 4.7 percent in 2021 to 8.8 percent in 2022 but to decline to 6.5 percent in 2023 and to 4.1 percent by 2024 (International Monetary Fund - IMF, 2023). The impact of the 2022 world events appears to have affected both sides of most sectors and markets in this country for the third year in a row - demand disruptions having run up against supply problems - making the short-term outlook uncertain for agriculture, industry and service sectors.

Source: World Bank - Latest available data.

Political Outline

Current Political Leaders

President: Joko Widodo (since 20 October 2014) - PDI-P
Vice-President: Ma'ruf Amin (since 20 October 2019) - Independent

Next Election Dates

Presidential: 2024
House of Representatives: 2024

Current Political Context

The government led by the President Joko Widodo, who was re-elected for a second five-year term in May 2019, focuses on structural reform and improving governance. It has begun a thorough overhaul of the energy subsidy programme, which will fund infrastructure renovation and provide aid to the agricultural sector. With a focus on domestic issues during his second term, the president reaffirmed the reform agenda in 2020, particularly regarding labour, healthcare and infrastructure, in order to lure foreign investments and bolster growth. Seeking to push forward the reform agenda with ease, Joko Widodo brought key opponents into his cabinet to form a broad coalition, hoping that it would weaken critics over the government. The Omnibus Bill was passed and signed into law in October 2020 and could reform labour, taxes and other important laws in order to reduce bureaucracy and stimulate investment in a post-pandemic economy. Moreover, to respond to the COVID-19 crisis, the Government has announced a fiscal package amounting to 4.3 percent of GDP. The package includes funds to improve the preparedness of the health sector and a substantial increase in social assistance.

In 2021, the President Joko Widodo pulled another political party, the National Mandate Party, into his expanding coalition, which now controls 82 percent of the 575 seats in the House of Representatives. Despite growing public concern about pressures on civil liberties and the government’s pandemic difficulties, he remains incredibly popular with Indonesian voters. The President has accelerated the construction of dozens of much-needed highways, ports, and airports, with traffic-clogged Jakarta getting the country’s first-ever subway line in 2019. But in 2021, in the context of an aggravating COVID crisis, he struggled to deliver on his promises of high economic growth, pro-business reform, and improved social welfare.

President Joko Widodo, constitutionally barred from a third term, will lose influence as would-be successors jostle for position ahead of elections in 2024, but he will double down on efforts to attract increasing foreign direct investment into downstream heavy industries before his final term ends in mid-2024. His administration will make only token gestures on other pressing political matters, including addressing the political strife in Indonesia's Eastern provinces and reducing corruption. As Indonesia is bracing for a tumultuous political year in 2023, as parties gear up for the upcoming general elections next year, Joko Widodo's preferred successor, the current governor of Central Java, Ganjar Pranowo, should secure the presidency in 2024. Most other parties in the ruling coalition have yet to nominate their presidential candidates, while those which have are still leaving the door open for changes.

Uncertainties in an election year will undoubtedly have an impact on the economy, especially regarding investments, according to Center of Reform on Economics (CORE) Indonesia executive director Mohammad Faisal.

Main Political Parties

Single parties have little chance of garnering power alone. Thus, parties often work together to form coalition governments. Primary representation in parliament consists of both nationalist secular parties and moderate and Islamic-oriented groups. The major parties are:
Governing Coalition
- Indonesian Democratic Party of Struggle (PDI-P): centre-left, follows Pancasila’ideology based on the five founding principles of the Constitution; split-away group from the PD, led by ex-President Megawati Sukarnoputri
- Party of Functional Groups (Golkar): follows conservative liberalism, advocates democratic and liberal values
- National Awakening Party (PKB): Islamist, Pancasila ideoligy, nationalism
- United Development Party (PPP): Islamic democracy, nationalist islamism, Pancasila ideology
Opposition:
- National Mandate Party (PAN), Islamic democracy, Pancasila ideology
- Democratic Party (PD): centrist, Pancasila ideology
- Prosperous Justice Party (PKS), Islamist, conservative
-Great Indonesia Movement Party (Gerindra), conservatism, nationalism, populism

Executive Power

The President is both the head of the State and the head of the Government. The President enjoys the executive power and appoints the cabinet. Both the President and the Vice-President are elected through direct universal suffrage for five-year terms. The President is the commander-in-chief of the armed forces and responsible for domestic governance and policy-making and foreign affairs.

Legislative Power

The legislature in Indonesia is bicameral. The highest representative body at the national level is the parliament of the country, the People's Consultative Assembly (MPR). It consists of the DPR (House of People’s Representatives - lower house) with 575 members elected directly to serve five-year terms, and the DPD (House of Regional Representatives - upper house) with 136 seats, each province electing 4 members on a non-party basis. The President cannot dissolve the parliament but he has the power to veto bills. In turn, a super-majority of legislators may act to override the veto. The people of Indonesia have limited political rights.