International Business / Spotlight on Indonesia : The Indonesian Economy

The Republic of Indonesia, which once relied on oil as its chief asset, has worked hard to diversify its economy since oil prices began tumbling in the early 1980s. Those efforts have begun to pay off. The agriculture and service sectors have shown growth and manufacturing is growing rapidly.

ECONOMY: In the past decade, Indonesia has experienced growth in gross domestic product similar to the fast pace of growth in other Southeast Asia nations. But growth has been uneven throughout the country, which is spread out over almost 13,700 islands. Inflation, which declined significantly in the late 1980s, has been creeping up again in recent years. The rupiah, the Indonesian currency, has fallen about 20% against the dollar in the last five years to 2,160 rupiahs to the dollar. In 1989, the average was 1,770 rupiahs to the dollar.

INFRASTRUCTURE: Rapid economic development in the late 1980s put a strain on Indonesia’s infrastructure. Since then, the government has been made major investments in infrastructure and development, spending about 35% of the budget. Areas targeted include, electric power, communications, transportation and education.

LABOR FORCE: With 184 million people, Indonesia is the fourth most populous country in the world. About half of its population is under age 20. Labor costs are extremely low--the average daily wage last year was $1.50--but the work force is poorly trained. Only 22% of the the total population has completed elementary school and there is shortage of workers with management and technical skills.

TRADE: Oil has traditionally been Indonesia’s principal export, and energy products--like petroleum and natural gas--are still among the country’s major exports. Exports of wood, wood products and textiles are also prominent. The nation imports machinery, transport and electrical equipment and chemical and mineral products. Japan is Indonesia’s principal trading partner, supplying nearly one quarter of all imports and absorbing 43% of all exports. The United States, Singapore, Germany, Taiwan and the Republic of Korea are other major trading partners.

AGRICULTURE: With its rich, volcanic soil and hot, wet climate, Java, Indonesia’s largest island, is one of the most fertile areas in the world and nealy half--47.6%--of all workers are employed in agriculture. Principal cash crops include coffee, sugar cane, tea, coconuts and tobacco. Indonesia is also the world’s second largest producer of palm oil and natural rubber.

MANUFACTURING: Manufacturing is the fastest-growing sector of the Indonesian economy, with an average growth of 12.5% per year between 1980 and 1990. Petroleum refineries are a major part of Indonesia’s manufacturing base. Other main industries include textiles, food products, tobacco, chemicals and wood products. But Indonesia is still a major exporter of raw, unprocessed materials, so the country is vulnerable to any major slowdown in the industrialized world.

SERVICES: Indonesia’s service sector is large and growing, employing 30.5% of the labor force in 1990. Tourism--including revenue from hotels and restaurants--is one of the country’s principal sources of foreign exchange. As Indonesia improves its infrastructure and draws more foreign investment, the service sector--already growing 6.7% per year--is expected to boom.

Sources: Europa World Book; Price Waterhouse; Bank of America World Information Services