Economy of Indonesia

Indonesia operates a mixed economy with strong dirigiste tendencies, making it the largest emerging market in Southeast Asia. Classified as a newly industrialised country and an upper-middle income nation, it holds a seat in the G20. Its economy ranks 17th globally by nominal GDP and 7th by GDP (PPP). In 2022, its internet economy was valued at US$77 billion. The economy relies heavily on domestic consumption, government budget spending, and state-owned enterprises, whose combined assets exceeded US$1 trillion as of 2024. Price controls on basic goods like rice and electricity are a key feature, though micro, small, and medium enterprises contribute about 61.7% of economic output. Large private and foreign companies also play a significant role. After the 1997 Asian financial crisis, the government took over many private-sector assets by acquiring nonperforming loans and corporate holdings through debt restructuring, later selling them off in privatisation rounds. Recovery began in 1999, with growth accelerating to 4–6% in the early 2000s. The COVID-19 pandemic caused a recession in 2020, with growth contracting to −2.07%, the worst performance since 1997. More recently, the manufacturing sector—historically a growth driver—has lost hundreds of thousands of jobs, with an estimated 300,000 shed since 2023. **History**

**Sukarno era**

Just after independence, Japanese occupation and the Dutch-Republican conflict crippled production; rubber and oil exports fell to 12% and 5% of pre-World War II levels. The first Republican state bank, Bank Negara Indonesia, was founded on 5 July 1946 to issue the ORI currency, predecessor of the rupiah. However, Japanese-occupation and Dutch-issued currencies remained in circulation, and the ORI’s simplicity made counterfeiting easy. Between 1949 and 1960, economic disruptions included the dissolution of the United States of Indonesia, the nationalisation of De Javasche Bank into Bank Indonesia, and the takeover of Dutch corporate assets after the West New Guinea dispute—all of which halved the value of Dutch banknotes. During the guided democracy era of the 1960s, political instability caused severe economic decline. Inexperienced macroeconomic policies led to widespread poverty and hunger. By Sukarno’s fall in the mid-1960s, annual inflation hit 1,000%, export revenues shrank, infrastructure crumbled, factories operated at minimal capacity, and investment was negligible. Still, post-1960 economic improvement was notable given how few indigenous Indonesians had received formal education under Dutch colonial rule. **New Order**

After Sukarno’s downfall, the New Order administration imposed disciplined economic policies that quickly reduced inflation, stabilised the currency, rescheduled foreign debt, and attracted foreign aid and investment. Indonesia was Southeast Asia’s only OPEC member for many years; the 1970s oil price surge brought windfall export revenues, fuelling average growth above 7% from 1968 to 1981. Heavy state regulation and falling oil prices slowed growth to an average of 4.5% per year between 1981 and 1988. Reforms in the late 1980s included a managed rupiah devaluation to boost exports and financial-sector deregulation. Foreign investment poured in, especially into export-oriented manufacturing, and from 1989 to 1997 the economy grew by over 7% annually. GDP per capita rose 545% from 1970 to 1980 due to oil revenue spikes. However, high growth masked structural weaknesses: weak, corrupt institutions, severe public debt from financial mismanagement, rapid natural-resource depletion, and a culture of favours and corruption among politicians and business elites. Corruption intensified in the 1990s, reaching the highest political levels—Suharto became a highly corrupt leader, according to Transparency International. The legal system was weak, with no effective contract enforcement, debt collection, or bankruptcy mechanisms. Banking practices were unsophisticated, relying on collateral-based lending and widespread violations of prudential rules, including limits on connected lending. Non-tariff barriers, rent-seeking by state firms, domestic subsidies, internal trade barriers, and export restrictions all distorted the economy.