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Indonesia has a large, and in many cases unprospected, variety of mineral deposits. Mining, including the extraction of oil and natural gas, accounts for roughly one-tenth of the country’s GDP, and through exports and taxation it contributes substantially to foreign-exchange earnings and development. The mining industry employs only a tiny fraction of the workforce, however.
Fossil fuels, including petroleum, natural gas, and coal, constitute a major source of revenue. They are produced primarily in Sumatra and Kalimantan and from offshore sites in the Java and South China seas. Although refinery production since 1968 has been in the hands of the government-owned petroleum company Pertamina, foreign oil companies operate under a production-sharing formula. Under this arrangement, the ownership of oil resources remains with the government of Indonesia, and the foreign companies act as contractors, supplying the necessary capital. Since the last decades of the 20th century, Indonesia has greatly expanded its production of coal, to become one of the world’s leading exporters. The sale of liquefied natural gas is also increasingly important.
In addition to its hydrocarbon reserves, Indonesia’s mineral resources contribute significantly to the economy. The country is one of the world’s largest producers of tin, deposits of which are found on the islands of Bangka, Singkep, and Belitung and off the southwestern shore of Kalimantan. Bauxite is mined mostly on the Riau Islands and in western Kalimantan and is processed at an aluminum smelter—the first in Southeast Asia—at Kualatanjung in northern Sumatra. Celebes, Halmahera and other islands of the Moluccas, and Papua are sources of nickel. Manganese is present in central Java and on Sumatra, Kalimantan, Celebes, and Timor. Major copper deposits are mined in the Jayawijaya Mountains of Papua; smaller deposits have been found in Sumatra, Java, Kalimantan, and Celebes. Most of Indonesia’s gold comes from Papua.
The bulk of Indonesia’s electrical power is generated from fossil fuels. Until the late 20th century, the majority of the country’s power was provided by oil or gas. As the government stepped up its production of coal, however, it also strove to increase the domestic use of that resource. By the early 21st century, less than half the country’s power stations were fueled by oil or gas. Many plants were coal-driven, some were hydroelectric, and a small portion of plants were powered by geothermal sources.
Manufacturing
In the early 1970s import substitution (replacement of foreign-produced goods and services with those produced domestically) and support for the agricultural sector were the two major aims of industrial policy. Import substitution was geared to commodities such as food, textiles, fertilizers, and cement, and this required consistent government protection and controls. This policy proved to be both inefficient and expensive, however, and following the sharp decline in oil revenues in the 1980s, reforms were introduced to increase the competitive position of Indonesian manufactures in international markets. The government launched a series of deregulations and encouraged domestic and international private investment. Although many companies remained in government hands, the state also participated in joint ventures with the private sector.
As a result, the manufacturing sector has become the single largest contributor to the economy, constituting well over one-fourth of GDP and employing just over one-tenth of the labour force. A significant proportion of production is handled by medium- and small-scale privately owned enterprises, which supply consumer goods. Small-scale workshops manufacture such consumer goods and general products as furniture, household equipment, textiles, and printed matter. Since the mid-1980s there has been a major shift toward developing large-scale and high-technology industries, such as telecommunications and electronics; automobile manufacturing has expanded especially rapidly in the 21st century. The centre of private industry is in western Java, although considerable development has taken place in Jakarta.
One of the country’s principal industries based on imported raw materials is textile manufacturing. Spinning mills are largely state owned or in the hands of foreign companies, while weaving and finishing factories, which are centred in Bandung, are generally small-scale and privately owned by local entrepreneurs. Batik production—an Indonesian method of hand-dyeing textiles—is concentrated in central Java. Although production of batik remains a major cottage industry, there are a number of larger-scale operations.
Finance
Bank Indonesia, the central bank, is responsible for issuing the rupiah, the national currency. Other major government-owned institutions include the state savings bank, banks specializing in rural and industrial development, and a large commercial bank with overseas branches. Each bank is diversified and operates independently. Private domestic banks and foreign banks also operate in Indonesia. Nonbanking financial institutions are restricted. Indonesia has stock exchanges in Jakarta and Surabaya.
Generally, the aims of the government’s credit and fiscal policies have been to provide the conditions for private incentive within the context of financial orthodoxy. Before the 1980s, Indonesia’s capital market had been limited to the state-dominated banking system. Subsidized credit and interest rates were used in accordance with general government priorities, and a credit ceiling was imposed to ensure monetary stability. The credit ceiling, however, resulted in excess reserves held by state banks and ultimately triggered a restructuring and deregulation of the banking system.
In 1983 a reform package decontrolled the interest rate and abolished the credit ceiling system. Further reforms in 1988 liberalized licensing for new banks and lowered reserve requirements. The result was a dramatic expansion in the number of private banks, their branches, and the banks’ share of total deposits. The Jakarta Stock Exchange also experienced explosive growth.
The surge, however, was accompanied by a rise in interest rates (both for deposits and for lending), which effectively stifled domestic investment. In an effort to curb inflation, Bank Indonesia tightened the money supply, a move that further destabilized the country’s financial sector. When the Asian monetary crisis struck in 1997, Indonesia’s banking industry was among the first casualties.
In 1998 the government established the Indonesian Bank Restructuring Agency (IBRA) to extricate the financial sector from its monumental debt. IBRA accomplished this task largely through the closure and consolidation of financially precarious banks. The remaining banks then prioritized households and small businesses in their lending, which stimulated growth in the domestic private sphere. By 2004 the banking sector had stabilized, the country had returned to a general pattern of economic growth, and IBRA was dissolved—on schedule.
Trade
A complex and reasonably well-developed commercial sector has existed in Indonesia for many decades, if not centuries, based on the marketing and exporting of agricultural produce and on supplying consumer goods and services to the domestic market. Historically, trade has been dominated by Indonesian Chinese, although other segments of the population, especially people from western Sumatra and southern Celebes, also have made notable contributions.
No longer simply an exporter of agricultural produce, Indonesia has become an established international supplier of petroleum and petroleum products; rubber products; garments, shoes, and textiles; wood and wood products (including paper); machinery of various sorts (including automobiles); and other commodities, such as electronic products. Primary imports include petroleum and natural gas, machinery, chemicals, metals, and transport equipment. Indonesia’s most important trading partners include Japan, the United States, Singapore, China, South Korea, Thailand, Malaysia, and Australia.
Services of Indonesia
Services constitute a major segment of the Indonesian economy, generating more than one-third of GDP. Tourism in particular has emerged as a major source of income, although the industry’s growth suffered setbacks with the Asian economic crisis in 1997–98 and with multiple terrorist attacks and the outbreak of avian influenza (bird flu) in the early 21st century.
Labour
Indonesia’s industrialization has not produced strong organized labour. This is attributable in part to a surplus of labour in the job market; most lower-class Indonesians work in traditional, informal, and marginal jobs. Political repression under the Suharto presidency (1967–98) also discouraged politically motivated associations of workers. Rather, the government sought to incorporate functional groups such as those of farmers and fishermen into a quasi-governmental political party.
Thomas R. Leinbach Goenawan Susatyo MohamadTransportation and telecommunications
Because Indonesia is an island country, sea transport plays a key role in the movement of raw materials and agricultural products from their sources to markets. Although the physical nature of the country has favoured the development of strong sea links for freight and strong air links for passengers, many parts of Indonesia have not been adequately served by the transport network, a factor that has critically hampered economic development. The rapid expansion of telecommunications networks, however, has helped mitigate the insularity of some regions.
Roads and railways
Road transport is the dominant mode of transportation on Indonesia’s islands, especially the smaller ones, such as Java, Bali, and Madura. Some three-fifths of the country’s roads are paved, and most of these are on Sumatra, Java, and Bali, where the network of highways meets traffic needs in most areas. Much of the remaining paved mileage is on Madura, Lombok, and Celebes. Western and central Kalimantan have some good roads, but in Papua road transport has not developed evenly, owing to the size of the territory and to the government’s budgetary constraints.
Road traffic has been on the rise as roads have improved and as ownership of automobiles and motorcycles has increased. Trucks and intercity buses, operated by private enterprises, are central to the transportation system; using ferries to cross between islands, some cover distances as far as that between Medan in northern Sumatra and Surabaya in eastern Java. For traveling shorter distances, especially in the urban and semiurban areas, smaller buses and minivans are popular. In the larger cities, taxis are readily available, but most people opt to drive their own car, take a motorcycle, or, as a less expensive alternative, ride one of several types of minivan redesigned to accommodate additional passengers. The least expensive urban transportation services are provided by individual entrepreneurs who drive a single passenger on the back of a small motorcycle. In most towns, the becak (pedicab, or pedaled trishaw) remains a prominent feature of the streets, although this mode of transport is technically prohibited in Jakarta.
The railway, run by a public enterprise, operates mainly on Java and Madura, with less-extensive service on Sumatra. The demand for train services has remained strong, although geographic features limit the expansion of the railroads. Comfortable, reliable rail transport between major towns in Java has become a popular alternative to intercity buses and airlines.
Water and air transport
Most of the major population centres are close to the sea, where they can be served and linked by coastal and interisland shipping services. The adjacent seas are relatively calm because Indonesia is outside the belt of typhoons and high winds, and, even where docking facilities are not available, it is usually possible for ships to anchor and discharge and load from lighters and other craft.
There are numerous ports, some of which have facilities and water depths that allow large vessels to load and unload at quayside. The major dry-cargo ports are Tanjung Priok, the outport of Jakarta; Tanjungperak, the outport of Surabaya; and Belawan, the outport of Medan. Palembang, in southern Sumatra, is the major petroleum port. Other major ports include Semarang and Cirebon on Java, Telukbayur (the outport of Padang) on Sumatra, Manado on Celebes, Ambon in the Moluccas, Jayapura in Papua, and Banjarmasin on the south coast of Kalimantan.
Although Indonesia has scores of airports, few of them offer international service. Most international flights operate out of Jakarta and Yogyakarta in Java, Medan in Sumatra, Denpasar in Bali, and Balikpapan in Kalimantan. Major cities in Sumatra and Celebes also have limited service to Singapore and Malaysia. Scheduled services are provided by several companies, the most important of which are Garuda Indonesia (the national airline) and the privately owned Lion Air, both of which offer domestic and international flights. Merpati, also state owned, offers domestic service only.
Telecommunications
Since the late 1970s, immediate links between distant places in Indonesia have been established through telecommunications technology. The use of satellites, purchased by Indonesian public and private telecommunications companies, revolutionized the system. A unique solution to the general lack of telecommunications facilities was the establishment of neighbourhood wartel (“telephone shops”), where customers can make domestic or international calls and send or receive faxes for a time-based fee. However, with the rapidly expanding use of cell phones—which has far outstripped that of standard telephones—the wartel are playing a less critical role in the Indonesian telecommunications system. An increase in Internet usage has been attributable largely to the introduction of warnet (“Internet shops”) in major cities. Like wartel, these shops typically charge by the length of time used.
