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Indonesia (10/04)For the most current version of this Note, see Background Notes A-Z.
PROFILE Official Name: Geography People Government Economy PEOPLE Constitutional guarantees of religious freedom apply to the five religions recognized by the state, namely Islam (87%), Protestantism (6%), Catholicism (3%), Buddhism (2%), and Hinduism (1%). In some remote areas, animism is still practiced. HISTORY Beginning in 1602, the Dutch slowly established themselves as rulers of present-day Indonesia, exploiting the weakness of the small kingdoms that had replaced that of Majapahit. The only exception was East Timor, which remained under Portugal until 1975. During 300 years of Dutch rule, the Dutch developed the Netherlands East Indies into one of the world's richest colonial possessions. During the first decade of the 20th century, an Indonesian independence movement began and expanded rapidly, particularly between the two World Wars. Its leaders came from a small group of young professionals and students, some of whom had been educated in the Netherlands. Many, including Indonesia's first president, Soekarno (1945-67), were imprisoned for political activities. The Japanese occupied Indonesia for 3 years during World War II. On August 17, 1945, three days after the Japanese surrender to the Allies, a small group of Indonesians, led by Soekarno and Mohammad Hatta, proclaimed independence and established the Republic of Indonesia. They set up a provisional government and adopted a constitution to govern the republic until elections could be held and a new constitution written. Dutch efforts to reestablish complete control met strong resistance. After 4 years of warfare and negotiations, the Dutch transferred sovereignty to a federal Indonesian Government. In 1950, Indonesia became the 60th member of the United Nations. Shortly after hostilities with the Dutch ended in 1949, Indonesia adopted a new constitution providing for a parliamentary system of government in which the executive was chosen by and made responsible to parliament. Parliament was divided among many political parties before and after the country's first nationwide election in 1955, and stable governmental coalitions were difficult to achieve. The role of Islam in Indonesia became a divisive issue. Soekarno defended a secular state based on Pancasila (five principles of the state philosophy--monotheism, humanitarianism, national unity, representative democracy by consensus, and social justice), while some Muslim groups preferred either an Islamic state or a constitution which included a preambular provision requiring adherents of Islam to be subject to Islamic law. At the time of independence, the Dutch retained control over the western half of New Guinea, and permitted steps toward self-government and independence. Negotiations with the Dutch on the incorporation of the territory into Indonesia failed, and armed clashes broke out between Indonesian and Dutch troops in 1961. In August 1962, the two sides reached an agreement, and Indonesia assumed administrative responsibility for Irian Jaya on May 1, 1963. The Indonesian Government conducted an "Act of Free Choice" in Irian Jaya under UN supervision in 1969, in which 1,025 Irianese representatives of local councils agreed by consensus to remain a part of Indonesia. A subsequent UN General Assembly resolution confirmed the transfer of sovereignty to Indonesia. Opposition to Indonesian administration of Irian Jaya, also known as Papua or West Papua, gave rise to small-scale guerrilla activity in the years following Jakarta's assumption of control. In the more open atmosphere since 1998, there have been more explicit expressions within Irian Jaya of a desire for independence from Indonesia. Unsuccessful rebellions on Sumatra, Sulawesi, West Java, and other islands beginning in 1958, plus a failure by the constituent assembly to develop a new constitution, weakened the parliamentary system. Consequently, in 1959, when President Soekarno unilaterally revived the provisional 1945 constitution, which gave broad presidential powers, he met little resistance. From 1959 to 1965, President Soekarno imposed an authoritarian regime under the label of "Guided Democracy." He also moved Indonesia's foreign policy toward nonalignment, a foreign policy stance supported by other prominent leaders of former colonies who rejected formal alliances with either the Western or Soviet blocs. Under Soekarno's auspices, these leaders gathered in Bandung, West Java, 1955, to lay the groundwork for what became known as the Non-Aligned Movement. In the late 1950s and early 1960s, President Soekarno moved closer to Asian communist states and toward the Indonesian Communist Party (PKI) in domestic affairs. Though the PKI represented the largest communist party outside the Soviet Union and China, its mass support base never demonstrated an ideological adherence typical of communist parties in other countries. By 1965, the PKI controlled many of the mass civic and cultural organizations that Soekarno had established to mobilize support for his regime and, with Soekarno's acquiescence, embarked on a campaign to establish a "Fifth Column" by arming its supporters. Army leaders resisted this campaign. Under circumstances that have never been fully explained, on October 1, 1965, PKI sympathizers within the military, including elements from Soekarno's palace guard, occupied key locations in Jakarta and kidnapped and murdered six senior generals. Major General Soeharto, the commander of the Army Strategic Reserve, rallied army troops opposed to the PKI to reestablish control over the city. Violence swept throughout Indonesia in the aftermath of the October 1 events, and unsettled conditions persisted through 1966. Rightist gangs killed tens of thousands of alleged communists in rural areas. Estimates of the number of deaths range between 160,000 and 500,000. The violence was especially brutal in Java and Bali. During this period, PKI members by the tens of thousands turned in their membership cards. The emotions and fears of instability created by this crisis persisted for many years; the communist party remains banned from Indonesia. Throughout the 1965-66 period, President Soekarno vainly attempted to restore his political position and shift the country back to its pre-October 1965 position. Although he remained President, in March 1966, Soekarno had to transfer key political and military powers to General Soeharto, who by that time had become head of the armed forces. In March 1967, the Provisional People's Consultative Assembly (MPRS) named General Soeharto acting President. Soekarno ceased to be a political force and lived under virtual house arrest until his death in 1970. President Soeharto proclaimed a "New Order" in Indonesian politics and dramatically shifted foreign and domestic policies away from the course set in Soekarno's final years. The New Order established economic rehabilitation and development as its primary goals and pursued its policies through an administrative structure dominated by the military but with advice from Western-educated economic experts. In 1968, the People's Consultative Assembly (MPR) formally selected Soeharto to a full 5-year term as President, and he was re-elected to successive 5-year terms in 1973, 1978, 1983, 1988, 1993, and 1998. In mid-1997, Indonesia was afflicted by the Asian financial and economic crisis, accompanied by the worst drought in 50 years and falling prices for oil, gas, and other commodity exports. The rupiah plummeted, inflation soared, and capital flight accelerated. Demonstrators, initially led by students, called for Soeharto's resignation. Amidst widespread civil unrest, Soeharto resigned on May 21, 1998, 3 months after the MPR had selected him for a seventh term. Soeharto's hand-picked Vice President, B.J. Habibie, became Indonesia's third President. President Habibie reestablished International Monetary Fund (IMF) and donor community support for an economic stabilization program. He released several prominent political and labor prisoners, initiated investigations into the unrest, and lifted controls on the press, political parties, and labor unions. In January 1999, Habibie and the Indonesian Government agreed to a process, with UN involvement, under which the people of East Timor would be allowed to choose between autonomy and independence through a direct ballot. The direct ballot was held on August 30, 1999. Some 98% of registered voters cast their ballots, and 78.5% of the voters chose independence over continued integration with Indonesia. Many persons were killed by Indonesian military forces, and military-backed militias, in a wave of violence and destruction after the announcement of the pro-independence vote. Indonesia’s first elections in the post-Soeharto period were held for the national, provincial, and sub-provincial parliaments on June 7, 1999. The elections were contested by 48 political parties. For the national parliament, Partai Demokrasi Indonesia Perjuangan (PDI-P, Indonesian Democratic Party of Struggle led by Megawati Soekarnoputri) won 34% of the vote; Golkar ("Functional Groups" party) 22%; Partai Kebangkitan Bangsa (PKB, National Awakening Party linked to Nadhlatul Ulama and headed by Abdurrahman Wahid) 13%; and Partai Persatuan Pembangunan (PPP, United Development Party led by Hamzah Haz) 11%. The MPR selected Abdurrahman Wahid as Indonesia's fourth President in November 1999 and replaced him with Megawati Soekarnoputri in July 2001. In 2001 and 2002, the MPR enacted laws to provide for the direct election, by popular vote, of the president and vice president. Only parties that gain at least 3% of the House of Representatives (DPR) seats or 5% of the vote in national legislative elections are eligible to nominate a presidential and vice presidential ticket. This provision requires that legislative elections be held prior to the direct presidential election. The 2004 legislative elections took place on April 5. The first presidential election under this provision was held on July 5, 2004. No one candidate won at least 50% of the vote, so a runoff election between the top two candidates, President Megawati Sukarnoputri and retired General Susilo Bambang Yudhoyono, was held on September 20, 2004. In this final round, General Yudhoyono won 60.6% of the vote, a margin of just over 20% greater than his rival. Approximately 76.6% of the eligible voters participated, a total of roughly 117 million people, making Indonesia’s the largest and most complex single-day election in the world. The Carter Center issued a statement congratulating “the people and leaders of Indonesia for the successful conduct of the presidential election and the peaceful atmosphere that has prevailed throughout the ongoing democratic transition.” GOVERNMENT AND POLITICAL CONDITIONS The president, elected for a 5-year term, is the dominant government and political figure. The president and the vice president were elected by popular vote for the first time on September 20, 2004. Previously, the MPR selected Indonesia’s president. In 1999, the MPR selected Abdurrahman Wahid, also known as Gus Dur, as the fourth President. Wahid proved unable to govern effectively and the MPR impeached him in July 2001, immediately appointing then-Vice President Megawati Soekarnoputri as the fifth President. Although Megawati brought a certain amount of stability back to the country, her progress in combating corruption and improving the economy were not enough to satisfy the electorate, and in September 2004 Susilo Bambang Yudhoyono was elected as her replacement. The President, assisted by a cabinet that he appoints, has the authority to conduct the administration of the government and is accountable only to the MPR. President Yudhoyono’s Democratic Party (PD), with only 57 seats out of 550 seats in the People’s Representative Assembly (DPR), is one of the smallest in the legislature; the effectiveness of his administration is likely to hinge on his ability to forge a successful coalition or working relationship with the other factions. The 38 appointed seats previously reserved in the DPR for the armed forces (TNI) have been phased out. The new People's Consultative Assembly (MPR) has 678 members, consisting of the 550 members of the DPR and the 128 representatives of the newly-formed Regional Representative Council (DPD), which includes four members from each of Indonesia’s 32 provinces. The armed forces shaped and provided leadership for Soeharto's New Order from the time it came to power in the wake of the abortive 1965 uprising. Military officers, especially from the army, were key advisers to Soeharto and Habibie and had considerable influence on policy. Under the dual function concept ("dwifungsi"), the military asserted a continuing role in socio-political affairs. This concept was used to justify placement of officers to serve in the civilian bureaucracy at all government levels. Although the military still has great influence and is perhaps the only truly national institution, dwifungsi has largely disappeared. Military officers must now resign from the armed forces before taking a civilian government position. The police have been separated from the military, further reducing the military's direct role in governmental matters. Principal Government Officials The embassy of Indonesia is at 2020 Massachusetts Avenue NW., Washington, DC 20036 (tel. 202-775-5200-5207; fax: 202-775-5365). Consulates General are in New York (5 East 68th Street, New York, NY 10021, tel. 212-879-0600/0615; fax: 212-570-6206); Los Angeles (3457 Wilshire Blvd., Los Angeles, CA 90010; tel. 213-383-5126; fax: 213-487-3971); Houston (10900 Richmond Ave., Houston, TX 77042; tel. 713-785-1691; fax: 713-780-9644). Consulates are in San Francisco (1111 Columbus Avenue, San Francisco, CA 94133; tel. 415-474-9571; fax: 415-441-4320); and Chicago (2 Illinois Center, Suite 1422233 N. Michigan Avenue, Chicago, IL 60601; tel. 312-938-0101/4; 312-938-0311/0312; fax: 312-938-3148). ECONOMY In the mid-1980s, the government began eliminating regulatory obstacles to economic activity. The steps were aimed primarily at the external and financial sectors and were designed to stimulate employment and growth in the non-oil export sector. Annual real gross domestic product (GDP) growth averaged nearly 7% from 1987-97, and most analysts recognized Indonesia as a newly industrializing economy and emerging major market. The Asian financial crisis of 1997 altered Indonesia’s political and economic landscape. Since 1997, Indonesia has had four Presidents and as of mid-2002, its economy was only just recovering to pre-1997 levels. Seven percent GDP growth is the level most economists consider necessary just to absorb new job seekers, but the Indonesian Government estimates growth in 2004 of 4.5%. The number of unemployed and underemployed (working less than 15 hrs/week) is currently estimated at 40 million. President Megawati Soekarnoputri made important strides in her first 2 years in reducing political instability, strengthening Indonesia’s relationship with the International Monetary Fund (IMF), and reinvigorating the country’s economic reform program. The Indonesian Government exited its IMF program at year-end 2003, having met or exceeded most macroeconomic targets, including those on reducing inflation and reducing the government budget deficit. Megawati’s administration spawned a sustained increase in market sentiment during 2002 and 2003, with both the rupiah and Jakarta Stock Exchange performing strongly. Consumer confidence and exports have begun to rise from their very low levels of late 2001. It will be up to President Yudhoyono’s administration to generate the growth that will produce the jobs needed to satisfy the Indonesian constituency. The rupiah has strengthened significantly from trading at the rupiah (Rp) 11,440/U.S.$1 (USD) level in July 2001 when former President Megawati took office. It has strengthened slowly to the Rp 8,600/USD level, an increase of 25%. Previously, the value of the rupiah was very volatile ranging from Rp 2,500/USD prior to the Asian financial crisis to a low of Rp 17,000/USD after President Soeharto resigned in May 1998. Although the stability of the rupiah has returned, slower economic growth combined with high levels of debt make exchange rate risk a major concern of investors. The Megawati administration made much less progress in improving Indonesia’s troubled investment climate, and several adverse court rulings against foreign companies have brought investment issues to the forefront of government policymaking in recent years. Besides the lack of legal certainty, existing and potential investors cite a number of concerns with respect to Indonesia’s investment climate, including security, confusion over regional autonomy policies and fiscal decentralization, deteriorating infrastructure, and tax and labor issues. Indonesia's official debt burden increased from 27% of GDP prior to the 1997 financial crisis to approximately 100% of GDP at the end of 2000. Virtually all of the increase came in the form of $74.8 billion in bonds the government issued to domestic banks and the Bank of Indonesia to cover the costs of Indonesia’s banking sector bailout. As a result of asset sales and the rupiah appreciation, public debt has declined to 65% of GDP, but the budgetary burden of Indonesia’s debt service payments remains heavy: the government estimated that total interest payments accounted for almost 35% of central government expenditures in 2003. Banks have significantly reduced non-performing loans from over 50% in 1998 to less than 10% in 2003. Debtors and creditors have reached agreement on a substantial number of restructuring terms sheets through the Indonesian Bank Restructuring Agency (IBRA) and the Jakarta Initiative Task Force. Nevertheless, banks remain reluctant to lend to corporations due to unfavorable judicial rulings and the lack of credit risk agencies. Oil and Minerals Sector The state owns all oil and mineral rights. Foreign firms participate through production sharing and work contracts. The Indonesian Government passed a new petroleum law in October 2001 that deregulates the upstream and downstream sectors in 2 years. The law removes Pertamina’s monopoly over downstream oil distribution and marketing of fuel products in 2005, and makes no procedural distinction between foreign and domestic oil and gas companies. Pertamina’s responsibility to manage Production Sharing Contracts (PSCs), which authorize investors to produce oil and gas, shifted to an executive body within the central government that reports directly to the President, though the Energy Minister is regularly consulted. Oil and gas contractors are required to finance all exploration, production, and development costs in their contract areas; they are entitled to recover operating, exploration, and development costs out of the oil and gas produced. Although minerals production traditionally centered on bauxite, silver, and tin production, Indonesia is expanding its copper, nickel, gold, and coal output for export markets. In mid-1993, the Department of Mines and Energy reopened the coal sector to foreign investment, with the result that the leading Indonesian coal producer now is a joint venture between U.K. firms BP and Rio Tinto. Total coal production reached 114.6 million metric tons in 2003, including exports of 85.7 million tons. The Indonesian Government hopes to surpass 120 million metric tons of coal production in 2005. Two U.S. firms operate three copper/gold mines in Indonesia, with a Canadian and U.K. firm holding significant other investments in nickel and gold, respectively. In 2002, the value of Indonesian mining exports generated $4.2 billion, with receipts from copper and coal accounting for 75% of the total. Investment Despite improvements in political stability, incomplete reform in other sectors has slowed foreign investment growth. From a record high of $33.8 billion in 1997, approvals fell 73% to roughly $9.8 billion in 2002. New foreign investment approvals for 2003 increased 40% to $13.6 billion over 2002. This figure, however, reflects the government’s sale of Indosat and other “change of status” investments from domestic to foreign, rather than new, investment. (Note: The data does not include investments in oil and gas, finance, banking, non-bank finance, insurance, and leasing. Government approval reports should be treated cautiously, and used as no more than an indicator of possible trends because they represent applications to invest and not actual projects or money, which tend to be a fraction of the approvals.) In 2002, the commercial court’s Manulife bankruptcy ruling brought to light the judicial system’s serious weaknesses. Similar subsequent rulings against foreigners have made investors increasingly reluctant to invest prior to the establishment of a better functioning legal and judicial system, greater adherence to transparent and competitive processes, and improvements in security. With the passage of a new copyright law in July 2002, Indonesia's intellectual property rights regime was strengthened; however, the lack of effective enforcement remains a major concern. Indonesia has started losing international manufacturers concerned by rapidly rising wages and other benefits to labor, which threaten Indonesia’s competitiveness in labor-intensive industries. NATIONAL SECURITY The Indonesian National Police were for many years a branch of the armed forces. The police were formally separated from the military in April 1999, a process that was formally completed in July 2000. With 250,000 personnel, the police represent a much smaller portion of the population than in most nations. Indonesia is at peace with its neighbors. Without a credible external threat in the region, the military historically viewed its prime mission as assuring internal security. Military leaders now say they wish to transform the military to a professional, external security force but acknowledge that the armed forces will continue to play an internal security role for some time. Throughout Indonesian history the military maintained a prominent role in the nation's political and social affairs. Traditionally a significant number of cabinet members had military backgrounds, while active duty and retired military personnel occupied a large number of seats in the parliament. Commanders of the various territorial commands played influential roles in the affairs of their respective regions. With the inauguration of the newly-elected national parliament in October 2004, the military will no longer have a formal political role, although it retains important political influence. FOREIGN RELATIONS A cornerstone of Indonesia's contemporary foreign policy is its participation in the Association of Southeast Asian Nations (ASEAN), of which it was a founding member in 1967 with Thailand, Malaysia, Singapore, and the Philippines. Since then, Brunei, Vietnam, Laos, Burma, and Cambodia also have joined ASEAN. While organized to promote common economic, social, and cultural goals, ASEAN acquired a security dimension after Vietnam's invasion of Cambodia in 1979; this aspect of ASEAN expanded with the establishment of the ASEAN Regional Forum in 1994, which comprises 22 countries, including the U.S. Indonesia's continued domestic troubles have distracted it from ASEAN matters and consequently lessened its influence within the organization. Indonesia also was one of the founders of the Non-Aligned Movement (NAM) and has taken moderate positions in its councils. As NAM Chairman in 1992-95, it led NAM positions away from the rhetoric of North-South confrontation, advocating instead the broadening of North-South cooperation in the area of development. Indonesia continues to be a prominent, and generally helpful, leader of the Non-Aligned Movement. Indonesia has the world's largest Muslim population, though it is a secular state, and is a member of the Organization of the Islamic Conference (OIC). It carefully considers the interests of Islamic solidarity in its foreign policy decisions but generally has been an influence for moderation in the OIC. President Wahid, for example, pursued better relations with Israel. After 1966, Indonesia welcomed and maintained close relations with the donor community, particularly the United States, Western Europe, Australia, and Japan, through the Intergovernmental Group on Indonesia (IGGI) and its successor, the Consultative Group on Indonesia (CGI), which have provided substantial foreign economic assistance. Donors remain committed to helping Indonesia reform, but express increasing frustration with poor governance and implementation. Indonesia has been a strong supporter of the Asia-Pacific Economic Cooperation (APEC) forum. Largely through the efforts of President Soeharto at the 1994 meeting in Bogor, Indonesia, APEC members agreed to implement free trade in the region by 2010 for industrialized economies and 2020 for developing economies. U.S.-INDONESIAN RELATIONS The U.S. is committed to assisting Indonesia's democratic transition and supports the territorial integrity of the country. There are, nonetheless, friction points in the bilateral political relationship. These have centered primarily on human rights, as well as on differences in our respective foreign policy orientations. The U.S. Congress cut off grant military training assistance (International Military Education and Training--IMET) to Indonesia in 1992 in response to a November 12, 1991, incident in East Timor in which Indonesian security forces shot and killed East Timorese demonstrators. This restriction was partially lifted in 1995. Military assistance programs were again suspended, however, in the aftermath of the violence and destruction in East Timor following the August 30, 1999 referendum favoring separation from Indonesia. Separately, the U.S. has also urged the Indonesian Government to identify and bring to justice the perpetrators of the August 2002 ambush murders of two U.S. citizen teachers near Timika in the Papua province. Indonesia continues to align itself with Non-Aligned Movement and Group of 77 (G-77) foreign policy views, often taking unhelpful positions on issues of international human rights concern. On worker rights, Indonesia was the target of several petitions filed under the Generalized System of Preferences (GSP) legislation arguing that Indonesia did not meet internationally recognized labor standards. A formal GSP review was suspended in February 1994 without terminating GSP benefits for Indonesia. Since 1998, Indonesia has ratified all eight International Labor Organization core conventions on protecting internationally recognized worker rights and allowed trade unions to organize. However, enforcement of labor laws and protection of workers rights remains inconsistent and weak in some areas. Indonesia’s weak economic recovery has pushed more workers into the informal sector, with less legal protection, including child labor. Economic Relations with the United States The U.S. Agency for International Development (USAID) has provided development assistance to Indonesia since 1950. Initial assistance focused on the most urgent needs of the new republic, including food aid, infrastructure rehabilitation, health care, and training. Through the 1970s, a time of great economic growth in Indonesia, USAID played a major role in helping the country achieve self-sufficiency in rice production and in reducing the birth rate. Currently, USAID has identified priority program areas to strengthen a moderate, stable, and productive Indonesia. Resulting from President Bush’s October 12, 2003 announcement, a major new initiative seeks to improve the quality of basic education. A newly integrated approach to community-driven development and government service delivery will improve the quality of basic human services. In a sector where USAID is already the leading donor in Indonesia, assistance will be provided for effective democratic and decentralized governance. Supporting Indonesia’s economic stabilization efforts, assistance will strengthen economic growth and employment creation. Principal U.S. Embassy Officials The U.S. Embassy in Indonesia is located at Jalan Medan Merdeka Selatan 3-5, Jakarta (tel. (62-021) 3435-9000). U.S. mail to the Embassy may be addressed to FPO AP 96520. The U.S. Consulate General in Surabaya is located at Jalan Dr. Sutomo 33, Surabaya East Java (tel. (62-31) 568-2287). Principal Officer--Phillip L. Antweiler The U.S. Consular Agency in Bali is located at Jalan Hayam Wuruk 188, Bali (tel. (62-361) 233-605. For information on economic trends, commercial development, production, trade regulations, and tariff rates, contact the International Trade Administration, U.S. Department of Commerce, Washington, DC 20230.
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