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U.S. Department of State

Diplomacy in Action

Indonesia (05/05)


For the most current version of this Note, see Background Notes A-Z.

Flag of Indonesia is two equal horizontal bands of red (top) and white.


Official Name:
Republic of Indonesia

Area: 2 million sq. km. (736,000 sq. mi.), about three times the size of Texas; maritime area: 7,900,000 sq. km.
Cities: Capital--Jakarta (est. 8.8 million). Other cities--Surabaya 3.0 million, Medan 2.5 million, Bandung 2.5 million plus an additional 3 million in the surrounding area.
Terrain: More than 17,000 islands; 6,000 are inhabited; 1,000 of which are permanently settled. Large islands consist of coastal plains with mountainous interiors.
Climate: Equatorial but cooler in the highlands.

Nationality: Noun and adjective--Indonesian(s).
Population (2004): 224 million.
Annual population growth rate (2004): 1.9%.
Ethnic groups: Javanese 45%, Sundanese 14%, Madurese 7.5%, coastal Malays 7.5%, others 26%.
Religions: Islam 87%, Protestant 6%, Catholic 3%, Hindu 2%, Buddhist and other 1%.
Languages: Indonesian (official), local languages, the most important of which is Javanese.
Education: Years compulsory--9. Enrollment--92% of eligible primary school-age children. Literacy--85%. Health: Infant mortality rate--63/1,000 live births. Life expectancy at birth--men 60 years, women 64 years.
Work force: 91 million. Agriculture—46.1%, trade and restaurants--18.5%, manufacturing--12.0%, public services--10.7% (2003 data).

Type: Independent republic.
Independence: August 17, 1945 proclaimed.
Constitution: 1945. Embodies five principles of the state philosophy, called Pancasila, namely monotheism, humanitarianism, national unity, representative democracy by consensus, and social justice.
Branches: Executive--president (head of government and chief of state) elected by direct popular vote. Legislative—550-member House of Representatives (DPR) elected for a 5-year term. Judicial--Supreme Court.
Suffrage: 17 years of age universal and married persons regardless of age.

GDP (2004): $255.9 billion.
Annual growth rate (2004): 5.1%.
Inflation (2004): 6.4%.
Per capita income (2004): $1,143.
Natural resources (13.6% of GDP): Oil and gas, bauxite, silver, tin, copper, gold, coal.
Agriculture (17.5% of GDP): Products--timber, rubber, rice, palm oil, coffee. Land--17% cultivated.
Manufacturing (25.0% of GDP): Garments, footwear, electronic goods, furniture, paper products.
Trade: Exports (2004)--$69.4 billion including oil, natural gas, appliances, textiles. Major markets--Japan, China, U.S., Singapore, EU. Imports (2004)--$44.8 billion including food, chemicals, capital goods, consumer goods. Major suppliers--Japan, Singapore, U.S., China, EU.

Indonesia's approximately 224 million people make it the world's fourth-most populous nation. The island of Java is one of the most densely populated areas in the world, with more than 107 million people living in an area the size of New York State. Indonesia includes numerous related but distinct cultural and linguistic groups, many of which are ethnically Malay. Since independence, Bahasa Indonesia (the national language, a form of Malay) has spread throughout the archipelago and has become the language of most written communication, education, government, and business. Many local languages are still important in many areas, however. English is the most widely spoken foreign language. Education is compulsory for children through grade 9. Although about 92% of eligible children are enrolled in primary school, a much smaller percentage attend full time. About 44% of secondary school-age children attend junior high school, and some others of this age group attend vocational schools.

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.

By the time of the Renaissance, the islands of Java and Sumatra had already enjoyed a 1,000-year heritage of advanced civilization spanning two major empires. During the 7th-14th centuries, the Buddhist kingdom of Srivijaya flourished on Sumatra. At its peak, the Srivijaya Empire reached as far as West Java and the Malay Peninsula. Also by the 14th century, the Hindu Kingdom of Majapahit had risen in eastern Java. Gadjah Mada, the empire's chief minister from 1331 to 1364, succeeded in gaining allegiance from most of what is now modern Indonesia and much of the Malay archipelago as well. Legacies from Gadjah Mada's time include a codification of law and an epic poem. Islam arrived in Indonesia sometime during the 12th century and, through assimilation, supplanted Hinduism by the end of the 16th century in Java and Sumatra. Bali, however, remains overwhelmingly Hindu. In the eastern archipelago, both Christian and Islamic proselytizing took place in the 16th and 17th centuries, and, currently, there are large communities of both religions on these islands.

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 amended the constitution to provide for the direct election, by popular vote, of the president and vice president. In 2004's elections, only parties or coalitions of parties that gained at least 3% of the House of Representatives (DPR) seats or 5% of the vote in national legislative elections were eligible to nominate a presidential and vice presidential ticket. The 2004 legislative elections took place on April 5 and appeared generally free and fair. PDI-P lost its plurality in the House of Representatives, dropping to under 19% of the total vote, while Golkar remained basically at 1999 levels, with 21% of the vote. Five other parties won between 6 and 11% of the national vote. Of the 18 other parties that participated, 9 won small numbers of seats in the DPR. The first direct presidential election was held on July 5, 2004, contested by five tickets. 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."

Indonesia is a republic based on the 1945 constitution providing for a limited separation of executive, legislative, and judicial power. Substantial restructuring has occurred since President Soeharto's resignation and the short, transitional Habibie administration which followed. The Habibie government fashioned political reform legislation that--without changing the 1945 Indonesian constitution--formally set up new rules for the electoral system, the House of Representatives (DPR), the People's Consultative Assembly (MPR), and political parties. An MPR decree adopted in November 1998 limits the president to two terms in office.

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), holds only 55 seats out of 550 seats in the People's Representative Assembly (DPR), making it the fifth-largest in the legislature the effectiveness of his administration is could 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 been abolished, ending its formal involvement in government administration. Military officers must now resign from the armed forces before taking a civilian government position or political office. The police have been separated from the military, further reducing the military's direct role in governmental matters.

Principal Government Officials
President--Susilo Bambang Yudhoyono
Vice President--Yusuf Kalla
Minister of Foreign Affairs--Noer Hassan Wirajuda
Ambassador to the United States--Soemadi Djoko Moerdjono Brotodiningrat
Ambassador to the United Nations--Rezlan Izhar Jeni

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).

Indonesia has a market-based economy in which the government plays a significant role. It owns 158 state-owned enterprises and administers prices on several basic goods, including fuel, rice, and electricity.

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 the region's economic landscape: in 1998 Indonesia experienced negative GDP growth of 13.7% and unemployment rose to 15-20%. In the aftermath of the 1997-98 financial crisis, the government took custody of a significant portion of private sector assets through acquisition of non-performing bank loans and corporate assets through the debt restructuring process, but subsequently disposed of most of the assets averaging 29% return on the assets received. Indonesia has since recovered-- albeit slower than some of its neighbors--and has recapitalized its banking sector, improved oversight of capital markets, and taken steps to stimulate growth and investment, particularly in infrastructure. GDP growth was 4.3% in 2002, 4.5% in 2003, and 5.1% in 2004.

Economic Policy
After President Yudhoyono took office on October 20, 2004, he moved quickly to implement a "pro-growth, pro-poor, pro-employment" economic program. He appointed a strong group of economic ministers who announced a "100-Day Agenda" of short-term policy actions designed to energize the bureaucracy. President Yudhoyono announced an ambitious anti-corruption plan December 2004. The State Ministry of National Development Planning (BAPPENAS) released in early 2005 a Medium Term Plan focusing on four broad objectives: creating a safe and peaceful Indonesia, creating a just and democratic Indonesia, creating a prosperous Indonesia, and establishing a stable macroeconomic framework for development.

President Yudhoyono and his team have targeted average growth of 6.6% from 2004-2009 to reduce unemployment and poverty significantly. Indonesia's overall macroeconomic picture is stable and improving, although GDP growth rates have not yet returned to pre-crisis levels. Indonesia's 4th quarter 2004 GDP growth was 6.1%, its highest level since the 1997-98 financial crisis, and full year growth in 2004 was 5.1%. Per capita income rose to $1,143, topping the pre-crisis level. Domestic consumption continued to account for the largest portion of GDP, at about 66.5%, followed by investment at 20.9%, and net exports at 12.6%. In evidence of an accelerating economy, investment grew 15% in the second half of 2004, a significant shift from investment growth in 2003 of only 1.9%. Capital goods imports increased 41.3% in 2004, a further indication of a strengthening economy. The government's success in pushing forward its ambitious reform plan will determine whether Indonesia's GDP growth rates can recover to pre-crisis levels, and whether Indonesia will again become a favored destination for foreign investors.

Fuel Prices and Inflation
The government raised fuel prices by an average of 29% on March 1, 2005 in an effort to reduce Indonesia's fuel subsidy burden (projected to reach Rp 63 trillion in 2005 or 3% of GDP before the price hikes). Most economists expect the fuel price hikes to lead to a 0.8-1.2% rise in Indonesia's 2005 average inflation rate, and the Government of Indonesia's revised FY 2005 budget projects an inflation rate of 7.0%. The Government of Indonesia is now discussing a compensation package with parliament that would provide a range of benefits for low-income families including subsidized rice, improved health and social services, housing subsidies, microcredit and family planning programs.

Banking Sector
Indonesia's commercial banking sector is set to undergo a period of significant change over the next five years. Bank Indonesia (BI) announced plans in January 2005 to strengthen the banking sector by encouraging consolidation and improving prudential banking and supervision. BI hopes to encourage small banks with less than approximately Rp 100 billion (about US $11 million) in capital to either raise more capital or merge with healthier "anchor banks" before 2009. It plans to announce the criteria for anchor banks by July 2005. BI is also encouraging consolidation by removing the former 10% limit on the capital that one bank could inject into another.

BI plans to adopt Basel II standards beginning in 2008, and is establishing a credit bureau to centralize data on borrowers. Another important reform is the Government of Indonesia's decision to gradually reduce the blanket guarantee on bank third-party liabilities beginning in 2006. BI and the Government of Indonesia will replace the blanket guarantee with a deposit insurance scheme run by an independent "Indonesian Deposit Insurance Agency." The new deposit insurance scheme, which will begin operations in September 2005, will cover deposits in all foreign, commercial, state-owned, rural, and shariah banks.

Indonesia currently has 134 private banks, 52 of which have capital under IDR 100 billion (US$ 10.8 million) and control less than 0.2% market share. Four state-owned banks (Bank Mandiri, BNI, BRI, BTN) continue to dominate the sector with approximately 40% of assets. In late 2004, the Government of Indonesia sold approximately $520 million in shares of several banks formerly owned by the Indonesian Bank Restructuring Agency (IBRA). The Government of Indonesia plans to sell more shares of ex-IBRA banks in 2005 but has no plans to privatize state-owned banks. Three small banks representing less than 0.6% of combined market share failed in 2004, apparently due to owner malfeasance. The three--Bank Dagang Bali, Bank Asiatic and Bank Global--presented no systemic risk, but nevertheless highlighted continuing weaknesses in both bank management and BI's supervision and examination regimes.

Exchange Rate
After reaching an average monthly low of IDR 14,900 Rupiah/U.S. $1 in June 1998 (during the financial crisis and after the resignation of Soeharto in May of that year) the Rupiah has been relatively stabile since mid-2002, trading around Rp 9500/U.S. $1 in early 2005. However, high levels of government debt, ongoing investment climate problems, and higher inflation in early 2005 mean exchange rate risk continues to be a concern for investors.

Earthquake and Tsunami Impact on Economy
The December 26, 2004 tsunami, and March 28, 2005 Nias earthquake, did not significantly change Indonesia's macroeconomic outlook. However, the impact in Aceh province was severe and according to the World Bank's damage and loss estimate, amounted to about $4.5 billion or 97% of Aceh's GDP. The overall impact on the national economy, however, is expected to be small, only 0.1-0.4% of GDP. Some economists even believe that the large amount of assistance and the beginning of reconstruction may even contribute to additional GDP growth of up to 0.5% in 2005. The large amount of donor funds from both private and public sources is still being calculated, but it is hoped that it will cover a large proportion of Aceh's reconstruction needs as the government implements its plans. Overall GDP growth for 2005 is expected to be between 5-6%, with steady increases in exports and investment.

Exports and Trade
Indonesia's exports grew to a record $69.7 billion in 2004, an increase of 11.49% from 2003. Strong sales in non-oil and gas commodities such as electronics, palm oil, clothing, coal and tin drove the growth in exports. Japan, the United States, Singapore and China accounted for 42.5% of Indonesia's total non-oil and gas exports last year, with the U.S. contributing 13.9%. Meanwhile, total imports jumped by almost 40% in 2004 to $46.2 billion, with oil and gas imports surging 52.4% to $11.6 billion and non-oil and gas imports increasing 35.7% to $34.5 billion. U.S. - Indonesia trade grew 12% in 2004 to $13.48 billion, while our trade deficit increased 16.3% to $8.14 billion ($2.67 billion in exports vs. $10.81 billion in imports).

Oil and Minerals Sector
Indonesia, the only Asian member of the Organization of Petroleum Exporting Countries (OPEC), ranks 17th among world oil producers, with about 1.8% of world production. Crude and condensate output averaged 1.09 million barrels per day (b/d) in 2004. In the 2003 calendar year the oil and gas sector, including refining, contributed $13.6 billion or 21.6% of total export earnings and about 24% of government revenues, a greater percentage than recent years due to high world oil prices. U.S. companies have invested heavily in the petroleum sector. Due to limited refining capacity and growing domestic demand for petroleum fuels, Indonesia became a net oil importer in 2003. Indonesia, which ranks sixth in world gas production, is still the world's number one exporter of liquefied natural gas (LNG), though its world market share has declined from 32% in 1998 to approximately 20% in 2004. Despite the declining trends, Indonesia's oil and gas trade balance remains positive at $6.5 billion in 2004 and a forecast $9.8 billion for 2005.

The state owns all oil and mineral rights. Foreign firms participate through production sharing and work contracts. The Indonesian Government passed a petroleum law in October 2001 that deregulated the upstream and downstream sectors. The law and follow-on implementing regulations transformed Pertamina into a state-owned enterprise, and eliminates the distinction between foreign and domestic oil and gas companies. Pertamina's monopoly over downstream oil distribution and marketing of fuel products will end in 2005. Management of Production Sharing Contracts (PSCs), which authorize investors to produce oil and gas, has shifted from Pertamina to an executive body within the central government that reports directly to the President, though the Energy Minister is regularly consulted. A new downstream regulatory body has assumed the role of Pertamina in controlling downstream activities. 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 Energy Ministry reopened the coal sector to foreign investment. Total coal production reached 127 million metric tons in 2004, including exports of 105.6 million tons. The Indonesian Government hopes to export 115 million metric tons of coal in 2005, which would surpass Australia and make Indonesia the world's largest thermal coal exporter. 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. Indonesian gold production in 2004 was 112 tons, down from a peak of 180 tons in 2001. The primary reason for the slump in production was decreased output at Grasberg following a late 2003 pit wall failure. Freeport's Grasberg mine is the country's and world's biggest gold producing mine. Indonesia's share of global exploration spending has dropped from 3% to 1% - since 1998 only three new gold mines have opened. This does not reflect Indonesia's mineral prospectivity, which is high; rather the decline reflects uncertainty over mining laws and regulations, low competiveness in the tax and royalty system, and investor concerns over divestment policies and the sanctity of contracts.

Since the late 1980s, Indonesia has made significant changes to its regulatory framework to encourage economic growth. This growth was financed largely from private investment, both foreign and domestic. U.S. investors dominated the oil and gas sector and undertook some of Indonesia's largest mining projects. In addition, the presence of U.S. banks, manufacturers, and service providers expanded, especially after the industrial and financial sector reforms of the 1980s. While the petroleum and mining investors remained after the 1997 crisis, the numbers of U.S. investors in other sectors declined. Other major foreign investors include Japan, the United Kingdom, Singapore, the Netherlands, Hong Kong, Taiwan, and South Korea. Infrastructure investment declined steadily after the financial crisis and has not yet recovered.

President Yudhoyono and his economic ministers have stated repeatedly their intention since taking office in October 2004, to improve the climate for private sector investment in order to raise the level of GDP growth and reduce unemployment. Though investment grew 15% in the second half of 2004, a significant shift from investment growth in 2003 of only 1.9%, many challenges remain. In addition to general corruption and legal uncertainty, businesses have cited a number of specific factors that have reduced the competitiveness of Indonesia's investment climate, including corrupt and inefficient customs services; non-transparent and arbitrary tax administration; inflexible labor markets that have reduced Indonesia's advantage in labor-intensive manufacturing; increasing infrastructure bottlenecks; and uncompetitive investment laws and regulations. By early 2005, significant reform efforts were underway in many of these areas. With the passage of a new copyright law in July 2002, and accompanying optical disc regulations in 2004, Indonesia's intellectual property rights regime was greatly strengthened. However, the lack of effective enforcement remains a major concern to U.S. intellectual property holders and foreign investors particularly in the high-technology sector.

Indonesia's armed forces (Tentara Nasional Indonesia, or TNI, formerly ABRI) total about 350,000 members, including the army, navy, marines, and air force. The army is by far the largest, with about 280,000 active-duty personnel. Defense spending in the national budget is only 1.8% of GDP but is supplemented by revenue from many military businesses and foundations.

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 insist 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 no longer has a formal political role, although it retains important political influence.

Since independence, Indonesia has espoused a "free and active" foreign policy, seeking to play a role in regional affairs commensurate with its size and location but avoiding involvement in conflicts among major powers. Indonesian foreign policy under the "New Order" government of President Soeharto moved away from the stridently anti-Western, anti-American posturing that characterized the latter part of the Soekarno era. Following Soeharto's ouster in 1998, Indonesia's Presidents have preserved the broad outlines of Soeharto's independent, moderate foreign policy. The traumatic separation of East Timor from Indonesia after an August 1999 East Timor referendum, and subsequent events in East and West Timor, strained Indonesia's relations with the international community.

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.

The United States has important economic, commercial, and security interests in Indonesia. Indonesia remains a linchpin of regional security due to its strategic location astride a number of key international maritime straits. Relations between Indonesia and the U.S. are good. The U.S. played an important role in Indonesian independence in the late 1940s and appreciated Indonesia's role as a staunch anti-communist bulwark during the Cold War. Cordial and cooperative relations are maintained today, although any formal security treaties do not bind the two countries. The United States and Indonesia share the common goal of maintaining peace, security, and stability in the region and engaging in a dialogue on threats to regional security. Cooperation between the U.S. and Indonesia on counter-terrorism has increased since 2002, as terrorist attacks in Bali (October 2002) and Jakarta (August 2003) demonstrated the presence of terrorist organizations, principally Jemaah Islamiyah, in Indonesia. The United States has welcomed Indonesia's contributions to regional security, especially its leading role in helping restore democracy in Cambodia and in mediating among the many territorial claimants in the South China Sea.

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. In 2005, the Secretary of State certified that Indonesian cooperation in the investigation had met the conditions set by Congress, enabling the resumption of full IMET. Congress in FY 05 also provided limited and conditioned Foreign Military Financing (FMF) for the Indonesian Navy for maritime security. Indonesia continues to align itself with Non-Aligned Movement (NAM) and Group of 77 (G-77) foreign policy views, often taking unhelpful positions on issues of international human rights concern. In May 2005, the Yudhoyono administration, in a major effort to reinvigorate its leadership of the NAM and reset the movement's future course, hosted an Asia-Africa Summit to commemorate the founding of the NAM in Bandung, Indonesia in 1955.

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 slow economic recovery has pushed more workers into the informal sector, with less legal protection, including child labor.

USAID Programs in Indonesia in the political area include assistance for the following:

Democracy Reform: The USAID Democracy and Reform objective aims to further democratic reforms in the world's largest Muslim country by deepening competitive political processes for Indonesia's 2004 elections, strengthening civil society by increasing citizen participation and promoting religious tolerance, conflict prevention, respect for human rights, and further justice sector reforms.

Decentralizing/Strengthening Local Government: This program plays a critical role in strengthening the capacity of local governments to respond to the challenges posed by the deep and broad devolution of management and fiscal authority initiated by the central government in January 2001. The program aims to improve and monitor the effectiveness of decentralization policies, build local government capacity in budget development, financial management, and delivery of key services such as water and education.

Humanitarian Assistance and Crisis Mitigation: This cross-cutting objective serves as USAID's primary mechanism for taking advantage of opportunities to stabilize conflict situations in Aceh, Papua and other strategic parts of Indonesia, as well as for delivering food assistance to improve food security for urban and rural poor.

Economic Relations with the United States
U.S. exports to Indonesia in 2004 totaled $3.2 billion, still down significantly from $4.5 billion in 1997. Indonesia is currently the 35th-largest export market for U.S. goods. The main exports were construction equipment, machinery, aviation parts, chemicals, and agricultural products. U.S. imports from Indonesia in 2004 totaled $8.7 billion and consisted primarily of clothing, natural rubber, footwear, machineries and sound recorders. The stock of U.S. foreign direct investment (FDI) in Indonesia in 2004 was $133.2 million and is concentrated largely in energy and mining sector. Economic assistance to Indonesia is coordinated through the Consultative Group on Indonesia (CGI), formed in 1989. It includes 19 donor countries and 13 international organizations that meet annually to coordinate donor assistance.

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. Current USAID programs in the economic area include:

Economic Growth and Reform: USAID's economic growth program is helping accelerate Indonesia's economic recovery and strengthen the capacity of key institutions and policy-makers, encourage sound polices, create a market-oriented legal and regulatory environment that also reflects new counter terrorism priorities, and foster competition as well as small and medium enterprises (SMEs).

Health, Population and Nutrition: USAID's health, population, and nutrition program focuses on strengthening public sector commitment for reproductive and child health, improving access, quality and sustainability of basic health services, and empowering women, families and communities to take responsibility for improving health.

Natural Resource Management: This program strengthens local management of Indonesia's forests, protected areas, coastal zones, and mineral resources. USAID's program aims to improve protected forest management and agro-forestry practices, establish effective community-based coastal management, promote orangutan habitat protection and improve mining regulation and coal seam fire suppression.

Energy Sector Reform: The energy sector is a major component of the Indonesian economy, but the sector is plagued by corruption, weak policies, monopolistic and inefficient production, and wasteful consumption. USAID's program aims to improve the efficiency and transparency of the energy sector.

Disaster Relief: USAID and other U.S. Government agencies have worked closely with the Government of Indonesia to provide relief and other assistance to those affected by the earthquake and tsunami. By April 2005, USAID had provided more than $52.1 million in emergency food assistance, relief supplies, shelter, water and sanitation, health, livelihoods and other support for affected communities in Aceh and North Sumatra.

Principal U.S. Embassy Officials
Ambassador--B. Lynn Pascoe
Deputy Chief of Mission--Lewis Amselem
Political Counselor--Marc L. Desjardins
Economic Counselor--William A. Heidt
Management Counselor--J. Patrick Truhn
USAID Director--William Frej
Defense Attache--Col. Joseph Judge III
Consul General--Mary E. Grandfield
Public Affairs Officer--Charles N. Silver
Commercial Counselor--Margaret Keshishian
Department of Agriculture Office--Christopher Rittgers (Acting)

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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