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Diplomacy in Action

Indonesia (05/06)


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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.

PROFILE

Official Name:
Republic of Indonesia

Geography
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.

People
Nationality: Noun and adjective--Indonesian(s).
Population (2005): 242 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).

Government
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.

Economy
GDP (2005): $281.3 billion.
Annual growth rate (2005): 5.6%.
Inflation (2005): 17.1%.
Per capita income (2004): $1,277.
Natural resources (15.4% of GDP): Oil and gas, bauxite, silver, tin, copper, gold, coal.
Agriculture (13.4% of GDP): Products--timber, rubber, rice, palm oil, coffee. Land--17% cultivated.
Manufacturing (23.2% of GDP): Garments, footwear, electronic goods, furniture, paper products.
Trade: Exports (2005)--$85.6 billion including oil, natural gas, appliances, textiles. Major markets--Japan, U.S., Singapore, China, EU. Imports (2005)--$57.5 billion including food, chemicals, capital goods, consumer goods. Major suppliers--Japan, China, U.S., Thailand, EU.

PEOPLE
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%). (Hinduism, however, is the majority religion on the resort island of Bali, over 90% of the population.) In some remote areas, animism is still practiced.

HISTORY
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.

The constitution, as amended in the post-Soeharto era, provides 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, 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, which sent a delegation to observe the election first-hand, 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
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. The constitution 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 was 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. President Yudhoyono's Democratic Party (PD), holds only 55 seats out of 550 seats in the House of Representatives (DPR), making it the fifth-largest in the legislature, although as of mid-2006, Yudhoyono also had the support of other political parties that, combined, hold a majority of the seats in the DPR. The People's Consultative Assembly (MPR) has 678 members, consisting of the 550 members of the DPR and the 128 representatives of the House of Regional Representatives (DPD), which includes four members from each of Indonesia's 32 provinces. Since 2004, all seats in the DPR and DPD have been held by legislators elected by the citizenry; previously, some seats had been reserved for representatives of the armed forces (TNI).

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 retains influence and is one of the only truly national institutions, the wide-ranging democratic reforms instituted since 1999 abolished "dwifungsi" and ended the armed forces' formal involvement in government administration. The police have been separated from the military, further reducing the military's direct role in governmental matters. Control of the military by the democratically elected government has been strengthened.

Principal Government Officials
President--Susilo Bambang Yudhoyono
Vice President--Jusuf Kalla
Minister of Foreign Affairs--Noer Hassan Wirajuda
Ambassador to the United States--Sudjadnan Parnohadiningrat
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).

ECONOMY
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 via debt restructuring, but subsequently sold most averaging a 29% return. Indonesia has since recovered--albeit slower than some of its neighbors--has recapitalized its banking sector, improved oversight of capital markets, and taken steps to stimulate growth and investment, particularly in infrastructure. GDP growth was 4.5% in 2003, 5.1% in 2004, and 5.6% in 2005.

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 also 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 reshuffled his Cabinet in December 2005, appointing former Finance Minister Boediono as Coordinating Minister for Economic Affairs, and moving Sri Mulyani Indrawati from the National Development Planning Agency to the Finance Ministry. In early 2006, the Government of Indonesia announced new policy packages for stimulating investment and infrastructure.

The Yudhoyono Administration has 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. Per capita income rose to $1,277 in 2005, topping the pre-crisis level. Domestic consumption continued to account for the largest portion of GDP, at about 65.4%, followed by investment at 22%, and net exports at 9.5%. In evidence of an accelerating economy, investment realization doubled in 2005. Capital goods imports increased 35.9% in 2005, 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.

The government raised fuel prices by an average of 126% on October 1, 2005 in an effort to reduce Indonesia's fuel subsidy burden (projected to reach Rp 89.2 trillion in 2005 or 3.3% of GDP). The fuel price hikes led to a surge in inflation and, and the Government of Indonesia's revised 2005 budget projects a year end inflation rate of 8.6%. The Government of Indonesia implemented a quarterly cash compensation package for low-income families and extra range of benefits including subsidized rice, improved health and social services, housing subsidies, micro credit and family planning programs.

Banking Sector: Indonesia currently has 131 banks, of which 41 are under the ownership control of foreign investors. The top ten banks control about 80% of assets in the sector. Four state-owned banks (Bank Mandiri, BNI, BRI, BTN) continue to dominate the sector with approximately 40% of assets. 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 announced the criteria for anchor banks in July 2005. 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. BI and the Government of Indonesia will replace the blanket guarantee with a deposit insurance scheme run by the independent "Indonesian Deposit Insurance Agency" (also known by its Indonesian acronym, LPS.) Sharia banking has grown considerably in Indonesia in recent years, up from a low base, and represents 1.4% of the sector, about $2.2 billion in assets as of the end of 2005.

Exports and Trade: Indonesia's exports grew to a record $86.2 billion in 2005, an increase of 19.4% from 2004. The largest export commodities in the two years were oil and gas (24.1%), electrical appliances (13.9%), textiles (11.9%), minerals (8.9%), and wood and paper products (7.5%). Japan, the United States, Singapore and South Korea accounted for 58.5% of Indonesia's total exports in 2004, with the U.S. contributing 15.2%. Meanwhile, total imports jumped by 26.7% in 2005 to $69.7 billion, with largest imports are of oil and gas (23.7%) base metals (8.6%), machinery and equipment (16.7%), chemicals (10.4%), and foodstuffs and vegetable products (6.3%).

The U.S. trade deficit with Indonesia decreased by 13.3% in 2005 to $5.9 billion ($3.9 billion in exports versus $9.9 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 1.06 million barrels per day (b/d) in 2005. In the 2005 the oil and gas sector, including refining, contributed $19.2 billion or 22.5% of total export earnings and about 30% 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 2004, and remained so in 2005 on dollar-value basis. Indonesia, which ranks eighth 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 19% in 2004. Despite the declining trends, Indonesia's oil and gas trade balance remains positive at $1.8 billion in 2005 and a forecast $2.3 billion for 2006.

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 144.5 million metric tons in 2005, including exports of 104.8 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 2005 was 167 tons, up almost 50% from 2004 production, but still below the 2001 peak of 180 tons. Production mainly came from Freeport's Grasberg mine--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 competitiveness in the tax and royalty system, and investor concerns over divestment policies and the sanctity of contracts.

Investment: 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. 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. In February 2006, the Government of Indonesia announced a new policy package to improve the investment climate in Indonesia for both domestic and foreign investors. The package, announced in a Presidential Instruction (INPRES) No. 3/2006, consists of policies designed to strengthen investment services, harmonize central and regional regulations (Perda), improve customs, excise, and taxation services, create jobs, and support small & medium enterprises. Labor reforms planned for 2006 have been delayed due to union resistance, however.

The passage of a new copyright law in July 2002, and accompanying optical disc regulations in 2004, greatly strengthened Indonesia's intellectual property rights (IPR) regime. However, despite the government's recent efforts to improve enforcement, IPR piracy remains a major concern to U.S. intellectual property holders and foreign investors particularly in the high-technology sector. In March 2006, President Yudhoyono issued a decree establishing a "National Task Force for IPR Violation Prevention (also known as the "IPR Task Force"). The IPR Task Force will formulate national policy to prevent IPR violations and determine additional resources needed for prevention. It will also help to educate the public through various activities and improve bilateral, regional and multilateral cooperation to prevent IPR violations.

NATIONAL SECURITY
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.

FOREIGN RELATIONS
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. President Yudhoyono has sought a higher international profile in accordance with Indonesia's size and democratic credentials. In March 2006 he traveled to Burma to discuss democratic reform, and in April-May 2006 he visited several Middle Eastern and delivered a major speech in Saudi Arabia. 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. At ASEAN's Bali Summit in October 2003, the organization undertook to create an ASEAN Community characterized by greater integration in the areas of political and security affairs; economics; and socio-cultural affairs. Indonesia was a strong proponent of this initiative. 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 United States has important economic, commercial, and security interests in Indonesia. It 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 and have advanced significantly since the election of President Yudhoyono in October 2004. 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 no formal security treaties 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 steadily since 2002, as terrorist attacks in Bali (October 2002 and October 2005), Jakarta (August 2003 and September 2004) and other regions 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. had 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. Eight suspects were arrested in January 2006 and as of mid-2006 were pending trial. 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. In November 2005 the Under Secretary of State for Political Affairs, under authority delegated by the Secretary of State, exercised a National Security Waiver provision provided in the FY 2005 Foreign Operations Appropriations Act. The waiver removed congressional restrictions on Foreign Military Financing (FMF) and lethal defense articles .and represented reestablishment of normalized military relations, allowing the U.S. to provide greater support for Indonesian efforts to reform the military, increase its ability to respond to national and regional disasters, and promote regional stability. Indonesia still often supports 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.

Development Assistance from the United States to Indonesia
The U.S. Agency for International Development (USAID) and its predecessors have 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. Today, USAID assistance programs focus on basic education, democratic governance, rebuilding after the tsunami, economic growth, health, water, food, and the environment.

Improving the Quality of Decentralized Education: In October 2003, President Bush announced a $157 million Indonesian Education Initiative for 2004-2009 to improve the quality of education in Indonesia. This is a cornerstone of the U.S. Government assistance program in Indonesia, directly responding to the Government of Indonesia's priorities and reflecting joint Indonesia-U.S. commitment to revitalize education for the next generation of Indonesia's leaders.

Managing Basic Education (MBE): Since 2003, this project has worked with local governments to strengthen their capacity to effectively manage basic education services in 20 districts/municipalities in East and Central Java, Aceh, and Jakarta. MBE is also working with 10,000 educators to improve the quality of teaching and learning in grades 1-9 through in-service teacher training, community participation, and the promotion of school-based management. MBE directly reaches 450 schools, 20% of which are madrassah, and 140,000 students. Through dissemination of good practices, teachers from 2,000 additional schools received training last year.

Decentralized Basic Education (DBE): The Indonesia Education Initiative will increase the quality of basic education in primary and junior secondary schools, both public and private, and focus on three results: (DBE1) Local governments and communities more effectively manage education services; (DBE2) Enhance the quality of teaching and learning to improve student performance in key subjects such as math, science, and reading; and (DBE3) Youth gain more relevant life and work skills to better compete for jobs in the future.

Opportunities for Vulnerable Children: This program promotes inclusive education in Indonesia. Children with special needs such as visual impairment are provided the opportunity to be educated in public schools. Replicable models are being developed to expand the reach of the program over time.

Sesame Street Indonesia: A new Indonesian co-production of the award winning television show targeting young children is being developed and produced by the Sesame Workshop in New York with local Indonesian partners and USAID funding. Millions of Indonesian children will be better equipped to start school. The first season is scheduled to air in mid-2007.

Effective Democracy and Decentralized Governance: This objective aims to further democratic reforms in the world's largest Muslim country by supporting effective and accountable local governance, addressing conflict and encouraging pluralism, and consolidating national-level democratic reforms.

Mitigation of Conflict and Support for Peace: USAID remains a key donor working to mitigate conflict and support peace in conflict areas, such as Aceh, Papua, Sulawesi, and Ambon. Assistance activities focus on: conflict resolution/mitigation; civilian-military affairs; livelihoods development in conflict areas; drafting and monitoring of relevant legislation; and emergency and post-conflict transitional assistance to conflict affected persons.

Anti-Trafficking In Persons: USAID's anti trafficking programs work closely with the Ministry of Women's Empowerment and civil society groups in policy making, program development, victim support and dissemination of information which will contribute to reducing the trafficking of women and children in Indonesia.

Justice Sector Reforms: Through the Democratic Reform Support Program and Justice Sector Reform Program, USAID's current Justice Sector programs provide technical assistance and training to judges, prosecutors and staff members at the Supreme Court, the Constitutional Court, and the Attorney General's Office.

Legislative Strengthening: Technical assistance and training are provided to strengthen the legislative and legal drafting skills of parliamentarians as well as provide institutional support to the National House of Representatives, National Regional Representative Council, nine provincial legislative councils and 40 district-level legislative councils. Activities include promoting constituency and media outreach; developing the capacity to draft and analyze legislation and operational budgets; creating inter-party coalitions; encouraging legislative commissions to carry-out their functions, and perform strategic planning.

The Local Governance Support Program: Currently assisting 60 local governments, this program works to increase governmental accountability and transparency, strengthen the local legislative process, promote citizen engagement and civil service reform, and improve the delivery of basic services.

Media Development: In October 2005, USAID funded a new media development project entitled "Building on the Foundations: Strengthening Professional, Responsible and Responsive Broadcast Media in Indonesia." The goal of the program is to build professional, information-based local media that are responsive to the development and reform of districts across Indonesia. The program assists local radio stations in North Sumatra, Aceh and Java, fostering dialogue on media regulations, and providing support for Media and Media Education in Aceh.

Tsunami Reconstruction: The U.S. Government was one of the first donors to respond to the disaster, and remains one of the largest contributors to relief and reconstruction efforts in Indonesia. Through numerous grants to NGOs, international organizations, and UN agencies, USAID has helped stabilize the humanitarian situation in Aceh, avert a public health crisis and get survivors back on their feet.

Rebuilding Shelter and Key Infrastructure: USAID is assisting communities to recovery and reconstruct by providing much needed shelter, and working with the Indonesian Government to rebuild key infrastructure, ensuring proper mapping and planning is considered through local cooperation.

Restoring Livelihoods: By focusing efforts at the local level, USAID enables communities to direct capacity building to benefit them collectively. USAID's Community Based Recovery Initiative is working with the community in 59 villages to plan for the future and the return of livelihoods.

Strengthening Capacity and Governance: USAID is providing assistance to restore local government services in Aceh, working to increase governmental accountability and transparency, strengthen the local legislative process, promote citizen engagement and civil service reform, and improve the delivery of basic services.

Economic Growth Strengthened and Employment Created: Assistance to the Indonesian Government and private sector focuses on creating jobs by improving the business and investment climate, combating corruption, increasing competitiveness in key sectors, and improving the safety of the financial system. Through USAID, the U.S. is working with Indonesians to ensure that future generations enjoy an increasingly prosperous, democratic and stable country.

Business Climate & Enterprise Development: Efforts to promote a transparent and predictable legal and regulatory business climate aim to reduce the hidden costs of doing business, to reduce uncertainty, and to promote trade, investment and job creation. USAID delivers technical assistance to leading industry sectors in an effort to fuel growth, exports, jobs and prosperity. These efforts drive increased productivity and national competitiveness by forging stronger coalitions of public, private and civil society advocates for legal, regulatory and policy change.

Financial Sector Safety and Soundness:USAID is working to improve the oversight of bank and non-bank financial intermediaries in order to promote safety and soundness in the financial system, and to improve transparency and governance.

Improving the Quality of Basic Human Services: The USAID Basic Human Services Office provides assistance to Indonesia through an integrated strategy combining health, food/nutrition, and environmental management and water services at the district and community levels.

Environmental Services: This program supports better health through improved water resources management and expanded access to clean water and sanitation services. With a ridge to reef approach, partners improve water resource management from watershed sources, along rivers, through cities, and to coastal reefs. In the upper watershed, the program promotes forest management, biodiversity conservation, and land use planning to protect a steady, year-round source of clean water. Further downstream, the program strengthens municipal water utilities to improve and expand piped water and sanitation services to communities. Stakeholder forums link upstream and downstream communities to build consensus on water and waste management issues. Marginalized urban communities also benefit from the introduction of safe drinking water through Air Rahmat, a home chlorination product being introduced to the market through a public-private partnership.

Health Services: Women, newborns and children are the principle beneficiaries of this integrated public health program. Working with the government, NGOs, and other partners, USAID focuses on maternal, neonatal and child health; reproductive health; nutrition; HIV/AIDS, tuberculosis, malaria; and decentralization of the health sector. Improved health-seeking behaviors within communities link key hygiene promotion interventions, such as hand-washing with soap, in order to reduce diarrheal disease, a major cause of childhood death. New initiatives address challenges from the re-emergence of polio and the outbreak of avian influenza in Indonesia.

Food and Nutrition: Improving the nutritional status of Indonesians, USAID food assistance targets poor communities. These activities directly impact women and children through targeted supplemental feeding and nutritional education activities. The food assistance program works with villages to construct public latrines, washing facilities, protected water stations, and to organize solid waste disposal efforts to better protect community health. Over 1 million people will be direct recipients of USAID food assistance under this program.

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--Lawrence Mandel
USAID Director--William Frej
Defense Attache--LTC Kevin Richards
Consul General--Mary E. Grandfield
Public Affairs Officer--Michael Anderson
Commercial Counselor--Richard Rothman
Department of Agriculture Office--Fred Kessel

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--Claire A. Pierangelo

The U.S. Consulate in Medan is located at Jl. Walikota no. 13, Medan, North Sumatra (tel. (62-61) 415-2200).
Principal Officer--Sean Stein

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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