Indonesia. Country Profile 2004

Transcription

1 Country Profile 2004 Indonesia This Country Profile is a reference work, analysing the country s history, politics, infrastructure and economy. It is revised and updated annually. The Economist Intelligence Unit s Country Reports analyse current trends and provide a two-year forecast. The full publishing schedule for Country Profiles is now available on our website at The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom

2 The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where its latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group. London The Economist Intelligence Unit 15 Regent St London SW1Y 4LR United Kingdom Tel: (44.20) Fax: (44.20) london@eiu.com Website: New York The Economist Intelligence Unit The Economist Building 111 West 57th Street New York NY 10019, US Tel: (1.212) Fax: (1.212) newyork@eiu.com Hong Kong The Economist Intelligence Unit 60/F, Central Plaza 18 Harbour Road Wanchai Hong Kong Tel: (852) Fax: (852) hongkong@eiu.com Electronic delivery This publication can be viewed by subscribing online at Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, on-line databases and as direct feeds to corporate intranets. For further information, please contact your nearest Economist Intelligence Unit office Copyright 2004 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author s and the publisher s ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it. ISSN Symbols for tables n/a means not available; means not applicable Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK.

3 MYANMAR LAOS Main railway Main road THAILAND International boundary International airport Andaman Sea CAMBODIA VIETNAM PHILIPPINES Capital Major town Other town October 2004 South China Sea Banda Aceh Sulu Sea Simeulue Aceh Medan Nias Padang Siberut Sipura Pagai Utara Pagai Selatan Tebigtinggi Pematangsiantar Jambi Sungaipenuh Bengkulu Pekanbaru Tanjungpinang Singkawang Sumatra Pontianak Palembang Kotabumi Bangka Pangkalpinang Tanjungkarang Telukbetung JAKARTA Serang Cirebon Bandung INDIAN OCEAN MALAYSIA SINGAPORE Natuna Besar Belitung Sukabumi Pekalongan Java Sea Cilacap Yogyakarta Surakarta Madiun Malang Kediri BRUNEI MALAYSIA Borneo Kalimantan Banjarmasin Semarang Turban Kudus Java Amuntai Samarinda Balikpapan Madura Surabaya Banyuwangi Bali Sangkulirang Denpasar Jember Lumajang Martapura Tarakan Tanjungredeb Majene Lombok Mataram Sumbawa Palu Parepare Watampone Makassar Wotu Raba Kolaka Bulukumba Kupang Manadao Gorontalo Kendari Ternate Molucca Sea I N D O N E S I A Flores Sea Sumba Sulawesi Celebes Sea Flores Savu Sea Peleng Buton Sangir Taliabu Alor Timor Buru Wetar Kepulauan Talaud Obi Seram Sea Seram Ambon EAST TIMOR Palau Morotai Palau Halmahera Fakfak Banda Sea Manokwari Sorong Kepulauan Tanimbar Biak Arafura Sea PACIFIC OCEAN Strait of Malacca Kepulauan Aru Biak Jayapura Papua (Irian Jaya) PAPUA NEW GUINEA Amamapare Merauke 0 km ,000 Timor Sea 0 miles ' The Economist Intelligence Unit Limited 2004 AUSTRALIA

4 Country Profile The Economist Intelligence Unit Limited 2004

5 Indonesia 1 Contents Indonesia 3 Basic data 4 Politics 4 Political background 4 Recent political developments 8 Constitution, institutions and administration 9 Political forces 12 International relations and defence 16 Resources and infrastructure 16 Population 18 Education 19 Health 20 Natural resources and the environment 21 Transport, communications and the Internet 23 Energy provision 26 The economy 26 Economic structure 27 Economic policy 32 Economic performance 35 Regional trends 36 Economic sectors 36 Agriculture 41 Mining and semi-processing 42 Manufacturing 44 Construction 45 Financial services 46 Other services 47 The external sector 47 Trade in goods 50 Invisibles and the current account 50 Capital flows and foreign debt 53 Foreign reserves and the exchange rate 55 Regional overview 55 Membership of organisations 58 Appendices 58 Sources of information 59 Reference tables 59 Population 59 Geographical distribution of population by province, Labour force 60 Transport statistics The Economist Intelligence Unit Limited Country Profile 2004

6 2 Indonesia 61 National energy production statistics 61 Government finances 62 Summary of government budgets 62 Gross domestic product 63 Real gross domestic product by expenditure 63 Nominal gross domestic product by expenditure 63 Prices and earnings 64 Money supply 64 Interest rates 64 Agricultural production 65 Minerals production 65 Main composition of trade 66 Balance of payments, IMF series 67 External debt, World Bank series 67 Foreign reserves 67 Exchange rates Country Profile The Economist Intelligence Unit Limited 2004

7 Indonesia 3 Indonesia Basic data Land area Sea area (exclusive economic zone) Total area Population Main towns Climate Weather in Jakarta (altitude eight metres) Languages Measures Currency Time Fiscal year Public holidays 1,904,443 sq km 3,166,163 sq km (before deductions for sea area now under East Timorese control) 5,070,606 sq km (as above) 221m (projection for 2003 based on 2000 census results) Population in 000 (2000 census) Jakarta (capital) 8,385 Medan 1,792 Surabaya 2,589 Semarang 1,345 Bandung 2,142 Palembang 1,442 Tropical Hottest months, April-May, C (average daily minimum and maximum); coldest months, January-February, C; wettest months, January-February, 300 mm average rainfall Indonesian (Bahasa Indonesia), as well as some 250 other regional languages and dialects. English has replaced Dutch as the main second language, and is widely spoken in government and business circles Metric system Rupiah (Rp). Average exchange rate in 2003: Rp8,577:US$1. Exchange rate on October 21st 2004: Rp9,110:US$1 Western Zone seven hours ahead of GMT, Central Zone eight hours ahead, Eastern Zone nine hours ahead January 1st-December 31st (beginning in 2001) New Year, January 1st; Independence Day, August 17th; Christmas, December 25th. Other moveable holidays: Nyepi, Easter, Miraj, Ascension Day, Waisak, Eid al-fitr, Eid ul-adha, Islamic New Year, Maulud The Economist Intelligence Unit Limited Country Profile 2004

8 4 Indonesia Politics The territorial extent of the Republic of Indonesia is defined principally by the boundaries of the former Dutch colonial empire in South-east Asia. The territories now comprising the country had never constituted a single political entity before the establishment of Dutch colonial rule, and their pre-colonial history was marked by the rise and fall of a number of important empires and kingdoms. Close commercial links with the Arabian Peninsula from the 13th century led to the gradual Islamisation of the archipelago, replacing much of the prevailing Hindu and Buddhist culture, although this remains strong in Bali. Political background In 1511 the Portuguese arrived in Indonesia, in the quest for spices, followed by the Spanish, resulting in the introduction of Christianity to the region. By 1799 the Dutch had established colonial rule in Indonesia and embarked on an extended period of territorial conquest, which continued into the early years of the 20th century. In the early 1900s a pan-indonesian nationalism began to emerge. The Japanese conquest of the Dutch East Indies in 1942 and Japan s subsequent defeat enabled the nationalists to proclaim Indonesia s independence on August 17th This was followed by an extended armed struggle against returning Dutch forces. It was not until late 1949 that the Dutch formally transferred sovereignty over the archipelago, excluding Dutch New Guinea (West Papua), to Indonesia. The Portuguese remained in control of East Timor. The leader of the Indonesian nationalist party, Achmed Soekarno, became president. In 1950 a unitary political structure was established, and in 1955 the first general election was held. Soekarno won, but the Indonesian Communist Party (PKI) gained a substantial 16% of the vote. Soekarno s nationalism subsequently led to the Indonesian invasion of West Papua in 1962 and to a conflict with Malaysia over parts of Borneo. The period was characterised by revolutionary zeal, but also by political instability and a lack of economic prudence, and eventually economic decline. In 1965 an abortive coup, led by a group of middle-ranking army officers but blamed on the PKI, heralded the end of the Old Order, as the Soekarno era came to be known. The coup was crushed by the army, and as many as 750,000 alleged members of the PKI were killed. In March 1966 the New Order was established when the executive power of government was transferred to General Soeharto. Recent political developments The New Order Soeharto became acting president in March 1967, and was elected for six further five-year terms. Soeharto, supported by the military, imposed a repressive regime; there was no freedom of the press or of expression. A small number of Soeharto s family and friends amassed vast wealth, primarily through the exploitation of Indonesia s abundant natural resources. The period was nevertheless characterised by rapid economic expansion, particularly after 1970, Country Profile The Economist Intelligence Unit Limited 2004

9 Indonesia 5 and this probably helped to legitimise the regime in the eyes of the people. However, opposition to the regime started to become more vocal in the mid- 1990s!the parliamentary election campaign in May 1997 was exceptionally violent!and was given added momentum by the severe economic crisis that gripped Indonesia in late Four days of rioting in the capital, Jakarta, in mid-may 1998 convinced even Soeharto s most loyal supporters that a change was needed. Having lost the backing of the military high command and most of his cabinet, the president resigned on May 21st He was succeeded by his recently elected vice-president, Bacharuddin Jusuf Habibie. The Habibie presidency Political instability escalates under Mr Wahid Stability improves under Ms Megawati After assuming the presidency, Mr Habibie had to distance himself from his former mentor, Soeharto; his survival depended on his ability to play to the diverse constituencies that had forced Soeharto to step down. All of these constituencies had reason to distrust Mr Habibie, and as a result his hold on power was never secure. His weakness was demonstrated for the last time when the People s Consultative Assembly (MPR) voted in October 1999 to reject his account of 18 months in office. This ended his hopes of re-election. One of Mr Habibie s few notable achievements was the holding of a democratic election, Indonesia s first for 34 years, to select a legitimate successor. In the parliamentary election, on June 7th 1999, no single party won an outright majority. The party that won the most seats (153 out of 500) was the secular nationalist party, the Indonesian Democratic Party-Struggle (PDI-P), led by Soekarno s daughter, Megawati Soekarnoputri. Despite the numerical strength of the PDI-P, on October 20th 1999 the MPR appointed Abdurrahman Wahid, a moderate Muslim cleric and leader of the National Awakening Party (PKB), as president. Ms Megawati, who gleaned 313 votes compared with Mr Wahid s 373, was appointed vice-president in an attempt to prevent civil unrest. The administration quickly ran into problems, with mounting tensions within the multiparty cabinet and also between Mr Wahid and parliament. Mr Wahid, who suffered from ailing health, became notorious for unrehearsed, off-the-cuff comments, and for inconsistent and unprepared policies. His presidency was also marred by allegations of corruption. Although the allegations did not directly implicate Mr Wahid, they cost him much credibility. On July 23rd 2001, after only 21 months in office, Mr Wahid was formally impeached by the MPR on the grounds of incompetence, and Ms Megawati was elected president. Shortly thereafter Hamzah Haz, the leader of the Islamic United Development Party (PPP), was elected vice-president. Following the near-chaotic presidency of Mr Wahid, a general consensus emerged among all political parties on the need to restore stability. A tacit agreement was reached to support the authority of Ms Megawati until the next election, due in Ms Megawati, for her part, nominated a multiparty cabinet with representatives from all the main parties, the military and the two leading Islamic organisations, Nadhlutal Ulama and Muhammadiyah. The two key economic posts in the cabinet, the positions of co-ordinating minister for the economy and minister of finance, went to two respected technocrats, Dorodjatun Kuntjoro-Jakti and Boediono. Although there has been no direct challenge to The Economist Intelligence Unit Limited Country Profile 2004

10 6 Indonesia Ms Megawati s presidency, legislating effectively has still proved difficult. Her party s lack of a majority in the House of People s Representatives (DPR, the lower house) has meant that legislating, and particularly securing the passage of sensitive reform bills, has been protracted and often unsuccessful. After settling into office Ms Megawati started to lean towards a resurgent military for support in the face of her uneasy relationship with the Islamic parties in her coalition government. New parties emerge in the 2004 elections The first democratically elected president takes office In April 2004 the second parliamentary election since the downfall of Soeharto and the first under the new constitutional framework took place. In an orderly and relatively transparent poll the electorate voted for members of the 550-seat DPR and for 128 members of the new Regional Representatives Assembly (DPD). Golkar, the political vehicle of former president Soeharto, won the largest number of seats in the election, but still only received 21.8% of the vote; the PDI-P saw a sharp drop in its support base, garnering only 18.7% of the vote, and the mainstream Islamic parties failed to increase their share of the vote. The election was noteworthy for the rise in support (primarily in urban areas) for two smaller parties, the nationalist-secular Democratic Party (DP) and a hardline Islamist party, the Prosperous Justice Party (PKS). Despite its fundamentalist Islamic views, the PKS campaigned primarily on an anticorruption campaign, as did the DP. In July 2004, for the first time in the country s history, national elections were held for the president and vice-president. There was no outright winner in the July vote, and in September 2004 a second round run-off took place between the two candidates who had received the highest number of votes in July. The incumbent, Ms Megawati, faced her former security minister and a leading member of the DP, former lieutenant-general Susilo Bambang Yudhoyono. Mr Yudhoyono won a landslide victory, gaining 61% of the vote. His campaign had focused on job-creation, economic growth and fighting corruption. He was inaugurated on October 20th, and announced his cabinet a day later. The new cabinet continued the multiparty tradition, but had a heavier weighting of nonpartisan technocrats. The cabinet was criticised for the number of old faces it contained, despite Mr Yudhoyono s promises of reform. However, without the support of at least some members of the larger parties, such as Golkar, Mr Yudhoyono would have found himself unable to legislate. Important recent events June 1999 The first free election since 1955 is won by the Indonesian Democratic Party-Struggle (PDI-P). Golkar, the political vehicle of former president Soeharto, comes second, with strong showings by the Islamic parties, the United Development Party (PPP) and the National Awakening Party (PKB). August 1999 The East Timorese vote heavily in favour of independence in a referendum on the territory s political future. Following the announcement of the results on September Country Profile The Economist Intelligence Unit Limited 2004

11 Indonesia 7 4th, the Indonesian military and local militia gangs launch a campaign of terror directed against supporters of independence. October 1999 The accountability speech of the president, Bacharuddin Jusuf Habibie, is rejected by the People s Consultative Assembly (MPR, the legislature), and he withdraws from the next day s presidential election. Abdurrahman Wahid is elected president, defeating his nearest rival, Megawati Soekarnoputri, but Ms Megawati is appointed vice-president, averting the threat of massive civil unrest. East Timor formally separates from Indonesia. May 2000 A scandal builds over the misuse of funds from the State Logistics Agency (Bulog). The deputy head of the agency stands accused of channelling Rp35bn (US$4.2m) of agency funds to Mr Wahid s personal masseur. June 2000 A separatist congress held in Irian Jaya (Papua), attended by 3,000 people, declares the territory to have been an independent state since November 2000 Leaders of the Papuan Presidium Council who called publicly for Papuan independence in June are arrested and charged with treason. July 2001 The MPR convenes in special session, and Mr Wahid is impeached for his involvement in the misuse of Bulog funds. Ms Megawati is installed as the new president, and after four rounds of voting the MPR elects Hamzah Haz, the leader of the PPP, to the vice-presidency. August 2002 At its annual session the MPR votes for direct elections of all political representatives, including the president and vice-president. It also decides that the security forces are to lose their right to 38 parliamentary seats in The assembly votes against the introduction of Islamic (Sharia) law in Muslim provinces. October 2002 A night-club on the holiday island of Bali is bombed, resulting in over 200 deaths. The bombings are believed to be the work of an Islamist terror group, Jemaah Islamiah (JI). December 2002 A peace accord is signed between the Free Aceh Movement (GAM) rebels and the government. The government makes a number of key concessions, and there is optimism about progress on ending separatist conflicts. May 2003 The peace accord in Aceh breaks down. The government imposes martial law in the province and launches a massive military assault on GAM. The Economist Intelligence Unit Limited Country Profile 2004

12 8 Indonesia August 2003 A bomb goes off at the JW Marriott hotel in the capital, Jakarta. Twelve people are killed and many injured. The bomb is blamed on JI. April 2004 Golkar wins the largest number of seats (127) in the parliamentary election, following a significant loss of support for the PDI-P. July 2004 The first direct election for the president and vice-president takes place. There is no outright winner, but Ms Megawati and her former security minister, Susilo Bambang Yudhoyono, win the two largest shares of votes. September 2004 The second round of the presidential election results in a landslide victory for Mr Yudhoyono. He pledges to prioritise job creation and fighting corruption. Constitution, institutions and administration Indonesia is governed by a constitution drawn up in 1945 and based on five principles: monotheism, humanitarianism, national unity, representative democracy by consensus, and social justice. These principles are embodied in the state ideology, Pancasila (a Sanskrit term originally referring to a Buddhist code of ethics). The constitution also provides for six principal organs of state: the People s Consultative Assembly (MPR); the presidency and vice-presidency; the House of People s Representatives (DPR, the lower house); the Supreme Advisory Council (DPA); the State Audit Board (BPK); and the Supreme Court. Under Soeharto s rule these institutions were subordinated to the presidency, the country s highest executive office. Each of the 27 provinces is headed by a governor who is responsible to the president via the minister of home affairs, and represents the central government in his province. The role of the DPR is strengthened A committee set up during the 1999 general session of the MPR made substantial amendments to the chapters of the constitution dealing with the powers of the presidency, including limiting a president s tenure to two fiveyear terms and reducing the president s legislative powers. All new laws now have to be approved by the DPR, although the president retains the right to select the cabinet (in consultation with the DPR). Further constitutional amendments, passed at the 2002 annual session of the MPR, paved the way for the president and vice-president to be elected by popular vote in If no pair of candidates wins an outright majority in the first round of voting, a second round is held. Other amendments passed included changes to the composition of the MPR. The MPR used to consist of a 500-strong DPR (including 38 non-elected members of the military and police forces) and 200 regional and interest group representatives. Following the elections in 2004 it now comprises a 550-seat DPR!with no appointments from the security forces!and the DPD (consisting of 128 directly elected regional representatives). Elections to the DPR and DPD are to be held every five years. Elected seats are contested under a complicated Country Profile The Economist Intelligence Unit Limited 2004

13 Indonesia 9 system of proportional representation, which gives a disproportionately large number of seats to Indonesia s outer islands. The DPD s formal powers are limited. It cannot pass or veto legislation, but can only propose bills to the DPR, discuss the bills and then monitor their implementation if they are passed. Furthermore, these roles are limited to legislation on specific topics related to the regions. The DPR has always had the right to initiate legislation, but never did so during the Soeharto years. Draft legislation is submitted to the DPR and passes through four stages: an explanation of the proposed legislation, a general debate, discussions between the relevant commissions and the government, and a final debate and vote. Any legislation that is approved is then sent to the president for enactment. The president can, however, make use of direct legislative powers in times of perceived national emergency. The MPR historically met every five years to sanction the Broad Guidelines of State Policy (GBHN) and elect the president and vice-president. Its function is now more ceremonial, but it retains an important role if an impeachment case is launched against the president. The BPK audits the state finances and reports the results of its investigations to the DPR. Political forces Golkar dominated during the Soeharto regime Nationalist-secular parties remain dominant Political parties were subject to severe restrictions under Soeharto s New Order government. The main New Order political grouping was Golkar, a coalition of professional and functional groups, civil servants and retired military officers set up in the early 1960s to counter the growing appeal of the Indonesian Communist Party (PKI). As a self-proclaimed political group rather than a party, Golkar was not bound by the campaigning restrictions that applied to political parties, allowing it to develop a formidable electoral infrastructure, particularly in rural areas. From 1973 only two state-sanctioned opposition parties were permitted, the Indonesian Democratic Party (PDI), a coalition of Christian and nationalist parties, and the United Development Party (PPP), a coalition of Muslim parties. These parties stood little chance against the privileged Golkar, and typically mustered only 30% of the vote in parliamentary elections, leaving Golkar with an unassailable majority. Golkar is now registered as a political party. Despite being tainted by its association with Soeharto s autocratic regime, the party s robust electoral infrastructure helped it to first place in the 2004 general election. However, the party s win was less than convincing, and it suffered embarrassment in the presidential election when its candidate, General Wiranto, failed to make it to the second round. The current party leader, Akbar Tandjung, has been discredited by allegations of corruption, and the party appears divided on the question of whether to support and work alongside the new president, Mr Yudhoyono, or use its numerical strength to undermine his position. The nationalist-secular PDI-P, led by Ms Megawati (and founded by her in 1996 as a breakaway party from the PDI), remains the second-largest party in the DPR, but it has lost its reformist image, largely as a result of failing to take sufficient steps The Economist Intelligence Unit Limited Country Profile 2004

14 10 Indonesia against corruption during Ms Megawati s term in office. The party is deeply divided following its poor electoral performance. If Ms Megawati remains leader of the PDI-P, relations between the party and the new president are likely to be acrimonious. Ms Megawati and Mr Yudhoyono fell out over the latter s decision to leave Ms Megawati s cabinet and run for the presidency. The Democratic Party (DP), co-founded by Mr Yudhoyono, is a new party and did not contest the 1999 elections. It has been vocal in its calls for reform and measures to tackle corruption. It did well in the 2004 elections, winning 10.3% of the seats in the DPR, perhaps because it offered a fresh alternative to the established political elite, but also because of the increasing popularity of Mr Yudhoyono. Political Islam has largely failed to gain ground Fundamentalist Islam has small pockets of support The military s official political role has ended The Islamic political parties have largely failed to capture the imagination of the electorate since the demise of Soeharto, suggesting that the population is keen to maintain a divide between politics and religion. Politicised Islam was strongly discouraged by Soeharto, but his successor, Mr Habibie, handed important cabinet portfolios to a number of modernist, nationalist Muslims from the Association of Islamic Intellectuals. Although his successor as president, Mr Wahid, was a leader of Nahdlatul Ulama, a Muslim organisation with 37m members that draws much of its support from traditionalist Muslims in rural areas of East and Central Java, his political views were explicitly secular. In the 1999 general election the Islamic parties coalesced to form the so-called Centre Axis, and secured the post of MPR speaker for the de facto leader of the axis, Amien Rais. Mr Rais is a former leader of the 23m-strong Muhammadiyah, a modernist Muslim organisation with a large membership drawn from urban areas. In the 2004 election the mainstream Islamic parties, of which the United Development Party (PPP) and the National Mandate Party (PAN) are the largest, campaigned independently and won slightly fewer seats. The success of the more fundamentalist Prosperous Justice Party (PKS) in the 2004 election is believed to have been largely the result of its clean image and reformist policy stance, as it downplayed its Islamic credentials in its election campaign. The form of Islam practised in Indonesia has traditionally been moderate, but since the demise of Soeharto there have been signs of a more radical fundamentalist movement gaining some support, although its membership remains small. Initially it appeared to focus its attacks on the sizeable Christian communities in parts of Indonesia, but in recent years there have been clear indications that some elements have links with international Islamic terrorism, notably the al-qaida network. The bombings in Bali in October 2002, and at the JW Marriott hotel in the capital, Jakarta, in 2003 and the Australian embassy in 2004, both in the capital, Jakarta, have been attributed to a regionwide terror group, Jemaah Islamiah (JI), whose aim is to create a pan-regional South-east Asian Islamic state. The Islamists are capitalising on the prevailing mistrust of the West to argue that the US-led war on terror is a war on Islam. The Indonesian military (TNI) has been under intense pressure to end its political role. Although it no longer has parliamentary representation, it retains Country Profile The Economist Intelligence Unit Limited 2004

15 Indonesia 11 a powerful influence over the government and currently holds four important posts in the cabinet. The need for tighter security (in the wake of the Bali bombings) and the assault launched on separatist insurgents in the province of Aceh in May 2003 have bolstered the military s political leverage. Ms Megawati, accused of being ineffectual, also leaned heavily on the military for support. At end-september 2004 a revised military bill was passed, requiring that the TNI cease its involvement in business activity within five years. The original bill, largely drafted from TNI inputs, had sought to increase the military s power and influence. However, by the time the bill was passed, it represented a setback for the military. Although the withdrawal of the TNI from involvement in business will be economically beneficial, the government will have to supplant the TNI s operational funding, at a cost of 1-3% of GDP. Main political figures Susilo Bambang Yudhoyono Mr Yudhoyono was born in East Java in He rose to the rank of lieutenant-general and was the army chief of territorial affairs before being appointed to the cabinet in October 1999 as minister of mines and energy. His political star rose with his appointment to the influential post of co-ordinating minister for political, social and security affairs in August The then president, Abdurrahman Wahid, subsequently sacked him in July 2001, but he was restored to his former post in Ms Megawati s August 2001 cabinet. While in office, Mr Yudhoyono won international acclaim for his strong stance against terrorism, and domestically he gained a reputation for honesty. He completed a degree in agricultural economics in He was elected president with a huge popular mandate in the second round of the presidential election in September Yusuf Kalla Born in South Sulawesi, Mr Kalla has a degree in economics, and was active in both business and government during Soeharto s rule. He is a member of the Golkar party. He was involved with the Indonesian Chamber of Commerce and Industry (KADIN) at the provincial level in South Sulawesi, and served in the House of People s Representatives (DPR, the lower house) for four consecutive periods before becoming a member of the cabinet under Mr Wahid s presidency in October He was not particularly close to Mr Wahid, and was sacked from his position as trade and industry minister by the president in April Mr Kalla held the position of co-ordinating minister for people s welfare in the Megawati administration. He has considerable investments in the agribusiness, retail and construction sectors, and there have been allegations in the past that he has abused his position to benefit his companies. He also has a reputation for more activist Muslim views. Megawati Soekarnoputri Daughter of Soekarno, the first president of Indonesia, Ms Megawati has been active in politics since 1987 and assumed the leadership of the Indonesian Democratic Party (PDI) in December Her party won the 1999 parliamentary election, but she was outmanoeuvred in the October presidential election and forced to accept the vice-presidency. However, in July 2001 she assumed the presidency following the impeachment of Mr Wahid. Ms Megawati proved an enigmatic president, often The Economist Intelligence Unit Limited Country Profile 2004

16 12 Indonesia accused of ineffectiveness; nevertheless, by carefully balancing the many conflicting interests in the country, she managed to oversee the return of relative political and economic stability. She lost to Mr Yudhoyono in the 2004 presidential election largely because of the perception that she had failed in her pledge to rid the country of corruption, cronyism and nepotism (commonly referred to as KKN). In her last month in office she damaged her reputation by failing to acknowledge defeat and by rushing through controversial legislation. She is likely to face challenges to her leadership of the PDI-P. Agung Laksono Mr Laksono is known as Akbar Tandjung s protégé, but could become a key challenger for the position of Golkar leader. He is a former minister of youth affairs under Soeharto. He is known as an opportunist and long-time bureaucrat with links to the military, business and the old political elite. In September 2004, Mr Laksono was voted leader of the DPR. This is now a particularly important role, given the president s lack of a party-political support base in the DPR. Mr Laksono has pledged to work with the president, but he will play a pivotal role in the smooth functioning of the legislative process. Akbar Tandjung Mr Tandjung rose to prominence in May 1998, when he was appointed state secretary to the president, Bacharuddin Jusuf Habibie, a powerful position with direct access to the president. Before that, he had held two minor positions in the Soeharto government. He was voted chairman of Golkar in July 1998, and succeeded in steering the party to second place in the 1999 DPR election. In October 1999 Mr Tandjung was elected to the position of speaker of the DPR. Although he led Golkar to victory in the 2004 election, Mr Tandjung s personal ambitions have been severely damaged by allegations of corruption. He could also face a challenge to his leadership. Greater regional autonomy is introduced The country s provincial and district level governments have grown as a political force since the introduction of regional autonomy on January 1st This has at times placed Indonesia s regions at odds with the central government, which is fighting to retain its authority. The legislation was introduced to appease resentment of the central government s control of natural resource revenue and its insensitivity to regional differences. However, the legislation was rushed through and proved to be contradictory to many existing laws, creating considerable legal and administrative uncertainty. A revision of the laws is now under way. International relations and defence Foreign relations under the New Order aimed at stability The establishment of the New Order government resulted in a transformation of foreign policy. Soekarno s quest for recognition as a revolutionary leader of the developing world was abandoned and replaced by a more pragmatic and low-key approach. The new goal was to emphasise stability in Indonesia s international relations, thereby allowing the country to concentrate on domestic economic development. Despite theoretically adhering to the principle of non-alignment, Indonesia drew increasingly close to the West. It has generally enjoyed good relations with most Western countries, although the Country Profile The Economist Intelligence Unit Limited 2004

17 Indonesia 13 IMF s involvement in the country and the East Timor debacle have severely tested relations in recent years. Until the mid-1980s Indonesia was content to focus its foreign policy within the regional context of the Association of South-East Asian Nations (ASEAN), and to permit its wider foreign policy initiatives to be taken under the auspices of that organisation. Having made much progress towards its primary aim of domestic economic development, the government began to seek a more prominent international role from the second half of the 1980s. Indonesia chaired the Non-Aligned Movement from 1992 to 1995, and played a leading part in developing the Asia-Pacific Economic Co-operation (APEC) forum, hosting its second annual summit in November Financial constraints and domestic instability have forced a period of greater introspection since East Timor issues dominated international relations Relations with the US are often tense The Portuguese withdrew from their colony of East Timor in The capital, Dili, was occupied by the left-wing Revolutionary Front for an Independent East Timor (Fretilin). Indonesian troops intervened and set up a provisional government. In 1976 the Indonesians invaded and East Timor became the 27th Indonesian province, although this was never formally recognised by the UN. Local resistance to Indonesian rule remained strong, and in August 1999 a referendum was held, resulting in an overwhelming vote for independence. Following the referendum violence broke out between pro-independence and pro-indonesian groups, and was only halted by international military intervention, led by Australia. In October 1999 the Indonesian government agreed to accord East Timor its independence. Relations with Australia and East Timor were subsequently strained for some years. However, since East Timor gained full independence in 2002, there has been a concerted effort by both the Indonesian and East Timorese governments to establish more cordial diplomatic relations. There remain unresolved issues, such as bringing to justice those guilty of orchestrating violence following the East Timorese vote for independence, but the East Timorese government has adopted a conciliatory approach. Relations with Australia have also improved, particularly since the October 2002 bombings in Bali, following which the Australian and Indonesian defence forces worked closely together to catch the perpetrators of the crime. There remain sensitive issues with Australia as well, such as the treatment of refugees using Indonesia as a base for entry to Australia, and Australia s staunch support of US foreign policy, but again both governments appear committed to maintaining amicable relations. The US severed all military links with the Indonesian armed forces (TNI) following the 1999 violence in East Timor, and a resolution of the related human rights cases was made a precondition for the restoration of relations. However, the murder of two US teachers in Papua in August 2002 has been an additional factor preventing progress. Initially the US suspected TNI involvement in the murder, but the US is now seeking the extradition of a Papuan activist, and is accusing the Indonesian authorities of failing to co-operate. It seems likely that Indonesia s refusal to support the war against The Economist Intelligence Unit Limited Country Profile 2004

18 14 Indonesia Iraq and its only cautious support for the war on terror are the more likely reasons for the continued withholding of US military aid. The economic crisis slows the military build-up The combat capacity of the armed forces was allowed to decline between the mid-1960s and the late 1980s, and capital spending on defence fell to a low of 2.5% of total development expenditure between fiscal year 1984/85 (April- March) and 1988/89. The end of the cold war (which led to a reduction of the US presence in South-east Asia) and the militarisation of China and India then prompted a drive to improve Indonesia s defence capacity. Capital expenditure on defence and security increased to about 5% of total spending from 1989/90 to 1993/94. Armed forces, 2004 Indonesia Australia South Korea Thailand Army 233,000 25, , ,000 Strategic reserve 30,000 - Regional commands 150,000 Special forces 5,300 Navy 45,000 12,850 63,000 70,600 Marines 15,000 11,860 28,000 8,026 Naval air 1, ,940 Air force 24,000 13,650 64,700 46,000 Paramilitary Police 280,000 4, ,700 Marine police 12,000 4,500 2,200 People s securitya 40,000 3,500,000 45,000 Total armed forces 702,000 73,400 5,187, ,600 Active 302,000 51, , ,600 Reserves 400,000 21,600 4,500, ,000 a Part-time auxiliary force receiving three weeks basic training each year in Indonesia; civilian defence corps in Thailand and South Korea. Source: International Institute for Strategic Studies, The Military Balance, However, the recent economic crisis has since forced the military to put its expansion plans on hold. The defence budget fell from nearly 5% of development (as distinct from current) spending in 1997/98 to only 1.9% of development spending in It is estimated that the state budget accounts for only 30% of military expenditure. The remaining 70% is funded by the military itself through its extensive commercial interests and private security arrangements. In 1999 the police formally separated from the armed forces, and spending on defence and security is now split between the two institutions. Following the US ban on military contact with the TNI, the procurement of military equipment has proved costly and problematic. In late 2003 the Indonesian air force obtained four Sukhoi jet fighters and two attack helicopters from Russia as part of an effort to develop the country s sources of military equipment. Security risk in Indonesia The outgoing president, Megawati Soekarnoputri, succeeded in restoring a modest degree of stability after taking office in However, Indonesia s vast size and diversity creates an element of internal conflict that hinders progress on investment projects and the operations of foreign businesses. Greater political freedom since the Country Profile The Economist Intelligence Unit Limited 2004

19 Indonesia 15 end of the Soeharto era has exacerbated these innate tensions, leading to a surge in separatist violence, clashes between the military and civilian protestors, and ethnic and religious violence in many parts of the country. There are a number of risks, including the military assault on Aceh, a revision of decentralisation legislation and the potential for growing factionalism in the nation s politics. Armed conflict Communal violence between Christians and Muslims in the Moluccas, and Dyaks and Madurese in Central Kalimantan, has left thousands dead since the beginning of Intermittent religious violence has also flared up on Lombok in West Nusa Tenggara, and (more seriously) in Poso, Central Sulawesi. Peace agreements in all of these areas are now being enforced, with varying degrees of success. Separatist sentiment has been stimulated by the success of the East Timorese in securing independence from Indonesia in 1999, and by the public exposure of massacres and other atrocities perpetrated by the military under the New Order. The collapse of the December 2002 Aceh peace accord led to the imposition of martial law in the province in May A military assault was simultaneously launched on the Free Aceh Movement (GAM) guerrillas. Although martial law was replaced by civil emergency status in May 2004, there was no withdrawal of troops. In the extreme east of the country, the Free Papua Organisation (OPM) continues to struggle for independence in Papua, where support for its cause was voiced by a broad cross-section of the region s population at a congress held in the province between late May and early June Although it remains a less vociferous separatist campaign than in Aceh, relations between Papua and the Indonesian government have deteriorated since 2003 as the government attempted to divide Papua into three separate provinces. One of these, West Irian, was created, but the issue has proved so controversial that there has been no further progress. Both Aceh and Papua have been offered autonomy in the form of much greater control of revenue generated in the provinces and greater scope for self-rule: Aceh, for example, is being allowed to operate shariah (Islamic) law. However, GAM and the OPM are not content to accept greater autonomy and continue to press for independence. Ms Megawati, meanwhile, was adamant that there would be no discussion of independence. It appears unlikely that the conflicts in the two provinces will be resolved in the near future. A number of foreign mining and oil and gas companies have interests in Aceh and Papua, which are rich in natural resources. Their operations have been largely unaffected by the troubles, although ExxonMobil, a US oil company, was forced to close its Aceh operations temporarily in March 2001 in the face of a deteriorating security situation. Terrorism In October 2002 bombings on the holiday island of Bali killed 202 people and injured many more. The bombings are believed to have been the work of Islamist terrorists, members of a region-wide terror group, Jemaah Islamiah (JI). As yet the extent and strength of JI is uncertain, but it appears to have active cells across Southeast Asia, and its stated aim is the creation of a pan-regional Islamic state. Prior to The Economist Intelligence Unit Limited Country Profile 2004

20 16 Indonesia Bali there had been a number of isolated terrorist attacks, notably at Christian churches on Christmas Eve in 2000, but the size of the Bali bombs and the fact that foreign tourists were the target has led to a reassessment of the terrorist risk in Indonesia. A bomb at the JW Marriott hotel in the capital, Jakarta, in August 2003 and another outside the Australian embassy in September 2004 confirmed the continued risk to foreign targets. The Indonesian government acknowledges the risk, and the police force has been co-operating extensively with other South-east Asian security forces and the US and Australian counter-terrorist services. Tough, but temporary, anti-terrorism legislation was enacted in the wake of the Bali bombings, but it was declared unconstitutional in mid There remains the real risk of further terrorist attacks, perhaps because Indonesia is seen as an easy target. Civil unrest Mass demonstrations are a periodic feature of the Indonesian political landscape. Ongoing cuts to the fuel subsidy, rises in electricity prices and changes to the labour law have all led to public demonstrations in recent years, some of which result in violence. Foreign businesses operating in more remote areas of the country have also recently been the target of angry protests!sometimes by those who have suffered genuine loss when land was acquired by large-scale investors, but also by people seeking to take advantage of the uncertainty caused by the rushed introduction of regional autonomy. Crime Violent crime has been on the rise in recent years, but does not pose a serious threat to foreign business interests. Likewise, organised crime is seldom a threat to foreign business, although it thrives in the Indonesian underworld. Kidnapping has not traditionally affected foreigners, but in recent years separatist fighters in Papua have kidnapped several non-indonesians. Extortion in the conventional sense does not affect foreign business in Indonesia. However, government officials typically demand illegal payment for permits, licences and other privileges, and the army or police often require additional payments for security arrangements. Resources and infrastructure Population Population growth slows Family planning is successful Indonesia is the fourth most populous country in the world after China, India and the US. The 2000 census placed the population at 206.3m (including nonpermanent residents). Population growth in the 1990s was 1.5% per year, well below an average of 2.3% recorded in the 1960s and 1970s and slower than the rate of 2% between 1980 and The falling rate of population growth is in part a result of a successful familyplanning programme that has, since it was introduced in the early 1970s, reduced the fertility rate from 5.7 in the late 1960s to 2.6 in Accordingly, at the time of the 2000 census 30.4% of the population was under 15 years of age, compared with 36.6% in 1990 and 41.9% in In 2000 the number of people Country Profile The Economist Intelligence Unit Limited 2004

21 Indonesia 17 aged over 65 years stood at 4.6% of the population, up from 2.5% of the population in Population, 2000a ( 000 unless otherwise indicated) Age group Male Female Total % of total ,296 10,007 20, ,434 10,060 20, ,461 9,993 20, ,649 10,500 21, ,237 10,021 19, ,335 17,705 35, ,866 13,505 27, ,878 8,163 17, ,480 5,519 10, ,238 10,728 20, Total 100, , , a Permanent residents only. Source: Central Bureau of Statistics, 2000 census. About 95% of the population is of Malay origin, but there are over 300 minority groupings including Melanesian, Polynesian and Micronesian. There are an estimated 4m ethnic Chinese in Indonesia. During the breakdown in law and order that followed the downfall of Soeharto, there was considerable hostility towards the largely wealthy Chinese community, resented for its active role in industry and business. The population is 87% Muslim, 10% Christian, 2% Hindu (mainly in Bali) and 1% Buddhist. Distribution remains highly uneven The UNDP highlights regional inequality Industrial development has brought large-scale migration to urban areas!42% of the population lived in cities in 2000, compared with 30.9% in 1990 and 22.3% in The population distribution also remains highly uneven. Despite attempts to ease congestion on Java, Bali and Madura through the now moribund transmigration programme, 60.4% of Indonesians still live on these three crowded islands, which make up only 7% of Indonesia s land surface area. In 2002 the population density of Java island stood at an estimated 975 people per sq km; Bali was the second most densely populated area, at 573 people per sq km. The population density of the capital, Jakarta, stood at 12,623 people per sq km. Outside Java and Bali population density averages less than 100 per sq km, with Papua having only six people per sq km. In 2004 a United Nations Development Programme (UNDP) special report on human development in Indonesia cited progress in the country as a whole, but repeatedly referred to the large regional variations. According to the UNDP, between 1999 and 2002 the number of people living in poverty fell from 23% to 18%, although the report made the point that there was considerable movement in and out of poverty, affecting between one-third and one-half of the population. The UNDP reported that child malnutrition had fallen to 27% in 2002, down from 35% in 1996 and 45% in 1990, and that the infant mortality rate is progressively falling. On the gender front, it praised the rise in the female The Economist Intelligence Unit Limited Country Profile 2004