by Prema Nakra, Ph.D.

The Republic of Indonesia is the largest and most populous economy in Southeast Asia with 240 million people, making it the fourth largest country in the world. Located in the heart of the economic growth in Southeast Asia, it is a vast polyglot nation that stretches more than 5,000 kilometers across the equator and is made up of more than 17,000 islands.

 

Indonesia gained independence from the Dutch on August 17, 1945. More than a decade after the chaotic overthrow of the Suharto dictatorship in 1998, the country seems to have stabilized. With its abundant resources, large productive and young population, and strategic access to the global mobility network, Indonesia is poised to establish itself as one of the leading economies of the world.

 

In this series of articles I will discuss Indonesia's success story and identify the non-tariff barriers that must be removed for this emerging market to reach its full potential.

 

INTRODUCTION

 

Indonesia is the world's third-largest democracy after India and the United States, and a home to the world's largest Muslim population and the richest natural resources. Foreign investment is on the rise in Indonesia, and there are significant improvements in the general investment climate. Originating from a traditionally agriculture-based economy, Indonesia has shifted a larger portion of its economic activities toward manufacturing and service-oriented industries.

 

In the past 25 years, Indonesia has steadily liberalized its trade regime and taken a number of important steps to liberalize the economy. Under President Yudhoyono's leadership, the government of Indonesia has adopted a "pro-growth, pro-poor, pro-employment" economy policy. The plan involves a number of specific initiatives including reforming the country's regulatory framework, attracting continued foreign investment, tackling corruption, and removing artificial economic distortions such as oil subsidies.

 

The government has eased investment rules in areas including health care, construction and electricity generation. The government believes that investors planning for long-term returns will invest in Indonesia due to sound macro-economic fundamentals, relatively stable political conditions, moderate interest rate (6.0%), accelerating economic growth, an emerging middle class, and growing wealth.

 

As a country of 240 million people and growing, the size of the Indonesian domestic consumer market is an alluring attribute for any investor. The core pillars of economic growth are political stability, a young population with a large domestic market, and vast natural resources.

 

Indonesia is a member of the Association of Southeast Asian Nations (ASEAN), the ASEAN Free Trade AREA (AFTA), the Asia-Pacific Economic Co-operation (APEC) Forum, and the World Trade Organization (WTO) and follows agreements made in each of these multilateral forums.

 

Economic Growth

 

After reaching 6.5% growth in 2011, Bank Indonesia has forecast that GDP growth in 2012 in Indonesia will be 6.4%. Indonesia's relatively young population and the government's stimulus policies, as well as a popular program of direct cash transfers to the poor, have kept the country on a growth path. This growth trend is expected to continue with GDP growth expected to remain steady at around seven percent over the coming years, according to investment bank Morgan Stanley. According to the CIA's The World Factbook, Indonesia's GDP per capita measured by purchasing power parity has risen from $4,300 in 2009 to $4,700 in 2011.

 

While all income groups have benefited from Indonesia's accelerated growth, the middle class has enjoyed the most rapid advances in terms of spending increases and quality of life improvements, and this group has increased demand for a range of consumer categories from home electronics and appliances to health and beauty products. Under the right economic and political conditions, Indonesia has the ability to migrate from an emerging economy to an advanced economy.

 

In my next several articles I will detail the investment opportunities available in Indonesia, the country's value proposition, and the various non-tariff barriers that could hamper the country's continued economic growth.