Expert reviewed • 22 November 2024 • 11 minute read
Indonesia's journey towards economic integration into the global economy has been marked by various reforms and policy initiatives. These policies aimed to liberalise trade, attract foreign investment, and enhance competitiveness.
Indonesia's integration into the global economy accelerated in the late 1980s and 1990s through trade liberalisation policies. These included reducing tariffs and non-tariff barriers, deregulating foreign investment rules, and increasing participation in global trade. As a result, the average tariff rate dropped from over 20% in the 1980s to about 6.9% by 2022. This, in turn, has facilitated the export of natural resources, manufactured products, and agricultural commodities. Furthermore, deregulation efforts have boosted foreign direct investment, reaching $24.8 billion in 2022. Participation in trade agreements like the ASEAN Free Trade Area and commitments under the WTO have also further enhanced market access, contributing to a total trade volume of $529.5 billion in 2022. Thus, we can see that Indonesia has completely transformed its economy, increasing its integration into the global economy.
Globalisation has led to increased foreign direct investment (FDI) inflows into Indonesia. This has occurred in particular industries, namely: manufacturing, natural resources, and services. Investments in labour-intensive manufacturing industries have grown significantly, fostering job creation and economic development. The natural resource sectors, including mining, oil, and gas, have also seen significant FDI, with the mining sector alone receiving $3.3 billion in 2022. Additionally, the services sector, notably finance and telecommunications, has expanded with substantial foreign investments, accounting for $5.5 billion in 2022. As such, it is evident that Indonesia's increased participation in globalisation has assisted FDI inflows into the country.
Global demand has driven Indonesia's commodity exports, making it a major exporter of palm oil, coal, and natural gas. In 2022, Indonesia exported $25 billion worth of palm oil, $26 billion in coal, and $13 billion in natural gas. This heavy reliance on commodity exports makes the country vulnerable to global price fluctuations, which can significantly impact its economic stability. To mitigate this vulnerability, Indonesia has been making efforts to diversify its economy beyond natural resources by investing in manufacturing, tourism, and digital economy sectors.
To increase economic growth and development, Indonesia has implemented various strategies and policy measures. These include:
Deregulation packages were introduced to attract foreign investment and streamline business operations. Following the 1997-98 Asian Financial Crisis, significant banking sector reforms were enacted to restore stability. This included implementing measures to control inflation and enhance regulatory frameworks. Additionally, the reduction of fuel subsidies was undertaken to improve fiscal sustainability. This, in turn, saved the government billions, enabling the Indonesian government to redirect funds towards essential infrastructure projects.
These efforts have improved the overall efficiency and competitiveness of the Indonesian economy, contributing to its long-term sustainable development.
To enhance its competitiveness, Indonesia has focused on improving education and workforce skills. The government has allocated 20% of the national budget to education, significantly increasing spending in this sector. This funding supports the expansion of vocational training programmes, ensuring that the workforce is equipped with relevant skills. These efforts aim to create a well-educated, skilled, and healthy workforce capable of meeting the demands of a competitive global economy.
Indonesia has placed significant emphasis on promoting small and medium enterprises (SMEs) as key drivers of economic growth. To support SMEs, the government has introduced various microfinance programmes. These programmes have allowed business owners to have easier access to credit, enabling them to secure necessary funding. In 2022, microfinance institutions disbursed over $15 billion in loans to SMEs, allowing for significant business expansion. Efforts to integrate SMEs into global value chains have also been a priority. This integration helps SMEs to scale up operations, increase competitiveness, and access new opportunities for growth.