While the Republic of Indonesia is less than seven decades old in its current form, the South-east Asian nation of more than 17,500 islands has had a much longer history under other names. In fact, the name “Indonesia” was first used in 1850 by British anthropologist James Richardson Logan as he referred to the extensive group of islands widely known as the Indian or Malayan Archipelago.


Archaeological evidence indicates that the ancestors of modern humans were present on the archipelago as early as 1.9m years ago, while evidence of modern humans goes back around 40,000 years. By 2000 BCE, the islands were inhabited by a diverse group of peoples known as the Austronesians. These peoples exhibited impressive maritime skill and took full advantage of the archipelago’s location, engaging in extensive inter-island trading. Such burgeoning trade prompted the speedy development of agricultural techniques and rice cultivation methods that facilitated pockets of growth in the form of villages, towns and cities. Islam first entered the region around the 8th century CE, although meaningful conversions did not occur until the 14th century beginning in Samudera Pasai (North Sumatra) and continuing in Makassar and central Java in the 17th century. By this time, Islam had become the archipelago’s principal religion.


Pancasila constitutes the original philosophical foundation of Indonesia and consists of two Sanskrit words, panca meaning five, and sila meaning principle. These five inseparable and interrelated principles, which were first articulated in speech delivered by Indonesian Nationalist leader Sukarno, include the following: nationalism, humanitarianism, representative democracy, social welfare and monotheism. These five principles became a relative blueprint for the growth and progression of the Indonesian nation and their significance in society remains even today, despite variations in their interpretation and order over the 20th century.

The flag of Indonesia is embodied by two equal horizontal bands of red (at the top) and white (at the bottom). The colours are derived from the banner of the Majapahit Empire of the 13th-15th centuries; red symbolises courage and white, purity.

Independence & The Path To Democracy

The Dutch colonisation was well established in Java by the mid-18th century, and the Dutch continued to consolidate their power over the following two centuries. However, the first 30 years of the 20th century saw a rise in the popularity of the notion of independence and nationalism amongst the region’s incumbent population.

The Second World War brought with it the Japanese invasion and ensuing occupation, which signalled the end of Dutch rule and acted as a catalyst for the previously suppressed Indonesian independence movements. As such, when the Japanese occupation finally ended as the Japanese forces surrendered in the Pacific, it was only two days before the country’s first President, Sukarno, declared Indonesian independence on August 17, 1945. Following this declaration, it took six weeks for the allied Dutch and British forces to arrive, by which time Indonesian nationalist forces had established themselves. The conflict which followed represented a final attempt by the Dutch to re-establish their authority. However, with the British withdrawing towards the end of 1946, and following four years of intermittent fighting and consistently fierce criticism of the Dutch by the UN, The Netherlands formally recognised the sovereignty of a federated Republic of the United States of Indonesia on December 27, 1949. On August 17, 1950, precisely five years after the proclamation of independence, Sukarno proclaimed a single unitary Republic of Indonesia.

While the first democratic elections were held in 1955, the years which followed were fraught with political, economic and social volatility. In 1957 Sukarno declared and implemented a system of “Guided Democracy”, declaring himself president for life in September of 1963. He presided over a raging political sea within which the civilian nationalist leadership, the Islamic leadership, the Indonesian Communist Party (PKI) and the army were all opposed to each other.

However, the situation reached a breaking point on September 30, 1965 through an attempted PKI coup against Sukarno’s government. Following the impromptu formulation of a “New Order” coalition, comprised of students, Muslim communities and army factions, the PKI coup was swiftly and brutally defeated in the months which followed. By this point, however, Sukarno was in failing health and he was replaced by an army officer largely responsible for halting the coup, Major General Suharto.

Assuming full power in March 1967, Suharto’s reign endured seven consecutive five-year terms in office, within which time a system of highly centralised governance appeared, including transmigration policies and coerced resettling of many Javanese people – a legacy of which remains today in the form of ethnic tensions. During this time, the annexation of both West Papua and East Timor sparked international condemnation, while the population started to express its frustration towards the widespread corruption and Suharto’s brand of authoritarianism.

When the Asian financial crisis of 1997-98 prompted the currency to plummet and inflation to soar, students took to the streets to voice their grievances, supported by the greater population.

Eventually, under widespread pressure to resign, Suharto left office on May 21, 1998. His position was filled by his vice-president, Bucharuddin Jusuf Habibie. Habibie restored order by regaining IMF support for economic stabilisation programmes and beginning a period of considerable governmental change under the banner of “Reformasi”.

Political Landscape

In 1999 Indonesia’s first freely contested parliamentary elections since 1955 were held with Abdurrahman Wahid, a well-known intellectual and leader of Indonesia’s largest Muslim organisation (Nahdlatul Ulama, NU), sweeping to victory. His leadership style, however, was less popular and unrelenting questions concerning his competency and health meant he was dismissed in July 2001 in favour of his vice-president, Megawati Sukarnoputri. Though head of the Indonesian Democratic Party of Struggle (PDI-P) and Sukarno’s eldest daughter, Megawati’s reign was also short-lived and she was defeated in the September 2004 election by retired army general and Democratic Party candidate, Susilo Bambang Yudhoyono. Widely referred to as SBY, Yudhoyono served as the first democratically elected president in Indonesia’s history and was re-elected for a second five-year term in 2009. While SBY’s popularity has remained stable, the same cannot be said of the Democratic Party, which has failed to secure a significant portion of the vote in Parliament.

Fresh presidential elections will take place in July 2014 and since he will have served the maximum of two terms permitted, SBY’s presidential career ends here, although it has been confirmed that he will remain as his party’s chairman. While the July 2014 elections are wide open, there are a number of diverse candidates making 2014 an increasingly significant year for Indonesia.

In terms of Indonesia’s greater regional involvement, after chairing the Association of South-east Asian Nations (ASEAN) in 2011, the country has continued as an increasingly influential member. In recent years Indonesia has continued strengthening its diplomatic relations with neighbouring countries including Malaysia, Singapore and the Philippines, while it has also boosted long-term cooperation with Japan. Indonesia has also occupied an integral role in assisting the resolution of territorial disputes between Thailand and Cambodia.

The next stepping stone for ASEAN is the ASEAN Economic Community (AEC), which is likely to create numerous opportunities for investors in the region with a combined GDP of around $2.3trn. The AEC is designed to allow the free movement of goods, services, investment, skilled labour and capital in the region (see analysis).

Human Capital & Foreign Investment

Undefined Indonesia’s young and growing population is one of the country’s strongest assets. The country’s middle classes also continue to expand.

The government has continued its focus on the promotion of creative industries, areas which have seen considerable success in neighbouring countries such as Thailand. At present more than 8m people work within these industries which contribute approximately 8% to Indonesia’s GDP.

Local and foreign corporations are increasingly investing in Indonesia, realising the potential of the country. The country is targeting the provision of improved vocational training opportunities for graduates. Such a focus coalesces well with Indonesia’s continual support and encouragement of the development of value-added industries. Through inviting targeted investment and adapting existing regulatory frameworks the government has taken significant steps to facilitate foreign investment and the development of value-added industries.

Investment currently accounts for roughly 32% of the nation’s GDP. While the country’s natural resources are still plentiful, by channelling foreign direct investment into the right areas the government is ensuring that true potential, in terms of value and manufacturing, is achieved.

Natural Resources

Indonesia is a country renowned for its abundance of natural resources, which include oil, gas, coal, nickel, tin, copper, gold and silver. While slightly down on the year before, the country’s total oil production for 2012 stood at 861,000 barrels per day (bpd), accounting for approximately 1.2% of the world’s oil production. Indonesia had proven oil reserves of 3.7bn barrels as of the end of 2012, according to BP’s “Statistical Review of World Energy 2013”, while it imported around 480,000 bpd during the year in light of consistently increasing domestic demand for fuel.

Indonesia remains the world’s largest exporter of thermal coal, exporting a total of 304m tonnes in 2012 to countries such as Japan, South Korea, China and India. The country’s coal resources total 60bn tonnes and are estimated to last 83 years at current production rates, with the three largest deposits located in Kalimantan. Around 60% of Indonesian coal is lower-quality or sub-bituminous coal. Despite price volatility towards the end of 2012, production continued at the rate of 370m tonnes at the end of that year. Other minerals produced in Indonesia include tin, nickel, gold and silver.

Production continued to increase in 2012, reaching 26.5m tonnes on the year, up from 23.5m tonnes in 2011 and 21.8m tonnes in 2010, according to the Indonesian Palm Oil Association (GAPKI). The majority of this was exported, with 18.22m tonnes shipped in 2012. Through the first seven months of 2013 exports were on pace to outperform 2012 with a total of 12.21m tonnes shipped, and the US Department of Agriculture projected total 2013 output of around 31m tonnes (28m tonnes by GAPKI). The total area of oil palm cultivation in Indonesia was estimated at 8.2m ha – an increase of more than 100,000 ha over 2011. The plantations are concentrated in Sumatra, Kalimantan and Sulawesi.

While there has been talk of a reduction in export taxes, this has yet to materialise, and lower tax levels in Malaysia continue to give it an advantage. Higher taxes have also been applied to CPO as opposed to downstream products made from CPO as part of a government-initiated shift to promote the development of downstream industries.

Concerns over deforestation of rainforests remain a major issue, although there are efforts to address the situation, and many Indonesian companies have joined the Roundtable for Sustainable Palm Oil, an organisation established in 2004 with the objective of promoting the growth and use of certified sustainable palm oil.


Around 86% of Indonesia’s energy comes from conventional thermal sources, with hydroelectric power accounting for 9%, and geothermal and other alternative energy sources for 5%. The government recently set an ambitious target of reaching 90% national electricity coverage by 2020. The country is keen to develop nuclear power and in early 2014 the government announced a nuclear power plant with a capacity of 30 MW would be built in the western part of Java. In terms of alternative energy sources, Indonesia is focusing on solar power, with the government planning to build 36 new solar power plants especially in isolated and border areas. Due to the rapidly increasing demand for power, a 10,000-MW “fast track” plan has been under way since 2004 in a major bid to boost output, predominantly through the construction of coal-fired thermal power plants. While the completion date has been pushed to 2014, it is being followed by a second Power Transmission Development Project. This development project aims to further stabilise the power system in Java and Bali, while also expanding the supply of power to eastern and western areas. Perusahaan Listrik Negara, the state-owned energy distribution firm, is in charge of the development projects and accounts for approximately 85% of generated power. A 2009 Electricity Law aims to reduce the state-owned firm’s monopoly on distribution and encourage the participation of private firms in the power sector.


With a population of approximately 247m made up of more than 300 different ethnic groups, Indonesia is the third-largest democracy in the world while also being the world’s most populous Muslim nation. Indonesia is currently the world’s 16th-largest economy, while Jakarta is the country’s most populated city, with more than 10.18m inhabitants living within an area of 740 sq km. Other major cities include Surabaya, Bandung, Medan and Semerang. Java is the most populated island in the world with 141m people spread over 128,298 sq km, which is equal to just 7% of Indonesia’s total land mass. The population has more than doubled since 1971, when it was 119.2m, while it continues to grow at a rate of 1% per year. It is estimated that by 2050, the country’s population will exceed 420m.

Indonesia is home to more than 300 different ethnic groups. The largest groups, according to the 2009 census, are the Javanese (41.7%), Sundanese (15.4%) and Malay (4.1%), closely followed by Madurese (3.3%), Batak (3%), Bugis (2.9%), Minangkabau (2.7%) and Betawi (2.5%).


Indonesia has a total land mass of 1.90m sq km, spread over an archipelago of around 17,508 islands, some 6000 of which are inhabited. With a coastline of 54,716 km, Indonesia has 1107 km of land boundaries with its neighbour Malaysia, 820 km with Papua New Guinea and 288 km with East Timor. The archipelago acts a meeting place between the Pacific and the Indian oceans, while also bridging the Asian and Australian continents. This unique position has had an influence, affecting the country’s cultural, social and political make-up.


Indonesian is an Austronesian language which stems from the country’s various cultural and linguistic groupings, the majority of which are ethnically Malay. As part of the country’s independence movement during the 1930s, the language – a standardised form of Malay – became titled as Bahasa Indonesia and has since become the dominant language in terms of government and media communication, education and business.

Local dialects and languages such as Balinese, Javanese and Sudanese are still used in certain areas of the archipelago. The popularity of the English language has continued to increase. This has likely also stemmed from the middle and upper classes sending their children to schools where English is the main language of instruction.


The Indonesian Constitution guarantees freedom of religion with the government currently recognising six religions, namely Islam (86.1%), Protestantism (5.7%), Catholicism (3%), Hinduism (1.8%), Buddhism (around 1%), and Confucianism (less than 1%). On the island of Bali, unlike the rest of the country, more than 93% of the population practices Balinese Hinduism, while in certain rural areas, animism is still practised.


Due to its proximity to the equator, Indonesia’s tropical climate is accompanied by average temperatures of between 28 C and 34 C in coastal areas, and 23 C in the mountain areas. Temperatures remain similar year round with little variation from season to season. The dry season lasts from June to October, while the rainy season runs from December to March. The country’s relative humidity stays between 70% and 90%. Located over the Ring of Fire, the meeting place of tectonic plates, Indonesia can be subject to earthquakes and volcanic eruptions.