Indonesia, the world’s third-largest democracy—and fourth-largest country overall—held a presidential election on Feb. 14. Defense Minister Prabowo Subianto, who served as the commander of Indonesia’s special forces when the country was previously under a dictatorship, declared victory after receiving a reported 60 percent of the vote in a three-way contest. Official results aren’t expected for a few weeks, but Prabowo is expected to take office in October, replacing the term-limited Joko Widodo, known as Jokowi, who has served as president since 2014.
How does Indonesia’s geography as an archipelago affect its economy? What is Jokowi’s economic legacy? What is Indonesia’s role in the global Islamic economy?
Indonesia, the world’s third-largest democracy—and fourth-largest country overall—held a presidential election on Feb. 14. Defense Minister Prabowo Subianto, who served as the commander of Indonesia’s special forces when the country was previously under a dictatorship, declared victory after receiving a reported 60 percent of the vote in a three-way contest. Official results aren’t expected for a few weeks, but Prabowo is expected to take office in October, replacing the term-limited Joko Widodo, known as Jokowi, who has served as president since 2014.
How does Indonesia’s geography as an archipelago affect its economy? What is Jokowi’s economic legacy? What is Indonesia’s role in the global Islamic economy?
Those are a few of the questions that came up in my recent conversation with FP economics columnist Adam Tooze on the podcast we co-host, Ones and Tooze. What follows is an excerpt, edited for length and clarity. For the full conversation, look for Ones and Tooze wherever you get your podcasts. And check out Adam’s Substack newsletter.
Cameron Abadi: What kind of structural economic conditions do archipelago nations face? Indonesia is obviously a collection of islands scattered across a vast swath of the Pacific. Are there any common economic characteristics that island archipelago nations like Indonesia face?
Adam Tooze: I think it’s important to start just by acknowledging how radically sui generis Indonesia is. I mean, it’s astonishing. To categorize it along with any other country seems to me always a bit of a mistake. 270 million people—that’s the fourth-largest country in the world, the third-largest democracy, spread over 17,000-plus islands. The precise number of islands in Indonesia depends on how you count coral reefs and small sandbars, but everyone agrees it’s somewhere in that scale. So Indonesia is just wildly more complex, I think, than virtually any other country, society, nation-state in the world. It’s sort of staggering.
Culturally speaking, this creates enormous diversity because islands have had this weird history in terms of transport. Because before the advent of modern road and rail transport, the best way of getting around was by water—certainly when moving heavy goods. And so Indonesia bursts into history as a massively important intersection of many trade routes between the major continents. It’s hugely interconnected. It is the “Spice Islands.” This is what European exploration was directed toward finding. When we talk about the Indies in the early modern or the medieval periods, we’re talking about Indonesia, not so much what we think of as modern India. But that structure also means that it’s just massively diverse in cultural terms. So 700 living languages are spoken in this country of 270 million people across 17,000 islands. Ten percent of all living languages in the world are spoken in Indonesia. And it’s not by accident. It’s because of the fragmentation created by the separation of these islands. The standard language, which most people speak for business purposes, is Malay—well, Indonesian, which is a standardized version of Malay. But plurilingualism is absolutely the norm in complex, complex societies like this. Javanese is the most common Indigenous language that’s spoken, but it’s only spoken by 31 percent of the population.
And now, of course, Indonesia is threatened by climate change and by sea level rise in a way that compact continental or just standard landlocked states aren’t. And right now, by 2100, it expects to lose between 92 and 100 islands.
CA: Joko Widodo, the current president, took office making some big promises about Indonesia’s economic development. And I’m curious what you make of his legacy. How has he executed on those big promises he made about Indonesia’s future?
AT: It’s a really interesting question. If you look at the simple growth record since Jokowi entered office in 2014, it’s 4.2 percent per annum and 5.1 percent per annum if you take the pandemic years out. And that’s a substantial growth record by any standard other than the Chinese standard. It’s a rapid rate of growth over such a long period of time. He made huge promises, above all, on infrastructure. But I think it’s important to get a clear understanding of the historical backdrop to this and, crucially, to understand the existential political economic shock delivered to Indonesia by the 1997 Asian financial crisis and the subsequent upheavals, also political. Indonesia’s sense of itself as a modern, forward-moving economy was put in question by a shock that took GDP down by 13 percent. And Jokowi’s promise to achieve a high growth rate was set against that backdrop. In fact, the growth rate he aimed for was 7 percent, which was what Indonesia was growing at just before the Asian financial crisis. And he has fallen short of that target.
The other big promise was infrastructure investment. And again, this relates to this trajectory—this traumatized trajectory. So before the Asian financial crisis, infrastructure investment in Indonesia was running at about 9 percent of GDP and plunged to as little as 2 percent of GDP by 2001. Restoring public investment—and he has effectively tripled its share of public spending in Indonesia over his time in office—is, in a sense, redressing the damage done by that massive deviation to Indonesia’s growth path. Concretely, what this has above all meant is very large-scale spending on roads because, as we were saying, for this mountainous complex island society, or this fantastically complex nation, internal infrastructure and transport is an absolutely crucial issue. He has also proposed building a new capital city to replace Jakarta, which has just become impossible to live in and is sinking into the ocean. The road construction numbers are impressive. We’re talking about 2,000 kilometers of toll roads, approximately; thousands of kilometers of regional roads; and tens of thousands of kilometers of roads for the rural communities, which still dominate a large part of Indonesian life. I think that’s where we’re really seeing the payoff, in a modernization of Indonesia in all different directions: the construction of new airports, of dams, of major bridges. It’s a kind of a China-lite version of modernization with a heavy Chinese footprint at the level of engineering and construction going on across Indonesia.
The big issue for many people, and in the run-up to this election, is the extent of corruption that goes hand in hand with this. Indonesia is, by most international rankings, an extremely corrupt place to do business. And Jokowi, though he is barred from running again for office, has effectively secured through his son, Vice President-elect Gibran Rakabuming Raka, the possibility of his dynasty continuing. I think one of the anxieties is that this growth has gone hand in hand with a kind of crony capitalism that, in the long run, may be a token of a subsequent slowdown in Indonesia’s development.
CA: What is the balance right now in Indonesia’s economy between exporting commodities and developing higher-value industries? Beyond commodities, what exactly does Indonesia excel at?
AT: To understand Indonesia’s modernization program, you have to understand how Indonesia stacks up and compares with other societies and economies in Southeast Asia. That’s really the benchmark. And the fact of the matter is that Indonesia is lagging far, far behind the Malaysias, the Thailands, the Philippines, let alone the Chinas of this world. Over the period from 1980 to 2020, worldwide trade grew sevenfold, at an annual rate of about 5 percent per annum. Malaysia, Thailand, and the Philippines increased the total volume of their exports by a factor of 12. Indonesia barely managed a threefold increase. So it lags far, far behind its neighbors. The share of trade in Indonesian GDP since the shock of the late 1990s in the Asian financial crisis fell from 72 percent in 2000 to 33 percent in 2020.
So there’s this sense in which Indonesia has actually been going backward, or at least, in relative terms, it has become less and less really engaged in the global economy, even though it is a major exporter of key raw materials and some manufactured goods. The share of manufacturing in Indonesia’s GDP fell from 31 percent in 2002, when Indonesia was a classic low-wage manufacturing hub, to 19 percent in 2021. Indonesia is de-industrializing, de-globalizing in a period when the rest of Southeast Asia and China, of course, are massively accelerating. And the two things are interconnected in that it is China that has gobbled up a large slice of the potential export market and Indonesia has not found a place for itself in those value chains to the same extent. This is what hangs over the kind of Indonesian story. It’s at some levels a great success story of democratization and of modest prosperity and development over time. These growth rates are real, but they are not following the sort of Asian Tigers model of East Asia or even their immediate neighbors.
CA: As the world’s largest Muslim country, what role does Indonesia play in the global Islamic economy?
AT: The global Islamic economy is actually kind of a buzzword. It’s a thing. You can look it up and find it. There are banks and agencies that track it. And I think there are two different ways of defining it. One way of defining the global Islamic economy is in terms of where Muslim people are and their economic activity. And in those kinds of rankings, Indonesia comes in the top four of national societies that are overwhelmingly Muslim and have substantial economies. And it’s up there in that list of Saudi Arabia, Turkey, the United Arab Emirates, Malaysia, Indonesia. It’s in that group. Sheer size, relative rapid economic growth, it’s undeniable.
The other way of defining the global Islamic economy is to look at specific niches and sectors that serve the religious needs and cultural and social needs of the Islamic population. That would be halal food, cosmetics, and pharmaceuticals, it would be modest fashion—according to the modesty norms of conservative Islam—and then Islamic finance. Those are really big markets, and Malaysia plays a substantial role in them. Just to give you a sense of the scale, global Muslim spending on halal food and beverages is between $1.5 trillion and heading toward $1.7 trillion, $1.8 trillion a year. If you add in pharmaceuticals, cosmetics, and modest fashion to that, and maybe travel as well, including the Hajj, you’re up to $2.3 trillion, $2.4 trillion. Now the global economy is $100 trillion, but this is a segment that’s nontrivial from the point of view of businesses that are operative in it. Islamic finance, we’ve spoken about before on the show, is a finance business that has assets in the trillions of dollars. Like, currently on the balance sheets of Islamic finance institutions, we’re talking about maybe $4 trillion, something like that. So not world-bestriding dominance in the global financial system but a nontrivial element in it. And especially regionally in middle-income countries, this is big money.
