The Political And Legal Systems Of Indonesia Economics Essay

1. State profile:

Indonesia is located in the southeast portion of Asia. Indonesia stretches 5120 kilometer along the equator and has 13000 islands between Australia and Asia. Due to this there has been an influence on the societal, cultural, economic and political life of the state. Indonesia ‘s entire country is 80 % sea mass. Java, Sumatra, Kalimantan, Papua and Sulawesi are the five a largest island of which Java is the most populated island, a entire population of 125 million ( CIA 2010 ) . Jakarta is the capital of Indonesia. Indonesia has a tropical clime which consists of two season ‘s summer from May to September and the rainy season from October to April. Indonesia experiences rain during both the seasons.

The 4th most populated state in the universes is Indonesia with a population of 242.96 million ( CIA 2010 ) . Indonesia is the largest Moslem state. It is an ethnically diverse state with more than 300 linguistic communications.

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Figure 1: Dutch east indies Map

Beginnings: CIA Website 2010

2. Political system and Legal systems:

Dutch east indies today is Southeast Asia ‘s most vivacious democracy. The Indonesians enjoy a degree of political freedom. The present improved political system now encourages freedom and equality for the people of Indonesia.

Figure 2: Political system of Indonesia

Beginning: Dutch east indies 2009: An official enchiridion

The three cardinal subdivisions of the Indonesian authorities are

The executive subdivision

The legislative subdivision

The judicial subdivision

2.1 Executive subdivision:

The president is the caput of the province and authorities, in bend is on top of the executive subdivision. Under him is the vice-president, cabinet curates and besides non-departmental bureaus. He is besides the commander-in-chief of the armed forces. The chief function of the president is to regulate his state, do policies and expression in to the foreign personal businesss. The president has the power to delegate and reject the cabinet curates. One of the chief functions of the president is to delegate the justice for the Supreme Court.

2.2 Legislature subdivision:

This subdivision consist a representative organic structure which is the people ‘s advisory assembly or ( MPR ) . The MPR has the right to oppugn the unity of the president. The MPR has two lower Chamberss i.e the People ‘s Representative Council or the ( DPR ) and the Regional Representatives Council or ( DPD ) .

2.3 Judicial subdivision:

The Indonesian judicial system has three chief tribunals i.e. the high tribunal, Supreme Court and the territory tribunals. The Supreme Court is the highest degree. These tribunals have the rights to exert both civil and condemnable instances. Indonesia has different tribunals for different affairs, spiritual tribunals, military tribunals and administrative tribunals. First all the civil differences are handled in a province tribunal and so forwarded to the high tribunal. A commercial tribunal exists to manage bankruptcy and commercial affairs.

The three subdivisions of the legal system in Indonesia are

The notaries


Legal advisers.

A notary is appointed by the Department of Justice & A ; Human Rights who is trained lawfully to notarize workss. A notary prepares and executes the formal title called the notarised title, it is besides known as the reliable title. The legal paperss require notarised workss. The function of the notary is to do certain that the parties have considerable sum of cogent evidence for their workss and the title is executed decently. The notary should be present when a party programs to get down a company.

A notary is appointed by the authorities and his responsibility does non include giving legal advice. These parties need to acquire legal advice before they meet the notary. The chief responsibilities of the notary are to fix and verify the paperss. The parties are free to take any notary they want.

Advocates are attorneies who pattern in private and have formal legal preparation. The chief responsibility of the advocators is to concentrate on judicial proceeding but they can besides supply general legal advice. For advice on foreign dealing experienced attorneies are needed.Hiring a good and trust worthy attorney is indispensable for making concern in Indonesia. Some of the of import Torahs relevant for concerns in Indonesia are given below:

The Law on Investment

The Labour Law

The measure on Mineral and Coal Mining

The Oil and Gas jurisprudence

The Shipping Law

Law on Disputes and Conflict declaration

Corporate Law

Land rights

Few tips for the foreign investors

There should non be any limitations on the type of concern the company is be aftering to get down.

A good notary is a must to put up a concern.

The employees who have an of import place should be paid good.

Build good dealingss with the company and the society.

3. Economic system

Under the leading of Suharto who was the president of Indonesia for over three decennaries the economic system had witnessed two major fiscal crises. This was during 1997- 98 and 2008. Indonesian economic system is straight dependent on three chief sectors,




These crises were direct consequence of corrupt politicians, natural catastrophes, perturbations in the society and terrorist act. The consequence was that the economic system suffered which in bend caused in bead of employment chances and loss of work force that migrated in hunt of employment. The graph shows the distribution of work force among the three cardinal economic sectors.


Indonesia ‘s Employment

A Figure 3: Indonesian Employment

Beginning: Economy Watch

The three chief sectors that constitute the Indonesian Economy are:

Primary Sector:

Agribusiness by far is the largest employment sector. Some of the common green goods is rice, porc, java, tea, chocolate, spices, gum elastic, eggs, copra, palm oil and peanuts. Indonesia stands 4th in universe market for the production of java and rice.

Secondary Sector:

About 27.9 % of Indonesian ‘s GDP comes from the fabrication sector ( EIU 2010 ) .

Third Sector:

Service sector has for long has been the pillar of Indonesian economic system lending about 38.5 % towards the state ‘s GDP. Global fiscal crises slowed down the IT sector. However, it has been predicated to lend up to 15 % towards the compound one-year growing rate ( CAGR ) during the period of 2010-2014 ( EIU 2010 ) . Cordial reception industry has surprisingly started lending towards Indonesian economic system. The touristry industry flourished with no major impact due to the planetary recession.

4. Economy:

Indonesia has the largest economic system in Southeast Asia. It is a market based economic system with a important engagement of the province. There are a big figure of province owned endeavors ( SOEs ) . Indonesia is considered as an emerging economic system. In the terminal of 2009 the GDP was $ 540.3 billion and the per capita GDP was $ 2717. The GDP growing in 2010 reached 5.9 % and to foster accelerates to an norm of 6.2 % a twelvemonth in 2011-2014. In footings of GDP industrial sector is the largest ( 46.9 % ) , followed by services ( 37.2 % ) and agribusiness ( 15.9 % )[ I ]. Indonesia is a major exporter of oil ( US Department of State 2010 )

Indonesia is market leaders in the production of palm oil and one of the chief manufacturers of gum elastic, coal, liquefied natural gas and chocolate. Some of the premier industries are mining, crude oil and natural gas, cement, fabrics and chemical fertilisers.

There is a decrease in the poorness of the population. Indonesian economic system has been bettering after some major fiscal crisis in the past, therefore puting on Indonesian Economy would be associated with low hazard.

Growth in GDP by field of concern from 2005 to 2009:

Growth ( % )








Mining and Quarrying








Electricity, Gas and Water Supply








Trade, Hotels and Restaurants




Transportation system and Communicationss




Finance, Rental and Business Service












Beginnings: Bank Indonesia and Asian Development Bank 2010

Distribution of GDP by field of concern from 2005 to 2009:

Distribution of GDP ( % )



2009[ two ]





Mining and Quarrying








Electricity, Gas and Water Supply








Trade, Hotels and Restaurants




Transportation system and Communicationss




Finance, Rental and Business Service








Beginnings: Bank Indonesia and Asian Development Bank 2010

4.1 Inflation Rate:

Harmonizing to the fiscal study in April 2011 Indonesian rising prices rate stood at 6.16 % . During the period between 1997 to 2010, Indonesian rising prices rate averaged between 13.26 % and making its all clip high of 82.4 % in the 3rd one-fourth of 1998 and reached a all clip low record of -1.17 % in first one-fourth of 2000.

4.2 Social Economy:

The population of Indonesia stood at 232.4 million during 2010. It has a healthy per centum of population who are immature. The average age is 27.2 old ages and the population growing is 1.175 % . Looking at the age construction, 28.4 % of the population is between 0-14 old ages, 67.5 % are between 16-67 and 5.8 % over 65 old ages. Life anticipation is 70.46 old ages. As of February 2011, labour force was 116.5 million. When spliting the labour force by sector, one finds that agribusiness employs the most people ( 42.1 % ) , closely followed by the services sector ( 39.3 % ) . 18.6 % are employed in the industrial sector.

The tabular array shows the distribution of the employment among the major industries.


# of employees


Agribusiness, Livestock, Forestry, Fishery



Mining and Quarrying






Electricity, Gas, Water






Trade, Hotels, Restaurants



Transportation, Storage, Communication



Finance, Real estate and Business services



Community, Social and Personal services



Beginning: Dutch east indies 2008: An Official Handbook

Indonesia ‘s official unemployment degree is presently 7.4 % ; a lessening from former degrees of unemployment between 8 and 9 % .

5. Cultural issues

Indonesias work force values is as given below:

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Figure 5: Geert Hofstedea„? Cultural Dimensions

Beginnings: Geertz Hofstede 2009

The above graph indicates that Indonesian ‘s are by and large inclined towards distribution of power in a pyramid similar construction as opposed to individuality which is promoted in western civilizations. Culture is a multi layered which incorporates a battalion of facets which has to be closely understood before any new venture is planned. Below figure outlines a few key determiners which constitutes a civilization,

Figure: Cultural Norms

Beginning: International Business, Asia Pacific edition.

The Indonesian civilization is rather different from the western civilization. Tradition is really of import for the Indonesian ‘s even though they live in a modern society. This does non intend they do n’t welcome the western civilization. Indonesians are proud of their background and are non really lament on larning about different civilizations. They in bend expect the aliens to put clip and attempt in larning their civilization. In order to construct good dealingss with the Indonesians it is better to larn their linguistic communication and civilization. This wo n’t be an obstruction since the Indonesians are friendly and polite people.

To set up itself it is compulsory for concern to put and take part in the development of the societal construction and economic system of Indonesia. Variables such as gender, age, matrimonial position and instruction affect the easiness with which personal and commercial relationships are formed. In order to perforate and regulate smooth operations it is advised to put up older and mature executives to be in charge as opposed to immature executives. It has been proved that aggressive nature of pursing concern has many hazards associated as the societal construction calls for puting clip in fostering and constructing relationships adhering to the cultural norms which in bend will take to successful concern operations.

6. Ethical Issues:

The most common ethical issues encountered are employment patterns, human rights, environmental ordinances, corruptnesss and the moral duties. Skilled labor is more of a trade good in Indonesia as the local companies invest minimum clip and attempt on developing their staffs. Investing on preparation and development is one of the cardinal enterprises that have to be undertaken by any new ventures.

Recent tendencies show employees value the clip and money invested in preparation and development which in bend leads to increased trueness and increase production. Drastic alterations in direction policies have to be elusive and good planned, as this might take to insecurity and misinterpretation. It is suggested to seek aid from independent hearers to reexamine any human rights misdemeanors that might indirectly impact the concern. But recent tendencies suggest minimum human right misdemeanors.

Environmental ordinances in Indonesia are still being formalized and this in bend stations a disputing quandary of adhering to the policies which is far inferior to that of the place state ‘s environment policies. Added steps have to be put in topographic point to keep the delicate balance of the local milieus and guaranting minimum impact to the environment. Corruptness in Indonesia has been a long standing issue. Recent alteration in the authorities construction has non been to counter this major concern. This has been a major determiner for foreign investors to shy away from Indonesian markets. To contradict this factor the organisations civilization and leading should outline a codification of moralss against corruptness. And stress all concern patterns to purely adhere to these moralss.

7. Trade:

Due to the betterment in Indonesia ‘s trade the economic system had seen a batch of positive alterations. This alteration has increased employment chances, has reduced poorness and increased the position of the in-between category. Indonesia has been able to retrieve good after the fiscal crisis when compared to the adjacent states. Because of this Indonesia can increase its portion in the planetary market and increase the domestic gross revenues. For this to go on successfully Indonesia needs to reform its trade construction and cut down the duties and quotas. Even though there has been a drastic growing in the export of the states resources, it has non made any advancement in the exports of manufactured merchandises.

The chief concern of the manufacturers in Indonesia is they can non vie with the manufacturers who manufacture with decreased costs. One of the chief grounds for Indonesia ‘s merchandises to be weak in competition is the low degree of connectivity. The high cost of transit is one of chief causes in the worsening of trade. Trade between states might be cheaper than trading among the islands.

Transportation system utilizing trucks is inconvenient because of the hapless roads in Indonesia. Another chief disadvantage that reduces international trade is the low public presentation of Indonesia ‘s chief ports. Just-in-time production is non possible in Indonesia because of the inefficient and expensive conveyances. Another issues refering international trade is licencing and policies imposed by the authorities. Dutch east indies does non promote in bettering the logistics which deprives them of new engineerings.

8. Investing chances by sector:

Indonesian economic system has great possible for foreign investings, as it is a big state with ample natural resources, excavation and energy, forestry, agribusiness, and marine resources, many of which are non exploited yet. The state has a really big and cheap work force every bit good as a important market. Indonesia has been sing a steady one-year economic growing and this growing is go oning for old ages.

8.1 Energy:

As an emerging economic system, Indonesia depends to a great extent on an increased production domestically of energy resources. Energy is the largest export merchandise and the 2nd largest import merchandise. When sing both the exploited/developed and unexploited/undeveloped energy resources, there is still a great possible for increased trade and investing in the energy sector.

8.2 Oil, gas and coal:

Among the states in Asia, Indonesia is among the top graded state as it has proven gas militias of approximately 3.18 trillion. It is predicated that the demand is likely to increase in local power workss.

Due to dissatisfactory geographic expedition by major participants, oil production has decreased during the last decennary. Its presently consumes about 1.2 million bbl/d of oil which makes it a net importer.

The state has invested to a great extent on the production of natural gas aiming the export market, but worsening oil production has forced them to deviate most of its gas production into local markets.

8.3 Telecommunications:

Indonesia for several old ages has been the fastest-growing nomadic phone market in the Asia-Pacific part with one-year growing rates of up to 60 % . Even though Investing on Mobile markets has been high its comparatively little compared to the cost of set uping a fixed-line web. Millions of Indonesians who otherwise would non hold entree to telecom services now have a nomadic Telephone ( CIA 2010 ) .

8.4 Infrastructure:

Indonesia has experienced rapid growing in the entire figure of route vehicles, peculiarly bikes, but besides autos and trucks. Inadequate substructure is hence frequently mentioned as one of the chief hindrances to investings in Indonesia. The authorities with the aid other fiscal AIDSs, is seeking to better the substructure by presenting new undertakings ( Bloomberg 2010 ) .

9. Foreign exchange:

Exports are an built-in portion of Indonesian economic system as it generates foreign exchange. This in bend allowed it to get natural stuffs and machinery required for the development. The net incomes from Export helped Indonesia to borrow from international fiscal markets and development bureaus. This helped authorities patron developmental undertakings in Indonesia. Because of the addition in borrowing by 1990 Indonesia ‘s entire foreign debt was US $ 54 billion. A commission was established in 1991 named The Foreign Debt Coordinating Committee to look into the turning foreign debt. Indonesia was funded by World Bank, Netherlands, Japan, Denmark and Asian Development Bank.

The supply and demand relationship between international and the domestic market is determined by the foreign exchange rates in Indonesia. In an attempt to stabilise the exchange rates the Bank of Indonesia on a regular basis sterilizes the exchange rate.

9.1 Currency:

The currency of Indonesia is the Rupiah It is a freely exchangeable currency. Since the rupiah was subjected to high rising prices during the Asiatic Financial crisis in 1997-98, the rupiah has been considered as hazardous currency to keep. After the recovery of the economic system the currency has been comparatively stable. Today, this perceptual experience has changed as the solid basicss of the economic system and sustained high outputs underpin the attraction of investing.

Historical exchange rates:




























Beginnings: Norges Bank, CIA

10. Fiscal direction:

Indonesia Financial sector in Indonesia is divided into Bankss held by local authoritiess, Bankss held by province, private sector Bankss, foreign Bankss and concerted Bankss. However three major participants in the microfinance industry which govern the Indonesian markets are the state-owned BRIs, BPRs are little fiscal establishments and soaking company. Since 1986 the BRI unit has been profitable and has operated as an independent entity since its 1987.

The Indonesian Movement for Microfinance Development ( GEMA PKM ) which is an organisation consisting representatives of the authorities, NGOs, fiscal establishments, the concern sector, universities, and research institutes. There primary aim is to spouse in the drafting of a Microfinance Act, besides explicating some best patterns which would help in poorness decrease and for the growing in economic system. One such alteration was to present Tax Laws to repair corporate income revenue enhancement to 25 % from 2010.Description


Concluding Income

Tax Rate ( % )

Leases of land and edifices

10 %

Returns from transportations of land and edifice rights

5 %

Interest on clip or salvaging sedimentations and on Bank of Indonesia Certificates ( SBIs ) other than that collectible to Bankss runing in Indonesia and to authorities approved pension financess

20 %

Interest on bonds other than that collectible to Bankss runing in Indonesia and to authorities approved pension financess

15 %

Sale of exchange-traded portions on the Indonesian stock exchange

0.1 %

Forward contract derived functions

2.5 %


ax Rate ( % )

The primary docket in forepart of National Committee is to outline out issues and route blocks that are promoting poorness ; It besides organizes meeting between concern and establishments in order to place and measure policies that are presently imposed on little concerns and MFIs ; They are in the procedure of speed uping the transition of a new Credit Collateral Law that will simplify distribution of microcredit system.

11. Recommendation:

Dutch east indies remains as attractive finish to put, but has been found vulnerable to multiple hazards. Therefore is it imperative for Organizations to take a proactive attack while sing investing options. Below are some of the strengths which will help in determination devising and besides some of the failings that have to be assessed in order to explicate an effectual hazard direction scheme.


Low investing rate

Limited bank intermediation

Infrastructure lacks

Persistent corruptness and deficiency of transparence

Interethnic tensenesss exacerbated by high unemployment and poorness

A Strengths

Strengthened banking sector

Diverseness of natural resources ( agricultural, energy, excavation )

High fight underpinned by low labor costs

Consolidation of political stableness

Dynamic touristry

12. Decision:

The above study provides a high degree overview of the feasibleness and associated hazard involved in puting in Indonesia. The current concern environment posts several challenges some of the chief issues are bureaucratism which lacks transparence, unsure legal construction, hapless substructure and lacks security. But recent tendencies all point towards organisations researching developing economic sciences in hunt of enlargement as the market has enormous chances. Decentralization of power is non adding in smooth investing as this construction introduces farther degrees of bureaucratic procedure. Adding to the above mentioned jobs Indonesia has been prone to natural catastrophes which add to the bing hazards.

13. Executive Summary:

As the 4th most populated state in the universe, Indonesia ‘s big domestic market offers a broad scope of investing chances for foreign and domestic investors. This study will seek to measure some of the cardinal elements such as the political system and legal system asses the favorability and easiness of investing in Indonesian markets.

Then the study shifts its focal point on the economic system which by far is one of the most of import factors that straight influences investing determinations. Economic growing which has been predicated to be in the scope of 5 % and 7 % for the following five old ages, which shows proactive attack by the Indonesian authorities to pull FDI. The projected FDI by 2014 is expected to make about US $ 222 billion.

The authorities has made amendments to cut down income revenue enhancement on cooperates and fixed it to a level rate of 25 % . The licensing procedure has been made easy to promote investings in the excavation and transportation sectors. Decentralization of authorities sectors has acted as a major route block in simplifying the licensing procedure for foreign organisations to put in Indonesian markets.

Indonesia presently has some of the largest sedimentations of natural gas and oil resources across Asia. Harmonizing to the recent tendencies and look intoing the assorted sectors lending towards the current state of affairs, Indonesia can be considered as a medium hazard investing chance. It is recommended to take a cautious attack in puting in Indonesian markets. Foreign investings should see puting on Indonesian Limited Liability Company to cut down possible hazards. Besides opening little subdivision offices and measuring the market status is the most suited option of investing.