Indonesia: Southeast Asia's Largest Economy

The economy of the world's fourth most populous country, from its recovery after 1998 to its strategy of processing nickel at home.

Indonesia is an archipelago of over 17,000 islands and the world’s fourth most populous country, with around 280 million people. It is the largest economy in Southeast Asia and a member of the G20.

From crisis to stability

Indonesia was hit hard by the 1997 and 1998 Asian financial crisis. Its currency collapsed, the economy shrank by over 13 percent in 1998, and the crisis contributed to the fall of President Suharto after more than three decades in power. Since then, Indonesia has become a democracy and achieved relatively stable growth of around 5 percent a year for much of the past two decades, with lower inflation and more careful public finances, including a legal limit on the budget deficit of 3 percent of GDP.

Commodities

Indonesia is rich in natural resources. It is the world’s largest exporter of coal and palm oil, and a major producer of nickel, copper, gold and tin. Commodity booms have boosted growth, while busts have slowed it.

Downstreaming nickel

Indonesia holds large nickel reserves, a key metal for electric vehicle batteries and stainless steel. In 2020, it banned the export of raw nickel ore, requiring companies to process it in Indonesia. This policy, called downstreaming, aims to capture more value at home.

Investment, much of it from Chinese companies, poured into nickel smelters, and Indonesia’s exports of processed nickel products rose dramatically. Indonesia became by far the world’s largest nickel producer. Critics point to environmental damage, coal-fired power for smelters, and safety concerns, and the European Union challenged the ban at the World Trade Organization.

The value of processing at home

A tonne of raw nickel ore exported is worth relatively little. Processed into nickel pig iron or battery-grade chemicals, the same nickel is worth far more. By requiring processing at home, Indonesia aimed to create factory jobs and earn more from its resources, rather than letting that value be added in other countries.

Challenges

Indonesia faces challenges including a large informal sector, infrastructure gaps across its many islands, deforestation, and the need to raise education quality. Its young population and large domestic market give it strong potential.

Thinking export bans always work

Indonesia's nickel ban attracted huge investment, but the strategy worked partly because Indonesia controls a large share of world nickel supply. A country with a small share of a commodity might simply lose exports if it banned raw shipments.

Key takeaways

Indonesia is the world's fourth most populous country and Southeast Asia's largest economy.
After the 1998 crisis, it became a democracy with steady growth around 5 percent.
It is a leading exporter of coal and palm oil and the largest nickel producer.
Its 2020 raw nickel export ban drove investment in processing, with environmental concerns.