Geopolitical Report ISSN 2785-2598 Volume 50 Issue 5
Author: Riccardo Rossi

Executive Summary

During Joko Widodo’s presidency (2014-2024), Indonesia adopted a comprehensive industrial and trade development programme, confirming itself as a major economic force in the Association of South-East Asian Nations and an important strategic partner for the People’s Republic of China (PRC), Japan and the United States of America.

By examining Indonesia’s geo-economic value and development policies, the report based on international, local sources, and previous SpecialEurasia’s monitoring activities, aims to outline prospects for further growth of the national economy.

Indonesia: The Impact of The Geo-Economic Factor

The PRC, the US, Japan, and South Korea all view Indonesia and its partnerships as highly geopolitically significant in shaping the economic and strategic balance of the South China Sea region.

The high availability of fossil resources and numerous sea straits give the Indonesian archipelago, compared to other South China Sea riparian states, exceptional geo-economic value. These straits constitute obligatory passages for the major sea lines of communication (SLOCs) connecting the main Chinese, Japanese and South Korean ports to European, African and Middle Eastern markets.

In particular, the Strait of Malacca, sandwiched between Malaysia, Indonesia and Singapore, interconnects the southern waters of the SLOC with the Bay of Bengal, constituting the main geo-maritime hub of the Asia-Pacific region. Every year, 94,000 ships ply the waters of Malacca, carrying 30% of globally traded goods and 60% of raw materials (oil, crude oil and liquefied natural gas) from OPEC countries, bound for storage hubs or refineries in Beijing, Tokyo and Seoul.

In 2023, the Strait of Malacca, with a flow of 23.7 million barrels per day (bpd) of oil, became the most important global chokepoint, surpassing the Strait of Hormuz, which recorded crude oil traffic of 20.5 million bpd in the same year. The increased passage of oil tankers through Malacca shows growing energy demand from major South-East Asian countries and China.

According to an estimate by the International Energy Agency, Beijing will need 15 million bpd by 2035 to meet part of its energy needs, 80% of which will have to pass through Straits of Malacca and the Indonesian maritime space. Faced with this prospect, the PRC and the US-Japan-South Korea partnership have progressively increased their influence on Indonesia, paying special attention to Indonesian fossil and mineral resources located on the islands of Sumatra, Java, Kalimantan, Sulawesi, Maluku and Papua.

Indonesia is home to reserves of coal, oil and natural gas, the primary sources of energy supply for industrial and civil purposes. According to data compiled by the Ministry of Energy and Mineral Resources, Jakarta had 30.2 billion tonnes of coal, 4.17 billion barrels of crude oil and about 62.4 trillion cubic metres of natural gas in 2021.

In addition, Indonesia is among the countries with the largest deposits of copper, cobalt, zinc, tin, antimony, bauxite and nickel, metals that are essential for high-tech industrial and manufacturing sectors. Since 2014, Joko Widodo’s presidency has exploited these resources, focusing particularly on nickel, of which Indonesia holds 42% of the world’s reserves, amounting to 55,000,000 tonnes. By 2023, global nickel production covered 50% using large mines located in four industrial parks: Indonesia Morowali Industrial Park, Pomalaa Black Nickel Industrial Area, Weda Bay Industrial Park and Obi Island.

Indonesia has leveraged its geographical advantages and resources effectively under President Joko Widodo, laying the groundwork for medium- to long-term economic and industrial development.

Indonesia: Foreign Investment and Business Development

In 2024, the Indonesian government approved the 2025-2045 National Long-Term Development Plan intending to increase the capacity of high-tech industries (robotics, artificial intelligence, 5G, aeronautics), expanding the green economy, enhancing the infrastructure network, and fostering urban and rural development.

The ambitious project will require Jakarta to optimise fossil wealth, enhance Malacca’s economic importance, and open the domestic market to foreign direct investment (FDI) from Beijing, Seoul, Tokyo and Washington. Consequently, Jakarta adopted two important measures: Global Maritime Fulcrum (GMF) doctrine and the establishment of special economic zones (SEZs).

President Joko Widodo’s 2014 GMF initiative highlighted the crucial role of maritime trade routes, especially the Strait of Malacca, in boosting Indonesia’s economy.  It also prioritised four key political goals: port development and security, maritime diplomacy, marine resource protection, and naval efficiency. In recent years, the effectiveness of the Global Maritime Fulcrum has been facilitated by the implementation of the Master Plan for the Acceleration and Expansion of Indonesian Economic Development 2011-2025, which outlines the creation of six economic corridors (Bali-Nusa Tenggara, Java, Kalimantan, Papua-Maluku, Sulawesi and Sumatra) instrumental in linking SEZs. These mostly export-oriented areas provide for a special regulatory regime with separate customs zones, duty-free benefits, simplified procedures and their own management authority.

Since the enactment of the 2009 Special Economic Zones Act, Indonesia has consistently promoted their development intending to foster balanced economic growth among regions. This can be seen in former President Joko Widodo’s decision to give SEZs a key role in attracting over 50 billion in foreign direct investment within the next 50 years. In 2021, Indonesia had nineteen special economic zones (of which 12 were active and 8 under construction), mostly operating in six economic sectors: energy-mining, logistics, technology development, tourism, agriculture, education and health.

The economic and industrial significance of the Arun Lhokseumawe, Sei Mangkei, and Kendal SEZs will be discussed below.

• Arun Lhokseumawe. Built in 2017, it is located in Aceh Province, the northern access point to the Strait of Malacca. Operational since December 2018, it houses companies active in the petrochemical, logistics and energy (oil and gas) sectors, with a focus on liquid natural gas re-gasification processes. According to Indonesian government estimates, Arun Lhokseumawe is expected to attract investments of up to $3.8 billion and employ 40,000 workers by 2027.
• Sei Mangkei. Established in 2012, it is Indonesia’s first SEZ. Located on the northern side of the Strait of Malacca, it is characterised by high production of rubber and palm oil, of which Indonesia is the world’s largest exporter, accounting for 70% of demand. The main export markets are: India (27.5%), the PRC (14.8%), Malaysia (7.5%), the Netherlands (7.1%) and Singapore (5.1%). According to Jakarta’s forecasts by 2031, Sei Mangkei is expected to attract more than 83,000 jobs, boosting local and national economic development.
• Kendal. Kendal Industrial Park, with an area of 2,200 hectares, was transformed in 2019 into one of the main SEZs on the island of Java, which is home to most of the population and contributes 60% of Indonesia’s gross domestic product. President Joko Widodo has strengthened the infrastructure and production network of the Kendal SEZ, to attract foreign direct investment from China, South Korea, Taiwan and Japan in the electronics, automobile, logistics and textile manufacturing industries. The Ministry of Finance’s recent tax policies have spurred the growth of Special Economic Zones. A provision grants commercial entities and economic operators within SEZs a 100% corporate income tax (CIT) exemption for investments of at least $7,000 over a minimum ten-year period. Kendal ZES offers the following incentives: a tax holiday of up to 20 years, contingent upon investment value; a 30% tax allowance distributed over six years; and exemptions from value-added tax and import duties.

Conclusion

Under President Joko Widodo, Indonesia has progressively attracted Chinese, US, South Korean and Japanese foreign direct investment. In particular, Beijing has made important trade agreements with Jakarta, becoming an essential partner for Indonesia’s economic development.  The bilateral trade flows between the two countries from November 2023 to November 2024 confirms the positive trend in Chinese-Indonesian trade. Chinese exports to Indonesia grew from USD 6.16 billion to USD 7.4 billion, while Chinese imports from the Indonesian market increased from USD 6.27 billion to USD 6.71 billion.

In recent years, thanks to the FDIs, Indonesia has reached a gross domestic product of USD 1.442 trillion in 2024 with a growth rate, referring to the two-year period 2024-2026, of between 5.1-5.2 per cent. These figures suggest an increase in foreign direct investment in the automotive, energy and mining sectors, which are essential for Making Indonesia 4.0, aimed at strengthening the Indonesian manufacturing sector, generating over 10 million new jobs.

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