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Indonesia, the largest economy of Southeast Asia, has gone through drastic changes in the last decades. Being a dynamic and diverse country, its economic system is shaped by the unique interplay of the market-oriented policy and selective governmental intervention. It has been imbued with an historical context combined with rich natural resources and the shifting paradigm of world trade.
This article examines the basic features of the Indonesian economic system: its core role of government, its international market impact, and its future challenges and opportunities. An overview of Indonesia’s economic bases and present trends will explain to us the position of Indonesia in the current global economic setting.
Key Takeaways:
- Being a dynamic and heterogeneous country, its economic structure mingles a unique blend of market-oriented policies together with strategic governmental intervention.
- An economic system is an institution or framework through which a society organizes and directs its economic activities, including both government-led and private sector initiatives.
- Indonesia follows the economic system of Pancasila whereby the values of mutual cooperation and collective strength of the country are deeply embedded.
Definition of Economic System
Quoting from the book ‘Sistem Ekonomi Indonesia, written by Muchtar et al., a host of writers drawn from different disciplines, including law and economics, an economic system is that framework through which a society organizes and coordinates its economic activities both from the government and private sector level (Muchtar et al., 2021).
It is founded on some principles, which all have a general purpose of ensuring prosperity and wellbeing. Any economy’s backbone is the ideologies, crucial in giving it a backbone and something to build from. Without ideologies forming the core of an economic system, it would be just some technical and theoretical creation devoid of any attributes which may define it.
It is this ideological nature of these values that distinguishes one economic system from another. For example, the capitalist economic system is radically different from the socialist system, not just in the principles on how to operate but in the very tenets on which it rests.
Moreover, since these values are ideological, the effects spill over not only into economic decision-making but also into wider areas of life, such as politics and social issues. This interconnection underlines the fact that ideology is the most significant constituent element of an economic system, which defines it and determines the way it functions.
Indonesia Economic System
Indonesia follows the Pancasila Economic System, which is based on the foundation of mutual cooperation and collective strength inherent in the core of the nation. According to the Agency for Pancasila Ideology Development, this model of the economy denotes the commitment of Indonesia towards national unity and solidarity in economic practices.
The Pancasila economic system consecrated the guideline for the management of the economy and gave the authority to the state to direct the activity of production in Article 33 of the 1945 Constitution. In this system, an economic development shall be oriented toward the common welfare of a group rather than toward the accumulation of capital by an individual or particular groups, so that the wealth is distributed equitably among the people.
Article 33 is the constitutional basis for setting economic policy in Indonesia, particularly with respect to state ownership of certain strategic sectors. It regulates vital industries and natural resources, giving emphasis on the leading role of the state in the management of these resources towards the maximum prosperity of its people. Further, it also underlines how the government extends its cooperation with the private sector toward developing the best welfare for the people by considering common ownership and family-oriented economics. It controls land, water, and other natural resources with the view of promoting their use in a sustainable manner for the benefit of all citizens of Indonesia.
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Characteristics of Indonesia’s Economic System
Article 33 of the 1945 Constitution is the basis for Indonesia’s economic system implementation, which, according to a paper by Eunike Rose Mita Lukiani, a student born from the Economics Education Program in University of Nusantara PGRI Kediri, and Doctorate Student of Economics Education at Universitas Negeri Malang entitled ‘Human Perspective in Indonesian Economic System’. Initially, it was a three-paragraph document but was expanded on August 10, 2002, to include five key provisions outlining the general principles governing the state’s economic system (Eunike Rose Mita Lukiani, 2015).
These five paragraphs provide that: (1) The economy is organized as an enterprise collective in view of the kinship system; (2) The state manages strategic industries that are indispensable to the nation and vital to the needs of the greater number; (3) The state holds land, water, and natural resources in trust for the people; (4) The national economy is directed according to the principles of economic democracy, namely, cooperation, efficiency with social justice, sustainability and environmental concern, independence, and patriotisms and balanced progress; and (5) The manner of implementation of these principles is further governed by law.
1. Indonesian Economy is Collective Effort-Based on Kinship
The first principle, as detailed in Article 33, paragraph 1, provides that the Indonesian economic system runs on a collective effort with a basis in kinship. This model was set in contrast with the capitalist-liberal systems that were oriented toward competition at the individual level and the accumulation of profits. Instead, the Indonesia system based on kinship encourages solidarity in which concern is for mutual interest rather than personal profit. Economic enterprise is organized to realize mutual development in which success is shared reasonably by those concerned with their input into the venture while common development must not be sacrificed to individual progress.
2. State Control Over Key Sectors Vital to the Nation and People’s Livelihoods
The second characteristic defining it, stipulated in paragraph 2, asserts that the state controls sectors critical to the nation and crucial to the welfare of the population. These are those which normally produce goods and services that are indispensable to living and are usually narrow in supply. The state’s control over these industries is to ensure they serve the collective good in ways which protect interests at a national level and maximize public welfare. While these strategic sectors are regulated by the state, private enterprise is left to try its hand in areas where they would not dominate the livelihood of the people so that a proper balance between state control and the growth of the private sector is maintained.
3. Land, Water, and Natural Resources Controlled by State for Welfare of All
From paragraph 3, it was said that land, water, and natural resources controlled by the state ensure their use serves the benefit of all citizens. Such resources, regarded as gifts from the gods, are somehow part of the common patrimony rather than private property. The state is supposed to manage them wisely so that the people would enjoy plenty and not concentrate wealth in the hands of a few. It is in tune with the general underlying values of Indonesia, such as social justice, which ensure that the resources of the nation are conserved and utilized in a manner that will be sustained for generations to come, and that public welfare is at the heart of economic governance.
4. Economic Democracy: Principles of Cooperation, Equity, and Sustainability
The fourth central principle is that Indonesia’s economy is based upon a model of economic democracy. This means that economic activities serve the interest of the people and are undertaken for the main reason of attaining common good. Economic democracy ensures that all voices of the citizens are heard in all of the economic processes of their country through fairness, sustainability, and concern for the environment. By upholding these values, it follows that the economic framework in Indonesia upholds the national unity of Indonesia, ensuring that economic progress is welfare-oriented in a manner that will benefit the present and future generations as well as be friendly to the environment.
Key Pillars of the Economic System in Indonesia
Indonesia’s economic framework derives from the very fundamental tenets of Pancasila, which is the state ideology: to guide the economy in service to the common welfare of the people and to serve the purpose of safeguarding national unity by adhering to ethical and just practices.
Explanation of basic pillars that shape Indonesia’s economic system, which is in regards to how economic activities are organized, ordered, and conducted. According to Eka, a student from the Faculty of Accounting Universitas Negeri Semarang, it goes as follows (Eka, 2015):
Principle of Divinity
The Principle of Divinity forms part of the foundation of Indonesia’s economic system and strongly stresses that economic activities must run in conjunction with divine attributes such as honesty, justice, and morality. Indonesia encourages and promotes religiously founded economic practices, such as Islamic finance, to encourage diversity and inclusion within the economic climate.
On the other side, this concept has played a role in shaping ownership in Indonesia. Natural resources and their value are therefore God’s creation, in which He is the true owner. Still, ownership by individuals is allowed, provided that natural resources, being public property, are to be administered for the welfare of all. With that, the philosophy of common trusteeship in regard to the resources rather than individual proprietorship for personal benefit is complete. Principle of Divinity: This principle upholds that all economic activities should be directed to the common good with respect to divine justice.
Principle of Humanity
The guiding principles of kemanusiaan place the welfare and dignity of the person at the center of Indonesia’s economic system. Humans are to be treated as rational, free, and essentially social beings, created equal before God, and the system should reflect those humanistic values, showing that economic activities elevate human welfare and freedom.
This means that, in practice, people are free to engage in those economic activities that interest them or that they aspire to, insofar as such practice does not violate the rights of others. Private ownership is allowed, but it carries a social responsibility in the sense that very often, personal wealth comes with the active contribution of other members of society. It tries to balance the rights of the individual with the common good, ensuring that economic activities are useful to general well-being.
Principle of Unity/Nationalism
The Principle of Unity is crucial in maintaining Indonesia’s national cohesion. It requires that economic activities be able to build a sense of togetherness with broad participation from all walks of society. This pillar also voices balanced distribution, which signifies that every resource is fairly distributed to create the feel of economic benefits among the populace. This will also nurture national self-reliance and economic independence through the development of industries that promote competitiveness in the international market, with nationally driven pride and unity remaining intact.
Principle of Democracy
Basically, democracy in Indonesia’s economic system is reflected by the notion of economic democracy, which places the people at the helm, as being the most important entity in decision-making processes regarding the economy. By people-centered it means that economic activities are initiated, conducted and led for the welfare of the people as a whole.
“From the people” implies that the national economy is led by a mandate from its citizens. “By the people” is about active involvement in economic activities, where the people and the community participate directly in the process. Lastly, “For the people” indicates that the ultimate goal involves ensuring shared prosperity for all citizens, not just a certain individual or group, is at the core of the movement. It is to assure this democratic approach that the economy will be all-inclusive, equitable, and oriented toward an improved quality of life for all Indonesians.
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The economic system of Indonesia promises a certain degree of opportunities as well as challenges for any business that seeks to establish a foothold in the region. Indonesia’s economic system is an eclectic blend of market-driven policies and government intervention, which has spurred economic growth in various sectors. However, to understand and control the minute details of the regulations and the economic mechanism might prove to be very cumbersome for any foreign investment seeking investment or expansion in Indonesia.
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