In the mid-1980s, the government began eliminating regulatory obstacles to economic activity. The steps were aimed primarily at the external and financial sectors and were designed to stimulate employment and growth in the non-oil export sector. Annual real gross domestic product (GDP) growth averaged nearly 7% from 1987-97, and most analysts recognized Indonesia as a newly industrializing economy and emerging major market. The Asian financial crisis of 1997 altered the regionís economic landscape: in 1998 Indonesia experienced negative GDP growth of 13.7% and unemployment rose to 15-20%. In the aftermath of the 1997-98 financial crisis, the government took custody of a significant portion of private sector assets via debt restructuring, but subsequently sold most averaging a 29% return. Indonesia has since recovered--albeit slower than some of its neighbors--has recapitalized its banking sector, improved oversight of capital markets, and taken steps to stimulate growth and investment, particularly in infrastructure. GDP growth was 4.5% in 2003, 5.1% in 2004, and 5.6% in 2005.

The Yudhoyono Administration has targeted average growth of 6.6% from 2004-2009 to reduce unemployment and poverty significantly. Indonesia's overall macroeconomic picture is stable and improving, although GDP growth rates have not yet returned to pre-crisis levels. Per capita income rose to $1,277 in 2005, topping the pre-crisis level. Domestic consumption continued to account for the largest portion of GDP, at about 65.4%, followed by investment at 22%, and net exports at 9.5%. In evidence of an accelerating economy, investment realization doubled in 2005. Capital goods imports increased 35.9% in 2005, a further indication of a strengthening economy. The governmentís success in pushing forward its ambitious reform plan will determine whether Indonesia's GDP growth rates can recover to pre-crisis levels, and whether Indonesia will again become a favored destination for foreign investors.

The government raised fuel prices by an average of 126% on October 1, 2005 in an effort to reduce Indonesia's fuel subsidy burden (projected to reach Rp 89.2 trillion in 2005 or 3.3% of GDP). The fuel price hikes led to a surge in inflation and, and the Government of Indonesia's revised 2005 budget projects a year end inflation rate of 8.6%. The Government of Indonesia implemented a quarterly cash compensation package for low-income families and extra range of benefits including subsidized rice, improved health and social services, housing subsidies, micro credit and family planning programs.

The U.S. trade deficit with Indonesia decreased by 13.3% in 2005 to $5.9 billion ($3.9 billion in exports versus $9.9 billion in imports).

Although minerals production traditionally centered on bauxite, silver, and tin production, Indonesia is expanding its copper, nickel, gold, and coal output for export markets. In mid-1993, the Energy Ministry reopened the coal sector to foreign investment. Total coal production reached 144.5 million metric tons in 2005, including exports of 104.8 million tons. The Indonesian Government hopes to export 115 million metric tons of coal in 2005, which would surpass Australia and make Indonesia the worldís largest thermal coal exporter. Two U.S. firms operate three copper/gold mines in Indonesia, with a Canadian and U.K. firm holding significant other investments in nickel and gold, respectively. Indonesian gold production in 2005 was 167 tons, up almost 50% from 2004 production, but still below the 2001 peak of 180 tons. Production mainly came from Freeportís Grasberg mine--the countryís and worldís biggest gold producing mine. Indonesiaís share of global exploration spending has dropped from 3% to 1%--since 1998 only three new gold mines have opened. This does not reflect Indonesiaís mineral prospectivity, which is high; rather the decline reflects uncertainty over mining laws and regulations, low competitiveness in the tax and royalty system, and investor concerns over divestment policies and the sanctity of contracts.

President Yudhoyono and his economic ministers have stated repeatedly their intention since taking office in October 2004, to improve the climate for private sector investment in order to raise the level of GDP growth and reduce unemployment. In addition to general corruption and legal uncertainty, businesses have cited a number of specific factors that have reduced the competitiveness of Indonesia's investment climate, including corrupt and inefficient customs services; non-transparent and arbitrary tax administration; inflexible labor markets that have reduced Indonesia's advantage in labor-intensive manufacturing; increasing infrastructure bottlenecks; and uncompetitive investment laws and regulations. In February 2006, the Government of Indonesia announced a new policy package to improve the investment climate in Indonesia for both domestic and foreign investors. The package, announced in a Presidential Instruction (INPRES) No. 3/2006, consists of policies designed to strengthen investment services, harmonize central and regional regulations (Perda), improve customs, excise, and taxation services, create jobs, and support small & medium enterprises. Labor reforms planned for 2006 have been delayed due to union resistance, however.

The passage of a new copyright law in July 2002, and accompanying optical disc regulations in 2004, greatly strengthened Indonesiaís intellectual property rights (IPR) regime. However, despite the governmentís recent efforts to improve enforcement, IPR piracy remains a major concern to U.S. intellectual property holders and foreign investors particularly in the high-technology sector. In March 2006, President Yudhoyono issued a decree establishing a "National Task Force for IPR Violation Prevention (also known as the "IPR Task Force"). The IPR Task Force will formulate national policy to prevent IPR violations and determine additional resources needed for prevention. It will also help to educate the public through various activities and improve bilateral, regional and multilateral cooperation to prevent IPR violations.