The Dutch began to colonize Indonesia in the early 17th century; the islands were occupied by Japan from 1942 to 1945. Indonesia declared its independence after Japan's surrender, but it required four years of intermittent negotiations, recurring hostilities, and UN mediation before the Netherlands agreed to relinquish its colony. Indonesia is the world's largest archipelagic state and home to the world's largest Muslim population. Current issues include: alleviating poverty, preventing terrorism, consolidating democracy after four decades of authoritarianism, implementing financial sector reforms, stemming corruption, and holding the military and police accountable for human rights violations. Indonesia was the nation worst hit by the December 2004 tsunami, which particularly affected Aceh province causing over 100,000 deaths and over $4 billion in damage. An additional earthquake in March 2005 created heavy destruction on the island of Nias. Reconstruction in these areas may take up to a decade. In 2005, Indonesia reached a historic peace agreement with armed separatists in Aceh, but it continues to face a low intensity separatist guerilla movement in Papua.

Early in the Christian era, Indonesia came under the influence of Indian civilization through the gradual influx of Indian traders and Buddhist and Hindu monks. By the 7th and 8th cent., kingdoms closely connected with India had developed in Sumatra and Java; the spectacular Buddhist temples of Borobudur date from this period. Sumatra was the seat (7th–13th cent.) of the important Buddhist kingdom of Sri Vijaya. In the late 13th cent. the center of power shifted to Java, where the fabulous Hindu kingdom of Majapahit had arisen; for two centuries it held sway over Indonesia and large areas of the Malay Peninsula. A gradual infiltration of Islam began in the 14th and 15th cent. with the arrival of Arab traders, and by the end of the 16th cent. Islam had replaced Buddhism and Hinduism as the dominant religion. The once-powerful kingdoms broke into smaller Islamic states whose internecine strife made them vulnerable to European imperialism.

Early in the 16th cent. the Portuguese, in pursuit of the rich spice trade, began establishing trading posts in Indonesia, after taking (1511) the strategic commercial center of Malacca on the Malay Peninsula. The Dutch followed in 1596 and the English in 1600. By 1610 the Dutch had ousted the Portuguese, who were allowed to retain only the eastern part of Timor, but the English competition remained strong, and it was only after a series of Anglo-Dutch conflicts (1610–23) that the Dutch emerged as the dominant power in Indonesia.

Throughout the 17th, 18th, and 19th cent. the Dutch East India Company steadily expanded its control over the entire area. When the company was liquidated in 1799, the Dutch government assumed its holdings, which were thereafter known in English as the Netherlands (or Dutch) East Indies. Dutch rule was briefly broken (1811–14) during the Napoleonic Wars when the islands were occupied by the British under T. Stamford Raffles. The Dutch exploited the riches of the islands throughout the 19th cent., but their rule did not go unchallenged by the Indonesians. In 1825, Prince Diponegoro of Java launched a long and bloody guerrilla war against the colonists, and in 1906 and again in 1908 the native rulers of Bali led their subjects in suicidal charges against Dutch fortifications.

Indonesia, a vast polyglot nation, has struggled to overcome the Asian financial crisis, and still grapples with high unemployment, a fragile banking sector, endemic corruption, inadequate infrastructure, a poor investment climate, and unequal resource distribution among regions. Indonesia became a net oil importer in 2004 because of declining production and lack of new exploration investment. The cost of subsidizing domestic fuel placed increasing strain on the budget in 2005, and combined with indecisive monetary policy, contributed to a run on the currency in August, prompting the government to enact a 126% average fuel price hike in October. The resulting inflation and interest rate hikes will dampen growth prospects in 2006. Keys to future growth remain internal reform, building up the confidence of international and domestic investors, and strong global economic growth. In late December 2004, the Indian Ocean tsunami took 131,000 lives with another 37,000 missing, left some 570,000 displaced persons, and caused an estimated $4.5 billion in damages and losses. Terrorist incidents in 2005 have slowed tourist arrivals. Indonesia experienced several human cases of avian influenza in late 2005, sparking concerns of a pandemic.