3 - Macroeconomic Management: Success and Challenges

Summary

INTRODUCTION

At the start of his presidency, Joko “Jokowi” Widodo promised that Indonesia would achieve a 7 per cent economic growth within three years of his administration. His plan was to achieve this through a combination of infrastructure development, improved budget allocation and efficiency of spending, increased private sector participation in the development and financial sector deepening. Four years later, the economy seems to be stuck at a 5 per cent growth rate, leaving the impression that the 7 per cent target is too hard to come by, if not impossible.

Jokowi's government, however, inherits the legacy of macroeconomic conditions from its predecessors, particularly those resulting from the substantial change post the devastating Asian Financial Crisis (AFC) 1997–98. Analysing the current government achievement without considering the conditions that preceded it will not be an objective approach. The AFC was a significant game changer to the management of the Indonesian economy. The economy underwent a series of economic reforms that provided it with better resilience when facing the Global Financial Crisis (GFC).

The Indonesian economy took a big hit during the AFC. GDP fell by over 10 per cent at the peak of the Crisis in 1998, inflation soared to above 50 per cent, and it took a while before the economy eventually recovered to the level of economic activity it had before the Crisis. In about a decade prior to the AFC, Indonesia massively liberalized its banking sector through its second banking liberalization package in October 1988 (Pakto 88) that brought substantial liquidity deepening impact to the economy. The financial deepening impact, however, came at a cost of the country's heightened vulnerability to financial shocks especially when coupled with inadequate financial supervision. Combined with a practically pegged exchange rate regime, the economy had quietly built up a substantial risk of financial vulnerability that culminated in late 1997 when authorities had to acknowledge defeat in holding its overvalued currency and had to go through a considerable overhaul in the banking sector.

Post-crisis, Indonesia went through a series of reforms. It underwent a rapid political democratization process which was both beneficial for the country's future but taxing to the economic recovery processes at the same time. A rapid move towards fiscal decentralization changed the ball game for fiscal interventions by passing more authority to the local government in decision-making.