4 - Indonesia's Economic Development During and After the Soeharto Era: Achievements and Failings

Summary

INTRODUCTION

After presenting a brief overview of Indonesia's rapid and sustained economic growth during Soeharto's New Order era and its performance after the Asian economic crisis, this paper discusses the country's economic and social achievements as well as its serious shortcomings during the New Order era. The paper then discusses the challenges which the post-Soeharto governments faced in solving the serious economic and social problems currently facing Indonesia.

THE INDONESIAN ECONOMY DURING AND AFTER THE SOEHARTO ERA : AN OVERVIEW

The achievements of Soeharto's New Order (1966–98)

During the late Sukarno years in the mid-1960s, Indonesia was experiencing stagnating output, widespread poverty and hunger, crumbling infrastructure and a hyperinflation of almost 600 per cent because of runaway deficit-financing. However, after a successful stabilization and rehabilitation programme designed by a new team of capable economic advisers (the so-called ‘Berkeley Mafia’), Indonesia since the late 1960s embarked on a period of rapid and sustained economic growth averaging 6.7 per cent annually which lasted for three decades until the Asian economic crisis struck Indonesia in 1997/98.

Meanwhile, a successful family planning programme reduced population growth from an average of 2.4 per cent in the period 1965 to 1.8 per cent in 1980–1996 (World Bank, 1992: 268; 1998: 43). The resultant average population growth of 2.0 per cent led to an average, annual GNP per capita growth of 4.7 per cent, one of the highest rates among the world's fast-growing, emerging economies (World Bank, 1998: 25). While per capita GNP was around $100 in the mid-1960s, it had reached $580 in 1982, and almost $1,000 in the early 1990s, enabling Indonesia to ‘graduate’ from the ranks of the ‘low income’ into the ranks of the ‘lower middle income economies’ (Thee, 2002: 198).

Indonesia's rapid economic growth was underpinned by a rapid and sustained growth in gross domestic investment, including investment in human capital, averaging 9.2 per cent on the average during the period 1965–1997, on a par like the two other, rapidly growing Southeast Asian economies, Malaysia and Thailand (World Bank, 1999: 16–9). Indonesia's rapid growth was also driven by high rates of total factor productivity (TFP) growth (World Bank, 1993: 28-29; 40–48).

Indonesia's rapid and sustained growth was also accompanied by a steady reduction in the incidence of absolute poverty.