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Growth Collapses in Indonesia: A Comparison of the 1930s and the 1990s

Published online by Cambridge University Press:  22 April 2010

Anne Booth
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Extract

Thanks largely to the work of Pierre van der Eng we now have quite a good picture of trends in growth of Indonesia's real Gross Domestic Product (GDP) over the twentieth century. There were two periods, each of around three decades when growth was positive in per capita terms. From 1900 to 1930, real GDP grew at 2.7 per cent per annum; if we assume that population grew over this period at around 1.2 per cent per annum, then annual growth in real per capita terms was 1.5 per cent per annum. This implies an increase over a thirty-year period in per capita GDP of around fifty-six per cent. Beginning in 1929, there was a sustained growth collapse which continued through the early 1930s; real per capita GDP in 1934 was only eighty-three per cent of the 1928 level in 1934 (Table 1). Some recovery occurred in the latter part of the 1930s, and by 1941 per capita GDP had returned to roughly the 1928 level. But the twenty-five years from 1941 to 1966 were characterised by foreign occupation, revolutionary struggle, and, after 1949, considerable macroeconomic instability culminating in hyper-inflation in the early and mid-1960s. In 1967, per capita GDP was estimated by Van der Eng to be only about seventy-five per cent of the 1928 figure.

Type
Conference: ‘Economic Growth and Institutional Change in Indonesia in the 19th and 20th Centuries’
Information
Itinerario , Volume 26 , Issue 3-4 , November 2002 , pp. 73 - 99
Copyright
Copyright © Research Institute for History, Leiden University 2002

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References

Notes

1 van der Eng, Pierre, ‘The Real Domestic Product of Indonesia, 1880–1989’, Explorations in Economic History 29 (1992) 343–373;CrossRefGoogle ScholarEng, Pierre van der, ‘Indonesia's Economy and Standard of Living in the Twentieth Century’ in: Lloyd, Grayson and Smith, Shannon eds, Indonesia Today: Challenges ofHistory (Singapore 2001) 181–199;Google ScholarEng, Pierre van der, ‘Indonesia's Growth Performance in the 20th Century’ in: Maddison, Angus, Rao, D.S. Prasada and Shepherd, W.F. eds, The Asian Economies in the Twentieth Centuries (Cheltenham 2002).Google Scholar There were certainly shorter periods between 1945 and 1960 when positive growth was achieved. But these growth spurts at best brought per capita GDP back to the levels achieved prior to 1941. See Booth, Anne, The Indonesian Economy in the Nineteenth and Twentieth Centuries: A History of Missed Opportunities (London 1998) Chapter 2 andCrossRefGoogle ScholarDick, Howard,‘The Challenge of Sustainable Development: Economic, Institutional and Political Interactions, 1900–2000’ in: Lloyd, Grayson and Smith, Shannon eds, Indonesia Today: Challenges of History (Singapore 2001) 200–215Google Scholar.

2 Bank, World, The East Asian Miracle: Economic Growth and Public Policy (Washington 1993)Google Scholar.

3 It was also a steeper decline than that experienced by the other severely affected economies. In 1998 total GDP fell by 13.1 per cent in Indonesia, by 10.8 per cent in Thailand, by 7.4 per cent in Malaysia and by 6.7 per cent in South Korea. These data are taken from Asian Development Bank, , Growth and Change in Asia and the Pacific: Key Indicators 2001 (Manila 2001) 48Google Scholar.

4 The World Bank's Asian Miracle report pointed out that there were quite wide variations in total factor productivity (TFP) growth between the eight high-performing Asian economies. Growth in Singapore, Malaysia and Indonesia was ‘investment driven’ while else where it was ‘productivity driven’; Bank, World, The East Asian Miracle, 54–60.Google Scholar The Singapore case has had much attention in the literature. For a penetrating critique of the recent growth accounting literature in the Asian context, see Felipe, Jesus, ‘Total Factor Productivity Growth in East Asia: A Critical Survey’, Journal of Development Studies 35/ 4 (1999) 1–41CrossRefGoogle Scholar.

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10 Booth, Anne, ‘Four Colonies and a Kingdom: A Comparison of Fiscal, Trade and Exchange Rate Policies in Southeast Asia in the 1930s’, Modern Asian Studies 36 (2002)Google Scholar forthcoming. Ironically it was in nominally independent Thailand that fiscal policy was most contractionary in the early 1930s.

11 See Bassino, Jean Pascal and Nakagawa, Hironobu, ‘Exchange Rates and Exchange Rate Policies in Vietnam under French Rule, 1878–1945’ in: Bassino, Jean-Pascal, Giacometti, Jean-Dominique and Odaka, K eds, Quantitative Economic History of Vietnam 1900–1990 (Tokyo 2000) 11–13Google Scholar for a discussion of the debate surrounding the decision to put the piastre on the gold standard.

12 The yen had left the gold standard in December 1931, after the Japanese had lost 675 million yen in gold in a vain attempt to defeat speculators, and thereafter depreciated rapidly against both the dollar and sterling, and the other currencies pegged to them. See Kindleberger, Charles, The World in Depression, 1929–1939 (Harmondsworth 1987) 163–164Google Scholar.

13 Booth, Anne, ‘Crisis and Response: A Study of Foreign Trade and Exchange Rate Policies in Three Southeast Asian Colonies in the 1930s’ in: Boomgaard, Peter and Brown, Ian eds, Weathering the Storm: The Economies of Southeast Asia in the 1930s Depression (Singapore/Leiden 2000) £314.Google Scholar For further discussion of japanese economic relations with the Netherlands Indies in the 1930s, see Booth, Anne, ‘Japanese Import Penetration an d Dutch Response: Some Aspects of Economic Policy Making in Colonial Indonesia’ in: Sugiyama, Shinya and Guerrero, M.C. eds, International Commercial Rivalry in Southeast Asia in the Inlerwar Period (New Haven 1994)Google Scholar.

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15 For further details see Booth, ‘Four Colonies’.

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17 Booth, ‘Four Colonies’, Table 8.

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19 Emerson, Rupert, Malaysia: A Study in Direct and Indirect Rule (New York 1937) 369Google Scholar.

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21 Booth, , ‘Crisis’, 308–309Google Scholar.

22 This follows from the identity (X-M) = (T-G) + (S-I).

23 Eichengreen, Barry and Sachs, Jeffrey, ‘Exchange Rates and Economic Recovery in the 1930s’, Journal of Economic History 45 (1985) 925–946CrossRefGoogle Scholar.

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26 Polak, J.J., ‘The National Income of the Netherlands Indies, 1921–1939’ (New York 1943)Google Scholar as reprinted in: Creutzberg, P. ed., Changing Economy in Indonesia 5: National Income (The Hague 1979) 81–83CrossRefGoogle Scholar.

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28 The Economist, 24 August 1996, 67–68. The article drew especially on the work of Morris Goldstein at the Institute for International Economics in Washington. For further discussion of which early warning indicators are most likely to predict financial crises; see Goldstein, Morris, ‘Early Warning Indicators of Financial Crises’ in: Hunter, W., Kaufman, G. and Krueger, T.H. eds, The Asian Financial Crisis: Origins, Implications and Solutions (Boston 1998)Google Scholar.

29 See Warr, Peter, ‘The Thai Economy: From Boom to Gloom?’ Southeast Asian Affairs, 1997 (Singapore 1997) 317–333, andGoogle ScholarWarr, Peter, ‘Thailand’ in: McLeod, Ross H. and Garnaut, Ross eds, East Asia in Crisis: From Being a Miracle to Needing One? (London 1998) 49–65 for a discussion of the factors contributing to the Thai crisis of 1997–1998Google Scholar.

30 Noland, Marcus, ‘How the Sick Man of Asia Avoided Pneumonia: The Philippines in the Asian Financial Crisis’, Working Paper 00–5, Institute for International Economics (Washington 2000)Google Scholar.

31 Solomons, Jay, ‘What Political Risk?’, Far Eastern Economic Review (20 02 1997) 56Google Scholar.

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33 See in particular Reisen, Helmut, ‘Domestic Causes of Currency Crises: Policy Lessons for Crisis Avoidance’, OECD Development Centre Technical Paper 136 (Paris 1998)Google Scholar.

34 ‘Let This Be a Lesson’, Far Eastern Economic Review (12 06 1997) 71Google Scholar.

35 See in particular Soesastro, Hadi and Basri, M. Chatib, ‘Survey of Recent Developments’, Bulletin of Indonesian Economic Studies 34/1 (1998) 3–54CrossRefGoogle Scholar.

36 The International Monetary Fund has been blamed by some observers such as Jeffrey Sachs for casuing the panic by insisting on the closure of the sixteen banks. My own view i s that even if the banks (most of which were known to be insolvent) had not been closed the run on the smaller domestic banks would have taken place anyway. In addition at least one of the banks which was closed was partly owned by one of Soeharto's sons and any attempt to keep it open would have looked like favouritism. In fact the bank was reopened later under another name which further weakened confidence in the domestic banking system.

37 See Booth, Anne, ‘The Causes of Southeast Asia's Economic Crisis: A Sceptical Review of the Debate’, Asia Pacific Business Review 8 2 (2001) 19–48, for a discussion of the reasons for the Indonesian collapse. In this paper I argue that changing public tolerance for corruption on the part of senior political figures and their families was a key reason for the collapse of confidence in the latter part of 1997CrossRefGoogle Scholar.

38 Bank Indonesia, Annual Report 2000, Table 2.

39 These figures refer to monthly averages; there were also considerable fluctuations within each month, especially in late 1997 and early 1998. Before July 1997, Indonesia's system of exchange rate management approximated to a crawling peg regime; see Williamson, John, ‘The Case for a Common Basket Peg for East Asian Currencies’ in: Collignon, Stefan, Pisani-Ferry, Jean and Park, Yung Chul eds, Exchange Rate Policies in Emerging Asian Countries (London 1999) 327–343Google Scholar.

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41 Net private sector inflows remained negative in 2000 and 2001; see Pangestu, Mari and Goeltom, Miranda, ‘Survey of Recent Developments’, Bulletin of Indonesian Economic Studies 37/2 (2001) 141–171, in particular 157CrossRefGoogle Scholar.

42 See Deuster, Paul R., ‘Survey of Recent Developments’, Bulletin of Indonesian Economic Studies 38/1 (2002) 5–37,CrossRefGoogle Scholar in particular 26. The rupiah experienced a massive real devaluation between September 1997 and March 1998; there was a significant real appreciation through 1998 and early 1999 mainly as a result of the very rapid inflation. However by the end of December 2001, the real value of the rupiah was still much lower than its pre-crisis level.

43 Rosner, Peter L., ‘Indonesia's Non-oil Export Performance during the Economic Crisis: Distinguishing Price Trends from Quantity Trends’, Bulletin of Indonesian Economic Studies 36/2 (2000) 85CrossRefGoogle Scholar.

44 Bird, Kelly, ‘The Economy in 2000: Still Flat on its Back?’ in: Lloyd, Grayson and Smith, Shannon eds, Indonesia Today: Challenges of History (Singapore 2001) 52Google Scholar.

45 The ratio of domestic revenues to GDP rose from 15.9 per cent in 1996–1997 to 21.5 per cent in 2000. This is in sharp contrast to the early 1960s when large budget deficits were clearly the result of the failure of domestic revenue policy; see Booth, The Indonesian Economy, Chapter 4, for further discussion of this period.

46 See Deuster, , ‘Survey’, 20–21,Google Scholar for details of the 2001 budget outturns.

47 The decline in development expenditures as a proportion of budgetary expenditures is in part the result of the decentralisation measures which became effective in 2001. As a result of these measures, regional governments will assume responsibility for spending on infrastructure rehabilitation and development in many sectors. In 2001 central government grants to the regions amounted to twenty-three per cent of total budgetary expenditures; this percentage is projected to increase further in 2002.

48 Schwulst, E.B., ‘Report on the Budget and Financial Policies of French Indo-China, Siam, Federated Malay States and the Netherlands East Indies’ in: Report of the Governor General of the Philippine Islands 1931 (Washington 1931) 57Google Scholar.

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51 A critical assessment of the use of food aid in late 1998 and early 1999 is given in Poh, Li Kheng et al., Manufacturing a Crisis: The Politics ofFood Aid in Indonesia (Manila 1999). This report argues that the cheaprice programme was targeted to cities and particular provinces as a means of ‘pacification’ and to consolidate political support in the run-up to the 1999 parliamentary electionsGoogle Scholar.

52 Suryahadi, Asep, Suharso, Yusuf and Sumarto, Sudarno, ‘Coverage and Targeting in the Indonesian Social Safety Net Programs: Evidence from 100 Village Survey’, SMERU Working Paper (Jakarta 1999) 7–9Google Scholar.

53 Tabor, Steve and Sawit, M. Husein, ‘Social Protection via Rice: The OPK Rice Subsidy Program in Indonesia’, The Developing Economies 39 (2001) 267–294CrossRefGoogle Scholar.

54 Suryahadi, Suharso and Sumarto, ‘Coverage’, Tables 5a and 5b.

55 A kabupaten is the level of government below the province; the kecamatan is the level of government between the kabupaten and the village.

56 Figures from officials in the Department of Education and Culture, Jakarta, September 1999.

57 INPRES is an acronym for Instruksi Presiden (Presidential Instruction). The term is used t o embrace a number of labour intensive public works programmes which were initiated between 1969 and 1975.

58 See Sumarto, Sudarno, Suryahadi, Asep and Pritchett, Lant, ‘Safety Nets and Safety Ropes: Comparing the Dynamic Benefit Incidence of Two Indonesian “JPS” Programs’, SMERU Working Paper(Jakarta 2000).Google Scholar These authors found that participants in the employment programmes were more likely to be from households which had experienced changes i n income, rather than from permanently poor households. They also argued that the employment programmes were much less cost-effective than the cheap rice programmes, in terms of costs per dollar of benefit to the recipients.

59 The official poverty estimates compiled by the Central Board of Statistics from the 1996 and 1999 Susenas surveys indicate that the percentage increase in numbers of poor was much higher in urban than in rural areas over these three years (sixty-three per cent compared with thirty per cent). The largest percentage increases in numbers of poor were in Jakarta and West java. See Central Board of Statistics, Statistical Yearbook ofIndonesia 2000 (Jakarta 2001) Tables 12.5, 12.6 and 12.7Google Scholar.

60 Manning, Chris, ‘Controversy over the Minimum Wage Increases in Jakarta’, Bulletin of Indonesian Economic Studies 38/1 (2002) 14Google Scholar.

61 Dick, , ‘The Challenge’, 214Google Scholar.

62 See Anderson, Benedict, ‘Old State, New Society: Indonesia's New Order in Cormparative Historical Perspective’, Journal of Asian Studies 42/3 (1983) 477–496,CrossRefGoogle Scholar for a comparison of the late colonial and Soeharto regimes.

63 The growth collapse of the early 1930s did not induce any comparable political change; indeed the Dutch colonial establishment remained firmly in control until the arrival of the Japanese Imperial Army in 1942.

64 For a detailed discussion of the Malaysian alternative to IMF orthodoxy see Athukorala, Prema-chandra, ‘Capital Account Regimes, Crisis and Adjustment in Malaysia’, Asian Development Review 18/1 (2000) 17–48.Google Scholar The author stresses that the Malaysian experience may not be readily transferable, and can hardly be considered a ‘ready-made’ alternative to IMF orthodoxy.

65 See Lindsey, Tim, ‘The Criminal State: Premanisme and the New Indonesia’ in: Lloyd, Grayson and Smith, Shannon eds, Indonesia Today: Challenges of History (Singapore 2001) 283–297,Google Scholar for a discussion of the state of the judiciary in post-Soeharto Indonesia and the need for constitutional reform. For a thoughtful analysis of the challenges confronting Thailand as it tried to manage its macroeconomy through a process of democratisation see Siamwalla, Ammar, ‘Can a Developing Democracy Manage its Macroeconomy? The Case of Thailand’, TDRI Quarterly Review 12/4 (1997) 3–10Google Scholar.