An emerald in the equator

The New Order Government, under Soeharto, came to power thirty years ago replacing Soekarno’s Old Order and bringing with it a series of stabilization programs that successfully rehabilitated the economy. Under the regime, Indonesia enjoyed a high rate of economic growth at 6.5% per annum and, prior to Asia’s financial crisis, was considered as part of the Asia’s miracle. Systematic exploitation of natural resources and political stability was the foundation upon which Indonesia’s extra ordinary economic growth flourished. Without vast reserves of oil, timber, minerals, and other resources the Indonesian economic story would be very different. On the other hand, the basis of political stability was laid by forging political infrastructure with the strength to support the formal requirements of economic growth. The political valve was practically closed shut, and the nation’s full attention and energy were directed towards building the economy.

The re-engineering of the political system that brought rapid economic growth had affected the rapid structural transformation. The country’s production base shifted quickly from agriculture to manufacturing. The contribution from manufacturing rised from 13% in 1980s to reach 24% in 1995, while the agriculture declined from 24% to 17%. In relatively short period of time, Indonesia was transformed from an agricultural country to a semi industrialized one. These successes were accompanied by a decline in the rate of population growth, brought by a successful national family planning program. The population growth rate declined dramatically from an average rate of 2.4% in 1971-1980 to 1.7% per annum in 1990-1995. This combination caused an increase of per capita income from US$50 in 1970 to nearly US$ 1200 a year before Asia’s financial crisis.
Indonesia had pulled itself out the ranks of the very poor countries and joined those of the lower middle income. At time when the economy moved towards liberalization, changes in Indonesia’s political orientation should also have taken place. Unfortunately, this did not happen. A more decentralized and democratic decision making process were not instituted. As a result, private agents did not become responsive to better allocation of scarce resources. Neither were check and balance instruments nor processes improved. Consequently, the nature of the situation gave rise to substantial market distortions. Condition that made Indonesia very vulnerable to the crisis.

Source: Barber (1996), Panggabean et al. (2000)