Indonesian Growth Dynamics

• DOI: http://doi.org/10.1111/j.1748-3131.2011.01184.x
• Published date: 01 June 2011
• Date: 01 June 2011
• Author: Hal HILL,M. Chatib BASRI

Indonesian Growth Dynamics

M. Chatib BASRI1† and Hal HILL2

1The University of Indonesia and 2The Australian National University

This paper provides an analytical narrative of Indonesian economic growth over the past two

decades. Particular attention is paid to the key economiccr isis eventsof 1997–1998 and 2008–2009,

and how and why Indonesia’s response to them was completely different. We emphasize and

illustrate how the years 1997–1998 were a watershed in the country’s economic history and political

economy. We underline the country’s generally good economic performance, especially the rapid

recovery over the past decade, while also highlighting the fact that its economic growth has never

quite matched that of the very high-growth East Asian economies. The final section analyzes some

key policy challenges, including embedding reforms in a highly fluid political environment, mac-

roeconomic management, and “connectivity” and regional (subnational) development.

Key words: economic crisis, growth dynamics, Indonesia, policy reform

JEL codes: G01, O53

1. Introduction

This paper examines Indonesia’s growth dynamics over the past two decades, in the

context of its management of two major crisis events since the mid-1990s, the Asian

financial crisis (AFC) of 1997–1998 and the global financial crisis (GFC) of 2008–2009. In

particular, we examinewhy and how the country was deeply affected on the first occasion,

while its growth momentum was little interrupted during the second. We also consider

some of the broader lessons learned from these events. The events of 1997–1998 are

crucial in understanding the country’s long-term growth dynamics. The crisis and the

associated reshaping of institutions and commercial rules of the game had three main

effects. First, it led to the sudden end of the 32-year Soeharto era of rapid economic

growth and authoritarian rule. Second, it appears to haveset the countr y on a new growth

trajectory, both somewhat slower in aggregate and with different drivers. Third, the

commercial policy environment was altered profoundly, with a weakened presidency,

an assertive if unpredictable legislature, and substantial devolution of authority and

resources to the regions.aepr_118490..107

An earlier version of this paper was presented to Asian Economic PolicyReview conference, Tokyo,

October 1, 2010. We thank conference participants for their useful comments, particularly the

editors and our two discussants,Chalong phob Sussangkarn andYuri Sato. Wealso thank Rizki Nauli

Siregar for research assistance. This is a much condensed version of our earlier paper, which also

contained more tables and figures. The earlier version is available as an Australian National Uni-

versity working paper.

†Correspondence: M. Chatib Basri, Instituteof Economic and Social Research, Faculty of Econom-

ics, University of Indonesia, Jalan Salemba Raya 4, Jakarta 10430, Indonesia. Email: dedebasri@

hotmail.com; dede@lpem-feui.org

doi: 10.1111/j.1748-3131.2011.01184.x Asian Economic Policy Review (2011) 6, 90–107

© 2011 The Authors

Asian Economic Policy Review © 2011 Japan Center for Economic Research

90

Our organization is as follows. We first provide an overview of the country’s growth

dynamics and macroeconomic performance since 1990. Here we underline the country’s

generally good economic performance, albeit a recordthat does not quite equal that of the

really high-performance Asian economies (e.g. China and earlier the Newly Industrializ-

ing Economics [NIEs]), and the significant discontinuity introduced by the AFC.We also

provide a sketch of the new institutional and policy landscape. In section 3 we examinethe

two crisis episodes, focusing on the differences: a deep economicand political cr isis on the

one hand, in contrast to a virtual noncrisis in 2008–2009. We survey the various expla-

nations for these vastly different outcomes, principally focusing on the combination of

“good policy” and “good luck” factors. In section 4 we review the broader lessons and

implications. Here we focus on three sets of factors: the complexities of policy reform in

a newly emerging democracy in which an influential constituency is skeptical of the case

for reform; the importance of good macroeconomic management, including the need for

high-quality financial regulation; and “connectivity” and regional development.

2. An Economic Overview

Since 1990, Indonesian economic growth has been moderately strong apart from the crisis

years 1997–1999 (Figure 1). At least five subperiods are discernible. First, there were the

last few years of the long Soeharto-era boom, with growth through to 1996 in the range

7–8%. The AFC began to affect Indonesia in the third quarter of 1997, but growth for the

whole year remained positive. Then there was the catastrophic contraction of 13.1% in

1998, followed by negligible growth in 1999. A third phase, of precarious growth in the

context of continuing political stability, occurredin 2000–2003. Growth accelerated from

2004 as political normalization took root. A final phase saw a moderate growth slowdown

from 2008 as the GFC began to take effect. But the impact on Indonesia was relatively

mild, and in 2009 it was the third fastest-growing economyin the G-20 group, behind only

China and India.

Figure 1 (%) Growth: Indonesia.

Source: CEIC and WDI.

M. Chatib Basri and Hal Hill Indonesian Growth Dynamics

© 2011 The Authors

Asian Economic Policy Review © 2011 Japan Center for Economic Research 91