Making Economic Policy in a Democratic Indonesia: The First Two Decades

• Author: Hal Hill,Chatib Basri
• DOI: http://doi.org/10.1111/aepr.12299
• Published date: 01 July 2020
• Date: 01 July 2020

Making Economic Policy in a Democratic

Indonesia: The First Two Decades

M. Chatib BASRI

1

and Hal HILL

2

†

1

University of Indonesia and

2

Australian National University

After three decades of rapid economic growth during the authoritarian Soeharto era, followed by

the deep but relatively short-lived Asian financial crisis, Indonesia transitioned rapidly to demo-

cratic and decentralized governance. We examine policy-making processes and economic out-

comes during the first two decades of this new era, leading up to the 2019 national elections

where it was widely conjectured that Indonesia might follow the global trends of authoritarian

rule and illiberalism. We conclude that, thus far, Indonesia has navigated the transition from

authoritarian to democratic rule quite successfully. Compared to the Soeharto era, growth has

been somewhat slower, inequality has risen, and policy reform is slower and generally incremen-

tal. But living standards continue to rise and all major political players have elected to operate

within the new democratic parameters. Macroeconomic management has continued to be effec-

tive. Nevertheless, there are no grounds for complacency: there is a large outstanding reform

agenda, and the economy is not providing enough economic opportunities for the better-

educated senior secondary and tertiary graduates entering the workforce.

Key words: decentralization, democracy, economic policy, Indonesia, reform

JEL codes: D72, E02, H11, O53

Accepted: 16 December 2019

1. Introduction

Few countries have experienced as much economic and political volatility as Indonesia

over the past quarter-century. In the mid-1960s it was one of the poorest countriesin the

world, it had withdrawn from the global economy and its institutions, it was experienc-

ing hyperinflation, and there were deep political schisms. However, in the wake of terri-

ble conflict, a new, authoritarian, growth-oriented regime under the leadership of

President Soeharto took control in 1966, and oversaw three decades of very rapid eco-

nomic growth and improved living standards. All this abruptly came to an end during

the Asian financial crisis (AFC), when the economy shrank by over 13% in 1998. And,

unlike its crisis-affected neighbors, these events triggered fundamental political change.

We are grateful to the Editors and designated discussants for helpful comments, to Takatoshi Ito

for very detailed comments, and to Abrar Aulia for excellent research assistance.

†Correspondence: Hal Hill, Arndt Corden Department of Economics, Crawford School, College

of Asia and Pacific, Australian National University, Canberra, ACT, 2601, Australia. Email: hal.

hill@anu.edu.au

214 © 2020 Japan Center for Economic Research

doi: 10.1111/aepr.12299 Asian Economic Policy Review (2020) 15, 214–234

The seemingly impregnable Soeharto regime suddenly collapsed in May 1998. Indonesia

then made four major transitions: From decades of authoritarian rule to a relatively open

and democratic state; from one of the deepest economic crises in recent times to a

growth recovery within 3 years; from highly centralized rule to what is in effect a federal

system of governance with significant local-level fiscal and administrative autonomy; and

from seemingly insuperable public indebtedness to effectivefiscal consolidation.

Against this backdrop, we examine Indonesia’s economic development and eco-

nomic policy making during the two-decade democratic era, from the early transition

and recovery period through to the 2019 elections that were conducted in an era rising

global polarization and authoritarianism. The present paper is organized as follows.

Section 2 provides an analytical sketch of the new institutional and political environ-

ment in which Indonesian economic policy-making is conducted. It also highlights

some of the key economic policy reforms that have been enacted. Section 3 provides

an overview of economic development from the mid-1990s, that is, the late Soeharto

era, to the present. In Section 4 we examine the outcome of the 2019 general election,

as a case study of how Indonesia’s evolving political system has responded to both the

current global discourses and to domestic socioeconomic challenges. A concluding

section sums up. The present paper can be read in conjunction with our companion

piece (Basri & Hill, 2020, hereafter BH2020), which provides additional information

on Indonesia in comparative Southeast Asian context.

2. Political Economy: From Authoritarian to Democratic Governance

In the aftermath of the AFC, Indonesia’s political economy framework changed funda-

mentally in the transition from the Soeharto to the democratic era. The former was

characterized by a commitment to economic growth, and its policy regime was shaped

by this imperative, as mediated by the constellation of political forces surrounding the

authoritarian presidency and by an array of external circumstances (Mackie &

MacIntyre, 1994). In difficult economic times –notably the late 1960s and the mid-

1980s –the technocrats led by Professor Widjojo Nitisastro were in the ascendancy,

and they pursued a broadly market-oriented, orthodox strategy combined with prudent

macroeconomic management. However, in “good times”their political influence was

circumscribed, as during the 1970s oil boom and the first half of the 1990s.

The AFC swept aside this economic and political model. Five key features of the

new political system were quickly established.

1

First, the president and vice-president

are directly elected, as part of a multiparty political system, and who are permitted to

hold office for a maximum of two consecutive terms. Second, there are separate elec-

tions for the two houses of parliament, with the lower house, the Dewan Perwakilan

Rakyat (DPR), the major law-making institution. The DPR was essentially a rubber

stamp for the Soeharto presidency, but it is now an independent and occasionally

assertive body, and one in which no one party has a majority. As a result, and third,

since the president’s party does not command a majority of seats in the DPR (and

internal party discipline is quite weak), “rainbow coalitions”of parties are necessary

Chatib Basri and Hal Hill Making Economic Policy in Indonesia

© 2020 Japan Center for Economic Research 215