A Country That Surprises

Indonesia is a country that surprises. In 1968 Benjamin Higgins called it a ‘chronic dropout’ and the ‘number one economic failure among the major underdeveloped countries’.  Who would blame him? The per capita income in 1966 was less than that of 1938, the budget deficit totaled half of government expenditures, and the inflation rate had surpassed 500 percent at the end of 1965. Foreign debt totaled to $2.4 billion in 1966 – at the time when GDP was only $1.4 billion and growing at a mere 2 percent per year. The strength of President Sukarno’s rhetoric did not translate well into economic development of the country.

Yet, three decades down the road, Indonesia had transformed very well. So progressively that economist Hal Hill wrote in 1996 that the Indonesia of mid 1990s was ‘almost unrecognizable’ compared to itself in the mid1960s. The World Bank was quick (too quick, said Paul Krugman) to call it a miracle. But Hill said it was pragmatism and orthodoxy: a stable economic and political environment, respected property rights, and reduced price distortions, inter alia.

If only good things could last forever.

Almost out of the blue, a financial tsunami hit. The Asian Financial Crisis of 1997-98 attacked so severely that Indonesia fell on its head, struggling far worse than any of its neighbors, including the epicenter Thailand. The economy plunged into the negative, inflation soared, and unemployment crept up. The politics were messy – culminating in the collapse of the Suharto regime.  

What went wrong? Apparently, Suharto had become too complacent; his economic policies became less prudent. In the lead up to the crisis, the country had been enjoying large inflows of mobile capital. But they were in large part short-term debts and portfolio investments – mostly unhedged. The rather loose financial regulations then made it all too easy for such capital to flee the country when things began to go awry (in fact, not just such capital, but also domestic funds). To make things worse, corruption was widespread and governance was weak – both were centered in and exacerbated by Suharto’s own family businesses. Then the crash came.

It took about a decade to get the country standing on its feet again. Or more precisely, only a decade, which surprised those who expected Indonesia to scramble like the Soviet Union, given the extent of the catastrophe. But Indonesia dies hard. It undertook key reforms, not just on the economic front, but also in the political landscape (think of decentralization – a big bang decentralization but, surprise, far from Balkanization).

On the fiscal side, the budget structure was improved. Inspired by the Maastricht Treaty in Europe, the government decided that budget deficit should not exceed 3% of GDP whereas public debt was capped at 60% of the GDP. In the monetary sector, Bank Indonesia shifted to an independent regime with a floating exchange rate and inflation targeting. The trade front improved, too: many trade barriers were torn down. All of this helped Indonesia navigate well, even when the Global Financial Crisis attacked in 2008. Good policies? Yes. Though good luck played a role, too. It just so happened that Indonesia’s domestic market is huge, its capital market is thin, and its dependence on exports is relatively low (to not say left behind its peers). Anyway, the country weathered the GFC successfully, along with China and India. To some, Indonesia’s resilience is yet another surprise.

Fast forward. President Yudhoyono was able to reclaim high growth and kept it fairly stable. Although inequity has risen, absolute poverty has declined, albeit slowly. Unemployment has gone down, too – though formal sector job creation is slow. Yudhoyono’s Indonesia also rose quite prominently in international forums (in fact, he is probably more successful in the eyes of outsiders than those of his own people). Challenges remain, of course. Two key obstacles to the Indonesian economy today are poor logistics and lax infrastructure, though some progress has been made, directly or indirectly.

Enter President Joko ‘Jokowi’ Widodo. He started with a surprise: the humble, low profile ordinary man beat a decorated general to become the commander-in-chief of the quarter-billion democratic population. On occasion, however, even he himself looks surprised. His bold move to scrap the fuel subsidy is commendable. But he is facing many other problems – and his handling of them is not consistently impressive. With arguably a weak cabinet and a quite hostile parliament, his journey ahead is no easy ride. His much-hyped maritime vision is not entirely novel. It is similar to Yudhoyono’s logistics and infrastructure improvement – only more focused. His stance on the fight against corruption is, well, disappointing.

But who knows, perhaps other surprises will come? Economists don’t really like surprises (after all, why do we study regression?). But certainly Indonesia is an interesting country. Time will tell.

Arianto A. Patunru is an economist at the Australian National University. He was the head of the Institute for Economic and Social Research (LPEM-FEUI) and taught at the University of Indonesia before he moved to Australia.