Macroeconomic Developments, Policies and Issues in Indonesia, 1956-2005: a Review

This paper reviews the major macroeconomic developments, policies and issues in Indonesia within a political economy perspective since it gained recognition of independence from the Dutch in December 1949. It reveals that the impressive economic and social progress in this country over the past five and a half decades was not a smooth process. Indonesia, under both the Japanese occupation (1942-1945) and the nationalist revolutionary leadership of President Sukarno (1945-1966), suffered from economic and political instability resulting in an economic and political crises in 1965. This led many observers to term the country an economic basket case . The establishment of the military government under Lieutenant General Soeharto in 1966 provided the much needed economic and political stability over the next three decades (1967-1996). This turned out to be the golden era of Indonesia s modem economic history when the traditional agricultural, albeit natural resource-rich, economy underwent impressive transformation into a balanced, outward-oriented industrialising economy. Then the 1997-98 currency-cum-financial crises came that lasted much longer than in other countries in the region and exposed the dark side of this country s economic miracle, which took the form of corruption, collusion and nepotism or crony-capitalism in short. Indonesia has slowly recovered and by 2004 moved to a higher growth path with improved economic, social and political institutions.