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Indonesia, Economy

Prior to independence, Indonesia’s economy was oriented to providing raw materials to The Netherlands. Subsistence agriculture, primarily the production of rice, was the mainstay of most of the population, but the economy also relied on plantation agriculture, including the production of sugar and rubber. Industry was not promoted so as to avoid competing with The Netherlands. The first few decades after independence were marked by economic mismanagement. The government of President Sukarno focused on unifying the country politically, not on rebuilding Indonesia’s crumbling infrastructure or improving the economy. In contrast, President Suharto’s “New Order” government gave much more priority to the economy, instituting a series of five-year plans (Repelita) starting in 1969. The aims of Suharto’s economic policy were to expand foreign investment and increase trade. When export revenues from oil declined in the early and mid-1980s, Indonesia was forced to expand other exports. To make these exports more competitive internationally, the government deregulated parts of the economy such as coastal transportation, finance, and banking.

Indonesia’s economy grew impressively during the 1980s and much of the 1990s, largely on the strength of its natural resources, which include a large population, solid energy reserves, substantial mineral deposits, and fertile farmland. Indonesia’s gross domestic product (GDP) was $153.3 billion in 2000. Its GDP per capita was $730. Between 1985 and 1995 the GDP grew by about 95 percent, while annual inflation remained below 10 percent. Between 1980 and 2000 there were significant shifts in the structure of the Indonesian economy. Agriculture shrank from 24 to 17 percent of the GDP. Industry as a whole remained stable, but manufacturing, the largest component of industry, grew from 13 to 26 percent of the GDP.

In mid-1997 an economic crisis developed in Asia when investors lost confidence in certain debt-laden economies. As the crisis spread to Indonesia, the value of the Indonesian currency plummeted, which threatened the capacity of the government, banks, and businesses to repay their foreign debts. In October the government negotiated an aid package with the International Monetary Fund (IMF). In exchange for massive loans, Indonesia agreed to implement austerity measures such as reducing government spending and reforming the financial sector. The crisis deepened in 1998 when the IMF halted funds, claiming that the Suharto regime had failed to abide by IMF terms, and as social unrest began to spread. By late May 1998 the economic and social crisis had caused President Suharto to resign. Indonesia was more seriously affected by the Asian economic crisis than were its neighbors. The GDP fell 13.2 percent in 1998 and shrank again in 1999. Nearly half of all corporations were insolvent in 1999, and unemployment increased. After the authoritarian Suharto regime ended, the IMF agreed to resume a multimillion-dollar loan program with the Indonesian government.

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