W9 - Indonesia

Question 1

What was the consensus opinion of SE Asia until the 1980s and 90s?

Answer 1

Many political scientists considered Indonesia a failed state until the 80s and 90s

Question 2

Who was Indonesia’s first president after independence?

Answer 2

President Sukarno (1948-1965)

Question 3

Who was the leader of Indonesia for most of the 20th century after independence?

Answer 3

President Soeharto

Question 4

When was President Soeharto in power?

Answer 4

1966-1999

Question 5

What happened in Indonesia in 1999?

Answer 5

Democracy began

Question 6

What is the story of Indonesia generally?

Answer 6

A country rich in natural resources but underperforming relative to EA, an OPEC member.

Question 7

How was Indonesia affected by the AFC?

Answer 7

Indonesia’s GDP per capita fell by more than 20% during the AFC in one year

Question 8

Why is Indonesia hard to govern?

Answer 8

There is large cultural, ethnic, religious and linguistic variations

Question 8

What were the big issues in Indonesia?

Answer 8

Huge levels of corruption so much so they even hired foreigners to run their customs office as they could not trust their own people due to huge bureaucracy around imports

Question 9

What is the economic story of Indonesia since the 1970s?

Answer 9

Did very well in the 1970s and 80s thanks to their oil boom. When the oil boom ended in the 1980s, Indonesia suffered as they hadn’t adapted to the global economy. Showed a strong recovery in the 80s and grew even faster until 1996, the average growth rate of around 6% under Soeharto. The AFC in 1998 caused Indonesian GDP per capita to fall more than 15% in real terms and then it recovered from 2003 and then was hit hard by COVID

Question 9

What was Indonesia like in the 1960s?

Answer 9

Very high infant mortality rates, closed economy with low trade and life expectancy

Question 9

What is Indonesia now considered economically?

Answer 9

A middle income economy

Question 9

What are the 4 major events since the 1960s in Indonesia?

Answer 9

1960s: Military coup
1980s: Few developing country oil exporters to avoid a debt crisis from effective domestic reform
1997-98: AFC/ Krimson
2008-09: GFC - navigated effectively using the lessons from Krimson with good policy and some luck

Question 10

Why has manufacturing growth slowed down sharply since the 1990s?

Answer 10

1) Commodity boom, squeezing non-commodity sectors, both in statistical and Dutch Disease sense (But need to explain why no manufacturing slowdown since the 1970s)
2) The global general equilibrium consequences of China’s rise as the factory of the world, lowering general manufacturing prices
3) Aspects of the Indonesian policy regime have hindered the competitiveness of internationally-oriented manufacturing. Missing out on global production networks

Question 11

What has been Indonesia’s stance on globalisation?

Answer 11

To be part of global production networks, you must allow foreign direct investment, allow foreign companies to come in and give them tax incentives but Indonesia did not do this so missed out on global production network. Indonesian government policy was also not always consistent and moved from one policy to another without any clear consistency or certainty. Indonesia was born a free trader but is consistently reluctant to accept globalisation despite the benefits it experienced from minimal opening

Question 11

Why has Indonesia been reluctant to adopt globalisation?

Answer 11

Acemoglu and Robinson suggest that it comes from Dutch Colonial history that made Indonesia turn inwards

Question 12

What is the macroeconomic management story of Indonesia?

Answer 12

Generally a success with prudent fiscal policy from balanced budgets under Soeharto and fiscal law in the democratic era.
They did pretty well in not having huge government deficits and had an open current account and have central bank independence.

Question 12

What was the issue with policy surrounding the 1997-8 AFC in Indonesia?

Answer 12

Domestic policy settings - fixed/adjustable exchange rates and limited financial supervision failed to adjust to the new international environment of high capital mobility

Question 12

Was the IMF bailout good for Indonesia?

Answer 12

The IMF misdiagnosed the crisis. Their policy prescriptions were not very good as they give the same standard policy prescriptions ignoring domestic conditions but Indonesia had not choice but to take the IMF bailout package without any negotiating power

Question 12

How has inequality in Indonesia changed since the AFC?

Answer 12

The Gini Index has increased since the Asian financial crisis, was at it’s lowest in the late 80s and 90s when there had been strong economic growth

Question 13

What are the reasons for the large increases in inequality?

Answer 13

• Labour market: end of labour intensive growth
• Commodity boom
• Decentralisation
• Little tax progressivity

Question 14

How did the labour market change during the Soeharto era?

Answer 14

There was rapid structural transformation from A to M to S. There was somewhat of a labour intensive growth path but didn’t grow as much as they intended and real wages in the formal sector were rising strongly. They had a large informal sector and given that it was an authoritarian government, they restricted economic freedoms (such as trade unions)

Question 15

What have been the results of a free-er labour market in Indonesia during the democratic era?

Answer 15

Weaker formal sector employment growth, increased labour productivity dualism and rising unit labour costs which has resulted in weaker formal sector employment growth; increased labour market dualism and rising unit labour costs

Question 16

How did absolute poverty change in Indonesia during the Soeharto era?

Answer 16

70 mil in 1970
27 mil in 1990

Question 17

Who were the main policy advisors during the Soeharto era?

Answer 17

Ali Wardhana - Berkely Mafia
- Their recommendations were to enter light manufacturing and export led-growth

BJ Habibie - Another advisor to Soeharto
He advised entering heavy manufacturing

Question 18

What was the impact of the 1970s oil boom on Indonesia?

Answer 18

Led to an overvaluation of the Indonesian Rupiah which led to a decline in the manufacturing and export sectors. This conflicted with the devaluation policy of Wardhana

Question 19

What was the advice of Bj Habibe?

Answer 19

He though they should invest in heavy chemical industry like SK and ignored the Berkeley mafia and tried to invest in heavy and chemical industry. However investing in heavy industry requires a lot of co-ordination for technology transfers, you need lots of scientists and large investment project. Indonesia failed to do this which led to a large debt crisis in the 1980s when the oil boom ended.

Question 20

What did Indonesia try to tackle during the Soeharto era?

Answer 20

KKN (Corruption, collusion and nepotism)

Question 21

Who was Soeharto’s son and why is he significant?

Answer 21

Tommy Soeharto and ‘cronies’ were given monopoly rights on most industries in the country

Question 21

What are the mediating factors of corruption?

Answer 21

Regulatory complexity, economic openness, civil service renumeration, likelihood of detection, role of the media, lifestyles of the politically powerful

Question 21

What was the issue with taking conflicting advice from BJ Habibie and Wardhana’s Berkley mafia?

Answer 21

Never picked a winner, let these two compete leading to no consistency. He always shifted from one policy to another policy. When you fail to create consistency, the development processes get stalled all the time.

Question 22

What was the difference in policy between Soeharto and democratic eras?

Answer 22

Soeharto was the institution
During democracy major macro refomrs took place but micro reform is much slower