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COPYRIGHT 2006 Institute of Southeast Asian Studies (ISEAS)
I. Introduction
It is debatable whether the crisis that hit Indonesia in 1997 was a curse or a blessing to the Indonesian people. A clear fact is that President Soeharto, the symbol of an authoritarian government, had been forced to step down in 1998. The euphoria of reformasi, (1) following the ousting of Soeharto, was seen everywhere in Indonesia. Indonesians who learned and experienced little, if any, of the joy of democracy, suddenly "found" the euphoria of democracy almost overnight.
Nevertheless, the lack of experience in living in a democratic society may have caused many Indonesians to become confused on how to behave democratically. Some even became anarchic, perceiving that democracy means freedom to do anything they want regardless of the impact on other people. The situation may have contributed to political chaos and uncertainty in the post-Soeharto period. At the same time, the economy was often criticized for not growing as rapidly as it should have.
Indonesia is also a large heterogeneous country with diverse ethnic groups. It recognizes six official religions (Islam, Protestantism, Catholicism, Hinduism, Buddhism, and Confucianism), but there are many aliran or sects within each religion. The new regional autonomy, which provides much more power to the districts (kabupaten, or regency, and kota, or city), has also resulted in the rising awareness of people about their ethnic identities and religions in each region, especially in regions that are associated with a particular ethnic and/or religious group. Ray and Goodspater (2003) argued that regional autonomy may have increased the likelihood of separatism and volatility of local politics.
Within this context of potential political instability, as part of a learning process towards a democratic society, the Indonesian economy is challenged to survive and prosper. This special focus issue of ASEAN Economic Bulletin (AEB) examines the Indonesian economy under this particularly interesting political situation--an emerging democracy in the world's fourth largest country. In this introductory paper, we first provide backgrounds on the Indonesian political economy, the resilience of the Indonesian population during various crises and the era of emerging democracy in Indonesia.
Second, we discuss some main findings from the articles in order to have a better understanding of the bumpy economic road Indonesia has recently taken during its journey towards a democratic society. The first part is related to regional autonomy, an important turning point in Indonesian democracy, particularly with regard to corruption and regional disparities. The second part deals with the completion of the demographic transition, along with the implied crucial health and ageing issue and its social, economic, and political implications. This part addresses issues surrounding social securities for the elderly and the workers, as well as on the timing of the young adult household members quitting from the household. The last part is concerned with economic decision-making at the national level during the democratic era. One article examines the design of supervision of financial institutions in the time when the central bank (Bank Indonesia, or BI) has greater independence from the government. Another article critically examines the brave government policy to drastically reduce fuel subsidy.
II. Economic Resilience
"It was a basket case, a chronic dropout, and a little prospect of economic growth". These were some of the descriptions of the Indonesian economy during the 1960s. Hill (2000) found that many informed observers had expressed no hope of any significant improvement in the Indonesian economy. In 1965, nobody would have predicted that in the first decade of the New Order government, the real growth of the GDP would exceed the inflation rate. Very few local and international observers expected the Indonesian economy to transform so rapidly after the political chaos in 1966-67. Indeed, the outlook in those days was very gloomy. Booth and McCawley (1981) mentioned that the real per capita income in 1966 might have been less than half of that in 1938; inflation had turned into hyperinflation, bringing the monetized economy almost to a halt; the manufacturing sector contributed less than 10 per cent of GDP; and the budget deficit reached 50 per cent of the total government expenditure.
However, against all odds, the facts indicate that Indonesia had undergone a remarkable economic transformation since 1966. Indonesia in the 1990s was completely different from the one in the 1960s. During the first three decades since 1966, when the New Order government put the restoration of the economy as its first priority, the Indonesian GDP had grown at an annual rate of 7 per cent. The annual growth rate of the population declined from 2.1 per cent during 1961-71 to 1.4 per cent during 1990-2000, thanks to the success of the national family planning programme. As a result, the per capita income in 1995 was four times higher than that in 1967, and the poverty rate declined from 60 per cent in 1965 to 11 per cent in 1996 (Hofman, Rodrik-Jones, and Thee 2004). Furthermore, Indonesia had also experienced significant progress in many socioeconomic sectors such as education and health (Hill 2000).
At the same time, as elaborated by Hill (2000), crises occurred in almost every decade. However, the government had always been successful in overcoming them, indicating the resilience of the Indonesian economy during the first three decades since 1966. The economy in the New Order itself was the product of a large political turmoil in mid-1960s.
Hill noted that the economic crisis in the mid-1970s was a result of the enormous accumulated debt of Pertamina, the state oil company. The debt reached almost one-third of GDP....
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