Explaining Indonesia’s Economic Growth

Jakarta Globe reported that, in 2020, Indonesia for the first time became an Upper-Middle Income country, a title few countries ever gain. A few decades prior, Indonesia was labelled an “East Asian Miracle” by the World Bank, alongside countries such as Japan, Korea, Taiwan, Hong Kong, Singapore, Thailand, and Malaysia.

Evidently, Indonesia’s economy is highly dynamic and a stark contrast to what it was during its early days post-independence. In this week’s article, we will be going over the history behind Indonesia’s economic growth. More specifically, we will be looking into the factors behind said economic growth including: Government intervention, oil revenue, and diversification.

Background

Indonesia is an archipelagic country north of Australia, south of Singapore, and east of Thailand. It was under Dutch colonial rule for some 350 years and under Japanese colonial rule for three years. While independence was eventually declared in 1945, true independence was only achieved after five bloody years of revolution against the Dutch post-WWII, writes the Indonesian Parliament.

The 1949-1965 period, under President Soekarno, was marred by sociopolitical unrest, instability, and volatility. Its economy reflected said unrest, instability, and volatility. GDP growth was restricted to 3% per annum, GDP per Capita growth limited to 1%, and food imports so high current accounts took a massive dip. Falling tax revenue, limited FDI, and poor macroeconomic management did not help, adds the Journal of Asia Pacific Economy.

Intervention

The situation changed from 1966 onwards under President Soeharto. Soeharto utilised the full extent of his government’s capacity to intervene, relying heavily on the Ministry of National Development Planning and the Bureau of Logistics to develop long-term economic plans and manage the national economy. SOEs and state banks helped in managing the economy.

According to the Economic History Association, the first priority involved fixing the overall macroeconomic situation. Macroeconomic prudence became the norm thereafter. Assistance programmes for the poor, greater access to education, and targeted investment in key infrastructure soon followed.

Oil Revenue

Of course, the discovery of oil helped facilitate economic reform as well as cushion any possible blowback from reform. According to the Reserve Bank of Australia, the oil shortage of the 1970s further helped Indonesian oil exports. Indonesia delicately balanced the benefits oil revenue offers and the dangers of Dutch Disease (i.e. The over dependence on oil and the reduced economic diversity and fewer comparative advantages as a result).

In doing so, bountiful oil revenue was funnelled into aforementioned poverty assistance, education, and infrastructure programmes. It was also funnelled into the agricultural sector which was already booming; however, with the additional support of oil revenues, the agricultural sector became the main driver of growth between the late 1960s and early 1980s. 

Irrigation projects, farm input subsidies, and greater road connectivity helped the sector grow. The agricultural sector benefited greatly from the Green Revolution (the sudden development of new, innovative farming techniques and technologies) as well, helping it achieve rice sufficiency by the early 1980s despite being the largest rice importer in the 1960s stresses the Journal of Asia Pacific Economy.

Diversification

Government revenue accumulated from oil exports and the agricultural sector continued to increase between the 1970s and the 1980s, combined with more responsible macroeconomic management, meant that when oil prices collapsed in the 1980s, the government had enough of a financial cushion to undertake further reforms. 

These reforms mainly involve greater investment in the manufacturing sector, states the Reserve Bank of Australia.  The initial development of the Indonesian manufacturing sector saw import substitution policies implemented and the assembly of automobile kits, as well as the production of parts and components, became the focal point of the sector. 

According to Asian Economic Papers, lucrative government contracts, as well as greater FDI inflows, attracted public and private companies to expand into manufacturing. Afterwards, the government shifted to export-oriented and labour-intensive manufacturing policies. The government announced economic liberalisation reforms and did so to support these policies and promote greater investment. 

Conclusion

Indonesia’s economic growth can be attributed to three factors: Government intervention, oil revenue, and diversification. Its economy has come a long way since the time directly following independence; though, admittedly, it has faced challenges.

Despite setbacks brought about by the 1997 Asian Financial Crisis, Indonesia’s economy slowly but surely recovered in the years since the crisis. According to the SMERU Research Institute, the manufacturing sector as a whole remains the second largest contributor to its overall GDP, second only to the services sector.