Indonesia: Diverging Trends

2001

Dr Howard Dick

In Indonesia, year 2000 saw a divergence of economic and political trends. The real economy performed better than expected with growth close to 5 per cent for the calendar year. The economy remained buoyant despite political turmoil and poor government, but these took their toll in exchange rate depreciation, rising inflation and higher interest rates, which will bite harder in 2001.

During 2000 the view gained credence that there was a ‘decoupling’ of economics and politics. The political trend was far worse than anyone expected. Indonesia no longer has either a credible or an effective government. President Abdurrahman Wahid, who after his first 100 days had begun 2000 amidst popular goodwill, squandered his political capital and by February 2001 was under parliamentary censure and politically isolated.

Nevertheless, for all its problems, in the first half of 2001 the Indonesian economy still has its best chance in the foreseeable future to move beyond recovery into growth. Achieving sustained growth is not fundamentally an economic problem. In the normal course of events, investment would accelerate in 2001 as capacity limits are reached in domestic and export industries. The problem of sustainability is political drag rather than lack of economic momentum. Poor government, worsening corruption and political turmoil in Jakarta, insecurity in the regions, plus the many unpredictabilities associated with decentralisation, are adding to risk and uncertainty and destroying investor confidence. Deterioration of the already poor business climate is also making it much harder to resolve the banking crisis, carry out corporate restructuring and service the massive public debt.

If by mid-year there is no better government, as well as continuing slowdown in North America and Europe and further stagnation in Japan, the prospects for late 2001 are an economy slowing to a growth rate of less than a 4 per cent per annum, barely enough to maintain living standards. The elite faces a historic political choice between either a virtuous cycle of recovery and expansion, which requires economic and political discipline, or a vicious circle of economic slowdown and political infighting.

WATCHPOINT: Will Indonesia take the path of discipline, leading gradually to prosperity, or continue towards mismanagement and mass poverty?

 

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