Indonesian Economic Crisis

From the middle of 1970s on it has been defined as involving three main elements, namely a sufficiently high economic growth, improved distribution on income and the fruits of development, and national (including economic) stability. This so called trilogy of development in essence proposes a kind of balance development in which growth will not be pursued at the cost of creating instabilities and a worsening in the distribution of income. Concern with distribution and equity issue should not lead to the adoption of policies that would result in economic stagnation. National stability is important but the pursuit of monetary stability, for instance should not be at the expense of growth and welfare.

Macroeconomic policies were adopted to achieve economic growth and stability. For many years, the government has strictly adhered to policy prescriptions that it has set for itself. These include the principle of a balanced budget, a current account deficit of no more than 2 percent of GDP, and a limit to external borrowing to maintain a debt service ratio (DSR) of less than 20 percent.

A significant portion of the national development budget has been devoted to the agricultural sector, rural development and the provision of basic needs. Most widely quoted has been the success in the reduction of the number of people living under the poverty line, from 70 percent in the late 1960s to 20 percent in the early 1990s.

The effect of crisis in 1997/98 which is still ongoing in Indonesia, has led to a serious questioning of all these achievements. Were the achievements real? Why has it been that the crisis has hit Indonesia so hard? The Indonesian economy is expected to experience a contraction of 15 % or more. Such severe contraction of the economy has happened before. Inflation has reached 80% for the first eight months in 1998 and is expected to reach 100 percent for the whole year. The number of people living under poverty line is estimated to have risen to 80 million, or about 40 % of the population.

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