Publication Date

January 1999

Publication Details

Harvie, C, Indonesia: recovery from economic and social collapse, Working Paper 99-5, Department of Economics, University of Wollongong, 1999.

Abstract

The collapse of the Indonesian economy during the period of the Asian financial and economic crisis of 1997/98, has been one of the most stunning and shocking events to have afflicted a developing country during the past several decades. Despite its remarkable economic success since the early 1970s and relatively strong economic fundamentals, with frequent references by the IMF and the World Bank to it as a model for economic development, its demise occurred rapidly in the second half of 1997 and continued unabated during 1998. In 1998 its economic output contracted by around 14 per cent, among the largest declines recorded anywhere in the world in the post World War II period. Millions of Indonesians have lost their jobs, poverty has increased significantly as a consequence, food production has been disrupted by the crisis as well as the effects of a severe drought in 1997. Prices for many of its export commodities, especially oil, have fallen sharply on world markets, and investors, both domestic and foreign, have fled the country. The banking system is in desperate need of restructuring with many banks insolvent and in need of recapitalisation, and thousands of its business corporations are effectively bankrupt and face closure. These difficulties contributed to a political crisis which culminated in a series of bloody riots in May 1998, and the replacement of President Suharto by President Habibie. This paper conducts a brief overview of recent macroeconomic developments in Indonesia, identifies some of the key factors behind the crisis, and outlines the IMF rescue program and the country’s policy framework. The paper also discusses the short term economic and social prospects for the country, and policies essential for its recovery.

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