Managing the Indonesian Economy: Good Policies, Weak Institutions

Abstract

Soeharto’s New Order government produced a remarkable three decades of rapid growth. From 1967 to 1997, Indonesia’s GDP grew by an average of 7 percent per annum and by 1995 Indonesia’s per capita income had grown to over four times the 1967 level, reaching $1100 (Booth, 2002). The number of people living in poverty declined from over 60 percent of the population in 1965 to 11 percent in 1996, while social indicators demonstrated impressive gains. Indonesia was, in short, a dramatic development success in all the senses outlined in Chapter 1: policies achieved their desired goals; enhanced human capabilities along the way; were (in its earlier decades at least) the products of a state deemed legitimate in many eyes; and produced sustained effects over the years. Indonesia’s economic success resulted from a pragmatic approach to economic management, with a group of technocrats shaping macroeconomic policies that coalesced with specific strategies for other sectors. In 1993, the World Bank (1993a) named Indonesia among the High Performing Asian Economies (HPAEs). Although critics pointed to the weak financial sector, lack of rule of law and rising corruption as factors that could undermine the country’s success, it was, as one observer remarked, ‘hard to argue with 7 percent growth.’²

The tragedy of…the New Order is that political and institutional developments were not tackled while there were the opportunity and resources to do so. (Dick, 2002: 214)

This chapter does not necessarily represent the opinions of the World Bank, its Executive Directors, or its member countries. All correspondence should be sent to bhofman@worldbank.org. The chapter is partly based on a paper prepared for the Shanghai Conference on Scaling Up Poverty Alleviation, Shanghai, May 2004. The authors would like to thank the late Saleh Afiff , Jehan Arulpragasam, Anthony Bebbington, Mark Baird, Yoichiro Ishihara, Homi Kharas, Tamar Manuelyan, Peter Timmer, Adam Schwarz and Roberto Zhaga, and participants at the Shanghai conference, for comments on an earlier version of this paper, and a senior Indonesian economic policymaker who wishes to remain anonymous for extremely useful discussions on the topic of the paper.