Indonesia was one of countries in Asia which experienced a high economic growth in early 1990’s. From 1987 to 1996, growth of Indonesian GDP has reached 7.1% which accounted as the great performance over the decade. This situation was mainly influenced by the financial deregulation in early 1980s which had triggered a great expansion in capital inflow and credit growth. However, the economy continued to overheat and asset price bubbles emerged in early 1990s which also led Indonesian economy susceptible to external shocks.
In 1997, Indonesian economy experienced a huge shock due to a currency crisis which broadened to a banking, financial and general economic crisis. Actually, the origin of the crisis was not mainly caused by the lax of macroeconomic policies, instead the unwell-developed financial system like unsound banking sector. At its heart, the Indonesian crisis was a banking crisis brought on by banks which took too many foreign currency risks. https://rupiah138.xn--6frz82g/
The recovery process of Indonesian economy has shown a slow pace due to a complexity of the domestic problems from 1997-2000. The political tension, for example, contributed to the uncertainty and led the recovery program did not work properly. This tension was reflected by the weakening of the rupiah, expectations of rising inflation, and decelerating economic activities. It appears that rising uncertainty has contributed to a slow economic recovery in Indonesia, although the momentum for recovery was in place, as indicated by a relatively high level of growth (4.8 percent) in 2000 and good progress in banking reform as well as corporate debt restructuring during the year.
The slow of the recovery process was also caused by mismanagement of economic policy in the event of crisis. In banking sector, for example, the closing of the insolvent banks has led to a run bank and caused the economy fall into a deep recession. Furthermore, a tight monetary policy that was always going to be some part of the response has also led to problems in investment and banking sector due to a high interest rate.
A gradual improvement of the recovery process has started since 2000, reflected in the stable inflation and exchange rate, reduction in the debt-to-GDP ratio and a manageable fiscal deficit in the last 5 years. Furthermore, Growth of GDP as represent of economic performance reached to 4.9% over the 6 years since 2000. In a policy side, fiscal and monetary policies have always shown a reasonably conservative. Inflation rates were low by developing country standards, budgets were reasonably controlled in most cases, and government debt levels were generally not excessive. Furthermore, these achievements also indicate to the strong commitment to sound economic policies.
However, a stable macroeconomic condition in Indonesia has not been accompanied with robust or quality economic growth because consumption remains the primary driving force in economic growth. This situation has been identified as consequence of supply side rigidities which also make monetary and fiscal policy can not be optimally used to push a higher economic growth. Furthermore, in the banking sector, an underperforming intermediation function continued to overshadow industrial performance. Consequently, economic growth in recent years was not followed by a significant reduction in unemployment and poverty and had little effect on income disparities.
Following on from this introduction, the reminder of this paper is structured as follows. The section two considers the economic performance in Indonesia from 2000-2006. The section three reveals the recent challenges to economic policy. Finally, concluding remarks are provided in the fourth section.
2. Snap-Shot of Economic Performance in Indonesia
2.1. Indonesian Economy performance 2000-2006
Indonesian economy after the crises shows a slow process of recovery due to a complexity of the domestic problems. Based on the graph below, the years to recover for Indonesia is 7 years, with average annual GDP percentage reached 4.9% from 2000-2006. However, In general, the Indonesian economy has experienced gradual improvement since 2000. The growth of GDP, for example, remained stable around 5% from 2000-2006. In 2006, the growth of GDP was mainly strengthened by the fiscal stimulus and robust export performance that mitigated the impact of weak public purchasing power. Analyzed by sector, the most vigorous growth took place in primary and services sectors. The robust performance of the two sectors in turn helped to promote more rapid recovery in economic activity in 2006.