1 - Setting the Scene: The Indonesian Economy in Transition — the Jokowi Era and Beyond

Summary

INTRODUCTION

It is now more than twenty years since one of the most decisive and important turning points in Indonesian economic and political history. The year 1998 was one of exceptional turbulence, hardship and uncertainty. The seemingly impregnable thirty-two-year Soeharto presidency came to a sudden end on 21 May. The economy and the currency were in free-fall. An acrimonious relationship had suddenly emerged with international financial institutions. There were nasty conflict episodes, mostly with serious ethnic dimensions. Almost one million of its citizens were internally displaced. There were various “Yugoslav” scenarios of territorial disintegration. Most important of all, there was no institutional roadmap to guide the country through the vacuum that Soeharto's hasty exit had created.

Viewing the country through the gloomy lens of that era, it is perhaps no exaggeration to state that the economic and political developments over the intervening two decades have been little short of miraculous. Crises of this depth and severity have often set countries back for extended periods, but Indonesian per capita income had recovered to pre-crisis levels by 2004. The country is now regarded as one of the most vibrant democracies in Southeast Asia and in the Muslim world. It has maintained its territorial integrity. There have been four rounds of credible national elections, while democracy has also taken root in the more than 500 subnational jurisdictions. A far-reaching programme of decentralization has been implemented. The economy has returned to at least a moderate growth rate of around 5 per cent per annum. Inflation is well under control, and the macroeconomic framework looks secure. The authorities navigated the 2008–09 global financial crisis with little difficulty. The economy is in much better shape than the resource-exporting members of the much-hyped BRICS (Brazil, Russia, India, China and South Africa) group. Indonesia is recognized as a significant regional power through its membership of the G20 and other international fora.

Yet in important respects Indonesia is still a country in transition, and one that faces major development challenges. It is still a relatively young democracy, in the process of establishing durable institutions that will be needed to underpin an upper middle-income economy. Its ambitious decentralization programme is still being bedded down into an effectively operating system of government. Tens of millions of its citizens live below or precariously above a meagre poverty line.