6 - Indonesia's Two Deep Economic Crises: The Mid-1960s and Late 1990s

Summary

This chapter discusses the two deep economic crises experienced by Indonesia, namely the crisis of the mid-1960s and the crisis of the late 1990s. The two deep economic crises of the mid-1960s and late 1990s led to a serious economic contraction, –3.0 per cent in 1963 and an even more serious –13.1 per cent in 1998, and to a steep rise in poverty. The crisis of the mid-1960s was caused by internal factors, namely the utter neglect of sound economic policies. By contrast, the crisis of the late 1990s was triggered by external factors, namely a sudden shift in market sentiments among foreign creditors and investors which led to panic. Comparing these two deep economic crises is of interest since it indicates that an economy depending on only one but unsustainable institution, a strong president, is vulnerable to internal or external shocks. These crises in their different origins and manifestations show the importance of ‘good governance’ and strong, viable institutions.

INTRODUCTION

This paper discusses the two most serious economic crises experienced by Indonesia since independence, namely the crisis of the mid-1960s and the crisis of the late 1990s. While Indonesia had experienced other economic crises, notably in the early 1980s following the end of the oil boom era, this crisis only led to a slower growth. The two deep economic crises of the mid- 1960s and late 1990s, however, led to a serious economic contraction, –3.0 per cent in 1963 (World Bank 1998: 2.1) and an even more serious –13.1 per cent in 1998, and to a steep rise in the incidence of absolute poverty. The economic crisis of the mid-1960s was accompanied by a serious political crisis which led to the ignominious downfall of Indonesia's first President. The economic crisis of the late 1990s led to a serious political crisis which, like in the mid-1960s, also led to an equally ignominious downfall of Indonesia's second president.

The crisis of the mid-1960s was primarily caused by internal (domestic) factors, specifically the supremacy of political over economic considerations, which led to an utter neglect of sound economic policies. This led, not surprisingly, to an economic breakdown and an unprecedented hyperinflation which greatly impoverished the population.