Indonesia

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Full Report: Indonesia

Overview

1910-1928: Nationalism and calls for independence emerge among Muslims and communists, and the colonial government responds with a weak advisory council and more social programs. Leadership of the independence movement shifts to secular, foreign-educated elites in the 1920s. The colonial government takes a less direct role in the economy, which remains based on raw materials.

1929-1941: Worldwide depression hurts the colonial economy as demand falls for key exports such as sugar. The nationalism movement is met with restrictions on civil liberties, and many of its leaders are imprisoned or exiled.

1942-1944: Japanese occupation breaks the Dutch hold on the islands. The nationalists have an opportunity to organize, and the use of Bahasa Indonesia as a national language takes off. But the Japanese also mobilize the economy with brutal efficiency to meet their wartime need for raw materials and labor.

1945-1949: The foundations of an independent Indonesia are laid in a 1945 constitution and some early exercises in parliamentary democracy. Intermittent fighting between Dutch colonial army and republican forces continues for four years until international pressure forces the Dutch to withdraw from the areas it still controls.

1950-1956: A 1950 constitution creates a unitary republic with a strong parliament and a weak president. Indonesia has its only experience with parliamentary democracy, and the last free elections for 44 years. But confusion reigns, and regional rebellions soon break out. The state assumes control of some sectors but leaves many of the Dutch firms in place, and there is little industrialization or growth.

1957-1965: Martial law and foreign-firm nationalization in 1957 is followed by Guided Democracy and the Guided Economy, which centralize political and economic power. As the economy deteriorates and more rebellions break out, Sukarno uses populist, revolutionary rhetoric to balance the army, communists, and Muslim groups. After a mysterious failed coup, communist PKI members are slaughtered and imprisoned.

1966-1972: Suharto maneuvers Sukarno out of power and builds an authoritarian state based on extensive bureaucracy and military penetration of government and economy. Sukarno's revolutionary rhetoric is replaced with pragmatic and liberal policies, although many features of economic nationalism remain.

1973-1982: Suharto consolidates his power, forcing political parties to merge into two tightly controlled "opposition" parties. The oil boom allows a return to expensive state-led projects and an expansion of health and education programs.

1983-1996: The fall in oil prices pushes several waves of liberalization intended to increase exports and cut the budget. State firms remain important but account for a decreasing portion of the economy as foreign investment and the domestic private sector take off. But over-borrowing and crony capitalism leave the economy dangerously exposed to a currency crash.

1997-1998: The Asian financial crisis causes political and economic shocks to the status quo. Suharto steps down, the IMF gains new leverage through badly needed loans, and the government temporarily acquires much of the economy through the bailout of bankrupt firms. Access to health, education, and nutrition falls as a result of the crash in the rupiah and a sharp rise in unemployment and poverty.

1999-2000: Democratic elections lead to the selection of Abdurrahman Wahid as president. The economy rebounds partly, but political turmoil continues as the effort to reform the army and battle corruption proves difficult. Wahid, known popularly as Gus Dur, governs increasingly erratically, providing his opponents with the ammunition needed to bring him down.

2001-2003: Wahid is ousted, and Sukarno's daughter Megawati becomes president. The economic recovery is fragile, and a terrorist bombing in Bali in October 2002 sets back tourism, trade, and confidence in the economy. East Timor becomes independent, and separatist tensions in other regions are addressed and abate. Corruption remains a major concern, and political and economic uncertainty prevail.

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Political

1910-1926: After taking over from the private Dutch East India Company in 1800, the Dutch government runs the Netherlands East Indies directly. Local rulers are replaced or integrated into the colonial bureaucracy. From 1908, students, Muslims, and others form organizations that begin to make up a nationalist movement. In response, the Dutch create the Volksraad in 1918, a powerless advisory council.

1927-1941: Internal splits and state suppression of Muslim and communist movements in 1926 and '27 allow control of the nationalist movement to shift to secular, Dutch-educated elites. Influenced by Western liberalism or Marxism, they found the Indonesian Nationalist Party under Sukarno's leadership, advocating an independent Indonesian nation. Many of the movement's leaders are soon imprisoned and exiled.

1942-1944: The Japanese invaders keep the Dutch administrative system, still ruling through local elites. First welcomed as liberators, the Japanese prove brutal and totalitarian. Under the Japanese, nationalists build networks in an increasingly politicized society. The Japanese allow political activity, the unifying Indonesian language, and even militias, especially late in the war, to block recolonization.

1945-1949: The Japanese surrender and Indonesia proclaims independence, sparking war with the Dutch. Most occupation-era institutions are replaced by a short 1945 constitution which provides for a strong presidency, although a parliament is soon added by decree. After four years of fighting and negotiations, international pressure forces the Dutch to recognize Indonesia.

1950-1958: A 1950 constitution replaces the federal state urged by the Dutch with a unitary republic. The constitution creates a tumultuous democracy, with a strong parliament, weak president, and checks and balances to prevent abuses. Weak institutions lead to confusion and regional rebellions, some CIA-supported. Inconclusive elections in 1955 don't improve stability, and Sukarno imposes martial law in 1957.

1959-1964: Sukarno replaces parliamentary democracy with a populist semi-dictatorship, reverting to the 1945 constitution. Under an increasingly authoritarian Guided Democracy, Sukarno wields ever more personal power while using patronage and charisma to juggle three power blocs: communists, the army, and Muslim groups. The army is granted representation in parliament, the Cabinet, and the bureaucracy.

1965: Sukarno's attempts to balance the army, Islam, and the communists end in a violent change of government. Responding to an alleged leftist coup, the unknown Gen. Suharto has the army and Muslims eliminate the world's third largest communist party, killing over half a million suspected communists and arresting a million more. Over several months Suharto maneuvers Sukarno out of power.

1966-1972: Suharto's bureaucratic authoritarian New Order represses dissent from students, journalists, workers, and politicians. The military assumes a social and political role as well as a military one, occupying key positions in the legislative and executive branches.

1973-1997: All remaining parties are consolidated into the Muslim PPP, the nationalist-Christian PDI, and the ruling Golkar. The two "opposition" parties are prevented from direct campaigning and are tightly controlled, allowing Golkar to win majorities in the elections held every five years and ensuring Suharto's selection unopposed.

1998: The Asian economic crisis sparks massive protests, at last forcing Suharto to step down. Vice president B.J. Habibie, a Suharto protege and longtime economic nationalist, assumes power and announces the first democratic elections since 1955.

1999-2000: The president is still selected indirectly by elected and appointed representatives, but elections are now free and fair. The nationalist Indonesian Democratic Party (PDI) beats out 45 parties, but can't form a coalition. Moderate Muslim leader Abdurrahman Wahid is sworn in for a five-year term. Wahid proves erratic and only partly succeeds in reducing the political role of the army.

2001-2003: After two years in office, Wahid is ousted by an extraordinary vote of the parliament. Vice President Megawati Soekarnoputri, Sukarno's daughter, is named president. East Timor becomes independent, ending a long conflict that tarnished Indonesia's image; the government signs a deal with rebels in Aceh and grants Irian Jaya autonomy, renaming it Papua. The Bali bombing damages confidence.

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Economic

1910-1928: The colonial state moves from direct participation to providing economic and administrative environment for private firms. Western firms control banks, shipping, mining, trade, and plantations. Ethnic Chinese dominate the domestic economy, with few opportunities for local merchants. Trade and plantations expand the money economy and wage labor, though a village subsistence economy persists.

1929-1941: The Depression causes a decline in plantation agriculture, especially the massive sugar industry. Foreign investment in large-scale industrial production, such as rubber, oil, and cement, continues to grow. Manufacturing increasingly moves from home to factory but remains a minor sector. The economy remains based on the export of primary goods and import of manufactures.

1942-1944: After the Indies government joins an international oil embargo against Japan, which imports 25 percent of its oil from the islands, the Japanese invade. Stressing the idea of a Greater East Asia Co-Prosperity Sphere, the Japanese exploit the outer islands for its resources and Java for its labor force. Many businesses fail because of disruptions from the Pacific war.

1945-1949: The 1945 constitution states that "Branches of production which affect the life of most people shall be controlled by the State." Lingering disruptions abroad from World War II and at home from the fight for independence hurt production of the exports the islands' economy depend on. The Dutch carry out several "police actions" against independence forces in an effort to retake key plantation areas.

1950-1956: Indonesia inherits an agricultural export economy based on Dutch investment. Linking capitalism with colonialism, nominally socialist parties move to dismantle the colonial economy slowly. With little private capital, state capitalism drives efforts to reduce foreign control. The state controls some banking, utilities, industry, and trading firms, but with the goal of boosting a private sector.

1957-1965: State capitalism accelerates as state-owned firms take over foreign plantations and private companies. By 1960 a Guided Economy seeks to industrialize through centralized planning and control, which Sukarno calls "socialism a la Indonesia." Failed policies and mismanagement causes inflation, a fall in per capita GDP, and an inability to import goods or service debts.

1966-1973: With Suharto in power, new policies reduce the state role by encouraging foreign investment and the private sector. But the regime maintains huge state firms, limits foreign ownership, and protects key industries. A National Development Planning Council that produces a series of Five-Year Plans is marked by a battle between Western-educated economists ("the Berkeley Mafia") and economic nationalists.

1974-1981: Oil price hikes fund a return to a state-led economy, including steel, oil-processing, and cement projects. The state oil firm grows into a huge conglomerate and source of funds for army and political factions before collapsing. Suharto cronies and connected ethnic Chinese build banking, trade, manufacturing, and timber empires. Riots spur foreign investment restrictions to boost local ownership.

1982-1989: Falling oil prices spur reforms urged by the World Bank and domestic businesses: boost exports, cut the budget, and replace state investment. Policy shifts from heavy industry to export goods; the mechanism is increasingly private investment. Banking and trade are deregulated, investment relaxed, and some state and private monopolies ended. State firms still account for 30 percent of GDP by 1990.

1990-1996: Liberalization is accompanied by a boom in foreign investment. Dismantling of the state sector continues, with shares sold in telecom, banking, and mining, and state monopolies opened. But in 1995, 180 state firms still account for 15 percent of GDP. The Five-Year Plans continue but emphasize private-sector development.

1997-1998: The financial crisis sweeps the region, causing the rupiah to crash. Investors panic, debts soar, and the banking sector collapses. The crash reveals weak banks, bankrupt conglomerates, and a corrupt judiciary. A massive bailout of the conglomerates leaves the state temporarily owning major parts of the economy. Despite IMF pressure to sell assets and privatize state firms, progress is slow.

1999-2000: IMF-influenced policies aim to encourage foreign investment and strengthen the banking and corporate sectors. But ongoing violence, corruption, the problem of reforming the political role of the military, and battles with Parliament distract Wahid from economic reforms. Indonesia is under pressure to privatize state firms and in particular its telecom sector.

2001-2003: The recovery is fragile. Megawati faces corruption and opposition to reform on one side and pressure from creditors on the other. Privatization gets a boost with the sale of a major bank, but investors are still slow to return. The global slowdown of 2001-02 and the 2002 Bali bomb fallout hold growth below 4 percent and force the government to spend on a stimulus package, widening the deficit.

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Social

1910-1919: Like other colonial governments, the Netherlands begins to follow more "ethical" policies. Spending on education and infrastructure increases in an effort to undermine the grievances that build support for nationalist movements.

1920-1928: By the 1920s the cash economy produces changes at the village level, causing a greater concentration of wealth, debt, and landlessness (as much as 65 percent in one survey of Java). Many peasants move back and forth between plantation labor and subsistence farming depending on seasons and sugar prices.

1929-1941: The drop in world demand for raw materials leads the colonial government to adopt a strict balanced-budget policy, aggravating economic and social conditions.

1942-1944: Confiscation of food by the Japanese army contributes to widespread shortages and starvation. Millions of romusha, or forced laborers, are conscripted, many of them sent to distant islands or elsewhere in Asia.

1945-1956: Recovery from the war is slowed by continued fighting. Even after independence, social conditions remain poor because of a ruined economy, rapid population growth, and food shortages.

1957-1965: Land-reform efforts are blocked by landowners and Sukarno's own bureaucrats, while failed economic policies help cause widespread poverty and a life expectancy under 50 years. Communist organizers use issues like land reform and rural poverty to build the world's third largest Communist Party.

1966-1972: The New Order ends talk of land reform and allows only one government-run labor union. At the same time, "Father of Development" Suharto points to falling poverty rates as a major achievement of his regime. Government health centers expand access to medical care, especially for women and children. The transmigration program grows, shifting poor and landless farmers to less crowded areas.

1973-1981: The Second Five-Year Development Plan aims to increase standards of living through better food, clothing, housing, infrastructure, social welfare benefits, and employment opportunities. The development budget boosts social expenditures such as education and health.

1982-1996: As one of the first steps of liberalization, food and fuel subsidies are cut. The official poverty rate falls from 60 percent to 15 percent in the 20 years up to 1996, though not all groups or regions benefit equally. In the '90s light manufacturing companies surge, as do many well-documented charges of forced overtime, unsafe conditions, and inadequate pay in export-oriented factories.

1997-2003: The economic crisis jeopardizes social gains, and the fragile recovery is undermined by uncertainty, investor jitters, and worsening conditions such as health and nutrition levels. Spending on social services widens the deficit. Regional conflicts abate thanks to settlements with separatists. But the Bali bombing highlights vulnerability to terrorism and potential Muslim fundamentalist pressures.

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Environmental

1910-1941: The colonial economy depends on large plantations of tree crops such as rubber and coffee, and other land-intensive agricultural products such as tobacco. Since 1870 state ownership of forest lands take precedence over any traditional practices, and large tracts of tropical forest are cleared for plantations.

1942-1944: The Japanese intensify extraction of natural resources to power the war effort.

1945-1965: The colonial principle of state ownership of forest is reaffirmed in the 1945 Indonesian constitution. Centralized control of resources was reinforced by the Basic Agrarian Law of 1960. Logging of the 150 million hectares of forest continues, but not yet at the high levels seen in subsequent years.

1966-1969: The 1967 Basic Forestry Law grants the state sweeping control over 143 million hectares of public forest land, despite the presence of communities that have used the forests for generations. The law sparks a logging boom, and by 1978 timber exports account for half the world total. Logging concessions go to army-owned businesses and cronies, who partner with foreign and ethnic Chinese capital.

1970-1981: The return of state-led industrialization spurs growth of high-polluting industries. The Green Revolution introduces seeds that respond well to fertilizers and pesticides, helping Indonesia go from world's largest rice importer to self-sufficient by 1985. But the costly chemical inputs also carried negative environmental and economic impacts, and benefits do not reach farmers in marginal areas.

1982-1989: Liberalization and the shift to export-oriented manufacturing produce growth of urban manufacturing and resulting environmental impacts. Increasingly well-organized nongovernmental organizations and a forward-thinking environmental minister become effective advocates for environmental management.

1990-1996: Timber-processing promotion, transmigration, and population pressures lead to an annual deforestation rate of 1 percent in the 1990s, much higher than the world average. Forest fires resulting from illegal and excessive logging blanket the region in haze.

1997-2003: The financial crisis, coupled with political change, produces a decline in government authority, allowing local governments, private firms, and illegal loggers and fishermen to exploit natural resources with little oversight. Conservationists sound an alarm over illegal logging at unprecedented levels and extreme damage to Indonesia's forests.

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Rule of Law

1910-1922: For many local elites wealth is increasingly obtained through a formal role in the colonial bureaucracy rather than through privileges granted by powerful patron. State monopolies and licenses are fairly transparent but discriminate against local businessmen in favor of European and Chinese firms.

1923-1941: A worsening economy and an increase in labor strikes leads the colonial government to change colonial laws and penal codes, severely restricting civil liberties such as freedom of assembly, speech and expression.

1942-1944: The Japanese mobilize the economy to meet their needs for raw materials, taking over plantations and factories and instituting massive forced labor projects with high fatalities.

1945-1949: The self-financed nature of the independence forces establishes a pattern that continues to the present day. Military commands at various levels generate revenue through enterprises or ties to businesses.

1950-1956: Setting a pattern that persists for decades, the 1950-55 Benteng Program allocates import licenses, bank credits, contracts, and concessions based on political ties, not transparent economic criteria. As many as 90 percent of import licenses are then resold to Chinese and foreign businessmen.

1957-1965: As parties weaken, the army and the president become the main source of patronage. The rise of state corporations reinforces a system that blurs the line between public office and personal gain. Military-run state trading companies control access to the market, creating wealth for army factions, families, and government offices. Inflation leads to smuggling and black-market operations.

1966-1973: Private conglomerates, mostly owned by Suharto's family and backers, are built through government-granted monopolies, contracts, and preferential access to credit, licenses, and raw materials. Monopolies such as the state oil company and the food logistics agency operate as giant army fiefdoms. Instead of reselling licenses and concessions, joint ventures become the new model of influence trading.

1974-1981: Policies to protect indigenous businesses from ethnic Chinese and foreign competition once again become instruments for the political connected to gain access to licenses and permits.

1982-1996: Reforms reduce the personal influence of officials of Pertamina, and the taxation and customs departments. But crony capitalism is still the norm, as Suharto friends and family expand their enormous empires.

1997-1998: The Asian crisis reveals the "corruption, cronyism, and nepotism," (KKN in the Indonesia acronym) riddling the economy.

1999-2000: Corruption obstructs recovery as the IMF and World Bank stop loans when a bank is found to have made payments to the former ruling party. Suharto's son is sentenced to prison but disappears; the judge in the case is later assassinated. Attempts to try Suharto himself are delayed by a lack of political will and his poor health. There is still little commitment to prosecute human rights violations.

2001-2003: President Wahid is ousted, ostensibly for corruption but primarily for political reasons. After Megawati takes over, a new human rights court is set up to try military abuses; its prospects for success are uncertain. Constitutional amendments make the presidency and vice presidency subject to direct popular vote. Corruption remains widespread, and various high-profile cases go unresolved.

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Trade Policy

1910-1928: The economy is based on exports of raw materials and agricultural goods, with nearly all manufactured goods imported. Trade is primarily through Dutch firms. Rice imports into the Dutch East Indies increase tenfold in value from 1880 to 1929 while the value of cotton goods triples from 1900 to 1925. Meanwhile, overall, export production rises about 5 percent per year from 1893 to 1928.

1929-1941: The Depression causes a slump in export prices, making imports of manufactured goods difficult. Competition from cheap Japanese products lead to a Crisis Act that imposes discriminatory tariffs that give Dutch goods an advantage. Some foreign firms invest in domestic manufacturing in an attempt at import substitution.

1942-1944: Raw materials, in particular oil, fuel the Japanese war machine, one of the chief justifications for the invasion.

1945-1949: Trade continues but is affected by the ruined world economy and by the fortunes of the struggle for independence, as plantation areas shift hands.

1950-1958: Import licenses for consumer goods and for raw materials needed in manufacturing are granted to those with political ties. Dutch companies still play an important role in the exports of plantation crops and mineral resources.

1959-1965: Plantation exports decline as a result of mismanagement of nationalized plantations, while anti-Western rhetoric is accompanied by closer trade links with China.

1966-1981: Indonesia reintegrates into the international economy after years of anti-imperialist rhetoric and economic decline. But the New Order still follows an import-substitution strategy to reduce imports and create jobs by boosting manufacturing and protecting key industries from competition. Many protective tariffs and foreign investment restrictions remain in place.

1982-1996: Falling oil income prompts a shift from import substitution to boosting exports through devaluation, incentives, foreign investment, and an end to monopolies that hurt producers. Manufactured exports grow from $1 billion in 1982 to $9 billion in '90. Protection of key industries remains, but by 1995 tariffs replace import quotas; those tariffs fall from 37 percent pre-1985 to 15 percent in 1995.

1997-1999: The crisis puts an end to a boom period in which exports increased 11 percent annually from 1993 to 1996. After the crisis, the unstable currency and disappearance of credit hampers Indonesian companies ability to trade, while the weak economy reduced consumer demand for the increasingly expensive imports.

2000-2003: Export growth returns to pre-crisis levels, partly because of rising oil prices. Even non-oil exports reach 92 percent of pre-1997 levels. Imports rise more slowly, at only 60 percent of what they had been before the crisis. But the 2002 Bali bombing decimates the tourist sector, a major foreign-currency earner, and sets back the fragile recovery. Oil-price hikes in early 2003 offer a respite.

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Money

1910-1941: The guilder of the Dutch East Indies is pegged one to one to the Dutch guilder, and the islands play an important role in Holland's balance of payments. As elsewhere in Asia, investment to expand and upgrade plantation production increases the public debt imposed on Asian economies by the colonial governments.

1942-1944: The occupation currency suffers from high inflation, opening the door to an active black market. Wartime inflation also serves to reduce both public and private debts.

1945-1949: During the war for independence, Dutch-controlled areas and Indonesian republican areas each issue currency: Oeang Netherlands Indies Civil Administration and Oeang Republik, respectively.

1950-1958: Indonesia inherits a debt of 4.3 billion guilders to Holland. The state takes over the 120-year-old Java Bank and establishes it as the Central Bank. Two other state banks are created to finance industry and importers as part of the strategy of using state capitalism rather than the private sector to end foreign domination of the economy.

1959-1965: Sukarno prints money as needed, despite falling exports and access to hard currency. Hyperinflation results, with figures passing 600 percent.

1966-1973: The "Berkeley Mafia" of economists controls inflation through tight fiscal and monetary policy. Rescheduled debts and new loans revive the flow of imports. Besides the Central Bank, specialized state banks channel funds into plantations, export/import, rural credit, industry, savings, and mining. Development banks funnel investment in each province to industries prioritized in the Five-Year Plan.

1974-1977: Inflation rises to 40 percent after a sudden surge of oil wealth following 1974 OPEC price hikes. It is brought down to below 10 percent by 1978, but the combination of inflation and a fixed exchange rate hurts exports in the meantime, as exported goods become more expensive to foreign buyers.

1978-1986: To make exports more competitive, the government devalues the rupiah 50 percent in 1978, and again in 1983 and 1986. Reforms in 1983 make monetary policy more market-oriented.

1987-1991: To avoid large devaluations the government adopts a "managed float" policy, allowing annual falls in the currency of under 5 percent. Stability encourages investment, but also spurs firms to borrow in foreign currencies. Loosening banking regulations leads to a surge in the money supply and inflation, forcing a tighter monetary policy.

1992-1996: Government debt slowly rises from 1992 to 1997, but the economy seems strong, and there is little domestic debt. In the same period, though, private debt increases from $28.2 billion to $78.1 billion, making the economy vulnerable to a fall in the exchange rate. Further banking deregulation leads in 1995 to about 200 private banks accounting for 48 percent of credit.

1997-1998: After the Thai crash, speculators and investors pull out of the region, and the rupiah falls from Rp2,500/US$ in July '97 to Rp17,000 in '98. More than 65 percent of loans are unrecoverable; many banks declare bankruptcy. Public debt soars due to bailouts and IMF loans, until payments equal 27 percent of the budget. Deregulation opens up banking, securities, and insurance to foreign investment.

1999-2003: In 1999, the Central Bank, Bank Indonesia, is granted full autonomy. Its main objective is to maintain the stability of the rupiah and keep inflation under control. A rupiah recovery in 2001-02 is halted by the October 2002 Bali bombing, which also pushes the stock market down to four-year lows. The event underscores the fragility and political vulnerability of the economy.

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Categories: Overview | Political | Economic | Social | Environmental | Rule of Law | Trade Policy | Money
Graphs: Growth | Income | Inflation | Well-being | Trade Volume | Trade (CAB) | Debt | Spending

Related: Video | LinksView all categories for years from to | See Full Report | Print