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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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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