Indonesia - Overview of economy

Indonesia is made up of the islands of the former Dutch East Indies, a colony established by the Netherlands to control the important spice trade and take advantage of the fertile tropical soil. Indonesia's first 15 years after gaining independence in 1949 were marked by high inflation and very little development beyond the economy inherited from the colonial system, which was heavily dependent on agriculture. The economy grew quickly after that, however, fueled first by oil and gas exports and then by the export of manufactured goods, such as shoes, clothing, and textiles. Agriculture remains important, including both small farmers producing crops for internal consumption and export, and large plantations producing products such as palm oil and rubber.

Indonesia has gone through 6 5-Year Development Plans, known by the Indonesian acronym Repelita. The first 5-Year Development Plan (Repelita I) started in 1969 and emphasized rebuilding the economy by improving agriculture, irrigation, and transportation. Repelita II, starting in fiscal year 1973-74, tried to increase the standard of living through better food, clothing, and housing, infrastructure , social-welfare benefits, and employment opportunities. Repelita III, beginning in fiscal year 1978-79, introduced the "trilogy of development" of high economic growth, national stability, and equitable distribution. Self-sufficiency in food and the promotion of industries processing basic materials into finished goods were also objectives. Starting in fiscal year 1984-85 Repelita IV continued to emphasize self-sufficiency in rice and industrial machinery. Repelita V, from fiscal year 1989-90, stressed rapid development with emphasis on the industrial and agricultural sectors. The sixth 5-Year Development Plan (Repelita VI) began to encourage foreign investment and abandoned policies of high tariff barriers, heavy regulation, and import substitution (manufacturing consumer goods domestically to reduce imports). The greatest success in attracting investment has been in textiles, tourism, shoes, food processing, and timber products.

Indonesia was hit hard by the Asian financial crisis that swept the region in 1997. Following problems with the currency in Thailand, the rupiah fell, causing investors to panic, debts to soar, and the banking sector to collapse. After growing throughout the 1990s, real gross domestic product (GDP) fell by 13 percent in 1998. The GDP was stagnant the next year, and increased slightly in 2000, but investment remained low, and many of the underlying problems still have not been dealt with: banks are weak, large companies are technically bankrupt, the government controls many assets acquired after bailouts, and reform of the corrupt judicial system has been delayed. While other countries in the region, such as Thailand and South Korea, began to rebound, Indonesia's failure to deal decisively with deep-seated problems and continued political uncertainty slowed recovery.

Before the crisis, Indonesia borrowed about US$5 billion annually from foreign countries and international financial institutions such as the World Bank and the International Monetary Fund (IMF) to finance its budget. The government debt slowly increased from US$55.5 billion in 1992 to US$59.9 billion in 1997, but the economy seemed strong and there was little domestic debt. However, in the same period, debt resulting from borrowing by private companies increased from US$28.2 billion to US$78.1 billion, making the economy vulnerable to a fall in the exchange rate . After the crisis, government debt soared as the government bailed out bankrupt companies and banks, and borrowed heavily from the IMF. The total cost of the bailout quickly reached US$69.6 billion. Due to the crisis, Indonesia borrowed US$43 billion from an IMF program and other outside financing from 1997 to 2000. Government debt is estimated by the World Bank to be equal to 80 percent of the GDP, and debt repayments eat up 27 percent of government allocations, more than the entire development budget.

Surveys of business travelers in Asia regularly rank Indonesia as one of the most corrupt places to do business. Corruption has interfered with recovery as well, as the IMF and the World Bank stopped payments in 1999 after a private bank was discovered to have funneled payments from the government to the former ruling political party. In September 2000, the Supreme Court convicted the son of former president Suharto for corruption in a real estate deal, but he vanished before he could be jailed. It is believed that Indonesia is becoming increasingly involved in the shipment of heroin from the Golden Triangle in mainland Southeast Asia.