| Indonesia has a market-based economy in | | | | involving family members of President |
| which the government plays a significant | | | | Suharto. The rupiah failed to stabilize |
| role. It owns more than 164 state-owned | | | | for any significant period of time, |
| enterprises and administers prices on | | | | however, and President Suharto was |
| several basic goods, including fuel, | | | | forced to resign in May 1998. In August |
| rice, and electricity. In the aftermath | | | | 1998, Indonesia and the IMF agreed on an |
| of the financial and economic crisis | | | | Extended Fund Facility (EFF) under |
| that began in mid-1997, the government | | | | President B.J Habibie that included |
| took custody of a significant portion of | | | | significant structural reform targets. |
| private sector assets through | | | | President Abdurrahman Wahid took office |
| acquisition of nonperforming bank loans | | | | in October 1999, and Indonesia and the |
| and corporate assets through the debt | | | | IMF signed another EFF in January 2000. |
| restructuring process. | | | | The new program also has a range of |
| Current GDP per capita grew an | | | | economic, structural reform, and |
| astonishing 545% in the Seventies | | | | governance targets. |
| fuelled by oil demand. But this proved | | | | The effects of the financial and |
| unsustainable and growth fell sharply to | | | | economic crisis were severe. In 1998, |
| a manageable 20% in the Eighties and 13% | | | | real GDP contracted by an estimated |
| in the Nineties. | | | | 13.7%. The economy bottomed out in |
| During the 30 years of president | | | | mid-1999, and real GDP growth for the |
| Suharto's "New Order" government, | | | | year was an anemic 0.3%. Inflation |
| Indonesia's economy grew from a per | | | | reached 77%in 1998 but slowed to 2% in |
| capita GDP of $70 to more than $1,000 by | | | | 1999. The rupiah, which had been in the |
| 1996. Through prudent monetary and | | | | Rp 2,400/USD1 range in 1997 reached Rp |
| fiscal policies, inflation was held in | | | | 17,000/USD1 at the height of the 1998 |
| the 5%-10% range, the rupiah was stable | | | | violence, returned to the Rp 6,500-8,000 |
| and predictable, and the government | | | | USD1 range in late 1998. It has traded |
| avoided domestic financing of budget | | | | in the Rp 6,500-9,000/USD1 range since, |
| deficits. Much of the development budget | | | | with significant volatility. Although a |
| was financed by concessional foreign | | | | severe drought in 1997-1998 forced |
| aid. | | | | Indonesia to import record amounts of |
| In the mid-1980s, the government began | | | | rice, overall imports dropped |
| eliminating regulatory obstacles to | | | | precipitously in the early stage of the |
| economic activity. The steps were aimed | | | | crisis in response to the unfavorable |
| primarily at the external and financial | | | | exchange rate, reduced domestic demand, |
| sectors and were designed to stimulate | | | | and absence of new investment. Although |
| employment and growth in the non-oil | | | | reliable unemployment data are not |
| export sector. Annual real GDP growth | | | | available, formal sector employment |
| averaged nearly 7% from 1987-1997, and | | | | contracted significantly. |
| most analysts recognized Indonesia as a | | | | In late 2005 Indonesia faced a |
| newly industrializing economy and | | | | 'mini-crisis' due to rising oil prices |
| emerging major market. | | | | and imports. The currency reached Rp |
| High levels of economic growth from | | | | 12,000/USD1 before stabilizing. The |
| 1987-1997 masked a number of structural | | | | government was forced to cut its massive |
| weaknesses in Indonesia's economy. The | | | | fuel subsidies, which were to cost $14 |
| legal system was very weak, and there | | | | billion for 2005, in October. This led |
| was and is no effective way to enforce | | | | to a more than doubling in the price of |
| contracts, collect debts, or sue for | | | | consumer fuels, resulting in |
| bankruptcy. Banking practices were very | | | | double-digit inflation. The situation |
| unsophisticated, with collateral-based | | | | has stabilized, but the economy |
| lending the norm and widespread | | | | continues to struggle with inflation at |
| violation of prudential regulations, | | | | 17% in January 2006. |
| including limits on connected lending. | | | | As of early 2006, Indonesia's economic |
| Non-tariff barriers, rent-seeking by | | | | outlook is more positive. Economic |
| state-owned enterprises, domestic | | | | growth accelerated to 5.1% in 2004 and |
| subsidies, barriers to domestic trade, | | | | reached 5.6% in 2005. Real per capita |
| and export restrictions all created | | | | income has reached pre-crisis levels. |
| economic distortions. | | | | Growth is driven primarily by domestic |
| The regional financial problems that | | | | consumption, which accounts for roughly |
| swept into Indonesia in late 1997 | | | | three-fourths of Indonesia's gross |
| quickly became an economic and political | | | | domestic product. The Jakarta Stock |
| crisis. Indonesia's initial response was | | | | Exchange was the best performing market |
| to float the rupiah, raise key domestic | | | | in Asia in 2004, up some 42%. Problems |
| interest rates, and tighten fiscal | | | | that continue to put a drag on growth |
| policy. In October 1997, Indonesia and | | | | include low foreign investment levels, |
| the International Monetary Fund (IMF) | | | | bureaucratic red tape, and widespread |
| reached agreement on an economic reform | | | | corruption. However, there is very |
| program aimed at macroeconomic | | | | strong optimism with the conclusion of |
| stabilization and elimination of some of | | | | peaceful elections during the year 2004 |
| the country's most damaging economic | | | | and the election of the reformist |
| policies, such as the National Car | | | | president Susilo Bambang Yudhoyono. |
| Program and the clove monopoly, both | | | | |