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