Economic and Social Change in Indonesia Essay Example

Indonesia both over the long term and during the economic decline of the late 1990s. (Corsetti 1998) The Indonesian economy Indonesia, the fourth most populated nation in the world, is an archipelago whose 13,000 islands are home to many different ethnic groups. The country varies a great deal in its urban and rural settlements. For example, population densities range from five people per square kilometer in the province of Irian Jaya to more than 700 people per square kilometer in Yogyakarta. The capital city, Jakarta, has been becoming increasingly important over time as the economic and political center of the country. Jakarta has been a major destination for permanent and circulatory migrants in the last three decades accounting for a quarter of interprovincial immigrants even though it represents less than 5% of the total population.

(Smith 2002) While not on the same scale as Jakarta, urban centers on other islands also grew in terms of their economic activity and the size of their populations. Still, in spite of the growth of a number of urban centers, Indonesia remains a largely agricultural country. In 1986, a fifth of Indonesians worked in urban areas; this fraction had risen to a third by 1997. (Korns 1987) Thirty years ago, Indonesia was one of the poorest countries in the world. Until the recent financial crisis, it enjoyed high economic growth rates and was on the verge of joining the middle-income countries. Prior to the crisis, in terms of size, its economy was comparable to that of Malaysia, the Philippines and Thailand combined.

On average, GNP per capita in Indonesia grew by 4. 5% per annum from the mid-sixties until 1998. (Mann

1998) However, economic growth was far from uniform across the country with economic growth having if anything increased over time. With the growth of industry and the service sector, the relative importance of agriculture gradually declined (from 55% of total employment in 1986 to 41% by 1997).

Over the same years, industrial employment more than doubled from 8% to 19% of the labor force. Not surprisingly, employment in the formal wage sector was expanding, rising from a quarter to a third of all jobs during the same years. (Korns 1987) This expansion of the formal wage sector, even though, it is important to emphasize that at the start of the economic crisis, most Indonesian workers were either self-employed or receiving unpaid work from family. Not only has the economy grown rapidly over the last quarter-century but there has also been a dramatic demographic and social change.

Fertility rates have declined substantially and there have been massive investments in human capital. This can be seen in secondary school enrollment rates which have risen from a mere 6% in 1960 to more than 50% today; primary school enrollment is essentially universal. (Poppele 1999) The investments are also reflected in the health of the population: at birth, the average Indonesian today expects to live to the age of 61 which is 50% longer than he or she expected 30 years ago. Thus, the labor force has not only grown dramatically in size but also in quality.

The consequences of these improvements are reflected in significant rising real wage levels over the last three decades. Smith 2002) Pride in its past economic achievements and optimism about its future were suddenly challenged by

the economic crisis which was accompanied by dramatic shifts in the economic and political landscape of the country. As indicated in Figure 1, the rupiah came under pressure in the last half of 1997 when the exchange rate began showing signs of weakness. After falling by half from around 2,400 per US$ to about 4,800 per US$ by December 1997, the rupiah collapsed in January 1998 when, over the course of just a few days, the exchange rate fell by 400% to Rp16,000 per US$. Although it soon recovered, by the middle of 1998, the rupiah had slumped back to the lows of January 1998. (Smith 2002) Since then, the rupiah has continued to oscillate, although at a lower rate and frequency.

The extremely unstable exchange rate has contributed to considerable uncertainty in financial markets. This is reflected in interest rates which quadrupled in August 1997 and were subsequently very unpredictable. (Poppele 1999) The banking sector fell into disarray and several major banks have been taken over by the Indonesian Bank Restructuring Agency. Turmoil in the financial sector has created havoc with both the confidence of investors and with the availability of credit. (Fallon 1999) Prices of many commodities spiraled upwards during the first three quarters of 1998.

Annual inflation is estimated by the Badan Pusat Statistik (BPS), the central statistical bureau, to be about 80% for 1998. In part, this reflects the fact that subsidies were removed on several goods, most notably rice, oil, and some fuels. Korns 1987) Part of the inflation can be attributed to the fact that rice accounts for a substantial fraction of the average Indonesian’s budget and its price more than

doubled. Since the share spent on rice is greatest for the poorest, inflation likely had a bigger impact on the purchasing power of the poorest.

Off-setting that effect, however, is the fact that some of the poorest are rice producers and as the price of food increased, so (net) food producers have benefited from the improvement in their terms of trade. More generally, there is abundant evidence that price increases have not been uniform, either for goods or for space. Inflation estimates produced by BPS are based on prices collected in urban areas; there are reasons to expect prices in rural areas have not moved in simultaneously with urban prices. Given the magnitudes of the swings in relative prices, it is likely that households will have responded to the price changes by staying clear from goods that have become relatively expensive towards goods whose prices have increased less. (Korns 1987) Indonesia has also undergone a dramatic transformation in the political sector. After thirty years of power, Suharto resigned from the Presidency in May 1998 in the midst of violent demonstrations throughout the country.

(Cameron 1999) Multi-party elections in 1999, diminished the influence of the military in political affairs and the granting of independence to East Timor may herald the birth of democracy in Indonesia although several other parts of the country are lobbying for independence and political, ethnic and religious as the tensions continue to rock the nation. (Kaur 2004) By any scale, the crisis in Indonesia had been extremely severe, far more severe than in any of its Southeast Asian neighbors. For example, a year after the crisis began, the Thai baht and Philippine peso stood

at about half their pre-crisis values, the Indonesian rupiah had fallen to about one-quarter its 1997 value. A collapse of this magnitude is not unique. Relative to the Thai and Philippines crises, the crisis in Indonesia was different in one key dimension: its timing was largely unanticipated.

For example, in January 1998, the Government of Indonesia predicted that for 1998 economic growth would be zero and inflation would be 20%. In July 1998, the World Bank admitted, "Few predicted the Indonesian crisis, and certainly none its severity...Indeed, Indonesia seemed better positioned than many other Southeast Asian countries on economic indicators such as growth, fiscal stance, the external current account, foreign exchange reserves, and inflation.

"Few Indonesians have been untouched by the crisis. For some, the impacts have been devastating, but for others, the crisis has likely brought new opportunities. Exporters, export producers, and food producers may have fared far better than those engaged in the production of services and those on fixed incomes. Moreover, some individuals may have more quickly embraced new opportunities or more efficiently offset the effects of the economic shocks that they have faced. (Cameron 1999) Given the complexity and multi-faceted nature of the crisis, it is only with sound micro-level empirical evidence that it becomes possible to fully explore the nature and extent of behavioral responses by individuals and families to the crisis and, therefore, characterize with much confidence what the combined impacts of the various facets of the crisis have been and how they have varied across socioeconomic and geographic levels. Corsetti 1998) Conclusion After over a quarter-century of sustained economic growth, Indonesia was struck by a large and unanticipated crisis at

the end of the 20th Century.

Real GDP declined by about 12% in 1998. (Corsetti 1998) It has been argued that the large and abrupt economic decline in Indonesia has resulted in unemployment on a massive scale. The evidence simply does not support this contention and estimates of unemployment appear to have been grossly exaggerated. In fact, labor markets in Indonesia appear to be remarkably flexible. (Feridhanusetyawan 1999)Indonesia is passing through a time of rapid and potentially dangerous transition. From a historical point of view, this period will be as significant as the country's struggle for independence in the late 1940s and the violent upheavals of the mid-1960s which brought President Soeharto's regime to power.

The depths of the economic crisis into which Indonesia fell in 1998 was largely due to the fact that political organizations in the country were already coming under pressure and were unable to cope with the sudden surge of unanticipated economic difficulties. Fallon 1999) Other countries in the region which faced similar problems were able to deal with them, though with great stress, without the arrival of the fundamental crisis of the state which Indonesia encountered. In the second year of economic downturn and the first year of political reform, Indonesia appears to have made progress towards recovery and reconstruction but is facing many more complex and hazardous hurdles. There are signs that the economic recession may have bottomed out, with the apparent stabilization of the currency and an end to falling rates of GDP. Papanek 1999) The social effects of the crisis, particularly in terms of absolute poverty, do not appear to have been as uniformly bad as early fears suggested,

but are concentrated in particular areas of the diverse Indonesian archipelago.

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