How has Indonesia coped with the crisis, compared to the crash of 1998?

July 15, 2009

     By Duncan Green     

How has Indonesia, the country worst affected in the late 90s by the last major financial crisis in the developing world, been coping with the current one? Quite well, according to the IMF, which predicts the economy will grow at 2.5% in 2009 and 3.5% in 2010. That’s down from the 6% average in the preceding years, but a far cry from the devastating 13-16% contraction (depending on who you believe) in 1998. How has it managed this? UNDP’s International Policy Centre on Inclusive Growth has a ‘one pager’ that summarizes the response as:

· ‘Cartelist stances in the supply of commodity exports’, agreeing with other regional producers to cut output of  rubber and tin to push up prices.
· Increased use of subsidies as part of wider ‘import-substitution measures’, for example boosting cotton production to reduce dependence on imports to feed Indonesia’s textile factories. The government is also subsidizing the footwear and textiles industry directly, helping it shift production from exports to the domestic market
· ‘a Keynesian fiscal stimulus’ of about 1.4% of GDP, and interest rate cuts.

The one pager concludes ‘until now these heterodox measures have been anathema to the neoliberal consensus. We are witnessing the resurgence of the developmental state, given the crisis of legitimacy faced by that consensus.’

Well maybe. Previous crises have shown that intellectual justification for big policy shifts often lags behind the shifts themselves. After the Great Depression destroyed their export markets, governments were forced to pursue ‘import substitution’, but the intellectual case by Raul Prebisch and others only arrived some years later. Similarly, the Latin American debt crisis of the early 80s may have had Milton Friedman salivating in the wings, but most governments in the region were initially just trying to cut spending to avoid default. The full justification for structural adjustment only followed later in the decade.

According to one Oxfam staffer in Indonesia ‘it is too early to see a comeback of the Development State. The winner of this election (Susilo Bambang Yudhoyono, known as SBY) is supported by an awkward combination of political liberals, who have been arguing for a reduced government role in the economy, and free-market reformers, such as Boediono (the Governor of the Central Bank and vice-president elect) and Sri Mulyani, (Minister of Finance and acting coordinator of economic ministers).’ The free-market reformers have been in ministerial power centres ever since the late 90s. They are mostly economists who supported and implemented the IMF’s Structural Adjustment Programs in Indonesia as a response to the 1998 crisis. This group is not much concerned with civil rights.

So for the moment, any moves towards a developmental state in Indonesia look reluctant, driven more by necessity than conviction.

And the elections themselves provided a handy, but one-off stimulus. Another Oxfam colleague reports a conversation with an official who pointed out that in the general election in April, 44 political parties all bought t-shirts and flags from small businesses across the country and paid people up to $10 a day to join campaign events. By one estimate, $250bn is spent during an Indonesian election, adding another third to the fiscal stimulus.

July 15, 2009
Duncan Green