Indonesia In Transition

For the last decade, Indonesia has experienced major issues ranging from financial crisis economy, politics, natural disaster, and religious conflicts. Some of the examples are the 1997-1998 Asian financial crisis caused the Indonesia money, rupiah, depreciate value as much as 90%, and it also resulted food riots. Indonesia also sees the transitions from three presidencies: Soekarno Presidency for seven years, Suharto Presidency for 33 years, resignation of President Wahid after two years in office, and the first presidential elections by popular votes in 2004. This paper will discuss the economic issues, political changes, and achievements of Indonesia from 1965 to the current, and it also concentrates on the transitions amongst presidencies from Soekarno Presidency to the current Yudhoyno Presidency.

Indonesia was colonized by the Dutch in the early 17th century, but the Portuguese and British had been on Indonesia before them, but having little effect on Indonesia. From 1602 to 1799, the country was ruled by the Dutch East India Company. Despite rebellions, Indonesia remained a Dutch colony until 1942. The Japanese occupied the islands from 1942 to 1945 before the Dutch returned to claims their colony; however, fierce resistance ensued and at the end of 1949 the Dutch conceded sovereignty in all Indonesia except West Irian.

Indonesia is demographically the fifth largest nation in the world. Geographically, Indonesia is an archipelago of about 13,000 islands that extend over 3,000 miles. Because of the proximity of Malaysian and Singaporean ports and financial centers and the difficulty of patrolling so many islands, strict control of trade and financial flows is impossible. Geography has made Indonesia a truly open economy.

Indonesia under Soekarno Regime from 1959 to 1965

The Soekarno took control of Indonesia from the Dutch in 1958. Claiming a need for strong leadership, Soekarno imposed presidential rule in June 1959. A few years later he appointed himself president for life. From 1959 until 1966 many ministries were given supplementary budgets for their existences which were not publicly acknowledged. The President himself controlled the Revolution Fund, which was financed from undisclosed nontax sources. He also created the idea of "Guided Economy" and had little resistance because its priority was to nationalize the Dutch firms. However, the "Guided Economy" agenda was unspecified made criticism difficult.

The "Guided Economy" program meant expanding state control over the means of production, using quantitative restrictions, and multiple exchange rates to address balance of payments deficits, favoring autarkic policies to promote industrialization, and printing money to finance budget deficits enlarged by extravagant showcase projects and the military buildup. The budget deficits between 1958 and 1965 period averaged 5% of GDP, and the resulting money creation caused the inflation rate to stay at the triple−digit level from 1962 to 1966.

Indonesia also began cutting itself off from foreign resources, withdrawing from the United Nations, the World Bank, and the International Monetary Fund. Meanwhile, President Soekarno embraced isolationist (Berdikari) policies. As the public sector began to place more demands on domestic resources, economic management became more diffused, and the Supreme Council of Economic Operations (KOTOE) was established in late 1964 to coordinate decision making. But it did not last, and in September 1965 a Self−Reliance Council (KOTARI) was founded to implement the Berdikari policies.

Suharto Presidency from 1966 to 1999

1965 was the difficult year for Indonesia politics and economy. Debt service obligations were $530 million, but export earnings were only $527 million. Real GDP growth between 1959 and 1965 had averaged only 1.8 percent a year, while population had grown 2.5 percent a year. In September 1965, an overthrow of Soekarno Presidency was attempted by his rival, General Suharto. Because economic and political conditions continued to worsen, President Soekarno was compelled to hand over executive power to General Suharto in March 1966.

From 1966 to1998, Indonesia was economic and political under reconstruction by President Suharto who seized power from his predecessor through a mixture of force and political maneuvering against the backdrop of foreign and domestic unrest. President Suharto constructed what he called the "New Order Regime" that focused on a strong central government along with military lines. He also won economic and diplomatic support of several Western governments in the era of the Cold War because of his ability to maintain stability and anti-Communist stance.

For most of his three decade rule, President Suharto experienced significant economic growth and industrialization. Real gross domestic product (GDP) per capita grew at an annual average rate of 4.3 percent, causing income per capita to almost triple from 1965 to 1990. During 1960s, there was 70% of labor force employed in agriculture, forestry, hunting, an fishing, and a good deal of structural transformation had taken place since. By 1985, the number of labor population employed in those activities went down to 50% while the wholesale and retail trade sector employed 15% and the manufacturing (construction) sector increased to 13%. These industries went up about 5% from 1971.

Labor Workforce

The general educational level of the Indonesian labor force was low although the government made effort to strengthen schools and universities. The educational problem was due to legacy of the Dutch colonialism which did not provide education for non-Dutch residents of the colony. As a result, the percentage of adult literacy was 39% in 1960. Even though there was great emphasis on growth of schools and education system, the supply of well-trained teachers could not meet the rapid demands of education expansion. The education gap remains large even compared to Indonesia's neighbors such as Thailand and Philippines.

State Owned Enterprises

Dirigisme is an economic term signifying direction of the economy by the state through economic planning and other types of intervention and it is the opposite of laissez-faire. Dirigisme has been a strong force in Indonesia since independence, and state participation in business is enshrined in the Indonesian constitution. At the end of 1987 Indonesia's central government owned 214 enterprises, including 23 financial institutions. These enterprises spanned a wide range of activities: manufacturing, mining, logging, plantation