The Economic History of Indonesia

Dr.Sri Endang Kornita, SE.,M.Si

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 The precolonial economy

• There were several influential kingdoms in

the Indonesian archipelago during the pre-
colonial era (e.g. Srivijaya, Mataram,
Majapahit)
• The role of the Dutch in the Indonesian
archipelago, which began in 1596 when the
first expedition of Dutch sailing ships
arrived in Bantam.
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 The precolonial economy

• In the seventeenth and eighteenth centuries the

Dutch overseas trade in the Far East, which
focused on high-value goods, was in the hands of
the powerful Dutch East India Company (in full:
the United East Indies Trading Company, or
Vereenigde Oost-Indische Compagnie [VOC],
1602-1795).
 The Colonial economy
• Culturstelsel (1830-1870)
In the nineteenth century a process of more intensive
colonization started, predominantly in Java, where the
Cultivation System (1830-1870)

The Cultivation System, initiated by Johannes van den

Bosch, was a state-governed system for the production of
agricultural products such as sugar and coffee. In return
for a fixed compensation (planting wage), the Javanese
were forced to cultivate export crops. Supervisors, such as
civil servants and Javanese district heads, were paid
generous ‘cultivation percentages’ in order to stimulate
production.
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 The heyday of the colonial export economy
(1900-1942)

• After 1870, private enterprise was promoted but the exports

of raw materials gained decisive momentum after 1900.
Sugar, coffee, pepper and tobacco, the old export products,
were increasingly supplemented with highly profitable
exports of petroleum, rubber, copra, palm oil and fibers.
• The momentum of profitable exports led to a broad expansion
of economic activity in the Indonesian archipelago.
Integration with the world market also led to internal
economic integration when the road system, railroad system
(in Java and Sumatra) and port system were improved.

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 The post-1945 period

• After independence, the Indonesian economy had

to recover from the hardships of the Japanese
occupation and the war for independence (1945-
1949), on top of the slow recovery from the 1930s
Depression.
• During the period 1949-1965, there was little
economic growth, predominantly in the years from
1950 to 1957.
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 …Continued

• During the period 1949-1965, there was

little economic growth, predominantly in
the years from 1950 to 1957.
• In 1958-1965, growth rates dwindled,
largely due to political instability and
inappropriate economic policy measures.

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 …Continued

After 1966, the second president, general

Soeharto, restored the inflow of western
capital, brought back political stability with
a strong role for the army, and led Indonesia
into a period of economic expansion under
his authoritarian New Order (Orde Baru)
regime which lasted until 1997.

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 …Continued
• In this period industrial output quickly increased,
including steel, aluminum, and cement but also
products such as food, textiles and cigarettes.
• From the 1970s onward the increased oil price on
the world market provided Indonesia with a
massive income from oil and gas exports. Wood
exports shifted from logs to plywood, pulp, and
paper, at the price of large stretches of
environmentally valuable rainforest.
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Three distinguishes phases within this period:

• (a) 1966-1973: stabilization, rehabilitation, partial

liberalization and economic recovery;
• (b) 1974-1982: oil booms, rapid economic growth, and
increasing government intervention;
• (c) 1983-1996: post-oil boom, deregulation, renewed
liberalization (in reaction to falling oil-prices), and rapid
export-led growth. During this last phase, commentators
(including academic economists) were increasingly
concerned about the thriving corruption at all levels of the
government bureaucracy: KKN (korupsi, kolusi, nepotisme)
practices, as they later became known (Thee 2002: 203-215).
 The financial crisis

• The financial crisis in 1997 revealed a number of

hidden weaknesses in the economy such as a feeble
financial system (with a lack of transparency),
unprofitable investments in real estate, and
shortcomings in the legal system.
• The burgeoning corruption at all levels of the
government bureaucracy became widely known as
KKN (korupsi, kolusi, nepotisme).
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 …Continued
• The financial crisis of 1997 started with a crisis of
confidence following the depreciation of the Thai baht
in July 1997. Core factors causing the ensuing economic
crisis in Indonesia were the quasi-fixed exchange rate of
the rupiah, quickly rising short-term foreign debt and
the weak financial system.
• Its severity had to be attributed to political factors as
well: the monetary crisis (KRISMON) led to a total
crisis (KRISTAL) because of the failing policy response
of the government.
 From 1998 until present
The Indonesian economy still suffers from severe
economic development problems following the
financial crisis of 1997 and the subsequent political
reforms after Soeharto stepped down in 1998.
An important issue on the reform agenda is regional
autonomy, bringing a larger share of export profits to
the areas of production instead of to metropolitan
Java. However, decentralization policies do not
necessarily improve national coherence or increase
efficiency in governance.
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