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Indonesian Decentralization

In: Other Topics

Submitted By VineetAbraham
Words 2448
Pages 10
Executive Summary
This paper analyses the factors which led to the economic crisis which faced Indonesia in 1997, which in turn led to Indonesia making major reforms in government as well as in every other sector. It also looks at the major factors that also have to be improved even though major reforms have swept the nation. The policy of decentralisation, although done for the better, has its drawbacks which can hurt Indonesia in the long run.


- Executive Summary 2
-Acknowledgements 3
-Introduction To The Topic 3
-Background Literature Survey 4
-Observations 8
-Conclusions and Recommendations For Future Studies 9
-Appendix/Bibliography/References 10

I would like to thank Prof. Perrie, for initiating this project and letting us choose suitable topics to analyse.

Introduction to topic
Indonesia is a country with around 240 million people. From being one of the worst hit countries of the Asian financial crisis of 1997-1998 it has become one of the largest countries in the South East Asia in terms of Economy. With a population so big and also a diverse ethnic culture to keep in mind the reforms which were propagated after the financial crisis has been largely the decentralisation of the Government.

Background Literature Survey
Indonesia has seen many difficulties through its history. In today’s world its problem is how it adapts to the changing economic scene and also become a country which is seen as competitive in an already competitive Asian continent. The country is seen as one of the giants of Asia, even though political and economic factors have stabilised quite recently (Indonesia had its first direct presidential Elections in September 2004).
The Asian Financial Crisis which hit in 1997, though was a turning point for this country. It came as a surprise to most people and even the Government was not able to handle it adequately. This has quite a lot to do with complacency. For a period spanning 3 decades with military style rule over the island, General Soekarno made US an ally and attracted foreign aid and investment. Indonesia is also blessed with the natural resources like oil which also helped it a great deal to stabilise its economy during the 1960’s to the 1990’s. Although, the governance of Soekarno brought widespread economic reforms and also boosted the manufacturing sector the long rule of Soekarno also hid the fact that there were quite a lot of structural problems in the way that the country was built. There was widespread corruption the remains of which remain to this day, which resulted in the weakening of major institutions. The largely weak institutions and the general bad state of affairs were actually hidden by the fact that they were enjoying economic growth which was seen as how the economy will progress for a long time. Thus when the Asian financial crisis hit the other Asian countries, the government still believed that the crisis would tide over without it being too much of a problem for them. This turned out to be majorly false, as when Indonesia had their turn at the financial crisis they were some of the worst hit in terms of the other countries. The local currency, rupiah, lost 40% of its revenue in August 1997, and by January the next year, it had lost 80% of the total value. In a single blow, all the economic reforms which were brought to the country as well as its industries were brought to its knees. Especially industries which were dependent on the import of materials, they had no choice but to shut down. The severity of the situation not being understood by the politicians was also one of the factors why there was no way to counter any of the terrible things that happened. The recession caught the government at its worst, and also brought all the years of corruption and bureaucratic weaknesses out in a dramatic fashion.
The implications of this are not just economic. When something this sever happens to the economy, the unemployment rate shoots up and also results in large, widespread unrest and eventually violence. Such was the case with Indonesia also. The large unrest and violence was unprecedented and even this was could not be controlled by the government by any measure. This in turn caused even more dissatisfaction towards the government by the people and a large movement which concentrated on anti government feelings, was started.
With a change in government after the Asian financial crisis, there also needed to be a change in policy. To do this, the major faults of the last government needed to be recognized and improved upon. It was seen that one of the biggest problems with the last government was that, they were completely preoccupied in administering the country internally, to spend time on the macro environment of economy and how that will affect the country. This was also one of the reasons why even after the Crisis hit, there was not much answer to it, as no one had predicted or prepared for a crisis of this scale. The power when centrally located towards the government also means that the local and regional powers did not have much in terms of real powers when it came to the administration of their own regions. Thus, when the crisis hit, even they could not do anything to even help at a local level, due to the structure of power that was built.
This meant that the centralisation of the power of the government needed to be brought down, and the region needed to govern itself in terms of administration as well as reforms at a local level, bringing the role of the government to a general direction and not everyday decisions. On the other hand, decentralization would be a tough decision to enact due to the collective effort needed to be able to work properly. Thus, when the new government came into power this policy needed to be introduced in a major way to the country. The various political parties were being reached out to introduce this concept of decentralisation and after that the country implemented it. This gave the local and regional authorities more autonomy in terms of governance of local life. They had full autonomy as long as it did not violate the national law, and it did not disturb the peace of the area. The decentralisation also meant that local authorities could look better into local problems and solve it with more insight and thus benefitting the people more.
The government could also now, be free to focus on the fact that Indonesia needed to look global and introduce major reforms if it was to recover from the crisis. The government took major economic decision and with the assistance of the IMF in terms of finance as well as advisory support it began to lay the foundation of the base for long term sustained growth. This has been largely successful as in the following years we have seen an exponential rise in the GDP growth rate of 6.3% in 2007. This is a rate which rivals some of the biggest economic and developing countries of the world. Optimism about Indonesia’s economic performance is also justified by its very strong progress in reducing government debt. Having blown out alarmingly during the Asian financial crisis, government debt as a proportion of GDP has been pulled back to a manageable level, thanks to sustained cautious macroeconomic management by successive governments. Inflation has generally been kept at reasonable levels, though very recently, it has begun to kick up sharply under mounting pressure from rapidly rising global food and oil prices. Particularly encouraging is the fact that Indonesia seems to have turned a corner in investor confidence. Investment—critical to sustained economic growth—was very slow to recover in Indonesia. Notwithstanding the return to political stability and economic reconstruction, investors inside and outside Indonesia remained wary of sinking new capital into the country. To overturn this, government itself has taken measure like, it has increasingly funded machinery and equipment, rather than just construction.
Through all this though, there has been a surprisingly large body of discontent in the country. The surging GDP growth rate and the country’s enormous wealth is seen to come at an economic level but not boiling down to actual standard of living made better or jobs for people. The poverty level and unemployment levels seemed to have not changed much with the huge change in the economy. A February 2008 LSI public opinion survey showed that most felt that their economic position was worsening. The picture is even more worrying because standard poverty indices don’t capture the full breadth and depth of the problem. Around 17% of Indonesians live below the country’s official poverty line (about US$1.55 a day), but very many more live only just above it. Data for 2006 showed 49% of Indonesians living below US$2 a day. The distribution of poverty and access to key welfare services isn’t simply divided along urban–rural lines; conditions are typically much worse in outlying areas, particularly eastern Indonesia. However, there’s no easy way to focus reformative efforts on eastern Indonesia—even though relative incidence of poverty is lower on the central islands of Java and Bali, in absolute terms that’s where nearly 60% of Indonesia’s poor live. Further compounding the problem is the current sharp rise in global food prices, which will disproportionately hurt the poor. In short, poverty is a very major problem for Indonesia, and a larger problem than the country’s overall economic circumstances lead one to expect. And the politics of poverty’s geographical distribution is vexed. Under the current government, Indonesia has been making efforts to address the problem but, although there has been some improvement over the past 1–2 years, overall poverty today stubbornly remains about where it was when the current government took office.
Another one of Indonesia’s major problems come from the fact that it lacks structurally in infrastructure. The government has been trying to prioritise infrastructure but there has been criticism that the government focuses on inter connectivity within the city like building better roads, rather than connectivity among the islands. Also, Investment in a wide array of infrastructure and services—transportation, communications, energy, education, public health and safety, water and sanitation, among others—has been severely inadequate at least since the time of the financial crisis. To its credit, the government has recently increased infrastructure spending, but the bottlenecks are on such a scale that they require urgent, sustained action.
The other aspect to this is also the fact that this infrastructure is hurting Indonesia in the way that, they are reducing the effects of the economic reforms that have hit Indonesia. It’s widely believed the economy must grow by at least 7% per year or job creation will have difficulty keeping pace even with Indonesia’s relatively low rate of population increase. Prolonged shortfalls of this sort invite deeper dangers of social instability. This kind of a growth rate is not feasible and the efficiency of the country is brought up will be beneficial in helping the reforms reach the ones who need it most.
To date, Indonesia, like other developing East Asian economies, has been largely insulated from the financial instability that’s rocked the US and Europe. However, the problems emanating from the US sub-prime lending market have evolved into credit crunches and economic slowdowns, and Indonesia is likely to suffer as key markets for its exports slow down. Just as Indonesia’s economic revival has been aided by the longest burst of sustained high growth in the global economy since the early 1970s, sooner or later it will be constrained by deteriorating global economic circumstances, especially in the advanced economies. This means that Indonesia cannot solely rely on the foreign investment to be high. It needs to invest in its own industries and be able to insulate from further financial crisis.

The question of reforms in Indonesia has not been debated much. As the actions after the crisis have shown that the growth rate and economy are in a good shape after the reforms have been introduced, there hasn’t been much debate as to how effective in terms of actual value to the country, rather than it being a period of increased economic prosperity. In the various articles and paper’s that were analysed, these fears were brought up in some way by talking about the real effect of the economic reforms that were happening and not just talking about it in an economic sense. Poverty, was used as a yardstick to measure how the country has done, and as it is seen, it has come up short. The surging GDP was not seen as helping the poor people, instead there was no effect that the country was going forward so much economically. This is a worrying problem for Indonesia as a long term growth is the only one that is viable and a growth which even in its nascent years is not able to include the poor people will be sure not to sustain.
Indonesia also needs not to fall into the trap of complacency again. It needs to make sure that rather than focusing on the numbers which come out every year, they measure the administration, infrastructure, corruption also. Economic reforms is just half the battle won, for it to translate to a better economy means that institutions need to be strengthened to decrease inefficiency.
Corruption is also one of the major problems that is seen by people analysing Indonesia. Historically it is a very corrupt nation, from its first President Suharto, to now. Although the level of corruption is much lesser now because of the fact that more power is given to the local and regional authorities and so more control dispersed means less chances of corruption.

The majority of studies that were found looked at the economic side of Indonesia presently only through one dimension, growth rate= good economy. Although this may be true in some cases, the recent global recession has shown us that unless the country is sustained in a large way in itself, it cannot be safe from a recession. Indonesia has been calling for major global investment in its country and has been doing a lot to boot investor confidence among the world to attract a lot of foreign investment. For a large part it has been successful, but this also means that it will be subject to the changes in the global economic scenario to a larger degree.
Further studies should focus on the institutions and how equipped they are to any situation that may arise.

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