Indonesia Today: Challenges of History

14 REFLECTIONS ON THE NEW ORDER ‘MIRACLE’

Indonesia experienced rapid economic and social development under the New Order government of President Soeharto, and this contributed to rising standards of living for the Indonesian population. However, focus on the economic achievements at the expense of the negative aspects of the New Order gives a biased view of the era. Given the current tendency in Indonesia to look upon the New Order as an unmitigated disaster, this chapter attempts to record both its positive economic and social achievements as well as the negative aspects of economic development under the New Order. FROM CRISIS TO ‘MIRACLE’ TO CRISIS After recovering from the severe economic crisis and the wrenching political dislocations of the mid-1960s, the Indonesian economy embarked on a period of unprecedented growth from the late 1960s. This was, in general, sustained for the next three decades. Rapid economic growth during this period transformed Indonesia from the ‘prime economic underperformer’ in Southeast Asia in the early 1960s into a newly industrialising economy (NIE) by the early 1990s. It also transformed Indonesia from a largely agrarian economy into one in which the manufacturing sector contributed more to gross domestic product (GDP). As a result, Indonesia was classified in 1993 as a ‘high-performing Asian economy’ (HPAE) by the World Bank in its famous but controversial report on the East Asian ‘miracle’(World Bank 1993, p. xvi). The HPAEs were made up of Japan, South Korea, Taiwan, Hong Kong, Singapore, Malaysia, Thailand and Indonesia. While other developing countries also grew quickly, none were able to sustain high growth rates for as long as the HPAEs. The growth 14 REFLECTIONS ON THE NEW ORDER ‘MIRACLE’ Thee Kian Wie* 163 AA/Part3 23/3/01 6:26 PM Page 163 of the HPAEs was underpinned by high rates of capital investment, including investment in human capital (World Bank 1993, p. 8). Rapid economic growth in Indonesia during the New Order was accompanied by steady improvements in social welfare, as reflected in a decline in the incidence of absolute poverty and considerable improvements in primary health care and education. Moreover, unlike in many other developing countries , Indonesia’s rapid economic growth was not accompanied by worsening income distribution. However, by July 1997, only two months after the release of a cautiously upbeat World Bank report on Indonesia’s medium-term prospects (World Bank 1997a), perceptions about the Indonesian economy suddenly changed for the worse. The Indonesian rupiah began to depreciate, first gradually and then rapidly, as foreign creditors and investors scrambled to reduce their exposure. The Indonesian government turned to the International Monetary Fund (IMF) for financial assistance to counteract the currency crisis. The government hoped that the availability of a large IMF standby loan backed by a credible domestic economic reform program sanctioned by the IMF would restore confidence in the rupiah (Sadli 1999, p. 17). Thus, as at the beginning of its reign in 1966, the Soeharto government again came under the tutelage of the IMF. But whereas in 1966 IMF assistance was aimed at combating hyperinflation (Booth 1998b, p. 178), in 1997 it was to stem erosion of market confidence in the rupiah. The IMF’s involvement failed to restore market confidence because of political uncertainty about President Soeharto’s health and because of his reluctance to implement the economic reform program faithfully. As the rupiah continued to depreciate – by 80% in January 1998 alone – inflation rose to more than 50% and the economy contracted sharply. Absolute poverty, which had declined steadily during the New Order era, began to rise. Indonesia was also hit by a severe El Niño drought, which damaged the rice harvest, and by falling oil prices, which reduced government revenues. Within less than 12 months, Indonesia was transformed from a ‘miracle’ economy, extolled by the international aid community and many foreign economists as a development model worthy of emulation by other developing countries, into a ‘melt-down’ economy dependent on the charity of the international aid community and donor countries for its very survival. The deepening and protracted economic crisis caused the economy to contract by almost 14% in 1998 – far worse than the 3% economic contraction in the mid1960s (World Bank 1998, p. 2.1). The economic distress caused by the 1997–98 economic crisis led to serious political and social unrest, forcing the resignation of President Soeharto after a reign of 32 years. Thus Soeharto’s New Order regime, which emerged in the mid-1960s during an economic and 164 THEE KIAN WIE AA...