Reflections on the Dynamics of the Indonesian Economy

Three very interesting books about the Indonesian economy were published last year, which provide important contributions to the growing literature on the subject. They have both differences and similarities. In terms of differences, each has a slightly different focus. The first book by Jan Luiten van Zanden and Daan Marks presents a historical perspective on the Indonesian economy since the nineteenth century, while the second book by Akhand Aktar Hossain examines a relatively newer period with a special emphasis on the design and conduct of monetary policy. The last book edited by Hal Hill, Muhammad Ehsan Khan, and Juzhong Zhuang (eds) discusses broad issues towards a more inclusive and green development policy in Indonesia.

Despite their different focuses, these three books share some areas of convergence. The books select Indonesia as a case study of how a small open economy managed its macroeconomic policy in response to many external shocks. In particular, Indonesia has been perceived to have made remarkable strides in terms of macroeconomic and political stability after being hard hit by the 1997– 98 currency-financial crisis. After undergoing a decade of relatively successful political and institutional reforms, Indonesia has become a highly competitive democratic country, suggested by the lack of effect from the global economic downturn of 2008–09; its growth has also moved back to pre-crisis level. Today, Indonesia’s GDP growth remains robust supported by the increase in private sector investment, strong domestic consumption, and generally positive external balances. In addition, poverty and unemployment rates have continued to fall and households’ spending power has remained strong, supported by the historically low inflation rate. For policy implications, all three books point out the need to strengthen the country’s institutional capacity, improve governance, keep up outward-oriented development strategies, and maintain its relatively young democracy.

In addition to indicating positive developments, the books also discuss Indonesia’s remaining vulnerability to sudden external shocks. The fundamental problems concerning the national macroeconomic policy are (i) how the country responds to the shocks, and (ii) how the country should prepare in order to better respond to future shocks.

An Economic History of Indonesia 1800–2012 begins with a classic development puzzle: “Why some countries have remained poor, or grown only a little, despite many new opportunities created by the expanding world economy and the accumulation of knowledge” (p. 1). The authors, Jan Luiten van Zanden and Daan Marks, argue that Indonesia is well suited as a case study of the fundamentals of long-term growth since it displays highly volatile growth performance over the long run. There are two central questions of the book. The first one relates to how a country with such great human and natural resources potential (like Indonesia) can become a laggard in terms of productivity and economic growth relative to the rest of the world. The second one is why the country’s long-term growth performance displays such an erratic pattern marked by a high degree of discontinuity.

The book examines the evolution of institutions, policies, and their economic outcomes in Indonesia over a period of approximately 200 years. It tries to explain the “missing link” between institutional structures and socio-political power relations with the choice of policies and implementation strategies. In this regard, the book can be considered as a complement to Anne Booth’s classic work, The Indonesian Economy in the Nineteenth and Twentieth Centuries: A History of Missed Opportunities (1998).

In addition, the book focuses on three main determinants of long-term growth: geography, trade openness, and the role of institutions. Firstly, geography is widely cited in growth literature as a key determinant of climate, endowment of natural resources, transport costs, market access, and diffusion of...