Economy of Indonesia

 


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Indonesia has a market-based economy where a significant role is played by the government. There are a lot of state-owned enterprises. The government administers prices on several basic goods: fuel, rice, electricity. After financial and economic crisis that began in mid-1997, the government took care of a great portion of private sector propriety. It acquired non-performing bank loans and corporate assets. Indonesia's economy grew from a per capita GDP of $70 to $1,000 by 1996. Inflation was held in the 5%-10% range with the help of effective monetary and fiscal policies. The government managed to avoid domestic financing of budget deficits, it was financed by foreign aid. (Lindblad J. 1996)

In the mid-1980s, the government began eliminating obstacles to economic activity. Its policy was aimed at the external and financial sectors. The government tried to stimulate employment and growth in different export sectors. Annual real GDP growth averaged nearly 7% from 1987-1997. As a result most analysts recognized Indonesia as a newly industrializing economy and emerging major market. But nevertheless there were some structural weaknesses in Indonesia's economy during 1987-1997, the legal system was very weak, and there was no effective way to enforce contracts, collect debts. Non-tariff barriers, domestic subsidies, barriers to domestic trade, and export restrictions all created economic distortions. (Howard D. , Vincent J. H. , Lindblad J. 2002)

The regional financial problems influenced Indonesia in late 1997 and cause economic and political crisis. But in October 1997, Indonesia and the IMF reached agreement. It concerned an economic reform program aimed at macroeconomic stabilization and elimination of some of the most damaging economic policies.

The effects of financial and economic crisis were considerable. In 1998, real GDP was 13.7%, but in mid-1999 real GDP growth for the year was only 0.3%. Inflation reached 77% in 1998. Events of 1997-1998 forced Indonesia to import great amounts of rice. It reduced domestic demand and caused the absence of new investment. Formal sector employment lowed significantly. Economic data provide evidence that the economic turnaround of 1999 has continued. Real GDP growth reached 4.13% in August 2000. Results of GDP growth are record exports, manufacturing growth, and increase household consumption. Besides there has been a significant increase in corporate debt restructuring. But Indonesia's banking and corporate sectors are still extremely weak. Banking sector reform has stalled. Progress on corruption cases is slow. Since the late 1980s, there have been significant changes that encouraged its economic growth. This growth was financed from private investment, both foreign and domestic.

But new foreign investment approvals fell by two-thirds between 1997-1999. The crisis pointed out areas where additional reform was needed. They were legal and judicial system, competitive processes, and adoption of internationally acceptable accounting.

After improvements in the laws recently, Indonesia's intellectual property rights regime remains weak; lack of effective enforcement and the area of private infrastructure projects are of a great concern Indonesia. It has a large labor force, abundant natural resources and modern infrastructure, but nevertheless private investment in projects ceased during the crisis. Conclusion.

So, what is happening in East Asia now? Strictly speaking, the same, that happened before it: the countries of Confucian culture play formation of new global center of economic and political power, and still the leading role. Certainly, the region cannot equally compete with 3 main centers of world economy and policy - the USA, ЕС, Japan. Most of the countries of the region still are poor, frequently inwardly unstable, and their development is based on the use of the adopted technologies. However great achievements of “tigers" and their “students” show that the region not only has enormous potential but also knows how to use its potential. Certainly, Singapore with its north-american indexes of GDP per capita is still the exception, but the rates of growth of this region are such, that it is clear: their output on the European level is the matter of time and, possibly, not too long.

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