The Economic Historyof

Indonesia

Dr. Abdul Aziz Ahmad

Ppt Based on: Jeroen Touwen, Leiden University, Netherlands

 Introduction
In recent decades, Indonesia has been viewed as one of Southeast
Asias successful highly performing and newly industrializing
economies, following the trail of the Asian tigers (Hong Kong,
Singapore, South Korea, and Taiwan) (see Table 1).
Although Indonesias economy grew with impressive speed during
the 1980s and 1990s, it experienced considerable trouble after the
financial crisis of 1997, which led to significant political reforms.
Today Indonesias economy is recovering but it is difficult to say
when all its problems will be solved. Even though Indonesia can still
be considered part of the developing world, it has a rich and versatile
past, in the economic as well as the cultural and political sense.
Indonesias Gross Domestic Product per Capita
Indonesias Gross Domestic Product per Capita
Compared with Several Other Asian Countries (in 1990 dollars)

Philippin
Indonesia Thailand Japan
es
1900 745 1 033 812 1 180
1913 904 1 066 835 1 385
1950 840 1 070 817 1 926
1973 1 504 1 959 1 874 11 439
1990 2 516 2 199 4 645 18 789
2000 3 041 2 385 6 335 20 084
2013
9 254 35 481
(PPP)
 GDP per capita PPP
=x
Country USD
Indonesia
Australia 42 809.93 4.63
Brazil 14 555.08 1.57
Canada 41 888.78 4.53
China 11 524.57 1.25
Euro Area 35 830.41 3.87
France 35 969.10 3.89
Germany 42 045.25 4.54
India 5 238.02 0.57
Italy 32 929.10 3.56
Japan 35 481.11 3.83
Mexico 16 290.81 1.76
Netherlands 41 979.87 4.54
Russia 23 564.21 2.55
South Korea 32 708.11 3.53
Spain 30 892.16 3.34
Switzerland 51 749.30 5.59
Turkey 18 646.78 2.01
United Kingdom 35 013.27 3.78
United States 51 450.74 5.56
 Basic Facts
Indonesia is situated in Southeastern Asia and consists of a large
archipelago between the Indian Ocean and the Pacific Ocean, with
more than 13.000 islands.
The largest islands are Java, Kalimantan (the southern part of the
island Borneo), Sumatra, Sulawesi, and Papua (formerly Irian Jaya,
which is the western part of New Guinea). Indonesias total land area
measures 1.9 million square kilometers (750,000 square miles). This is
three times the area of Texas, almost eight times the area of the United
Kingdom and roughly fifty times the area of the Netherlands.
Indonesia has a tropical climate, but since there are large stretches of
lowland and numerous mountainous areas, the climate varies from hot
and humid to more moderate in the highlands. Apart from fertile land
suitable for agriculture,
Indonesia is rich in a range of natural resources, varying from
petroleum, natural gas, and coal, to metals such as tin, bauxite, nickel,
copper, gold, and silver.
 Important Aspects of
Indonesian Economic History
Missed Opportunities
Anne Booth has characterized the economic history of Indonesia with
the somewhat melancholy phrase a history of missed opportunities
(Booth 1998). It refers to the fact that despite its rich natural resources
and great variety of cultural traditions, the Indonesian economy has
been underperforming for large periods of its history. A more cyclical
view would lead one to speak of several reversals of fortune. Several
times the Indonesian economy seemed to promise a continuation of
favorable economic development and ongoing modernization (for
example, Java in the late nineteenth century, Indonesia in the late
1930s or in the early 1990s). But for various reasons Indonesia time
and again suffered from severe incidents that prohibited further
expansion. These incidents often originated in the internal institutional
or political spheres (either after independence or in colonial times),
although external influences such as the 1930s Depression also had
their ill-fated impact on the vulnerable export-economy.
 Important Aspects of
Indonesian Economic History
Unity in Diversity
In addition, one often reads about unity in diversity. This is not only a
political slogan repeated at various times by the Indonesian
government itself, but it also can be applied to the heterogeneity in the
national features of this very large and diverse country. Logically, the
political problems that arise from such a heterogeneous nation state
have had their (negative) effects on the development of the national
economy. The most striking difference is between densely populated
Java, which has a long tradition of politically and economically
dominating the sparsely populated Outer Islands. But also within Java
and within the various Outer Islands, one encounters a rich cultural
diversity. Economic differences between the islands persist.
Nevertheless, for centuries, the flourishing and enterprising
interregional trade has benefited regional integration within the
archipelago.
 Important Aspects of
Indonesian Economic History
Economic Development and State Formation
State formation can be viewed as a condition for an emerging national
economy. This process essentially started in Indonesia in the nineteenth
century, when the Dutch colonized an area largely similar to present-day
Indonesia. Colonial Indonesia was called the Netherlands Indies. The term
(Dutch) East Indies was mainly used in the seventeenth and eighteenth
centuries and included trading posts outside the Indonesian archipelago.
Indonesian national historiography sometimes refers to a presumed 350 years
of colonial domination. From the mid-nineteenth century onward, Dutch
colonization did shape the borders of the Indonesian nation state, even though
it also incorporated weaknesses in the state: ethnic segmentation of economic
roles, unequal spatial distribution of power, and a political system that was
largely based on oppression and violence. This, among other things,
repeatedly led to political trouble, before and after independence. Indonesia
ceased being a colony on 17 August 1945 when Sukarno and Hatta
proclaimed independence, although full independence was acknowledged by
the Netherlands only after four years of violent conflict, on 27 December 1949.
 A Chronological Survey of Indonesian
Economic History
The precolonial economy
There were several influential kingdoms in the Indonesian archipelago
during the pre-colonial era (e.g. Srivijaya, Mataram, Majapahit) (see
further Reid 1988,1993; Ricklefs 1993). Much debate centers on
whether this heyday of indigenous Asian trade was effectively
disrupted by the arrival of western traders in the late fifteenth century
 Early Kingdoms-Srivijaya
Srivijaya controlled the
Malay Archipelago from
7th thru 13th Century.
Controlled Straits of
Malacca and Sunda plus
Isthmus of Kra with a
powerful fleet.
Capital at Palembang, a
center of Buddhist
learning.
Benefited from collapse
of Funan and surge in
Chinese trade during the
Tang dynasty.
Conquered briefly by
Rajendra Chola in 1025.
Early Kingdoms- Sailendras
The Sailendras
controlled central Java
during 8th & 9th Century.
Royal family was
Funanese who had been
deposed by Chenla.
Returned to conquer &
rule southern Chenla
until defeated by
Jayavarman II of Angkor
in 802.
Built Borobodur (778-
824), the greatest
Buddhist monument in S.
E. Asia.
 Early Kingdoms - Mataram
Patapan, a Sanjaya prince,
usurped the Sailendra
throne in 832. The capital
was moved to Mataram in
929.
Mataram emulated Sailandra
except in religion. A Hindu
resurgence led to the
construction of the
Prambanan complex.
Continued prosperous
trade with China &
Arabs.
 Early Kingdoms Kediri &
Singhasari
Mataram challenge Srivijayas dominance in 1006,
but was decisively defeated.
Rajendra Cholas warfare with & defeat of Srivijaya in
1026 allowed Airlangga, a Balinese prince, to restore
Matarams political power.
Airlangga divided his kingdom between his two sons
in 1042. The two kingdoms were Janggala and
Kediri. Kediri was dominant and flourished in trade
with India and the Mediterranean during early 13th
Century.
Ken Angrok conquered Janggala and then Kediri to
establish the Singhasari 1222. Under King
Kertanagara, Singhasari dominated both the Malacca
& Sunda Straits until the Mongol invasion in 1292.
Early Kingdoms - Majapahit
Kertanagara was killed by a
dissident vassal in the face of
Kublai Khans threatened
invasion. His heir, Vijaya, fled to
Majapahit. In a twist of fate, the
Mongols assisted him in
overthrowing the usurper.
The Majapahit prime minister,
Gaja Mada (1331-1364), then
united all of the archipelago for 75
years..
Majapahit dominance ended with
the spread of Islam to Malacca in
1402.
Majapahit was the last great
Hindu kingdom in S.E. Asia.
 Summary of Kingdoms
Srivijaya, 7-13th Century, Java, Sumatra &
Malay Peninsula.
Sailendras, 8 9th Century, Central Java.
Mataram, 832 1042, Central Java.
Janggala, 1042 1222, Central Java.
Kediri, 1042 1222, Central Java.
Singhasari, 1222 1292, Java, Sumatra &
Straits.
Majapahit, 1292 1402, The Whole Thing.
 A Chronological Survey of Indonesian
Economic History
Sixteenth and seventeenth century
Present-day research by scholars in pre-colonial economic history
focuses on the dynamics of early-modern trade and pays specific
attention to the role of different ethnic groups such as the Arabs, the
Chinese and the various indigenous groups of traders and
entrepreneurs. During the sixteenth to the nineteenth century the
western colonizers only had little grip on a limited number of spots in
the Indonesian archipelago. As a consequence much of the economic
history of these islands escapes the attention of the economic
historian. Most data on economic matters is handed down by western
observers with their limited view. A large part of the area remained
engaged in its own economic activities, including subsistence
agriculture (of which the results were not necessarily very meager)
and local and regional trade.
 An older research literature has extensively covered the role of the Dutch
in the Indonesian archipelago, which began in 1596 when the first
expedition of Dutch sailing ships arrived in Bantam. 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). However, the
region was still fragmented and Dutch presence was only concentrated in
a limited number of trading posts.

Both the Dutch VOC (Vereenigde Oostandische Compagnie) (1602) and

English East India Company (1600) were interested in S.E.Asian trade.
Conflict led to the Ambon Massacre in 1623 and the withdrawal of the East
India Company from the archipelago.
The Dutch gradually gained control of the entire archipelago: Ambon 1605,
Malacca 1641, Aceh 1667, Macassar 1669, Banten - 1682.
The objective was trade: Indian cottons for spices.
 The Dutch avoided direct administration until the mid 18th Century. Control was
exercised thru local rulers who were also doubled as principal traders
The system of leveringen began at end the the 17th Century. Fixed amounts at
fixed prices.
Direct administration of areas growing coffee, sugar, indigo and spices began
in the 18th Century.

During the eighteenth century, coffee and sugar became the most
important products and Java became the most important area. The VOC
gradually took over power from the Javanese rulers and held a firm grip
on the productive parts of Java. The VOC was also actively engaged in
the intra-Asian trade. For example, cotton from Bengal was sold in the
pepper growing areas. The VOC was a successful enterprise and made
large dividend payments to its shareholders. Corruption, lack of
investment capital, and increasing competition from England led to its
demise and in 1799 the VOC came to an end (Gaastra 2002, Jacobs
2000).
Hermann Daendels
Herman Daendels was appointed Gov-Gen of
Indonesia by Napoleon from 1808-11 to improve
defenses against the British and improve
administration. He
Centralized administration.
Reduced graft and corruption.
Established adat courts.
Increased compulsory coffee production and
established a monopoly on rice to raise funds.
Thomas Stamford Raffles
Gov-Gen Minto (India) led an invasion of
Java in 1811 and left Stamford Raffles in
charge. He introduced major reforms.
Permitted land ownership
with tax rate based on
fertility.
Peasants could cultivate
and sell crops of their
choice, except coffee.
Created an elaborate
court system with jury
trials.
Dutch returned in 1816.
 A Chronological Survey of Indonesian
Economic History
The nineteenth century
In the nineteenth century a process of more intensive colonization started,
predominantly in Java, where the Cultivation System (1830-1870) was based.

During the Napoleonic era the VOC trading posts in the archipelago had been
under British rule, but in 1814 they came under Dutch authority again. During
the Java War (1825-1830), Dutch rule on Java was challenged by an uprising
led by Javanese prince Diponegoro. To repress this revolt and establish firm
rule in Java, colonial expenses increased, which in turn led to a stronger
emphasis on economic exploitation of the colony. 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.
The exports of the products were consigned to a Dutch state-owned trading
firm (the Nederlandsche Handel-Maatschappij, NHM, established in 1824) and
sold profitably abroad.
 Although the profits for the Dutch state of the period 1830-1870 were
considerable, various reasons can be mentioned for the change to a liberal
system: (a) the emergence of new liberal political ideology; (b) the gradual
demise of the Cultivation System during the 1840s and 1850s because
internal reforms were necessary; and (c) growth of private (European)
entrepreneurship with know-how and interest in the exploitation of natural
resources, which took away the need for government management (Van
Zanden and Van Riel 2000: 226).

Financial Results of Government Cultivation, 1840-1849 (Cultivation

System) (in thousands of guilders in current values)

1840-1844 1845-1849
Coffee 40 278 24 549
Sugar 8 218 4 136
Indigo 7 836 7 726
Pepper, Tea 647 1 725
Total net profits 39 341 35 057
 A Chronological Survey of Indonesian
Economic History
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 Outer Islands supplied an increasing share in these foreign exports, which
were accompanied by an intensifying internal trade within the archipelago and
generated an increasing flow of foreign imports.
Agricultural exports were cultivated both in large-scale European agricultural
plantations (usually called agricultural estates) and by indigenous
smallholders.
When the exploitation of oil became profitable in the late nineteenth century,
petroleum earned a respectable position in the total export package. In the
early twentieth century, the production of oil was increasingly concentrated in
the hands of the Koninklijke/Shell Group.
Foreign Exports from the Netherlands-Indies, 1870-1940
(in millions of guilders, current values)
 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. In shipping lines, an
important contribution was made by the KPM (Koninklijke Paketvaart-
Maatschappij, Royal Packet boat Company) that served economic integration
as well as imperialist expansion. Subsidized shipping lines into remote corners
of the vast archipelago carried off export goods (forest products), supplied
import goods and transported civil servants and military.

The Depression of the 1930s hit the export economy severely. The sugar
industry in Java collapsed and could not really recover from the crisis. In some
products, such as rubber and copra, production was stepped up to
compensate for lower prices. In the rubber exports indigenous producers for
this reason evaded the international restriction agreements. The Depression
precipitated the introduction of protectionist measures, which ended the liberal
period that had started in 1870. Various import restrictions were launched,
making the economy more self-sufficient, as for example in the production of
rice, and stimulating domestic integration. Due to the strong Dutch guilder (the
Netherlands adhered to the gold standard until 1936), it took relatively long
before economic recovery took place. The outbreak of World War II disrupted
international trade, and the Japanese occupation (1942-1945) seriously
disturbed and dislocated the economic order.
 A Chronological Survey of Indonesian
Economic History
The post-1945 period
The Dutch promise a conference on self-
government before they leave in 1941.
Sukarno, Mohammed Hatta and Sutan Sjahrir
released from jail by the Japanese when they
occupied Indonesia in 1942.
Sukarno, Hatta and others formed Putera as a
double edge puppet government.
The Netherlands asked Britain to reoccupy
Indonesia on its behalf.
The initial British force attempted to occupy
Surabaya on November 10, 1945. The result was
a bloody one-month long battle.
Negotiations with Dutch led to Linggadjati
Agreement in 1947 creating the United States of
Indonesia under Dutch sovereignty. The USI was
to be part of a larger Netherlands-Indonesian-
Surinam-Curacao Union.
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. In 1958-1965, growth rates dwindled, largely due to
political instability and inappropriate economic policy measures. The hesitant
start of democracy was characterized by a power struggle between the
president, the army, the communist party and other political groups. Exchange
rate problems and absence of foreign capital were detrimental to economic
development, after the government had eliminated all foreign economic control
in the private sector in 1957/58. Sukarno aimed at self-sufficiency and import
substitution and estranged the suppliers of western capital even more when he
developed communist sympathies.
 After 1966,
March 11, 1966 Sukarno signed the Supersemar decree authorizing
Suharto to take all measures necessary ... This was the beginning of
the New Order.
Revived the parliament of 1955.
Adam Malik renegotiated debt of $1.7 million.
Ended Confrontation Policy.
Joined ASEAN
Befriended the West and Japan.
Held national elections in 1971.
 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 (see below for the three
phases in New Order). 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.
Soeharto managed to apply part of these revenues to the development of
technologically advanced manufacturing industry. Referring to this period of
stable economic growth, the World Bank Report of 1993 speaks of an East
Asian Miracle emphasizing the macroeconomic stability and the investments
in human capital (World Bank 1993: vi).
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). These practices
characterize the coming-of-age of the 32-year old, strongly centralized,
autocratic Soeharto regime.
From 1998 until present
Today, 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.
Secessionist movements and the low level of security in the provincial regions,
as well as relatively unstable political policies, form some of its present-day
problems. Additional problems include the lack of reliable legal recourse in
contract disputes, corruption, weaknesses in the banking system, and strained
relations with the International Monetary Fund. The confidence of investors
remains low, and in order to achieve future growth, internal reform will be
essential to build up confidence of international donors and investors.

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.
 Annual Average Growth in Economic Key Aggregates
1830-1990

GDP per Export Export Government

capita volume Prices Expenditure
Cultivation 1830-
n.a. 13.5 5.0 8.5
System 1840
Cultivation 1840-
n.a. 1.5 - 4.5 [very low]
System 1848
Cultivation 1849-
n.a. 1.5 1.5 2.6
System 1873
1874-
Liberal Period [very low] 3.1 - 1.9 2.3
1900
1901-
Ethical Period 1.7 5.8 17.4 4.1
1928
Great 1929-
-3.4 -3.9 -19.7 0.4
Depression 1934
Prewar 1934-
2.5 2.2 7.8 3.4
Recovery 1940
1950-
Old Order 1.0 0.8 - 2.1 1.8
1965
1966-
New Order 4.4 5.4 11.6 10.6
 Additional Themes in
the Indonesian Economy Historiography
The indigenous economy and the dualist economy
Although western entrepreneurs had an advantage in technological know-how
and supply of investment capital during the late-colonial period, there has
been a traditionally strong and dynamic class of entrepreneurs (traders and
peasants) in many regions of Indonesia. Resilient in times of economic
malaise, cunning in symbiosis with traders of other Asian nationalities
(particularly Chinese), the Indonesian entrepreneur has been rehabilitated
after the relatively disparaging manner in which he was often pictured in the
pre-1945 literature.
One of these early writers, J.H. Boeke, initiated a school of thought centering
on the idea of economic dualism (referring to a modern western and a
stagnant eastern sector). As a consequence, the term dualism was often
used to indicate western superiority. From the 1960s onward such ideas have
been replaced by a more objective analysis of the dualist economy that is not
so judgmental about the characteristics of economic development in the Asian
sector. Some focused on technological dualism (such as B. Higgins) others on
ethnic specialization in different branches of production (see also Lindblad
2002b: 148, Touwen 2001: 316-317).
 Additional Themes in
the Indonesian Economy Historiography
The characteristics of Dutch imperialism
Another vigorous debate concerns the character of and the motives for Dutch
colonial expansion. Dutch imperialism can be viewed as having a rather
complex mix of political, economic and military motives which influenced
decisions about colonial borders, establishing political control in order to
exploit oil and other natural resources, and preventing local uprisings. Three
imperialist phases can be distinguished (Lindblad 2002a: 95-99).
The first phase of imperialist expansion was from 1825-1870. During this
phase interference with economic matters outside Java increased slowly but
military intervention was occasional. The second phase started with the
outbreak of the Aceh War in 1873 and lasted until 1896. During this phase
initiatives in trade and foreign investment taken by the colonial government
and by private businessmen were accompanied by extension of colonial
(military) control in the regions concerned. The third and final phase was
characterized by full-scale aggressive imperialism (often known as
pacification) and lasted from 1896 until 1907.
 Additional Themes in
the Indonesian Economy Historiography
The impact of the cultivation system on the indigenous economy
The thesis of agricultural involution was advocated by Clifford Geertz (1963)
and states that a process of stagnation characterized the rural economy of
Java in the nineteenth century. After extensive research, this view has
generally been discarded. Colonial economic growth was stimulated first by
the Cultivation System, later by the promotion of private enterprise. Non-farm
employment and purchasing power increased in the indigenous economy,
although there was much regional inequality (Lindblad 2002a: 80; 2002b:149-
150).
 Additional Themes in
the Indonesian Economy Historiography
\Regional diversity in export-led economic expansion
The contrast between densely populated Java, which had been dominant in
economic and political regard for a long time, and the Outer Islands, which
were a large, sparsely populated area, is obvious. Among the Outer Islands
we can distinguish between areas which were propelled forward by export
trade, either from Indonesian or European origin (examples are Palembang,
East Sumatra, Southeast Kalimantan) and areas which stayed behind and
only slowly picked the fruits of the modernization that took place elsewhere (as
for example Benkulu, Timor, Maluku) (Touwen 2001).
 Additional Themes in
the Indonesian Economy Historiography
The development of the colonial state and the role of Ethical Policy
Well into the second half of the nineteenth century, the official Dutch policy
was to abstain from interference with local affairs. The scarce resources of the
Dutch colonial administrators should be reserved for Java. When the Aceh
War initiated a period of imperialist expansion and consolidation of colonial
power, a call for more concern with indigenous affairs was heard in Dutch
politics, which resulted in the official Ethical Policy which was launched in 1901
and had the threefold aim of improving indigenous welfare, expanding the
educational system, and allowing for some indigenous participation in the
government (resulting in the Peoples Council (Volksraad) that was installed in
1918 but only had an advisory role). The results of the Ethical Policy, as for
example measured in improvements in agricultural technology, education, or
welfare services, are still subject to debate (Lindblad 2002b: 149).
Living conditions of coolies at the agricultural estates
The plantation economy, which developed in the sparsely populated Outer
Islands (predominantly in Sumatra) between 1870 and 1942, was in bad need
of labor. The labor shortage was solved by recruiting contract laborers
(coolies) in China, and later in Java. The Coolie Ordinance was a government
regulation that included the penal clause (which allowed for punishment by
plantation owners). In response to reported abuse, the colonial government
established the Labor Inspectorate (1908), which aimed at preventing abuse
of coolies on the estates. The living circumstances and treatment of the
coolies has been subject of debate, particularly regarding the question
whether the government put enough effort in protecting the interests of the
workers or allowed abuse to persist (Lindblad 2002b: 150).

Colonial drain
How large of a proportion of economic profits was drained away from the
colony to the mother country? The detrimental effects of the drain of capital, in
return for which European entrepreneurial initiatives were received, have been
debated, as well as the exact methods of its measurement. There was also a
second drain to the home countries of other immigrant ethnic groups, mainly
to China (Van der Eng 1998; Lindblad 2002b: 151).
The position of the Chinese in the Indonesian economy
In the colonial economy, the Chinese intermediary trader or middleman played
a vital role in supplying credit and stimulating the cultivation of export crops
such as rattan, rubber and copra. The colonial legal system made an explicit
distinction between Europeans, Chinese and Indonesians. This formed the
roots of later ethnic problems, since the Chinese minority population in
Indonesia has gained an important (and sometimes envied) position as capital
owners and entrepreneurs. When threatened by political and social turmoil,
Chinese business networks may have sometimes channel capital funds to
overseas deposits.

Economic chaos during the Old Order

The Old Order-period, 1945-1965, was characterized by economic (and
political) chaos although some economic growth undeniably did take place
during these years. However, macroeconomic instability, lack of foreign
investment and structural rigidity formed economic problems that were closely
connected with the political power struggle. Sukarno, the first president of the
Indonesian republic, had an outspoken dislike of colonialism. His efforts to
eliminate foreign economic control were not always supportive of the
struggling economy of the new sovereign state. The Old Order has for long
been a lost area in Indonesian economic history (Dick 2002: 190; Mackie
1967).
Development policy and economic planning during the New Order period
The New Order (Orde Baru) of Soeharto rejected political mobilization and
socialist ideology, and established a tightly controlled regime that discouraged
intellectual enquiry, but did put Indonesias economy back on the rails. New
flows of foreign investment and foreign aid programs were attracted, the
unbridled population growth was reduced due to family planning programs,
and a transformation took place from a predominantly agricultural economy to
an industrializing economy.
Thee Kian Wie distinguishes three phases within this period, each of which
deserve further study:
(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).
Financial, economic and political crisis: KRISMON
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 Soeharto regime. Soeharto had been in power for 32 years
and his government had become heavily centralized and corrupt and was not
able to cope with the crisis in a credible manner. The origins, economic
consequences, and socio-economic impact of the crisis are still under
discussion. (Thee 2003: 231-237; Arndt and Hill 1999).