Executive Summary
In the recent past, Indonesia has been experiencing an improving gross domestic growth rate and purchasing parity despite the global financial crisis of 2007. However, the economic growth rate is hampered by unfavorable economic, political and social parameters like inflation, corruption, nepotism, and racism. In the 1960s, the country suffered an economic crisis which was believed to have been caused by corruption and inflation in the country.
Governments, nongovernmental organization, and civil groups have joined efforts to alleviate corruption; however it still is persistent. Indonesia is among world’s most inflated countries with inflation of more than 10% since the 1960s; with such a record in inflation, the country has continued to suffer a reducing purchasing power parity (PPP) (Fane, 2003). Corruption can be found among political leaders, public institutions, individuals, and private institutions; the “culture” hinders rapid growth in the oil rich country.
Statement of issue
The main issue affecting the country is to determine when corruption will be completely alleviated and who should be held responsible of the situation in the country. When will there be corrupt free institutions in Indonesia? Corruption is the main cause of all the problems in Indonesia; then the big question is, is there an effective policy that can completely eradicate this big problem? Has Indonesia been using the wrong development strategy?
Introduction
In the 1960s Indonesia suffered political instability that did not spare the economic situation; it was during this time that the country’s then president, Suharto was classified among the most corrupt leaders by transparency international. It was in 1990s while Suharto was still the president, that corruption gained momentum to a point that the government was not able to clear its debts or collect outstanding debts from its debtors. There was a high level of bankruptcy and the government was not able to bail out those who were bankrupt.
Moreover, the legal system was very weak to control any economic activities of the country. Businesses were carried out normally although the economy did not grow as expected because of corruption. Trade was carried out devoid of payment of tax and banks were also involved in corruption and their processes were unrefined. Lending was security based and lending regulations were not followed keenly. There were many barriers to domestic trade and export trade (Fane, 2003).
This led to low activities in businesses which contributed to increased poverty. Despite the high level of inflation during this time, there were no domestic subsidies and this led to hunger and poverty (Fane, 2003). Many people, about 70%, were living below the poverty line during this period; these problems distorted the economy of Indonesia greatly (see the appendix).
In 1998 Indonesia was in real economic crisis as inflation reached 80% and it was expected to reach 100% by the end of the year. Many people in Indonesia were faced with food security problems; people were hungry and poor.
This triggered students in Indonesia to start demonstrations demanding the President to put an end to corruption, favoritism and conspiracy. The students pointed out that corruption; favoritism and conspiracy were the main causes of economic crisis in Indonesia. They demanded for good governance which would liberate Indonesia from economic crisis (World Bank, 2008).
There were also problems in healthcare systems because the money allocated to them was not enough. Public health facilities did not have enough drugs. Further, health promotion and prevention programs were not in function due to lack of funds.
In addition, natural resources were depleted as a result of poverty because people relied on natural resources, such as fishing and agriculture for their survival. The population increased and this led to deforestation leading to low agricultural yield. There was food insecurity in the whole country. All this problems were as a result of corruption (Pettis, 2001).
Policy applied to recover Indonesia economy.
The policy of open economy was applied which was not as effective as expected. People termed it as premature because there was crisis in financial sector. Other countries have responded positively to an open economy policy but this was not the case for Indonesia. The question has always been, is Indonesia using the wrong development strategy? All the blame has been put on corruption and conspiracy. This has prevented Indonesia from globalization.
Emphasis has been put on good governance and good development strategy. The Policy of liberalization has been put in place to ensure that Indonesia is able to maintain an open economy. The country has also attempted to raise domestic interest rates and tightened its monetary policy as way of controlling corruption. International monetary fund came into an agreement with Indonesia to stabilize macroeconomic activities and eliminate programs that were affecting the economy.
The government of President Suharto then weakened and he was removed from office (Pettis, 2001). Abdurrahman took the office of presidency in 1999. He signed an agreement with international monetary fund for an extended fund facility. The economy was then at a poor state, but president Abdurrahman managed to put new administration and as a result inflation reduced by 2% by the end of 1999 (Muchhala, 2007).
Policy critique
In 2000 president Abdulahiman signed another agreement with international monetary fund for extended fund facility. This program targeted economic reform, structural reform and governance reforms. With the new administration the economy has been accelerating and recovery has been on the positive.
Poverty reduced from 17.8 to 16.6 percent in 2008 (Muchhala, 2007). The rate of unemployment has also been reducing. With oil contributing the biggest percentage of export, Indonesia is now one of the fast growing economies in the G20 developing countries. It has also industrialized and its economy has expanded.
The international monetary fund increased its focus on the country by raising it to 3.4 from 2.5 percent. The country has been able to implement its financial reforms by reducing public and external debt. Banking facilities have also been reformed and its vulnerability has reduced. Businesses have been strengthened and this has had great impact on individual development. Banks have been capitalized and supervision strengthened to make sure that there is no corruption (Miller, 1997).
Before the new administration was introduced, the use of open economy had failed because it was implemented by corrupt leaders. Presently, Indonesia has a market economy where the government is actively involved and owns many enterprises. The government has also been controlling prices of products such as oil and other basic products (Kaufman, Krueger, & Hunter, 1999).
Other issues to worry about
Though the economy has been growing continuously since 1999, inflation has persisted and has led to a wider economic gap among Indonesians. Inflation has been higher than economic growth and this has contributed to the high level of poverty in Indonesia. In the year 2010, inflation was at 7%; this was a high percentage compared to economic growth which was at 6%.
The cause of this high inflation remained a puzzle, although it was linked to corruption as being the main cause. It was noted that unless this issue is dealt with seriously, it may continue to deprive Indonesians off their wealth despite their growing economy (Fane, 2003).
The other issue that Indonesia needs to worry about is its rapid increasing population. Indonesia is known to be among the most populated countries. This has been straining its economy. This calls for birth control measures so as a country is able to have a population that it can support without straining (Deutser, 2002).
Another issue is deforestation and this has resulted from high population. This has adverse effects on agricultural production because it affects the climate. Most people depend on agriculture for food. Agricultural production is important as it contributes a big portion of gross domestic production. It also ensures that there is food security in a country (Pettis, 2001).
The other issue the government of Indonesia should consider is health; there have been concerns about the health of the population with diseases like HIV/AIDS, malaria and Tuberculosis being on the rise. These diseases have been increasing due to poor health promotion and prevention programs. The government should invest in health care systems for a healthy productive nation (Pettis, 2001).
Recommendations
To attain high economic growth rate, the Indonesian government should implement programs to alleviate corruption; the programs should be supported by government, international bodies, private and public institutions, and civil societies. The inflation situation of the economy can be checked by implementing effective frameworks to alleviate corruption and holding leaders accountable for their actions and decisions.
The programs should be set to focus not only individuals, but also institutions, political groups, community welfares, and government ministries. When addressing the issue of corruption, the program should be effective enough to address nepotism, racism, and conspiracy prevailing in the economy.
References
Deutser, P. (2002). Survey of Recent Development. Bulletin of Indonesian Economic Studies, 1(1).1.
Fane, G. (2003). Change and Continuity in Indonesia’s New Fiscal Decentralization Arrangements. Bulletin of Indonesian Economic Studies, 1(1).1.
Kaufman, G., Krueger, T., & Hunter W, (1999). The Asian Financial Crisis: Origins, Implications and Solutions. New York: Springer.
Miller, J. (1997). Deforestation in Indonesia and the Orangutan Population. TED Case Studies, 1(1), 1.
Muchhala, B, (2007) Ten Years After: Revisiting the Asian Financial Crisis. Washington, DC
Natasha, H. (2001). Anti-Corruption Strategies in Indonesia. Bulletin of Indonesian Economic Studies, 1(1), 1.
Pettis M, (2001). The Volatility Machine: Emerging Economies and the Threat of Financial Collapse. Oxford University Press. ISBN 0-19-514330-2.
World Bank. (2008). Indonesia: Economic and Social update. Retrieved from www.worldbank.org.
Appendix
Macroeconomic trend in Indonesia after signing international monetary fund agreement