Deregulation and Development in Indonesia

Deregulation and Development in Indonesia

Deregulation and Development in Indonesia

Deregulation and Development in Indonesia

Synopsis

Of the developing nations of East Asia, Indonesia came relatively late to liberalizing its trade and investment regime. Only in the mid-1980s, when it was clear that oil revenues alone would not suffice and that a new engine of growth was needed, did the country's government swing behind a systematic deregulation effort. Tariffs were cut, non-tariff barriers were lowered, foreign investment restrictions were reduced, export promotion incentives were enhanced, and various financial sector regulations were eased. All this combined to spark a labor-intensive export-led economic boom that was accompanied by an expansion in wages and employment and a boost in productivity. This book documents how Indonesia truly became part of the East Asian miracle story starting in the mid-1980s. Destined to become a leading case study of export-led development in Indonesia, this book grew out of a World Bank/Indonesian Economic Society Symposium held in Jakarta.

Excerpt

CHAPTER 2

The Evolution of Economic Policy Reform: Determinants, Sequencing and Reasons for Success

William E. James and Sherry M. Stephenson

CONVENTIONAL WISDOM ON THE CONTENT AND SEQUENCING OF REFORMS

The economic policy reform process is typically viewed as comprising two parts, stabilization and structural adjustment. The stabilization part works towards the correction of imbalances in foreign payments, government budgets and the money supply, with the aim of controlling inflation and reducing macroeconomic instability. The structural adjustment part typically covers measures aimed at changing the structure of production (towards tradable goods) and increasing the efficiency and flexibility of the economy.Deregulation and Development in Indonesia

It is generally argued that stabilization should be a precondition of longer-term structural adjustment policies on the assumption that such policies can succeed only if carried out in a stable macroeconomic framework. This is because reform packages depend on attaining and maintaining relative prices that reflect economic scarcities. This is true for domestic relative prices (between factors of production), for the cost of borrowing and for the ratio between domestic and foreign prices. An inflationary environment weakens the competitiveness of a country’s industries to

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