William E. JamesandAnwar Nasution
For a second time since independence Indonesia has recently faced an economic and political crisis. Like the crisis of the final years of the presidency of Sukarno in the mid-1960s, the most recent economic crisis of 1997–1998 marked the end of the presidency of Suharto following a long period of authoritarian rule. Both crises culminated in a steep recession, a substantial devaluation and high interest rates and inflation. In both episodes, capital flight, bank runs, and panic buying took place on a grand scale while ethnic tensions and anti-Chinese violence were widespread. However, the more recent episode took place after three decades of rapid economic growth that lifted the vast majority of the population out of poverty. This impressive growth record was brought about by a combination of sound economic policies, particularly openness of trade and investment, along with improved education and technical advances, especially in agriculture.
The growth process was initiated following the establishment of Suharto’s “New Order” government and Indonesia’s embrace of outward-oriented trade and investment policies advocated by a group of western-trained economists known as the “technocrats.” The hallmark of this openness was the free movement of capital, a policy that was adopted in the early 1970s and that has been maintained ever since. By guaranteeing investors the right to repatriate their capital, Indonesia was able to restore the confidence of investors who had withdrawn their capital