Sunday, 31 July 2011

The mystery of Komodo Dragon. (Part 1)

In the 1970s, the oil industrial starts to boom and leads to an average 6-8% high growth of economic of Indonesia per year. Countries in southeast Asia developed their economiess progressively. Stable  economic growth was supported by political stability, internal security control, confidence from foreign and domestic investor.

In the 1980s, Indonesia's government accounted for 70 percent of total revenue were contributed by their oil and gas industries. As a decade passed, the oil price fell. The government faced a decline in their export revenue. This prompt the government to do a series of adjustment to reduce the decline of total revenue.
The series of reform include trade reforms and liberalization of investment to integrate Indonesia into the international financial markets. Stock market exchange reflected their structural problems, which resulted from the government's regulatory framework.

To rectify these problem, the first macro and banking policy was implemented in 1983. The first act was to raise the interest rate, to increase the freedom for banks to support new lending. In 1998, in order to enhance local financial industries and increase the availability of long-term debt, banks were encouraged to drive competition, and promote the local capital market. Although they have make these changes, but serious weakness in the system were not answered.

In 1997, Asian Currency Crisis hit them, causing them to lose 55% of the value against the US dollar. Comparing to other ASEAN currencies, which is within the range of 11-41%. Further impact on their economy was seen with the 20% inflation rate. The crisis slowed down the growth of the local economy that resulted the decrease in export demand, causing numerous industries to shut down. This crisis was triggered by both internal and external factors.

According to IMF calculation on 1998 economic growth in Indonesia would be -5% compare to year 1997 which was +5%. These figure show decline rate rather than growth rate. Government attempts to recover the economy by introducing market operation which was known as "Operation of Sembako" ; which sembako means the basic commodity needs. The situation got worse when speculative distributors store their goods in their warehouse, resulted in the increase in inventory. They then sold it in the open market when the commodity prices goes in their favour. As a result, government requested financial help from IMF. A loan of US$3 million was issued to Indonesia with a total of 55 condition to follow, and they insisted to send their permanent executives in Jakarta. The purpose is to monitor and control the recovery package.

30 years of growth had collapsed in just a few months of time. Whether is it the mishandling of fiscal policies, or capitalism goes unregulated, there are many lesson we can learn from them. The only question now is will this economy emerge again, to compete with the rest of the emerging market? This will be seen soon.

Reference:
http://www.ifew.com/insight/13036mon/indones.htm
http://www.hawaii.edu/hivandaids/Indonesia__Rapid_Growth,_Weak_Institutions.pdf

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