The Financial Crisis in Indonesia: The Role of Good Governance

Indonesia’s economic performance over the past three decades has ranked among the best in the developing world, with real GDP growth averaging about 7 per cent annually since 1970. The structure of the economy has become diversified as dependency on the oil sector has declined and an export-oriented manufacturing base has emerged, led by a dynamic private sector and fuelled by high domestic savings and large inflows of foreign direct investment. The key to this success has been a consistent adherence to prudent macroeconomic policies, high investment and savings rates, and market-oriented trade and exchange regimes. Macroeconomic balance has been maintained: the budget has been balanced; inflation has been contained at relatively low levels; current account deficits have been kept moderate; and international reserves have remained at comfortable levels. In addition, broad-based labour-intensive growth, together with sustained improvements in basic education and health services, has dramatically reduced the incidence of poverty — from 58 per cent in 1972 to 11 per cent by 1997.