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Lessons from Development of the Indonesian Economy

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Indonesia, a vast archipelago containing many thousands of inhabited and uninhabited islands, is the fourth most populous country on the planet. The Indonesian Archipelago is 5,000 kilometers in breadth and straddles the equator, with a dramatic diversity of flora and fauna. Indonesia contains the fabled Spice Islands· the Moluccas that Iberian and other European explorers sought in the epic voyages of the fifteenth and sixteenth centuries. Long before the Europeans finally arrived in the early sixteenth century, Chinese, Arab and Indian traders had been active in the islands forming the Indonesian Archipelago. Initially, the islands attracted traders seeking to exchange goods for spices such as cloves, cinnamon, nutmeg and mace that were native species of the Moluccas. The annals of the Han Dynasty in China (206 B.C.E.–200 C.E.) mention the use of cloves, and a Roman law digest refers unambiguously to this spice as far back as 176 C.E. Arab references to trade in cloves appear as early as the tenth century C.E. (Muller, 1990).


Eventually, the Netherlands came to dominate Indonesia and put in place a monopoly on international trade in cloves in the form of the East Indies Company. Under Dutch control for three centuries, a series of new export crops were developed or introduced including pepper, coffee, rubber, and sugar. Indonesia finally broke free of Dutch control after a struggle that began with a declaration of independence on August 17, 1945 and ended on August 17, 1950. The United States in 1949 supported a United Nations Security Council resolution ordering the Dutch to withdraw and negotiate. The battlefield successes of the youthful Indonesian army, coupled with international opinion, sealed the end of Dutch colonial rule. A new era of independence dawned on the vast archipelago.


1. Prominent Australian economist Benjamin Higgins was among the first to voice dissent with the dualistic theory of Boeke. See Higgins (1956) and Meier (1988: 129–30) for discussion.

2. See Subroto (1998) for a discussion of the role of the economists in the 1960s. 3. An excellent source of information on the Indonesian economy is the Bulletin of Indonesian Economic Studies, published by the Indonesia Project of the Australian National University (ANU) in Canberra. Another good source is the annual Indonesia Outlook published by the Institute of Southeast Asian Studies in Singapore (jointly with ANU).


Asian Development Bank (ADB). Asia Recovery Report 2000 (March 2000).

Badan Pusat Statistik (BPS, Central Statistical Agency). Indikator Ekonomi (Economic Indicators). March 1999.

Bank Indonesia. Indonesian Financial Statistics (June 1999).

Bank of Korea. Monthly Balance of Payments (June 1999).

Bank of Thailand. Monthly Bulletin (May 1999).

Boeke, J. H. Economics and Economic Policy in Dual Societies. New York: Institute of Pacific Relations, 1953.

Frankel, Jeffrey and David Romer. “Does Trade Cause Growth?” in American Economic Review (June 1999).

Higgins, Benjamin. “The ‘Dualistic Theory’ of Underdevelopment,” in Economic Development and Cultural Change (January 1956).

Hill, Hal. The Indonesian Economy in Crisis. Singapore: Institute of Southeast Asian Studies— ISEAS, 1999. ———. Indonesia’s Industrial Transformation. Singapore: ISEAS, 1997. James, William. “The Impact of the Balance of Payments and Financial Crisis on Indonesia’s Foreign Trade and Economic Performance.” International Centre for the Study of East Asian Development— ICSEAD Working Paper Series, Vol. 99, August 16, 1999.

———. “Indonesia’s Non-Oil/Gas Export Performance in 1997 and Prospects for 1998.” ICSEAD Working Paper Series, Vol. 98, May 12, 1998.

———. “A Problem with Indonesia’s Export Statistics,” in Bulletin of Indonesian Economic Studies, Vol. 34, December 1998, pp.115–18.

———. “Indonesia: Non-Oil/Gas Export Performance in 1996 and Prospects for 1997.” ICSEAD Working Paper Series, Vol. 97, December 5, 1997, also published in East Asian Economic Perspectives, March 1998.

Kamininsky, Graciela, and Carmen Reinhart. “The Twin Crises: The Causes of Banking and Balanceof-Payments Problems” in American Economic Review, Vol. 89, No. 3, June 1999, pp. 473–500.

Meier, Gerald M. (ed.). Leading Issues in Economic Development, Fifth Edition. New York: Oxford University Press, 1988.

Muller, Kal. Spice Islands: The Moluccas. Berkeley: Periplus Editions, 1990. Pardede, Raden. “Survey of Recent Developments,” Bulletin of Indonesian Economic Studies, August 1999.

Subroto, Roberto. “Recollections of My Career,” Bulletin of Indonesian Economic Studies, August 1998.

Toida, Mitsuru. “Overview” in Toida, Mitsuru and Daisuke Harata (eds.) 1999 Economic Forecasts for Asian Industrializing Region. Institute of Developing Economies, Tokyo, May 1999. World Bank. Indonesia in Crisis: A Macroeconomic Update, Washington, D.C., 1998.