The Indonesian Adjustment Experience in an International Perspective

This study analyses stabilization and structural adjustment policies in Indonesia in relation to the highly varied experience of other developing countries. The paper begins by deriving salient lessons from adjustment experience in general. It is found that political economy considerations such as the nature of the state and institutions, are important to explain differential performance. The importance of outward orientation and exports for adjustment success is discussed along with country-specific tailoring of reforms and optimal timing and sequencing. This is followed by a discussion and overview of Indonesia's experience during the 1982-88 period, which was successful compared to that of most developing nations. After a short initial contraction, growth resumed at a fast pace and poverty alleviation continued throughout the adjustment phase. Indonesia also managed to diversify significantly from resource-based primary exports to manufactures. Most significantly, the reforms were undertaken voluntarily rather than under pressure from the Bretton-Woods agencies. Finally, the paper explains Indonesia's rapid and successful response in terms of the politicalinstitutional conditions prevailing at the onset of the crisis, the economic factors that determined the range of feasible options and the government's response strategy. The most important of these are the stability and credibility of the regime, stemming from sustained commitment to growth, rural development and poverty alleviation, relatively even land distribution, a rice boom that preceded the crisis and the strategy adopted. By simulating alternative policy scenarios on a computable general equilibrium model, it is shown that the policies adopted were near optimal.