Indonesia's Slow Recovery After Meltdown

Iwan J. Azis
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Iwan J. Azis: Cornell University, West Sibley Hall 213, Ithaca, New York 14853,

Asian Economic Papers, 2008, vol. 7, issue 1, pages 79-103

Abstract: Although signs have emerged that some of the forces that caused the 1997-98 Asian financial crisis have begun to diminish and progress has been made in macroeconomic affairs, 10 years after the meltdown Indonesia's recovery is still among the slowest in Asian crisis countries. During the last few years, the relatively rapid growth of the financial sector (inadequately restructured) reflects the presence of excess liquidity and the sector's vulnerability. The slow growth of investment explains the economy-wide effects on the real sector and the stagnancy or deterioration of some social indicators. This paper focuses on two issues related to the slow recovery: the financial structure of lenders and borrowers that dampened credit, and the dismal performance of regional growth following the 2001 decentralization policy. There is some evidence indicating that agency costs have slowed credit and investment growth (credit channel), and that institutional constraints produced a lack of growth incentives among local governments. Efforts to raise the sub-national welfare post-decentralization have also been constrained by national policies such as a tight budget and the relatively conservative monetary policy despite the fact that they are not too effective at controlling inflation. The decomposition analysis also shows that an aggregate demand expansion would have been effective to stimulate growth. (c) 2008 The Earth Institute at Columbia University and the Massachusetts Institute of Technology.

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