Why did Indonesia overcome the resource curse?

Abstract

Over the past few decades, developing countries that are rich in natural resources have performed significantly less well in economic terms than those that are resource poor. Indonesia is an exception in this respect. Despite its natural resource wealth, Indonesia performed extremely well in the three decades prior to the onset of the Asian crisis in 1997. In 1965, Indonesia was widely regarded as an economic “basket case” but by the early 1990s, it had been labelled by the World Bank as an East Asian “miracle” economy. How can Indonesia’s economic success compared to other resource-rich countries during this period be explained? This paper suggests that Indonesia’s success stemmed from two factors: the victory of counter-revolutionary forces over communist and radical nationalist forces in Indonesia during the 1960s and the nature of Indonesia’s geo-political and geo-economic environment. The former, it is argued, established the preconditions for a reorientation of economic policy during the late 1960s and, through this, the country’s reintegration into the global capitalist economy. The latter meant that this reintegration occurred on terms favourable to the country. The two combined meant that when international oil prices rose sharply during the 1970s, Indonesia’s “New Order” government had a strong incentive to manage the country’s newfound oil wealth well rather than allow it to be completely squandered through corruption or poor economic management.