Oil and the Indonesian Economy

Introduction For the past decade, Indonesia's economic development has been propelled by oil. Not that alone has been responsible for Indonesia's remarkable performance. A rate of growth of rice production of well over 4% a year which has owed relatively little to has been one very important ingredient and there have been others. But there can be no doubt that the oil bonanza which began with the quadrupling of the world price of crude in 1973/74 has been of enormous benefit, chiefly by relieving Indonesia of the chronic balance of payments problems which had hampered her economic progress ever since independence and by putting at the disposal of the government hitherto undreamed-of revenues for current and development expenditure.. So large were the two oil shocks of 1973/74 and 1979/80 that they were almost as disruptive in surplus as in deficit countries. But in Indonesia, national management coped with the disruptions, even with the serious Pertamina crisis of 1975, better than might have been expected. There has been very rapid economic growth and there is evidence that, despite growing inequality in some respects, the living standards of the great majority of th? people have improved. The glut in the world market that developed during 1981-82 threatens for some years to come to halt, and in real terms probably reverse, the growth in Indonesia's revenues. The large question now confronting Indonesia's policy-makers is how best to adapt to a period of renewed resource constraints. This paper begins with a brief historical account of the Indonesian industry and its growing role in the national economy. It goes on to discuss the effects of the bonanza, both favourable and unfavourable. Finally, it looks at the current situation and the prospects for the 1980s.