Urban development in Indonesia, 1990–2001: from the boom to the early reform era through the crisis

Abstract

This article discusses the recent urban development in Indonesia and the extent to which the current economic crisis and uncertain sociopolitical situation have affected urban development. Until the mid-1990s, urban development fuelled by high economic growth has been characterized by restructuring of physical and economic activities. However, the recent economic crisis has caused economic activities in cities to shrink greatly. Meanwhile, the new legislation of regional autonomy and fiscal decentralization and current socioeconomic and political situation could have significant impacts on urban development in Indonesia in the near future.

Introduction

The developing countries of Southeast Asia, notably Malaysia, Indonesia and the Philippines, have undergone a transformation of their economies, from agrarian to industrial based economies. In fact, the Southeast Asian countries have generally been well positioned in the global economy. In addition to their major role as primary commodity producers, at present, these countries have also received flows of investments in manufacturing industries from Japan and the New Industrialized Countries (NICs), notably from South Korea, Hong Kong and Taiwan, as well as from other developed countries. This has been supported by great advancement in the technology of telecommunication and transportation (McGee & Robinson, pp. 344–345). This transformation has had a significant impact on the pattern and process of urbanization in these countries.

As McGee and Robinson (1995) argue, the state policy in Southeast Asian countries has unintentionally encouraged the formation of mega-urban regions, in which metropolitan growth tends to sprawl along major expressways, leapfrogging in all directions putting down industrial estates, new towns and large-scale housing projects and even golf courses in urban fringes that were formerly agricultural rural areas. The urban centers, notably the Central Business Districts (CBDs) have undergone physical restructuring in which many residential areas have been converted into hotels, shopping malls, offices, and high-rise apartments, whereas the prime farmland in the outskirts has been converted into urban land uses. Meanwhile, in the larger context, the waves of investment from Japan and the NICs have formed hierarchically integrated ‘world cities’ in Southeast Asia, which are connected to the growing urban corridors of East and Southeast Asia (Lo & Marcotullio, 2000, p. 107; see also Firman, 1998; Choe, 1999; Yeung & Lo, 1999).

Unexpectedly, however, the Southeast Asian countries were hit by serious economic and monetary crises, which erupted in Thailand in July 1997, and quickly spread to Malaysia, Korea, the Philippines and Indonesia. The crisis has obviously caused great losses to the Asian economy.¹

The Indonesian economy experienced the worst impact: the currency fell significantly, foreign capital fled away, and investor confidence plummeted. The Indonesian economic crisis includes the offshore bad debts of many Indonesia's private enterprises, which failed to commit themselves to the schedule of repayments, and monetary mismanagement (see also McLeod, 1997). As Sadli (1998) points out, the fundamental weaknesses in the Indonesian economy lay with the private sector, which had proceeded on an investment spending spree made possible by foreign loans with minimum prudence and security (p. 273). The Indonesian economic crisis was rooted in overinvestment and overborrowing by the private sectors, corporate and banking, which in <10 years had amounted to nearly US $180 billion, mostly unhedged (p. 274). Dramatically, from July 1997 and June 1998, the exchange rate of Indonesian currency (Rupiah) vis-à-vis the US Dollar dropped from about Rp. 2400 to Rp. 13,000, although it increased again to Rp. 10,000 by the end of 2001. Meanwhile, the foreign capital outflows from Indonesia were US $4.3 billion, whereas capital inflows only reached US $1.1 billion in 1999. This caused Indonesia to suffer a deficit of about US $3.2 billion in the year, much higher than the deficit of US $350 million in 1998 (The United Nations World Investment Report 2000, cf. Jakarta Post, 4 October 2000). The World Bank was so pessimistic about the Indonesian economy in the early 1998 that it pointed out:

Indonesia is in deep crisis. A country that achieved decades of rapid growth, stability and poverty reduction, is now near economic collapse […] No country in recent history, let alone one the size of Indonesia, has ever suffered such a dramatic reversal of fortune. The next years will be difficult and uncertain (World Bank, 1998, p. 1).

The Indonesian economic crisis has been an extremely complex process. It has involved not only economic factors, but also political crisis connected to bad governance involving corruption, collusion and nepotism (Korupsi, Kolusi, Nepotisme (KKN)) in the government under the tenure of President Soeharto who had ruled the country for more than three decades (see Robison & Rosser, 1998; Robertson-Snape, 1999; Tubagus, 2000; Dick, 2001). The KKN paralyzed the country's productive capacity affecting the whole of Indonesian socioeconomic and political life resulting in a situation where institutions have been used for private gains, financially and politically (Almonte, 2000). Following massive protests from students over the issues of human rights, justice and democratization, President Soeharto eventually resigned and was replaced by President Habibie on 21 May 1998. The spirit of democratization and reforms (reformasi) has changed the political and socioeconomic environment, and now Indonesia enters a new era, which is popularly called ‘era reformasi’ (reform era). Meanwhile, the crisis seemed to be bottoming out by the end of 2000, and the economy started its recovery, meaning it is no longer contracting, since the second half of 1999 (Sadli, 2000). However, it is still questionable if the Indonesian economy is going back to normal soon, because the political situation is still fragile.

The current economic crisis has had a significant impact on urban development in Southeast Asia (see Chatterjee, 1998) most notably in Indonesia. The economic activities in major cities in the region have slowed down, causing a rapid increase in the number of urban unemployed. The extent to which urban development in Indonesia will continue in the reform era still remains to be seen. However, there are two recent events which could affect urban development in the near future: first is the promulgation of new legislation of regional autonomy (Law number 22/1999) and of fiscal decentralization (Law number 25/1999), and second is the change in political and socioeconomic conditions following the Presidential election in October 1999.

Bearing this background in mind, this article will discuss the recent urbanization and urban development in Indonesia and examine the extent to which the recent economic crisis and current sociopolitical conditions have affected the urban development in the country. Elsewhere, the author has discussed the impacts of the economic crisis on urban development in Indonesia (Firman (1998), Robertson-Snape (1999a), Firman (1999b)), but the crisis is on-going process until this moment, i.e. the end of 2001, so that its impact on urban development is still expanding. Within this context, the study will also update the situation. Apart from the introduction, the article is organized into four parts. Section 2 examines the urbanization and urban development in Indonesia during the boom economy; Section 3 discusses the impacts of recent economic crisis on urban development; and Section 4 analyzes the urban development situation in the early socioeconomic and political reform era, while Section 5 concludes the discussion.