Inflation Example

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Indonesia during periods of crisis

In 2008—2009, the United States of America experienced the sub-prime mortgage crisis that triggered the worldwide recession. Being the ‘manual’ for the world economy, the US crisis has also affected Indonesia in many ways. First of all, the exchange rate between Indonesia and America was changed drastically, consequently bearing a negative impact towards the export between the two countries. Secondly, loan interest rate also soared high due to credit awareness.

Although the crisis started in the housing sector of North America (causing the credit jam), the housing industry has many ties to various companies and international financial markets such as Indonesia. The spread of this economic crisis can be seen through the decrease in IHSG (Jakarta composite Index during 2008-2009).

The hardest impact was blown to the exporting industries in Indonesia. Companies with close ties and dependence of Indonesia-America exports were faced with the problem of the devaluating rupiah value. As seen in the graph above, during 2009 the growth rate of Indonesia’s GDP fell harder than any of the years before 2008 (reaching a year lowest of -3.57 in growth.)

The economic crisis in 1998 hit Indonesia quite severely. It was expected that inflation rate would rise between 80% - 100% at the end of the year in comparison with only a 10% increase during the years of high economic growth.

During the 1998 crisis, Indonesia’s GDP decreased by 12%. The crisis was caused by the sudden withdrawal by international investors from Asian financial markets in the mid-1997. Other than this external factor, Indonesia’s unstable banking system also worsened the situation. Indonesia could not handle the financial shock and were followed by a social as well as a political instability in Indonesia. The government responded the situation by lowering anti-competitive practices such as monopolies, oligopolies and cartels.

The government also...
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