Investment behavior and the Economic Crisis in Indonesia

Abstract

Investment in Indonesia has been running below levels found before the East Asian Economic Crisis in 1997–1998 and is a major reason why aggregate growth is not robust. The lack of investment results from a lack of confidence in economic prospects: a self fulfilling prophesy if capacity is not added and technological change stifled. By using a small-scale econometric model, the paper argues that structural change has occurred with the Crisis. The paper pinpoints (i) deficiencies in the banking and financial system and (ii) the changing appreciation of the costs of corruption as two important factors. These factors have to be seen, however, against a large number of other changes experienced in the region generally and Indonesia specifically.