Macroeconomic Adjustment and Private Investment in Indonesia in the Eighties

Abstract

A marked pattern in the adjustment process in the 1980s has been the inability of many developing countries to sustain investment rate. The same goes for Indonesia. Changes in policy during the period 1981-1988 in Indonesia have lowered the total amount of capital amount formation.

To access the impact of those policy changes whose impact can in fact be quantified, a simple model of Indonesia's private investment behavior has been developed which is essentially a variant of the flexible accelerator model adapted to incorporate some of the policy variables expected to affect Indonesia's private investment during the adjustment process. More specifically, this study concentrated on government's investment policies from a macroeconomics point of view.

The results show that the government's policies had a marked impact on private investment behavior in Indonesia during the sample period. In other words, changes in government policy are responsible for Indonesia's private investment behavior during the eighties.