The Asian economic crisis of 1997–98 had devastating effects on Indonesia's poor and near poor, the numbers of whom increased rapidly as a result. This development was particularly tragic since much progress had been made in poverty alleviation during thirty-two years of rapid and sustained economic growth under the New Order government (1966–98). To put adverse developments, particularly the rise in the incidence of poverty, in proper perspective, it might be helpful to have a brief historical overview of Indonesia's economic development and its impact on poverty during the three decades preceding the onset of the crisis and in the decade following it.

ECONOMIC GROWTH AND POVERTY ALLEVIATION DURING THE NEW ORDER 1966–98

As a result of political turmoil and the utter neglect of sound economic policies after the late 1950s, the Indonesian economy in the early 1960s experienced steadily rising inflation. As a consequence of the unrestrained printing of money to finance the rising government budget deficit, this spiraled into hyperinflation, which had reached almost 600 per cent by 1965. The economy had stagnated during the 1961–64 period; the modest growth that occurred in 1965 reflected only a good agricultural season (Hill 1996: 2). Since population growth exceeded economic growth in the early 1960s, per capita income declined during this period, particularly in 1962–63, with the economy contracting by three per cent in 1963 (World Bank 1998: 2.1).

With the deterioration in economic conditions, absolute poverty was quite high in the mid-1960s. In Java, 61 per cent of the population was very poor, while outside Java the very poor accounted for 52 per cent of the population. In 1961 no less than 68 per cent of the total population had no schooling at all, while only 0.1 per cent had enjoyed a tertiary education (Hill 1996:5). The available evidence also shows that per capita income in Indonesia in the mid-1960s was well below that of other Southeast Asian economies for which reliable data are available, and below even that of India. Indonesia's real per capita GDP in 1966 is estimated to have been only 535 international dollars (1985 prices), compared with US$650 in India (Booth 2000: 74).