Policy adjustments to the oil boom and their evaluation: The Dutch disease in Indonesia

This paper analyzes the effects of two policy adjustments, namely, exchange rate devaluation and the accumulation of budget surpluses, to the oil export boom in Indonesia by using a simple simulation model. Our results indicate that exchange rate adjustment had a significant impact on expansion of tradable sectors, especially the manufacturing sector, by reversing the real exchange rate. While officially maintaining the balanced budget principle, the government exercised delicate operations whereby the budget surpluses were covertly accumulated as government deposits. Such operations were executed as a necessary demand management policy to ensure that the effect of devaluation was persistent. These policy adjustments were consistent from a macroeconomic management point of view and have contributed to avoiding the “Dutch Disease” that Indonesia otherwise might have suffered because of its oil bonanza.