In 1949, after a four-year long armed struggle, Indonesia finally achieved effective control over its entire territory, with the exception of West Irian (now Papua). Nevertheless, the young nation faced serious political and economic problems. The Japanese occupation and the long fight against the Dutch had seriously impoverished the Indonesian people. The new government also faced armed insurrections and secessionist movements in various regions such as Aceh, West Java, South Sulawesi, and the Moluccas, which threatened the country's territorial integrity. In late January 1950, scarcely one month after the transfer of sovereignty, Raymond Westerling (a rogue member of the Dutch army) along with a few hundred troops under his command, carried out an audacious but quixotic plan to occupy Bandung and Jakarta. Although this plan immediately failed, it increased the sense of vulnerability of the Indonesian government.

When Indonesia finally received de jure independence in December 1949, the infant republic faced a range of serious problems, but nowhere were the problems more pressing than in the field of economic policy. In contrast with the Philippines and India, where the USA and Britain had honoured previous commitments and granted independence in 1946 and 1947 respectively, the refusal of the Netherlands to recognise the 1945 declaration of independence had led to four years of bitter and destructive fighting. Infrastructure on Java and elsewhere, already damaged during the Japanese occupation, deteriorated further after 1945, and by the end of the decade most of the important export industries were producing only a small fraction of their pre-1942 output. Smallholder agricultural output in Java was also well below pre-1942 levels. De Vries observed that many seed farms had been destroyed, irrigation systems had not been maintained and “vast areas of hill country” had been damaged by soil erosion. In the final years of the Japanese occupation, the Japanese army commandeered large amounts of rice, while the widespread issue of Japanese banknotes caused mounting inflation. Food was scarce everywhere and those with little or no land were most severely hit; most demographers concur that the population actually declined in Java after 1943, indicating a sharp increase in mortality.

Economic development during the Sukarno period has been touched upon in various surveys of modern Indonesian economic history. Yet, in 1971 Glassburner predicted that

the period beginning in December 1949, with the transfer of Dutch sovereignty over the East Indian Islands to the government of the United States of Indonesia and ending in December 1957, with the so-called “take-over” of Dutch-owned business property seems clearly destined to become one of those times of struggle and crisis which historians of the nation will analyze and reanalyze over the generations, interpreting and reinterpreting the known facts as the perspective of time changes.

The economist Hal Hill begins his authoritative survey of the Indonesian economy under Soeharto's “New Order” (Orde Baru) government with quotes from leading development economists, who are singularly pessimistic about the prospects for economic growth in Indonesia. A negative assessment such as that given by Swedish Nobel Prize Laureate Gunnar Myrdal is understandable as he was writing at the time of the severe economic crisis accompanying the eclipse of Sukarno's “Old Order” (Orde Lama) in the mid-1960s. More surprising is the verdict of Benjamin Higgins, known to have coined the expression “chronic dropout” for Indonesia. Higgins had spent quite a bit of time in Indonesia in the early 1950s as an advisor from the World Bank. Was his harsh verdict, akin to the oft-heard epithet “perpetual underachiever”, based on his own personal observations in the newly independent nation, or was his judgement also coloured by the near-collapse of the economy in the mid-1960s? The received dismal view of Indonesia's economic performance under Sukarno forms the logical point of departure for this article.