The State and Economic Development

Indonesia Table of Contents

Apart from rejection of leftism, probably the single greatest discontinuity between the Sukarno and Suharto eras was economic policy. Sukarno abused Indonesia's economy, undertaking ambitious building projects, nationalizing foreign enterprises, and refusing to undertake austerity measures recommended by foreign donors, because such measures would have weakened his support among the masses. Suharto also used the economy for political ends, but initiated a generally orderly process of development supported by large infusions of foreign aid and investment.

Debt service obligations in 1966 exceeded export earnings, and total foreign debt was US$2.3 billion. One billion dollars of this amount was owed to the Soviet Union and its East European allies, largely for arms purchases. The following year, talks were initiated with Western and Japanese creditors for aid and new lines of credit. An informal group of major Western nations, Japan, and multilateral aid agencies such as the World Bank, known as the Inter-Governmental Group on Indonesia (IGGI), was organized to coordinate aid programs. Chaired by the Netherlands, IGGI gained tremendous, and sometimes resented, influence over the nation's economic policymaking. Hand-in-hand with aid donors, a new generation of foreign-educated technocrats-- economic planners attached principally to the National Development Planning Council (Bappenas) led by Professor Widjojo Nitisastro-- designed and implemented a series of five-year plans. The first plan, Repelita I, which occurred in fiscal year (FY) 1969-73, stressed increased production of staple foods and infrastructure development; Repelita II (FY 1974-78) focused on agriculture, employment, and regionally equitable development; Repelita III (FY 1979-83) emphasized development of agriculture-related and other industry; Repelita IV (FY 1984-88) concentrated on basic industries; and Repelita V (FY 1989-93) targeted transport and communications. During the 1980s, these plans also provided a greater role for private capital in industrialization).

Helped substantially by oil revenues after the quadrupling of prices during the 1973 global "oil shock," Indonesia emerged from pauperdom to modest prosperity. The development of new, high-yield varieties of rice and government incentive programs enabled the nation to become largely self-sufficient in this staple crop. In most areas of the archipelago, standards of nutrition and public health improved substantially.

Oil revenues were vital for the Suharto regime because they provided it with resources to compensate groups whose cooperation was essential for political stability. Government projects and programs expanded impressively. Indonesia is a member of the Organization of the Petroleum Exporting Countries (OPEC). Reflecting OPEC's pricing policies, the state's income from oil, channelled through the state-owned enterprise Pertamina (the National Oil and Natural Gas Mining Company), increased 4,000 percent between the FY 1968 and FY 1985. Economic planners realized, however, the danger of depending excessively on this single source of export revenue, particularly when crude oil prices declined during the mid- and late 1980s. As a result, the export not only of manufactured goods but also of non-oil raw and semiprocessed materials such as plywood and forest products was promoted. But the oil boom also provided new opportunities for corruption. Pertamina was established in 1968 as a merger of Permina and two other firms. Its director, General Ibnu Sutowo, a hardy survivor of the transition from Guided Democracy to New Order who had been director of Permina, embarked on an ambitious investment program that included purchase of oil tankers and construction of P.T. Krakatau, a steel complex. In the mid-1970s, however, it was discovered that he had brought the firm to the brink of bankruptcy and accrued a debt totaling US$10 billion. In 1976 he was forced to resign, but his activities had severely damaged the credibility of Indonesian economic policy in the eyes of foreign creditors.

The Pertamina affair revealed the problems of what Australian economist Richard Robison, in a 1978 article, called Indonesia's system of "bureaucratic capitalism": a system based on "patrimonial bureaucratic authority" in which powerful public figures, especially in the military, gained control of potentially lucrative offices and used them as personal fiefs or appanages, almost in the style of precolonial Javanese rulers, not only to build private economic empires but also to consolidate and enhance their political power. Because Indonesia lacked an indigenous class of entrepreneurs, large-scale enterprises were organized either through the action of the state (Pertamina, for example), by ethnic Chinese capitalists (known in Indonesia as cukong), or, quite often, a cooperative relationship of the two.

Through the 1970s and 1980s, Indonesia's pervasive corruption became a political issue that the New Order state could not entirely muffle. In January 1974, the visit of Japanese prime minister Tanaka Kakuei sparked rioting by students and urban poor in Jakarta. Ostensibly fueled by resentment of Japanese exploitation of Indonesia's economy, the so-called "Malari Affair" also expressed popular resentment against bureaucratic capitalists and their cukong associates. During the 1980s, the ties between Suharto and Chinese entrepreneur Liem Sioe Liong, one of the world's richest men, generated considerable controversy. The Liem business conglomerate was in a favored position to win lucrative government contracts at the expense of competitors lacking presidential ties. Import licenses were another generator of profits for well-connected businessmen. The licensing system had been established to reduce dependence on imports, but in fact it created a high-priced, protected sub-economy that amply rewarded license holders but reduced economic efficiency. By 1986 licenses were required for as many as 1,500 items. Foreign journals also published reports concerning the rapidly growing business interests of Suharto's children.

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Source: U.S. Library of Congress