Indonesia: A New Dragon?

Author(s): Eugene B. Mihaly

Source: The World Today , Aug. - Sep., 1990, Vol. 46, No. 8/9 (Aug. - Sep., 1990), pp.
162-164
Published by: Royal Institute of International Affairs

Stable URL: https://www.jstor.org/stable/40396227

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 Indonesia: a new Dragon?

Eugene B. Mihaly
In the finance and planning ministries of the developing world,
economic liberalism is the new orthodoxy. But few nations are
practitioners. Indonesia, the world's fifth largest and arguably
least known major nation, is a notable, and successful, exception.
Today, Indonesia is moving steadily into position to join the
club of Asian Dragons, the group of newly industrialised coun-
tries (NICs) consisting of South Korea, Taiwan, Singapore and
Hongkong. Success is by no means pre-ordained and will cer-
tainly take some years to achieve. But even the possibility of
such a development reflects a remarkable turnaround. It was only
a generation ago, in 1965, that an economically crippled
Indonesia savaged itself in an attempted coup and counter-coup
that together took more than 250,000 lives.
Indonesia is exceptional in at least two respects. It is one of
the few (some would say, the only) among large former colonies
firmly on the track of a long-term economic development - a
development, further, sustained by a parallel political evolution.
And, in its economic progress, Indonesia is demonstrating that
there is life after oil. Alone among the handful of states with
major oil finds and large populations (Nigeria, Mexico,
Venezuela), Indonesia has extracted itself from near-total depen-
dence on oil income. It has broken away from the patterns of
institutionalised low productivity in agriculture and industry that
oil revenues in this group of countries have sustained by encour-
aging - in periods of high oil prices - economically and socially
costly import-substitution policies; and by financing the illusion
that the policies worked, thus undercutting the political will to
undertake difficult reform.
The strategic and political consequences of the economic
changes in Indonesia are likely to ripple far. For some years
Indonesia has been a developing regional military and political
power. But its voice has been muted by its economic limitations.
Though by far the largest state in the Association of South-East
Asian Nations (ASEAN), Indonesia's weight in the region has
been less than its population of 1 80m and its vast territory would
warrant. It has been over-shadowed by the economic dynamism
of Singapore, Malaysia and Thailand. Should today's economic
trends continue and be matched by the kinds of political changes
that will sustain them - and there are signs of these - Indonesia
will almost inevitably take its place as the dominant power in
Southeast Asia and as a nation to be reckoned with on the inter-
national stage.
as car ownership moves down through income strata. New roads
stripe the countryside, but they are not enough to keep up.
Indonesia's own satellites now link thousands of islands by tele-
phone and television.
Indonesian business is booming on both the home and export
markets. The economy has left behind near-total reliance on oil,
gas and agricultural commodities. Growth today is led by a steep
increase in exports of manufactures and processed goods. And
the more successful firms have reached the point of making
acquisitions in the 100m dollar range in the United States and
Australia. That is, Indonesian firms are going multinational.
At a more fundamental level, reasonable diets have replaced
mass malnutrition; foreign and domestically produced textiles
are the norm rather than yesterday's shabby clothes. In the
countryside, where shoes (when they were available) were the
principal transport vehicle, farmers move about on bicycles,
motorbicycles and in a surprisingly large number of mini-vans.
Almost all children go to primary school; 37 per cent to sec-
ondary school and 8.6 per cent to university. Life expectancy is
up and rising steadily. A middle class has emerged and is grow-
ing fast.
Indonesia, in short, is showing all the signs of sustained
growth. The data both reinforce the impressionistic picture and
qualify it. Growth was very high in the early years of President
Suharto's administration after 1968 - in the 10-1 1 per cent range
- then dropped to a steady 5-6 per cent in the 1970s. With the
decline in oil revenues in the mid-1980s, the economy came to a
virtual halt. Growth picked up again in the late 1980s and has
been rising steadily since: 5.9 per cent in 1986, up to 6.5 per cent
in 1989 and an apparent 7 plus per cent this year. Population
growth has dropped steadily, down now to about 2.1 per cent.
Thus the gdp figures reflect a good real rise in per capita income.
Further, the benefit is felt throughout - or nearly so - Indonesian
society, though the pattern of income distribution is all too remi-
niscent of the nineteenth century West, with most of the new
wealth going to a small fraction of the population. On the other
hand, 80 per cent of the population is now above the poverty line.
That line is not high. Per capita income is only approaching $600
per year.
All this, clearly, is not the usual story in the developing world.
What are the ingredients of the Indonesian experience that
account for the nation's economic health and good prospects?

A distance travelled Towards liberalisation

Today's
The Indonesian economy in the mid-1960s, in the days before the growth is a product of yesterday's prudence, and of
attempted coup of 1965 and the cataclysmic cycles of revenge
contemporary economic liberalisation.
that came after, was a shambles. Inflation was running at 400 per stabilisation of the economy, the first major initiative by
After
cent. Domestic investment had stopped; foreign investors thewere
then new Suharto government in 1968 was a quest for food
long gone. Growth was no more than a hope. The country was
self-sufficiency. The government approached the problem with a
desperately poor; its leadership was offering ideology - the half- of policies and initiatives. Most important, it paid prices
package
baked socialism so attractive to developing states in at those
or near world level to producers. In contrast to most develop-
days - in place of food. ing countries, Indonesia's farmers since then have not been
Now, 25 years later, Indonesia is almost unrecognisable. It to subsidise urban consumers. Simultaneously, the gov-
forced
looks, and is, increasingly prosperous. One notices first the sym- introduced new varieties of rice (at subsidised prices to
ernment
encourage
bols. The national airline, Garuda, has one of the largest jet fleets use), fertilisers and herbicides without which the
in Asia and is buying a civil aircraft partly designed and made
hybrid in varieties would have failed. It launched a massive irriga-
Indonesia. Jakarta's skyline is punctuated by high-rise office
tion construction programme and developed a good storage and
towers, some of them notably handsome. Traffic, that seemingly
distribution system.
unavoidable symptom of Asian success, is bad and getting worse The immediate objective was attained. By the mid-1970s,

162

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INDONESIA THE WORLD TODAY 1 63

Indonesia achieved anself-sufficiency economy that had become import-dependent, but that keptin the ric
from an importer which economy on an even keel. consumed,
And then they devised and putin into bad
of all rice on the world market
effect a new development strategy. Government into, in go
spending, they
exporter. Equally important argued, no longer could drive the economy. in the eyes o
Oil spending could
was the transformation no longer sustain of rural
the inefficiencies of importliving
substitution. Fromcond
initiative, in concert here on, theywith argued, the privatesocial sector would have and to be the sma
grammes, raised incomes economy's engine. And and growth wouldoverallbe based on a rising level stand
and thus assured the of exports,regime
with an emphasis on manufacturessolid suppor
and processed
Despite rapid urbanisation, goods. Indonesia w
nation of farmers, so that
To give form base
to the goal, the ofa pro-
Technocrats designed broad su
cial over the years. gramme that amounted to substantial dismantling of the state
The oil price bonanza machinery for control
of of the economy. They issued
1973 came a series of as th
surprise to Indonesia liberalisation
as 'packages'.
to These the
covered trade,otherinvestment, maj
party ended early in finance and micro-control of commerce.
Indonesia. An event t
ter at the time looks, The earlytoday,
packages transformed to Indonesia'shave
trade policy. been
Indonesian state oil Theycompany,
removed the country's high, sometimes insuperable, wall
Pertamina,
service $10bn in, primarily, of non-tariff barriers that blockedshort-term
all but those imports brought in deb
fund an array of long-term by the favoured or by the government itself. obligations,
In its place, they cre-
equipment for state ated aenterprises.
tariff regime that leaves the border today increasingly
The scand
press. Suharto, a man open. Exporters,
of moreover, were given the right to import pride
immense duty- an
was deeply embarrassed. free machine tools, components
He anddirected commodities that would that
bank should assume lead tothe
exports. This obligations
wiped out a major barrier to competitive- and, t
standing in the international ness.
financial com
three of the most respected Other measures transformed investment procedures for appr b
ing a plan for rapid investment, repayment. both domesticThe and foreign. rescue These tod
more important insimplified the beyond long recognition.
run, BKPM, the investment
control
ment macroeconomic was a mastiff
management at the gate, always slowing investment,
shifted
known formally asblocking the it. Today,
Technocrats,it is a promotion agency, infor charged wi
Mafia. ing as much investment as possible and approving it w
These economists, roughly, most 30 days.of them educated
California, had handled Banking and finance the have been 1968 put on an stabi internationa
inflation from 400petitive per basis. Private banks
cent to sink or swim on their perf
single-digi
few minor slips, it Indonesia's has stayed. once favoured state The banks now Technomust compe
this day - personal deposits
and and for commercial business. The
ideological intensity ofw
links
After cleaning up tion the for both private and state banks mess,
Pertamina has been raised t by
conservative fiscal sation and to foreign
monetary banks to operate full service branches o
regime in
realistic exchange rates and major provincial with cities. de All thisfacto has been acon major f
based on deft management business, as an arrayof of institutions
import vie to offer increasin
flow
reserves. sophisticated and tailored services. Further, financial
The Technocrats were not able, however, totion, startalong
a liberalisa-
with the other measures, has invigorated th
stock exchange
tion programme during the 1970s. Oil revenues paid for a major which has become one of most active, an
capital investment programme by the government. the hottest,
That spendingin Asia. And other exchanges are emerging in
drove the economy. The private sector was a thin cial tail
capitals.
on the pub-
Finally, the it
lic sector dog. To the extent that the country industrialised, government
did has simply dropped a host of
and authorisations
so on an import-substitution basis. Indonesia headed down the that stood between business and decision-
makers and
road of inefficient industry, totally protected by daily operations. These mechanisms had constituted
quotas,
elements of
monopoly rights, and - in the case of state industry a time-honoured and highly depressive skein of
- subsidies,
micro-controls
with all costs covered by oil earnings. Those earnings, plus ongood
business. Each one had given one or more
officials the power
agricultural performance, generated a respectable but ultimately to impede or block an enterprise's conduct of
vulnerable pattern of growth. Up to this point, business. And with eco-
Indonesian that power came the opportunity to extract
extra-legal
nomic policy still resembled that of the other large payments. The thinning out of permissions has helped
oil producers.
It differed most markedly in agricultural policy, to reduce
and thealsobreadth
in theof corruption. But the success of the
degree of prudence and in quality. The other oil states, notablyeconomy, and the huge increase in funds in circulation, appears
Nigeria, shaped economic policy as if the inflow to have
ofled to an increase
funds would in amounts of illegal payments.
go on forever. None made a serious effort in agriculture. Indonesian Farmers
society has generous, but not unlimited, tolerance
took note; few others did. for self-enrichment by the powerful. One of the few plausible
The end of the oil boom in the early 1980s was threats to the
the current development strategy is a widespread sense
watershed
for these countries. Nigeria, Mexico and the inothers Indonesiaaddressed
today that a few at the top are, in fact, doing too well
unfamiliar large trade and current-account deficits and are by
doing so because of de facto alliances with private busi-
borrowing
heavily. They made few changes in levels and ness. There have
patterns been no polls on the subject. Informal evidence
of expen-
suggests
diture or in overall development strategy. In contrast, Indonesia that the politically aware public knows that much of the
made a U-turn. wealth at the top has been earned - technically - within the law.
To meet the immediate crisis in both budget and foreign i.e., a senior official can own shares in a company that benefits
exchange availability, the Technocrats slashed public spending. from his decisions, but that there is strong resentment, neverthe-
They cancelled a number of capital projects (later, when the oil less. The economic impact of this eludes measurement.
price dropped further, they would cancel still more). They deval-Certainly, the distribution of wealth is distorted. But it is uncleai
ued the rupiah sharply, an action that was painful to a public andwhether the overall formation of capital, or the pace of develop-

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1 Ó4 THE WORLD TODAY AUGUST/SEPTEMBER 1 990

ment, has been affected. Onrule.the other Today, hand,

it is the emerging wealthas issu
a s
serious political problem in change
a polity reflects
that isa faring, general otherw openin
The press
quite well. Suharto has attempted is self-censored
to address the problem but wn
proposal that major domestic free, companiesand criticism sell and/or an everyday transfe
per cent of their equity to travel
cooperatives.
freely. The proposal has aro
Suharto has presided over
a storm in the business community andthis gradual
is opening
being and, viewed
reconside
optimistically, this movement towards participatory governance,
The political underpinning
with consummate skill. He is virtually unchallenged. He has
coopted the best of Indonesian society,
Economic liberalisation is engendering including most of the
entrepreneurship a
leadership of
creativity. But the liberalisation the opposition and
itself, parties. Hethe
has neutralised
fine mosteconomic
others. Many assume that,
formance Indonesia is experiencing, are Indonesia
the being the largest Islamic
products of poli
state, organised Islam
Indonesia has had two presidents inwouldthe
pose a threat.
43 Atyears
most, in fact,since
it ind
pendence. Suharto has been in
offers control
a moderate since
alternative for the future; not a1966 and in of
challenge in the
since 1968. Many key Cabinet near term. members, Technocrats and o

ers, have been in office (not The big political question

necessarily inin theIndonesia same today isposition
transition.
most of this period. StabilityWhen atwillthe Suharto top go? Who will succeed? Will thein
is unmatched transition
anybeo
country. That stability mirrors
orderly? Thethe nation's.
President's term ends in 1993. Suharto's fcN
He acts like a candi-
Order' of military rule and datemixed
for re-election. His colleagues in
military andthe army are sending few
civilian go
signals of their wishes;
nance has had substantial acceptance from but most suggest
its it is time for a change.
beginnings.
The President is vulnerable
The regime has faced opposition, sometimesto accusations that his family hasa
serious
widespread. There have been sporadic
benefited flashes
out of all proportion from his of anger
position. in t
Family-owned
streets. Student and Islamicenterprises
group control many of the commanding
disaffection has risen, heights of thefa
economy.
risen again. Intellectuals have The President's
gone through answer is periods
that these are legitimate,
of, alb
viable businesses
peaceful, opposition. The urban poor, and watched
that he cannot reasonably
carefully be expected
by to
regime's intelligence apparatus,
hold his family have rioted
back from commercial on a few occas
entrepreneurship.
But disaffection has never reachedThe conventional an wisdom in Jakarta is that Suharto
intensity great will enoug
pose a threat to the regime. decide
And to stand
any again but will not serve a full
Indonesian term; that he
regime iswill be
vuln
able. Had these or other majorreplaced elements
by the Vice-President ofwho will almost certainly
Indonesian be a
societ
any time coalesced to bringgeneral,
theand regime
that that leader down,
will in turn theybe succeeded would
by an elect- h
good chance of success. An ed civilian. There
army ofare a other
quarterscenarios, but of thisaone is the most
million m
plausible.
can not long impose an unacceptable government on a natio
1 80m, scattered across thousands In Indonesiaof today,islands,
there is astonishing withconsensusmany
on the cultu
a demonstrated capacity for regional
direction rebellion,
the country is taking: on export-led growth inand a market-a passion
rule by consensus. based mixed economy led by the private sector, and on gradual
Election results give perspective. Every
movement towards political democracy. five years
On the economy, debate the nat
elects its Parliament. On eachassumes theoccasion since
Tightness of the strategy and focuses 1968,
on tactics. How the gove
ment party, Golkar, has won handily
much social welfare should the in systemelections
provide? How much gov- that were
tially manipulated but have become
ernment more
control is legitimately needed toopen and
protect the nation from honest,
only marginal manipulation. Inof 1982,
the worst growth? On the Golkar
political side, the took 64.3 per c
question is pace.
in 1987, 73.2 per cent. The Indonesia
larger today thusof the
is a nation with opposition
no serious Left or Right, parties,
United Development Party only (PPP), which is a coalition of Isla
a complex centre.
organisations with a waning There commitment
are vulnerabilities. As its economytostrategy
the goal of a t
succeeds,
cratic state, has been unable Indonesia's
to get fortunes are increasingly
more than tied to the
29 performance
per ofcent (it t
only 16 per cent in 1987). the The international
non-Islamic economy and of opposition,
its major trading the
has taken a handful of seats partnersin each
- Japan, election
the United and
States, the European captured
Community. It
per cent in 1987, its best performance
is difficult to predict howyet - perhaps
the nation's consensus would hold a porte
up
development into the principalin an international
opposition economic crisis. Indonesia, after
party. all, is vol-
Parliament
longer only window-dressing. Inas the
canic, politically early
well as physically. Thedays after
last eruption
upheaval of the mid-1960s, Suharto
occurred and
in 1965. But that his
was long ago, military collea
and Indonesia is a pro-
were obsessed with the need for
foundly changedorder and
country, indonesia brooked
gives every sign that it no
can opp
tion. Parliament then servedride
as a rather
through thin
an international smokescreen
storm, and continue its growth and who
purpose was to provide an appearance
its movement towards theof legitimacy
status of a major power. for mili

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