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Indonesia The Politics of Economic Reform
Two main forces of influence within the New Order
government
battled to shape economic policy: the technocrats--who
favored
market reforms and a limited role for the government in
the
economy--and economic nationalists--who argued that trade
protection and direct government investment and regulation
were
necessary to contain foreign influence while mobilizing
sufficient
resources to modernize the economy. The technocrats were
led by the
original members of the "Berkeley Mafia," who had gained
cabinet
posts in the late 1960s. Among the most influential
technocrats
were Ali Wardhana, initially the minister of finance in
1967 and
coordinating minister of economics, finance, and industry
from 1983
to 1988, and Widjojo Nitisastro, who headed the National
Development Planning Board (Bappenas--for this and other
acronyms,
see table A), from 1967 to 1983. Although retired by 1988,
both men
remained influential behind-the-scenes advisers in the
early 1990s.
Under the tutelage of Professor Sumitro Djojohadikusumo, a
prominent intellectual and cabinet member in the 1950s who
founded
the University of Indonesia Faculty of Economics during
the 1960s,
these Western-trained economists were the voice of
economic
liberalism. The economic nationalists included prominent
officials
in the Department of Industry, headed by Hartarto; offices
under
the minister of state for research and technology,
Bacharuddin J.
Habibie; and the Investment Coordinating Board (BKPM; see
The Executive
, ch. 4). The balance of power between the
economic
technocrats and the economic nationalists was mediated by
Suharto,
who skillfully channeled the energies of both groups into
separate
arenas.
After the New Order successfully countered the rampant
inflation and financial collapse of the Sukarno era, the
technocrats gained credibility and influence in the domain
of
financial and fiscal policy. As oil revenues grew in the
1970s,
those government agencies responsible for trade and
industrial
policy sought to extend Indonesia's domestic industrial
base by
investing in basic industries, such as steel and concrete,
and by
erecting trade barriers to protect domestic producers from
excessive foreign competition. Government regulations
proliferated,
and oil taxes fueled investment in development projects
and state
enterprises.
The private sector became dominated by large
conglomerate
corporations, often Chinese minority-owned, which had
sufficient
wealth and know-how to assist the government in
large-scale
modernization projects. Australian economist Richard
Robison
estimated that Chinese Indonesian capital accounted for 75
percent
of private-sector investment in the 1970s. The two most
prominent
conglomerates, the Astra Group and the Liem Group, had
substantial
holdings in dozens of private firms ranging from
automobile
assembly to banking. The growth of these conglomerates
usually
hinged on close ties to government. In exchange for
monopoly
privileges on production and imports of key industrial
products,
conglomerates would undertake large-scale investment
projects to
help implement government industrialization goals.
Political
patronage became a vital component of business success in
the early
1980s as government restrictions were extended to curtail
imports
when oil revenues began to decline.
By the mid-1980s, about 1,500 items representing 35
percent of
the value of imports were imported either by licensed
importers or
controlled through a quota system. Such nontariff barriers
affected
virtually all manufactured imports, but were particularly
extensive
for textiles, paper and paper products, and chemical
products. As
a result of restrictions on imports, firms in these
sectors were
effectively protected from foreign competition or able to
sell
their products at a higher cost. Firms that obtained
import
licenses were also highly profitable, but costs were borne
by the
entire economy because imports were often key inputs for
many
manufacturers. Popular resentment grew as the gains from
these
restrictions enriched a privileged minority. To the
long-standing
public sensitivity toward the prominence of the Chinese
minority
was added dismay that members of Suharto's family were
profiting
from access to import monopolies.
Suharto's six children were the most visible
beneficiaries of
close government connections. Each child was connected
with one or
more conglomerates with diverse interests, and like their
Chinese
minority counterparts, they based their business success
at least
partly on lucrative government contracts. For example, son
Bambang
Trihatmodjo's Bimantara Citra Group, reportedly the
largest family
conglomerate by the 1990s and Indonesia's fifth largest
company in
1992, got its start in the early 1980s selling allocations
of
overseas oil to the National Oil and Natural Gas Mining
Company
(Pertamina)--the government oil monopoly and the nation's
largest
company. Lower value middle East oil was thus used for
domestic
refining and consumption while higher-grade Indonesian oil
was used
for export, primarily to Japan.
Two vital industries symbolized the intricate
relationship
between government and business: steel and plastics. In
the first
case, the founder of the Liem Group, Liem Sioe Liong,
agreed in
1984 to invest US$800 million to expand a government
enterprise,
Krakatau Steel, in Cilegon, Jawa Barat Province, to add
production
of cold-rolled sheet steel. In return, a company owned
partly by
Liem received a monopoly for the imports of cold-rolled
steel. Once
domestic production was underway, Liem's imports were
restricted to
assure demand for the Krakatau product. The
World Bank (see Glossary)
estimated that the scheme added 25 to 45 percent
to the
cost of steel sheets in Indonesia, thereby raising costs
of a wide
range of industrial products that used this material. In
the second
case, the importation of plastic raw materials was
monopolized
through government license by Panca Holding Limited, on
whose board
of directors sat Suharto's son, Bambang, and his brother,
Sigit
Harjojudanto. As a result, in 1986 the company earned
US$30 million
on US$320 million worth of plastics imports, adding 15 to
20
percent to the price of these materials for Indonesian
users.
When oil prices plummeted in 1986, the growing
dissatisfaction
with the direction of trade and industrial policy became
more vocal
among small private businesses excluded from the benefits
(see Minerals
, this ch.). A number of smaller businesses
organized the
Chamber of Commerce and Industry in Indonesia (Kadin).
These
businesses became open critics of the "high-cost" economy
of
monopoly privilege, and in 1987 Kadin became the
officially
sanctioned channel of communication between business and
government. Other influential groups began to pressure the
government for trade reforms, including international
lenders on
whom Indonesia relied to assist the government with
balance of
payments difficulties resulting from the decline in oil
revenues
(see
table 15, Appendix).
Several major reforms were underway before the 1986 oil
crisis,
but without direct affect on trade restrictions, which
although
valued by influential beneficiaries, had become costly to
many
businesses. Major trade deregulation began in 1986, but
left the
largest import monopolies untouched until 1988, a gradual
approach
to reform that influential technocrat Ali Wardhana
attributed to
the limitations of the government bureaucracy. He hinted
at a
broader political motive, however, in acknowledging that
piecemeal
reforms had the advantage of progressively winning a new
constituency for further reform. The financial sector was
the first
sector to be reformed in the 1980s, as it was in the
mid-1960s,
when the New Order government faced the excesses of the
previous
regime.
Data as of November 1992
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