Indonesia - The Economy

The economy

BY MANY MEASURES, the Indonesian economy prospered under the New Order of President Suharto after he came to power in 1966; growing industries added the benefits of modern technology to the natural abundance of the tropics, once the mainstay of the colonial economy. In 1965, before the New Order was initiated, the Indonesian economy had virtually no industry and little more total production per capita than when controlled by Dutch colonialists. However, so complete was the economic transformation under the New Order that, by the mid-1980s, the production of steel, aluminum, and cement was far more valuable than the produce of many thousands of hectares of plantations.

Perhaps the New Order's greatest asset was the resolve to alter policies when they no longer worked. For example, throughout the 1970s, tax revenues earned from oil helped fund growing government investment. In the mid-1980s, these revenues declined dramatically due to the glut on the world oil market. This decline in tax revenues as a base for economic development led, by the early 1990s, to an overhauling of the government's strategy to foster rapid industrial growth. The new strategy permitted a larger role for private businesses and featured greatly simplified government regulations.

Under Suharto's leadership, the nation seemed mesmerized by the prospects of modern technology. When tax revenues grew rapidly with oil price increases engineered by the Organization of the Petroleum Exporting Countries (OPEC) in the 1970s, the government pursued ambitious investments in heavy industries such as steel and advanced technologies such as aeronautics. Petroleum exports and the increasing exploitation of other natural resources funded imports of machinery and raw materials vital to rapid industrialization. Timber from Indonesia's vast rain forests, copper and nickel from remote mining sites, and traditional agricultural products such as rubber and coffee also contributed to buoyant export earnings.

Government agricultural programs brought the benefits of modern agricultural technology to millions of peasant farmers. The Green Revolution, based on the use of high-yielding seed varieties with modern inputs of fertilizers and pesticides, transformed subsistence rice farmers into productive commercial suppliers. Furthermore, new programs in the 1980s extended the benefits of modern agricultural techniques to other food and cash crops. This revolution created challenges in the early 1990s, however, as the greater diversity of crops other than rice and more varied conditions of cultivation made the task of increasing agricultural output more complex.

The New Order economic ideology was a departure from the former regime's brand of socialism, which was labelled by Sukarno, president from 1945 to 1967, as "socialism � la Indonesia." Under Sukarno's leadership, the government gained complete control over most private markets, including foreign trade and bank credit. The old regime was not limited by available resources: if ambitious government expenditures could not be funded by taxes, the government turned to the central bank for credit. Large budget deficits and intrusive economic controls led to mounting inflation and a stagnant economy.

Suharto learned from the mistakes of his predecessor. The hallmark of the New Order was fiscal and monetary conservatism. Budgets were balanced and growth in the money supply was restricted to contain inflation. Still, the forces that had pushed Sukarno toward socialism remained. After several centuries of Dutch rule, no indigenous group of industrialists had the resources to move the nation toward a modern economy. The most likely candidates, the ethnic Chinese minority, were still resented by the far more numerous and less well-off pribumi Indonesians. Whereas the Chinese minority had prospered in commerce and small-scale industry during the colonial era, pribumi Indonesians were primarily smallscale peasant farmers whose activities were limited by Dutch colonial policy. As a result, after independence Indonesians were ambivalent toward foreign investors because they symbolized foreign colonial domination.

The New Order steered a course that might be labelled "capitalism � la Indonesia." The government itself assumed the role of industrialist by direct state investment, increasing regulations and offering special protection for favored industries. Although never so intrusive or so poorly funded as Sukarno's programs, this strategy became increasingly plagued by inefficiency and corruption. In addition, the modern capital-intensive industries favored by government supports offered few employment opportunities to the growing labor force. In spite of abundant and cheap labor, Indonesia's exports were still dominated by natural resources and agricultural products. These exports provided less employment and were subject to larger price swings than the manufactured exports that had led economic development in many neighboring Asian nations.

The collapse of the oil market in the mid-1980s underscored the economy's weaknesses and forced the government to take stock of its economic policies. From the mid-1980s to the early 1990s, a wave of reforms to promote manufactured exports significantly reduced the role of government in all sectors of the economy. Private businesses seemed prepared to take up the slack. From a period of slow growth in the early 1980s, when annual gross domestic product (GDP) growth had dropped to 2 percent in 1982 compared with an annual average of 8 percent from 1970 to 1981, the economy rebounded to a GDP growth of 7 percent in 1990. Manufactured exports grew from less than US$1 billion in 1982 to more than US$9 billion in 1990. Still, the new orientation was a long way from laissez-faire, or, as Indonesians prefer, "freefight ," capitalism. Important government restrictions, such as a ban on timber exports, continued to affect private businesses. Several major state-owned firms, labelled strategic industries, were protected from any threat of privatization.

Ironically, the most visible beneficiaries of the growing economy during the 1970s and 1980s were the Chinese minority and members of Suharto's own family, whose business interests multiplied with lucrative government contracts. Although available evidence on income distribution suggested that income inequality declined during this period, the extreme wealth of the privileged few remained a symbol of inequity and a sensitive public issue in the early 1990s.

The vast majority of the population still lived in rural areas and earned a living from agriculture or from the informal sector of petty trade and other low-skilled services. The average Indonesian had only marginal contact with the modern industrial sector, through employment in the growing food market or occasional migration to urban areas for work. In the past, government largesse with oil tax revenues had strengthened these links by employing more civil servants and financing rural programs to assist pribumi farmers and small businesses. In the early 1990s, however, even though the government remained committed to improving the economic opportunities for pribumi Indonesians, the new policies relied more on a vigorous private economy to help spread the benefits of economic development.

For more recent information about the economy, see Facts about Indonesia.

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