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