Tue, 29 Jan 2008
From: The Jakarta Post
By Vincent Lingga The Jakarta Post Jakarta
Only an economic crisis could bring down President Soeharto, a political analyst once commented in the early 1990s when the authoritarian ruler began serving his sixth consecutive term with an ever stronger autocracy.

President Soeharto's regime fell along with the economic collapse in May, 1998. That showed how crucial his economic achievements had been in maintaining his political legitimacy for some 32 years despite a stunted political system.

In March, 1967, Soeharto took over from Sukarno a bankrupt economy ruined by a decade of mismanagement and succeeded in developing it within less than 15 years into one of the economic miracles in East Asia.

The conventional explanation for Soeharto's popularity until his miserable fall in 1998 was that his authoritarian rule delivered growth, stability, security and lifted tens of millions people out of absolute poverty, though at the cost of democracy.

That was what he mostly did during at least the first 15 years of what later turned out to be his autocratic rule of 32 years.

Soeharto's forceful reassertion of state power was indeed key to restoring order and stability -- the prerequisites to economic development -- because his rise to power coincided with a state breakdown and economic chaos.

But Soeharto left behind an economy in shambles causing one of the most massive destructions of wealth in modern history and plunging almost 35 million people into dire poverty.

Assisted by a strong economic team of like-minded, U.S-educated professionals under the leadership of Widjojo Nitisastro, Soeharto, immediately after taking over from Sukarno, launched what was then termed the New Order economic management and anchored in basic-needs policy measures.

With the full trust and support of the president, the closely knit team designed and implemented the whole sequence of economic policies -- from the stabilization and rehabilitation in 1967-1969 to the development stage, thereby securing policy coherence and consistency.

Soeharto's New Order regime, as his administration was eventually popularly known, succeeded within one year in controlling inflation which exceeded 600 percent in 1966 and restoring some order in government finances and international trade.

The new government regained the confidence of international creditors under the auspices of a creditor consortium called Inter-governmental Group on Indonesia (IGGI) which was later changed into Consultative Group on Indonesia and reintegrated the country into the global economy.

Encouraged by the foreign investment law that was enacted in 1967, foreign capital and technology began flowing in to the country, tapping its rich natural resources, notably oil and gas and other minerals as well as forests and fisheries and import-substitution manufacturing industry.

Luck was on also Soeharto's side. The quadrupling of the international oil prices set off by the political instability in the Middle East in 1973 pumped windfall profits into the state coffers.

With the influx of foreign investment, combined with a surge in oil revenues, steadily increasing foreign development assistance from IGGI donors and, yet more importantly, prudent economic management, the government accelerated infrastructure development and bolstered the pace of economic growth.

With the state coffers flush from the oil windfall and foreign aid and investment pouring in, the government built more roads, dams, power generation, telecommunication and transport infrastructure.

Being himself the son of a farmer and familiar with abject poverty in the rural areas, Soeharto put agriculture and rural development on top of his policies right from the outset when his first five-year development plan was launched in 1969.

He allocated a great portion of the state budget for building irrigation networks, the provision of agricultural extension services and fertilizers, pesticides and the development of high-yield rice strains.

He was honored by the United Nations Food and Agriculture Organization in Rome in 1985 for his outstanding achievements in making largely populous Indonesia self-sufficient in rice supply.

Soeharto poured a similarly huge investment into the development of education by building more schools, into health by building more rural health service centers and promoted family planning to control population growth.

This strategy -- basic-needs economic programs with emphasis on agriculture and rural development anchored by prudent fiscal and monetary management -- generated an annual average economic growth of more than 7 percent from 1968-1980. Growth declined to about 5 percent a year from 1981-1988 due to falling oil prices and a weakening global economy but rose again to an annual average of almost 7 percent between 1989 and 1996.

The broad-based growth lifted tens of millions of people out of dire poverty.

However, Soeharto's economic management began to suffer from market-distortion policies in the mid-1980s as his six children who entered the business world demanded monopolies in various sectors. Assisted by Soeharto's business cronies (mostly Chinese Indonesians), the Soeharto extended family and his relatives built up an economic empire at the cost of prudent economic management.

Corruption, collusion (between Soeharto and his business cronies) and nepotism increasingly seeped into Soeharto's administration as he became even more authoritarian and increasingly depended on a patrimonial power structure.

His economic management further suffered from more bad policies in the early 1990s after Soeharto diluted the role and influence of U.S.-trained technocrats, who quietly showed their uneasiness with the ever-expanding rent-seeking activities of his children and relatives.

He replaced the technocrats with nationalists and technologists led by B.J. Habibie, then notoriously as a big-spending minister behind several high-tech yet commercially unfeasible projects.

The corruption became a brake on growth and a drain on Soeharto's legitimacy.

Yet, the economy was still able to continue growing amid all the bad governance practices due to the steady flow of foreign soft loans from sovereign and multilateral creditors and foreign direct investment and favorable global economic conditions.

However, as the East Asian economic crisis -- which began in Thailand in July, 1997 and spread to Indonesia later in the same year -- panicked foreign investors and creditors rushed to pull out their money. This capital flight bared all the weaknesses of the economy, triggering first the melting of the rupiah and then the collapse of the financial system, causing an unprecedented destruction of wealth.

So fragile had been the foundations of the economy left behind by Soeharto that growth deteriorated to a contraction of almost 14 percent in 1998 and the rupiah exchange rate plunged to as low as Rp 10,000 to the dollar from Rp 4,000 in late 1997.

More than 25 years of steady growth generated new challenges in income inequality and weak institutions and a basic need for democratic system of checks and balances.

However, pressures from his greedy family members and relatives and business cronies and his patrimonial system made Soeharto blind to these new concerns and eventually caused his downfall, leaving behind a soup of a broad-based economy floating on a corrupt bureaucratic system as his legacy.



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