RI's economic policy experience<\/p>\n
The following article is based on a paper by Mohammad Sadli
\npresented at the Conference on Governance Innovation in Manila on
\nOct. 22. The conference was organized by the Ottawa-based
\nInstitute on Governance, the Economic Development Institute of
\nthe World Bank and local civil organizations. This is the first
\nof two articles.<\/p>\n
MANILA: Since independence in 1945, Indonesia has known only
\ntwo presidents. President Sukarno was the founding father of the
\nrepublic and its first president. The first period of
\nindependence, from 1945 to 1966, was marked by frequent political
\nturbulence. The management of the economy was socialistically
\ninclined; there was a very strong role for the state, and a weak
\nprivate sector. Direct foreign investment was ideologically
\nrejected because the country was busy eliminating the vestiges of
\na colonial system. At one time president Sukarno even took the
\ncountry out of the UN system, including withdrawing from the
\nInternational Monetary Fund and the World Bank. With his
\nobsession against colonialism and imperialism, he practically
\ntook the side of the Eastern camp in the cold war at the end of
\nhis reign. But this orientation only produced economic stagnation
\nand a hyper inflation. In the end, the regime collapsed.<\/p>\n
The new government had a beautiful opportunity to start on a
\ncompletely new basis. But two questions could be posed: why could
\nit do so and, why did it want to do so?<\/p>\n
First, the political make up of the new regime was radically
\ndifferent. The military dominated the new situation. The
\nIndonesian military was non-ideological in the sense that it was
\nnot attracted by the then current and fashionable ideologies or
\n\"isms\", like socialism, communism, nationalism or religious
\nfundamentalism. It was patriotic, but not \"nationalistic\" in the
\nmore ideological sense of the word. For instance, it had no hang-
\nups about foreign investment and international aid. It was
\nresult-oriented, and more systematic in its outlook. This was
\nunlike the political parties which were more matter-of-principle
\nin their outlook.<\/p>\n
The military, actually the Army rather than the other forces,
\nhad prior links with professors of major national universities,
\nthe University of Indonesia in Jakarta and Gadjah Mada University
\nin Yogyakarta, which provided lecturers for social science
\ncourses at the Bandung Army Staff and Command College at the
\ntime.<\/p>\n
From the mid-1950s, leadership in the army had seen the need
\nto educate high ranking officers in social sciences. This was
\nbased on the belief that army officers would graduate from being
\nmilitary leaders to being leaders of society. For that role they
\nneeded to be prepared in staff colleges.<\/p>\n
The so-called economic technocrats in the government of
\nPresident Soeharto were the economic instructors at the Bandung
\nArmy Staff and Command School in the fifties and sixties. In that
\ncapacity they came to be known, and trusted, by the generals of
\nthe middle and late 1960s. It was a fortunate occurrence of
\nproductive civil-military relationships in a newly independent
\ncountry still engaged in nation building and experimentation in
\nestablishing functioning political systems.<\/p>\n
Those economic ministers who started in 1966 as part of a team
\nof economic advisors to then Acting President Soeharto regarded
\nthemselves not as bureaucrats, or as politicians. They are often
\ncalled \"technocrats\", that is, top government officials who were
\nguided in their preparations for economic policy making, not by
\nthe rule of precedent -- like bureaucrats -- but by rational
\nconsiderations. These rational considerations were coupled with
\nhaving the interests of the whole country at heart. They observed
\nthe major principles of economics, such as the principle of
\nopportunity cost and the recognition that resources are scarce
\nand should be used in a thrifty manner. The technocrats had a
\ngreat sense of urgency and priority. Technocrats are not blind to
\npolitics, because they know they have to exercise the art of the
\npossible in a political environment.<\/p>\n
Instead of ideological \"isms\", their preferred guideline was
\npragmatism, that is, the principle that \"what is good is what
\nworks.\" For instance, when they realized that domestic savings
\nand resources were very deficient in 1966 and for the foreseeable
\nfuture, they had no qualms about attracting foreign investment
\nand courting western powers. They also approached multilateral
\nfinancial institutions, including the IMF and the World Bank, to
\nadvise the government on economic stabilization and
\nreconstruction. By contrast, in the previous regime, foreign
\ninvestments were spurned, and the IMF and the Bank were regarded
\nas part of the imperialistic plot. The new technocrats, however,
\nmoved that the country should join the IMF and the Bank again.<\/p>\n
Why were technocratic policy formulas readily accepted by the
\npolitical leadership and the public at large? Political
\nleadership was in the hands of the military, with President
\nSoeharto as the supreme commander. Why the military had almost a
\nblind trust in the small band of economic technocrats in 1966 to
\n1967 is a bit hard to explain. Perhaps it was because of the
\nrespect these technocrats had as their former teachers at the
\nstaff and command school. Perhaps it was because there were quick
\nresults to the new policies. What is certain is the fact that
\nSoeharto himself was soon convinced there was no better
\nalternative. He subscribed fully to the broad thrust of these
\npolicies.<\/p>\n
The package was simple. First, runaway inflation had to be
\nhalted. The main policy instrument was a balanced budget, that
\nis, the principle that the government should not resort to the
\nprinting press to finance its deficits. To make the policy more
\nrealistic, the balanced budget included revenue from foreign aid.
\nBut it still meant a heroic cutting of expenditure because the
\nfirst flow of foreign aid was a few hundred million U.S. dollars
\non an annual basis. It also meant there was an urgent need for
\nrescheduling the large and unserviceable foreign debt that the
\nprevious government had accumulated. This rescheduling came in
\n1970 with an exciting provision.<\/p>\n
In order to generate greater national product as soon as
\npossible, new capital inflow from outside was needed. Hence,
\nthere was a necessity to attract foreign investment. Promotion of
\nforeign investment was seen as bait to attract back the domestic
\ncapital parked outside the country in the previous period. This
\ndomestic capital was mainly from the Chinese minority, which has
\nalways been dominant in business and commerce.<\/p>",
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