New Order: Building from shambles
New Order: Building from shambles
By Hartoyo Pratiknyo and Lela E. Madjiah
When Soeharto's New Order government took power from president Sukarno in 1966, Indonesia was a demoralized nation, suffering from a collapsed economy with an inflation rate of over 600 percent, plus a bureaucracy as corrupt as it was huge. With no program to offer, Soeharto took propositions for economic change and development from a group of economists of the School of Economics at the University of Indonesia. These economists helped set up the country's foundation for economic development. In conjunction with the 30th anniversary of the issuance of the March 11 Letter of Order, or Supersemar, which marked the birth of the New Order government, The Jakarta Post's Raymond Toruan and Sabam Siagian interviewed three of Soeharto's five initial economic advisers, Widjojo Nitisastro, Emil Salim and Mohammad Sadli, and also Frans Seda, who held ministerial posts in both the Old Order and New Order administrations, to reflect upon the country's economic and political development in the past 30 years. The four narrate their recollections of the events that led to the conception of the country's development policy. More stories on Pages 2 and 3.
JAKARTA (JP): "Where else in the world can a person ride a train for 500 or 1,000 kilometers with a ticket that costs the same as a few dozen eggs?"
The question was raised by economist Mohammad Sadli on Jan. 10, 1966, when he addressed a conference at the University of Indonesia on the state of the economy.
The event, organized by the Indonesian Students Action Front of the university's School of Economics, marked the beginning of the end of public support for president Sukarno. After years of being told to be patient for things to improve, the people finally realized that there was no way Sukarno could keep his promises. Prices continued to soar, while goods were scarce, exports declined steadily, roads were badly damaged and even water and electricity were only enjoyed by a limited few in the big cities.
Later, in April the same year, the late Sultan Hamengkubuwono IX, in his first formal statement as a triumvir, wrote: "In 1965 prices in general rose by more than 100 percent; in fact the price of rice soared by more than 900 percent. Unless swift and correct steps are taken, it may skyrocket by more than 1,000 percent in 1966."
Sadli earlier proposed that the only way out was "to restore the good will of the international community and seek new credits abroad".
But what could the country do to attract foreign aid and investors? Certainly, no one would be interested in adding to Indonesia's already huge debts of US$2.3 billion as of Dec. 31, 1965.
The answers came from a group of five economists from the University of Indonesia, who was later known as the Widjojo Group.
At a second Army seminar held in August of 1966 at the Staff and Command School (Seskoad) in Bandung, the five economists -- Mohammad Sadli, Emil Salim, Subroto, Ali Wardhana and Widjojo Nitisastro -- presented their ideas which proposed that the new government bring inflation under control, revitalize production, meet the people's needs for food and clothing and increase exports.
"The seminar was strategic because it was the beginning of the New Order and Pak Harto had no programs to offer," Sadli, a West Java native, pointed out.
In other words, the seminar, organized by Seskoad's deputy head Suwarto, laid the foundation for cooperation between the army and technocrats. It was at the seminar that the programs, both economic and political, for the Soeharto government were discussed, said Sadli, 64.
After the seminar, Soeharto appointed the Widjojo Group as expert advisers.
Widjojo, then 39 years old, became chairman of the National Development Planning Board (Bappenas) and under his direction the country's economy was directed towards a planned economy which relied largely on market mechanism.
"A planned economy not based on free market failed under Bung Karno's leadership," Sadli said when explaining the choice of policy. "However, in the first phase it was still a mix between free market and centrally-planned economy as 40 percent of the market remained under government control."
The choice was both visionary and pragmatic, Sadli argued.
"The inflation was still high and if prices remained high, the people would suffer. Price control was considered an anti- inflation policy, a policy to safeguard public interest," Sadli pointed out.
Trilogy
The seminar held by the Indonesian Students Action Front of the School of Economics of the University of Indonesia's School of Economics on Jan. 10-20, 1966, according to Widjojo, was the first occasion on which the new concept -- particularly that of the need to curb the runaway inflation and for seeking new foreign loans by first rescheduling old loans -- was mentioned openly.
Even Widjojo marveled at how the way events unfolded in 1966.
"The Jan. 10 seminar, for example, took place only three months and 10 days after the coup (an abortive uprising led by the now defunct Communist party). That goes to show how enthusiastic we were," said Widjojo. "At the same time, students were demonstrating."
Soeharto, too, was impressed by the way university students positioned themselves.
"I am very happy because apart from staging demonstrations, university students are also aware of their responsibility and show it in a positive way by organizing this seminar. The economic and financial problem we are now facing is a problem of the people ... ," Soeharto noted in his speech at the seminar.
In July 1996 the Provisional People's Consultative Assembly (MPRS) issued Decision No. 23 outlining the foundations for the new economic, financial and development policies.
"It was a milestone of economic restructuring policy and if you look closely at the wording the convergence with the Jan. 10 seminar will become apparent," Widjojo said.
On Oct. 30, 1966, a government decision was issued delineating the further details of economic policy and elucidating the first outline of the development trilogy.
First on the agenda according to this trilogy was stabilization, followed by rehabilitation and development.
"Obviously one cannot possibly undertake development on a base of chaos. First stability, both political and economic, had to be established. Then comes rehabilitation. Only after that has been achieved can development begin," Widjojo explained.
Here Widjojo warned against the mistakes made by a number of countries which had followed development models conceived by experts without a clear vision.
"Some developing countries have made the mistake of immediately concentrating on industrial development in the hope of achieving a trickle-down effect as described by many experts and have been disappointed.
"We did not want to make the same mistake since a majority of our population are rural people," he explained. "For that reason industrialization must be done in phases, building on a sound agricultural base."
According to Emil Salim, one of Soeharto's most crucial decisions was to re-enlist Indonesia with the United Nations, the World Bank and the International Monetary fund (IMF). It was Sukarno who pulled out of the United Nations and denounced all Indonesia's debts.
The explanation behind Soeharto's decision was simple, said Emil.
Trickle down
"In order to obtain fresh foreign aid, we needed to settle our debts but the creditor nations required a letter of recommendation from the World Bank and the IMF that we were re- enlisted with them," said Emil. "They needed the letters to obtain approval from their congresses for more aid for Indonesia."
One of the criticism leveled against the Widjojo Group is that their policy has created a wide economic gap between the country's haves and have-nots. This was due to Widjojo's firm believe in growth preceding redistribution of wealth.
"Personally, I believe there was nothing wrong with it (Widjojo's concept) because we never really relied on the trickle down principles although we did not primarily build on the principles of redistribution of wealth either," Sadli explained.
Sadli drew attention to the development trilogy, namely stabilization, growth and redistribution, which he said was a logical strategy.
"Stabilization means political and economic stability, and economic stability means we have to slash inflation from over 600 percent to the lowest rate possible," he said.
Growth came after stabilization and Sadli said the Widjojo Group believed that without growth there was nothing the country could do.
"And, based on old theories, growth means investment withdrawn from savings. Since domestic savings were inadequate, we drew from foreign sources, including local money invested abroad," he said.
The first phase in national development under the New Order government was actually a rehabilitation and development process, from 1967 to the year the first Five Year Development Program (Pelita I) took off in 1969.
According to Sadli, the term rehabilitation referred to remedial steps, meaning recovering the capacity of existing infrastructure, which due to lack of maintenance, was disrupting economic activities.
As such, the development effort at the time came under three phases, namely stabilization, rehabilitation and then growth.
However Sadli stressed that the Widjojo Group itself never once used the term growth.
"We used the term 'development', which was differentiated from economic rehabilitation. Widjojo and associates never stressed on growth, but on development," Sadli pointed out.
Sadli also emphasized that if asked whether the group had wealth redistribution-related programs, Widjojo would have said no.
"Widjojo would say that lowering the inflation was a form of redistribution because if inflation was high, the people's purchasing power would be low. Lowering the inflation was considered a redistribution policy," said Sadli.
Aside from that, there was the rehabilitation process, particularly of the agricultural infrastructure which led to the improvement of rural economies, which in turn enhanced the redistribution of wealth.
"And under Pak Harto, food production and agriculture received first priority. Industry came only later," said Sadli.
There was never a direct income redistribution policy but improving food production indirectly helped the redistribution process because the food producers were farmers and all that was linked to rural development was considered pro-redistribution, Sadli argued. "And Widjojo always translated redistribution through direct projects such as the village development financed by special presidential funds (Inpres) and presidential funds for labor-intensive projects."
"Let me put it this way. Widjojo and associates never envisioned redistribution of wealth as income redistribution. We never really took it into our consideration," Sadli said.
Sadli also acknowledged that although the New Order government was for land reform, as one of the various means to foster redistribution of wealth, the government never really expected to rely on it for success.
Time has since proved the trilogy policy correct although Widjojo admits there is room for improvement. Shortcomings aside, it must be admitted that so good a job of raising the welfare of the general populace has been achieved that for many, it takes some reminding to realize that things have not always been as good as they are today. This goes for Widjojo as much as for other Indonesians.
"It's good to be reminded that exactly 30 years have passed. I wouldn't have realized it myself," Widjojo, the co-architect of Indonesia's New Order economy said with a chuckle.