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.