RI's economic policy experience

The following article is based on a paper by Mohammad Sadli presented at the Conference on Governance Innovation in Manila on Oct. 22. The conference was organized by the Ottawa-based Institute on Governance, the Economic Development Institute of the World Bank and local civil organizations. This is the first of two articles.

MANILA: Since independence in 1945, Indonesia has known only two presidents. President Sukarno was the founding father of the republic and its first president. The first period of independence, from 1945 to 1966, was marked by frequent political turbulence. The management of the economy was socialistically inclined; there was a very strong role for the state, and a weak private sector. Direct foreign investment was ideologically rejected because the country was busy eliminating the vestiges of a colonial system. At one time president Sukarno even took the country out of the UN system, including withdrawing from the International Monetary Fund and the World Bank. With his obsession against colonialism and imperialism, he practically took the side of the Eastern camp in the cold war at the end of his reign. But this orientation only produced economic stagnation and a hyper inflation. In the end, the regime collapsed.

The new government had a beautiful opportunity to start on a completely new basis. But two questions could be posed: why could it do so and, why did it want to do so?

First, the political make up of the new regime was radically different. The military dominated the new situation. The Indonesian military was non-ideological in the sense that it was not attracted by the then current and fashionable ideologies or "isms", like socialism, communism, nationalism or religious fundamentalism. It was patriotic, but not "nationalistic" in the more ideological sense of the word. For instance, it had no hang- ups about foreign investment and international aid. It was result-oriented, and more systematic in its outlook. This was unlike the political parties which were more matter-of-principle in their outlook.

The military, actually the Army rather than the other forces, had prior links with professors of major national universities, the University of Indonesia in Jakarta and Gadjah Mada University in Yogyakarta, which provided lecturers for social science courses at the Bandung Army Staff and Command College at the time.

From the mid-1950s, leadership in the army had seen the need to educate high ranking officers in social sciences. This was based on the belief that army officers would graduate from being military leaders to being leaders of society. For that role they needed to be prepared in staff colleges.

The so-called economic technocrats in the government of President Soeharto were the economic instructors at the Bandung Army Staff and Command School in the fifties and sixties. In that capacity they came to be known, and trusted, by the generals of the middle and late 1960s. It was a fortunate occurrence of productive civil-military relationships in a newly independent country still engaged in nation building and experimentation in establishing functioning political systems.

Those economic ministers who started in 1966 as part of a team of economic advisors to then Acting President Soeharto regarded themselves not as bureaucrats, or as politicians. They are often called "technocrats", that is, top government officials who were guided in their preparations for economic policy making, not by the rule of precedent -- like bureaucrats -- but by rational considerations. These rational considerations were coupled with having the interests of the whole country at heart. They observed the major principles of economics, such as the principle of opportunity cost and the recognition that resources are scarce and should be used in a thrifty manner. The technocrats had a great sense of urgency and priority. Technocrats are not blind to politics, because they know they have to exercise the art of the possible in a political environment.

Instead of ideological "isms", their preferred guideline was pragmatism, that is, the principle that "what is good is what works." For instance, when they realized that domestic savings and resources were very deficient in 1966 and for the foreseeable future, they had no qualms about attracting foreign investment and courting western powers. They also approached multilateral financial institutions, including the IMF and the World Bank, to advise the government on economic stabilization and reconstruction. By contrast, in the previous regime, foreign investments were spurned, and the IMF and the Bank were regarded as part of the imperialistic plot. The new technocrats, however, moved that the country should join the IMF and the Bank again.

Why were technocratic policy formulas readily accepted by the political leadership and the public at large? Political leadership was in the hands of the military, with President Soeharto as the supreme commander. Why the military had almost a blind trust in the small band of economic technocrats in 1966 to 1967 is a bit hard to explain. Perhaps it was because of the respect these technocrats had as their former teachers at the staff and command school. Perhaps it was because there were quick results to the new policies. What is certain is the fact that Soeharto himself was soon convinced there was no better alternative. He subscribed fully to the broad thrust of these policies.

The package was simple. First, runaway inflation had to be halted. The main policy instrument was a balanced budget, that is, the principle that the government should not resort to the printing press to finance its deficits. To make the policy more realistic, the balanced budget included revenue from foreign aid. But it still meant a heroic cutting of expenditure because the first flow of foreign aid was a few hundred million U.S. dollars on an annual basis. It also meant there was an urgent need for rescheduling the large and unserviceable foreign debt that the previous government had accumulated. This rescheduling came in 1970 with an exciting provision.

In order to generate greater national product as soon as possible, new capital inflow from outside was needed. Hence, there was a necessity to attract foreign investment. Promotion of foreign investment was seen as bait to attract back the domestic capital parked outside the country in the previous period. This domestic capital was mainly from the Chinese minority, which has always been dominant in business and commerce.