RI's economic policy experience

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.