Survival of New Order economics
Survival of New Order economics
By Mohammad Sadli
JAKARTA (JP): March 11, 1966, is one of the auspicious days Indonesia commemorates, in this case the passing of an old regime and the advent of a new one, often called the New Order and associated with President Soeharto.
New Order economics may not have started at that time. Professor Widjojo Nitisastro and his group anticipated the change a long time before, when they started thinking about policy alternatives, even when they were studying at Berkeley, California, in the early 1960s.
The previous policy regime was a command economy. The high inflation was like a wartime economy requiring many direct controls. Hence, ideology and necessity produced an all-pervasive (price) controlled economy, but because production stagnated, it became an empty shelf economy. Rationing of goods was supposed to render greater fairness but with too few goods to go around only city and privileged groups were secured. The rural folks resorted to a barter economy.
The team of economists helping President Soeharto was in favor of restoring economic and political ties with the West (previously denounced by President Sukarno) because it realized that quick recovery of the economy depended on an injection of foreign resources since domestic savings was at an all time low.
Foreign aid was forthcoming soon enough as the international political situation worked to the advantage of the new government, which saved the country from falling completely into the communist camp.
The amount of the first such aid was small compared to later figures of US$5 billion in annual commitments from the Inter- Governmental Group on Indonesia and Consultative Group on Indonesia, but in those days a few hundred million dollars of aid went a long way to restoring the economy of an otherwise richly endowed country.
Apart from foreign aid, foreign direct investments were given encouragement. The link between the two sources was perceived by the new policy makers. The speculation was that western countries, and Japan, would be more interested in giving aid to Indonesia if they could see that their businesses were also welcome.
Exploration and early production of crude oil would also strengthen the balance of payments and hence provide an additional guarantee that the aid and loans would be repaid. U.S. and French oil companies moved in quickly and oil production soon went up.
Mining investments took a lot more time to mature and provided longer-term support for the balance of payments. Freeport copper mining in Irian Jaya came into production fast enough to profit from the commodity boom. It took more time for PT International Nickel Indonesia.
Logging was a quick-yielding proposition. The environmental risks were probably not realized in the beginning because of the belief that "selective cutting for sustainable yield" could be implemented without great troubles. That turned out to be a naive proposition.
Foreign investments in manufacturing came a bit late because in 1967 and 1968 the Japanese were not ready yet for overseas investments. The only bank that was allowed to venture overseas was the Bank of Tokyo and the government never had troubles in 1967 selecting only one Japanese bank for entry.
At that time, the policy was to allow only 10 foreign banks to establish branches in Jakarta. The U.S. got four because of the difficulty to say no to more than one. The U.S. was then also the strongest supporter of the new government, at one time even twisting the arms of Japan to give as much aid as the U.S. (one- third U.S. aid, one-third Japanese aid, and the remaining third from the rest of the world). In those days the World Bank did not loom as large as it does now.
The runaway inflation, reaching some 600 percent in 1965, was curbed by the "balanced budget doctrine" initiated by the new government. The government budget was not really balanced, but the deficit should be as large only as the amount of incoming foreign aid. The purpose was that the government should not go to the printing press (as it did before) to finance a deficit.
Foreign aid buys rupiahs from the central bank and the latter sells the foreign exchange to importers. This method is not inflationary and it imposes discipline on the government to limit its deficits. The formula worked and triple digit inflation was brought down to double digit and single digit levels.
This doctrine still is upheld today and that is the inertia of politics. Economically, it did not make sense even in the 1970s, at the height of the oil booms. Swelling levels of expenditures, although balanced by revenues, have an inflationary impact by themselves. Inflation during the oil booms reached double digit.
Today, inflation is close to 10 percent annually. The government budget is still nominally in balance, but the monetary effect is contractive because of the large outpayments for debt service. These payments amount to $7.5 billion annually, whereas new aid is $5.5 billion.
Moreover, present day inflation is not caused by the government budget proper, but by the booming private sector and an expansionary banking system. Government enterprises are often also engaged in expansionary outlays, requiring fresh money from the banking system.
There is often criticism that "extra-budgetary" activities promoted by the government have been partly responsible for the inflation. On the other hand, there is a boom in the country, as well as in Southeast Asia, in property development, industrial investments and spending for consumer durables enticed by credit cards and bank financing.
Hence, the task of the New Order government's economic management has changed from managing a scarcity and ruined economy with pervasive poverty to managing prosperity. In many respects the tools and concepts are still the same and sometimes hopelessly outdated, such as the balanced budget doctrine as an anti-inflationary tool.
The new source of inflation is not the government budget any more. The completely free foreign exchange regime, working to great advantage before, is now a source of monetary instability as large and footloose flows of foreign funds go in and out of an "emerging market", creating havoc with the balance of payments and producing headaches for central bank governors unable to decide what to do with those less-welcome guests.
We now live in a much different world of globalization and interdependence, with completely different rules set by the World Trade Organization. A developing country can't engage any more in inward looking industrialization with high protection, much less currency controls. The new pressure is to "export or die". To be able to export, the economy has to be free of "high cost impediments", usually the product of protection and regulation.
How should the New Order economics be transformed? Well, by the way everybody else in the world has to. But old teachings die hard. Protectionist sentiments never die, as we see it now in the U.S. In the meantime, a new generation of government economists have taken the posts of the old stalwarts, like Widjojo and Ali Wardhana. They have to find the balance between continuity and change according to the requirements of the time.
One old problem never goes away: finding the balance between economic growth and equity. The fruits of development should be widely distributed and enjoyed not only by a small minority.
The first rumblings of student protests occurred in December 1973 when they went to the streets and buildings got burned. In 1974, the order of the Development Trilogy was reversed: distribution comes before growth.
After more than 20 years the problem is still acute, perhaps even more so. It is not enough that the number of people below the poverty line is reduced. City people and intellectuals worry about relative poverty. If I now earn two times more than before but my neighbor looks like earning 20 times more, that makes me (feel) very poor. But the same phenomenon exists in Thailand, Malaysia and Singapore. Those countries are far more prosperous than Indonesia but some of the people are as unhappy as their counterparts in Jakarta.
In countries like Korea, Japan and even India, political corruption and collusion between politicians and money moguls are drawing the ire of the political public. Similar seeds are in the ground in Indonesia.
Will the New Order Economics survive all this adverse weather? Probably yes, in the end, because a prosperous nation has greater resilience power, unless the political leadership really commits a series of grave political stupidities.
The writer is a several-times member of the New Order government's cabinet.
Window: The task of the New Order government has changed from managing a ruined economy with pervasive poverty to managing prosperity.