The New Order economy as seen from the present

The New Order economy as seen from the present

By Emil Salim

This is the second of two articles based on a paper presented
at a recent conference on Indonesian modern economic history with
the theme "Crisis and Continuity: Indonesian Economy in the 20th
century" organized by the Forum on the Economic History of
Indonesia in Yogyakarta.

YOGYAKARTA: The comprehensive stabilization and rehabilitation
plan was drawn by Indonesians themselves. There was no
International Monetary Fund (IMF) or World Bank in Indonesia at
that time. Indonesia had pulled itself out from the United
Nations. It had to rely on its own skills and experts to
formulate these plans.

With a no-nonsense physical and financial plan, hard measures
were taken. And it was a tribute to the Indonesian people,
especially farmers and villagers, that hyper inflation could be
controlled, confidence restored, self-sufficiency of food
achieved and the number of the poor below the poverty line
reduced.

Also close to 90 percent of children from seven to 12 years-
old were enrolled at elementary schools. Fertility rates were
reduced leading to a drop in population growth from above to
below 2 percent per annum.

In due course IMF, World Bank and the UN family were invited
back to Indonesia and took an active role in Indonesia's
development. Also friendly countries were helpful in supplying
Indonesia with the necessary assistance through a consortium
called the Intergovernment Group on Indonesia (IGGI) chaired by
the Netherlands to be followed by the Consultative Group on
Indonesia (CGI) chaired by the World Bank.

Indonesia was firmly on the road toward being a prosperous
nation, predicted for the early years of the third millennium.
Such a prediction was even expressed in the Consultative Group on
Indonesia's annual meeting in Tokyo early July 1997.

But then Thailand was hit by a serious financial crisis in mid
July 1997, soon to be followed by Indonesia, Malaysia, Singapore
and South Korea.

Indonesia was caught by surprise and ill-equipped to deal with
such a crisis. Due to its success in overcoming economic crises
before, Indonesian leaders were confident that this crisis could
also be overcome quickly. However there was hesitation in dealing
with the crisis firmly and with a coordinated effort. The IMF was
called to assist specifically to overcome the crisis. But it
somehow gave the wrong medicine at the wrong time.

At the root of the problem was that among the top leaders of
the nation there was distrust of the IMF and overconfidence that
the crisis might be solvable through various schemes that were
hastily cooked up, among others by new individual foreign
experts.

This crisis revealed the naked truth that within the
government, the confidence traditionally bestowed on technocrats,
had been eroded and other trustworthy persons surrounded the head
of state.

After the achievement of food self-sufficiency in the mid-
eighties, when the priority shifted towards industrialization,
the debate that flourished was centered around the issue of how
to industrialize and what should be the focus of
industrialization.

One group favored to focus on a broad spectrum of
industrialization, another group proposed to focus on industries
with competitive advantages, another group preferred to focus on
high-tech industries. All had their own pet industrial approaches
differed with the initial technocrats' notion of natural resource
based industrial developmental. Since the mid 1980's new groups
with new ideas were gaining entry into Presidential inner
circles.

Also the success achieved from decades of economic development
thus far, had raised a sense of over-confidence and a "Pavlov
type of conditional reflex" that whatever had been tackled would
lead towards success.

The success achieved in food production was recognized by the
Food and Agricultural Organization, the success achieved in
family planning was recognized by the United Nations-Funds for
Population Activities, the success achieved in poverty
eradication was recognized by UNDP -- all this boosted the
confidence that every problem tackled could in the end be
successfully solved.

But this time the crisis was not solvable and the economy
plunged more deeply into chaos. Overconfidence gave way to
reckless doubt. And the market, as well as the politicians, took
full notice of it. This opened the way not only for a loss of
confidence in the leaders of the economy, but in politics as well
and marked the beginning of the end of the New Order era.

The past was then examined to find out what went wrong in the
New Order era.

The events of 32 years of the New Order era have been
compressed into several years of wrong-doings. Soeharto who was
formerly dubbed the Father of Development, is now referred to as
the reckless irresponsible leader of destruction. And the Army,
which in the past were heartily embraced, are now asked to be
accountable for the many kidnappings and killings of civilians in
various places around the country. And this cast a shadow on the
technocrats whose assistance to the President and its cooperation
with the Armed Forces has raised suspicion that the technocrats
had sold themselves to become merely a tool of the power elite in
the development of the New Order economy.

The change in direction away from etatism towards market
economics gave the impression that Indonesia had abandoned its
socialistic inclination by moving rapidly towards capitalism,
including "crony capitalism."

The reliance on the market had created an unequal playing
field between weak and strong enterprises, which created the
impression that the New Order economy was firmly against populism
economy. This created the opportunity for faster growth for
conglomerates as compared to slow growth for small and medium
entrepreneurs. And the crisis that hit the economy was mainly due
to over-borrowing of unhedged external funds by the
conglomerates, especially those that not only own corporations
but banks as well.

With the concentration of economic and political power in the
hands of the power elite, the New Order economy provided a
conducive environment for corruption, collusion and nepotism to
flourish.

As seen from the present, the impression emerges that the past
policies of 32 years of New Order economy are rolled into one big
mistake that has led the nation into its deep crisis. Therefore
it is obvious the New Order economy has to be thrown out of the
window, and a new fresh approach is necessary.

On July 22, 1999 an agreement between the IMF and the current
government was reached and formulated in a Memorandum of Economic
and Financial Policies with supplements depicting the necessary
economic measures that the government is planning to take.

First is the Macroeconomic Framework and Policies with overall
macro economic objectives for April 1999 to March 2000 including:

-- real GDP growth of 1.5 percent to 2.5 percent;

-- inflation rate at the end of the period between 4 percent
and 5 percent;

-- inflation rate on average between 10 percent and 12
percent;

-- external current account balance of US$2.5 billion which
comprises 1.5 percent of GDP;

-- gross official reserves at the end of the period of $27.5
billion to $28.5 billion.

These objectives are planned to be reached by taking as
principal focus 5.8 percent of GDP as deficit in fiscal policy
combined with a monetary policy aimed at price stability, lower
interest rates and a stronger rupiah exchange rate.

Second is structural fiscal reform to strengthen the revenue
base by improving the fiscal incentive frame work, to eliminate
certain inefficient exemptions and zero ratings to review fiscal
concessions for the "Integrated Economic Development Zones" and
complete streamlining specific customs administration procedures.
Export and import tariff reform will be carried further. And all
budget accounts will be audited before the end of this fiscal
year. Based on regional governance and fiscal balance laws
approved by the House of Representatives in April 1999, fiscal
decentralization will begin in 2001/2002.

Third is the reform of the banking system which is focused on
loan collection and asset recovery by the state banks and the
Indonesia Bank Restructuring Agency (IBRA). Also the banking
system is completely overhauled assisted by recapitalization of
the banks and improving the legal, regulatory and supervisory
framework.

Fourth is corporate restructuring, governance and legal
reform, strengthen market discipline, reduce the scope for
corruption and prepare for private-sector led development.

Fifth is the privatization of state enterprises, improving
efficiency and governance of those organizations that will
temporarily remain in the hands of the government in preparation
for privatization, and preserving budgetary control. Special
audits of three public entities (BULOG logistic agency,
Pertamina, PLN state electricity company) was to be published on
Aug. 31, 1999, to be followed by audits on the Reforestation
Fund, the principal national airline, toll road operators, port
corporations and telecommunication companies.

At a glance Indonesia is back to square one in pursuing its
policies. Fiscal, monetary, institution reforms are revisited
again as if we are moving in a spiral with a continuous upward
movement but revisiting the same points at a bigger scale.

What lesson can we draw from the past?

That the present compared to the past is very familiar. Many
policies are currently on the table which have similarities to
past ones. The problems have of course multiplied significantly.
But the basic approach to these problems seems to be the same.
This confirms the notion that "history repeats itself."

The repetition of the Indonesian crisis and its amplification
is actually caused by the lack of change that a nation needs to
experience. If power prevails in one hand for decades,
significant changes are impossible. Especially if power is
exercised with over-confidence and a feeling emerges that the
leader becomes indispensable.

But leaders have also the inclination to immortalize
themselves by leaving lasting imprints on physical development.
This may be the driving force for Indonesian leaders to strive
for "white elephant's projects." But it also distorts priority
scales moving in the direction of wasteful investments with high
costs. Perhaps it is in this context that political leaders
consider economists more as a "brake" always using opportunity-
cost ratios, compared to engineers who as "accelerators in a car"
are capable to deliver physical projects (usually) while ignoring
costs.

Power corrupts and too long in power makes corruption last
longer. Its motivation may at the beginning be simple: to insure
financing for non-priority programs. But later the dividing line
becomes blurred between national and private priority programs.

For economists who are more familiar with economics rather
than politics, there comes a time when one has to draw a line and
set the time to withdraw. But by sheer ineptness of most teaching
by economic professors it was most difficult to know exactly when
to quit. Looking to the past from the present however, I came to
realize when to withdraw from the economic and political turmoil.

But looking from the past to the present I wonder whether
economists can leave the battle when the economy and politics are
in shambles and be able to live in peace with one's conscious.

Perhaps historians may find the answer.

The writer was a minister several times in New Order cabinets.