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.