Three decades of Indonesia's economic growth
Indonesia celebrated its 50th anniversary this year. Yoshihara Kunio, economics professor at Kyoto University's Center for Southeast Asian Studies, assesses Indonesia's economic development and future in this first of four articles.
KYOTO, Japan (JP): It was in early 1966 that I got to know something about the coup attempt in Indonesia a few months earlier. It was my last year as a graduate student at the Department of Economics at the University of California, Berkeley. I still remember: I was eating at a cafeteria on campus when an Indonesian classmate came and told me about the change taking place in his country.
I had known something about Indonesia, but not much. Although the leader of the country, President Sukarno, was popular among many intellectuals and students in Japan and the United States, I did not have a very good impression of him. I suppose my criteria for judging political leaders was different from those who supported him. He was a great revolutionary leader of Indonesia as well as one of the most famous leaders in the developing world. Those who supported him attached great importance to this fact.
But, being an economics student, I attached more importance to the economic management of a country. President Sukarno placed politics above economics and violated economic rationality quite often. For example, he often spent money disregarding budget constraints when it was politically necessary. The result was economic chaos in the first half of the 1960s.
Indonesia at that time was somewhat like an African country today which is experiencing rampant inflation, high unemployment, decline in agricultural production, and export stagnation. In the early 1960s, Indonesia was experiencing a 100-percent increase in food prices and, in 1964-65, the rate of increase jumped to several hundred percent.
In the opinion of many economists, President Sukarno's priorities were wrong. While the people were suffering from rampant inflation and food shortage, he was building monuments. His rationale may have been that monuments were needed as national symbols to unite the ethnically divergent people, but increasingly his monument building was used to divert the people's attention from the deteriorating economy.
In a country such as Indonesia whose population does not have a common cultural identity, national integration requires high priority. However, the utter disregard of economics is the wrong approach. Contrary to the widely held belief that Indonesia was a rich country, it was, in fact, overpopulated and suffering from the lowest level of income in Southeast Asia. In aggregate terms, the country was richer in mineral and forest resources than other Southeast Asian countries, but on a per capita basis, this advantage was not apparent. The country had to build a man-made system which encouraged production expansion, if it wanted to develop, but President Sukarno did not seem to understand it.
My image of Indonesia at that time was formed partly by the Western press which was attacking the nationalization of foreign enterprises in the country. President Sukarno began it with Dutch enterprises in December 1957. Soon after this, Chinese firms with Kuomintang connections were nationalized. Then, in 1963, in retaliation against British-sponsored Federation of Malaysia, British firms were seized. Finally, in 1965, all other foreign (mostly American) enterprises were expropriated.
One could rationalize President Sukarno's actions by saying that he was completing the unfinished Indonesian Revolution. At the time of independence, Indonesia gained political independence but had to make a number of concessions, among which was the promise that foreign enterprises would not be nationalized without due compensation. President Sukarno may have felt that without making the economy Indonesian-controlled, independence could not be complete. Many political leaders in the developing world held a similar view at that time.
In the first half of the 1960s, President Sukarno was relying more and more on the Communists, probably because he needed the PKI (Indonesian Communist Party) which had become a formidable political force. Towards the end of his rule, berdikari (standing on one's own feet) was his major strategy for the country's development; and the model developing country was the People's Republic of China. This conjures up in my mind an image of the North Korean leader, Kim Il-sung: his chuch'e was similar to berdikari in concept, and PRC was his only supporter at the end.
Given the economic chaos and the growing influence of the PKI in the mid 1960s, it would not have been surprising if the country had gone Communist. If it had, what would the country be like today? It might be a country like Cuba and North Korea where people suffer from the shortage of basic goods and, in order to obtain even small quantities of them, they have to queue in front of state-owned stores for many hours. Or it might be a country like Vietnam or China which got fed up with the poorly-working planned economy and shifted to a market economy. The people of Indonesia are enjoying greater freedom and higher standards of living than people in those countries.
In retrospect, 1965 was the second watershed in the 20th century history of the country. The first was when independence was gained after the Pacific War. President Sukarno was the key player at this time. But he could not develop the economy: rather, the economy worsened during his rule. He was like such great revolutionary leaders as Mao Ze-dong and Ho Chi Minh, who were indispensable at the stage of creating a nation, but who became a barrier at the next stage of economic development. In Indonesia, the second stage really began with the inauguration of Gen. Soeharto as president.
What we have learned in the past several decades is that people do their best when they are given incentives and that competition is indispensable for raising income. The economic system built on profit incentives and competition is called a market economy. The Communists wanted to replace it with a planned economy because they believed that a market economy would become a monopoly of capitalism and that the masses would suffer under the exploitation of monopoly capitalists. But a planned economy stifled incentives, and the economy declined, stagnated, or at best, lagged behind market economies. A number of nations became the communist countries which adopted a planned economy. But the end result of planning was economic devastation. It was fortunate that Indonesia did not join the group. Communism was the scourge of this century.