Three decades of Indonesia's economic growth

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.