Recollections: The Indonesian Economy, 1950s-1990s 9789812305978

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ecollections

Reproduced from Recollections: The Indonesian Economy, 1950s-1990s, edited by Thee Kian Wie (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at < http://bookshop.iseas.edu.sg >

The Indonesia Project is a major international centre of research and graduate training on the economy of Indonesia. Established in 1965 in the Division of Economics of the Australian National University’s Research School of Pacific and Asian Studies, the Project is well known and respected in Indonesia and in other places where Indonesia attracts serious scholarly and official interest. Funded by ANU and the Australian Agency for International Development (AusAID), it monitors and analyses recent economic developments in Indonesia; informs Australian governments, business, and the wider community about those developments, and about future prospects; stimulates research on the Indonesian economy; and publishes the respected Bulletin of Indonesian Economic Studies. The Institute of Southeast Asian Studies (ISEAS) in Singapore was established as an autonomous organization in 1968. It is a regional research centre for scholars and other specialists concerned with modern Southeast Asia, particularly the many-faceted problems of stability and security, economic development, and political and social change. ISEAS is a major publisher and has issued over 1,000 books and journals on Southeast Asia. The Institute’s research programmes are the Regional Economic Studies (RES, including ASEAN and APEC), Regional Strategic and Political Studies (RSPS), and Regional Social and Cultural Studies (RSCS).

© 2003 Institute of Southeast Asian Studies, Singapore

ecollections The Indonesian Economy, 1950s –1990s Edited by

Thee Kian Wie

Research School of Pacific and Asian Studies The Australian National University Canberra

Institute of Southeast Asian Studies Singapore

First published in Singapore in 2003 by Institute of Southeast Asian Studies 30 Heng Mui Keng Terrace Pasir Panjang Singapore 119614 Internet e-mail: [email protected] World Wide Web: http://bookshop.iseas.edu.sg Jointly published by ISEAS and The Indonesia Project Economics Division Research School of Pacific and Asian Studies The Australian National University Canberra, ACT Australia All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies. © 2003 Institute of Southeast Asian Studies, Singapore The responsibility for facts and opinions in this publication rests exclusively with the editors and contributors and their interpretations do not necessarily reflect the views or the policy of the Institute or its supporters. ISEAS Library Cataloguing-in-Publication Data Recollections: the Indonesian economy, 1950s–1990s/editor, Thee Kian Wie. (Local history & memoirs; 12) 1. Indonesia—Economic conditions—1945– I. Thee, Kian Wie, 1935– II. Indonesian economy, 1950s–1990s III. Series: Local history and memoirs (Institute of Southeast Asian Studies); 12. DS501 I595L no. 12 2003 ISBN 981-230-174-7 (soft cover) ISBN 981-230-178-X (hard cover) Photo credits: • The family of Mohammad Saubari for use of his photo. • Ms Hj. Aida H. Danukusuma for the photo of Teuku Mohamad Daud. • Dokumentasi KOMPAS for the photos of Abdoel Raoef Soehoed and Soedarpo Sastrosatomo. • TEMPO/Damhar Rahmad for the photo of Suhadi Mangkusuwondo; TEMPO/Gatot Sriwidodo for the photo of Sarbini Sumawinata; TEMPO/Bernard Chaniago for the photo of Mohammad Sadli; TEMPO/Robin Ong for the photo of Sumitro Djojohadikusumo; TEMPO/Awaluddin R. for the photo of Subroto; TEMPO/Acin Yasin for the photo of Sjafruddin Prawiranegara; TEMPO/Rully Kesuma for the photo of Emil Salim. Typeset by Superskill Graphics Pte Ltd Printed in Singapore by Seng Lee Press Pte Ltd

© 2003 Institute of Southeast Asian Studies, Singapore

To Professor Anne Booth, Editor of the Bulletin of Indonesian Economic Studies in the 1980s who designed and initiated the series of interviews and To the memory of Professor H.W. Arndt, brilliant scholar, wise guru and generous friend

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Contents

Foreword by Ross H. McLeod

ix

Preface

xiii

Acknowledgments

xvii

I.

Introduction Thee Kian Wie

II. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

Recollections Sumitro Djojohadikusumo Mohammad Saubari Sjafruddin Prawiranegara Abdoel Raoef Soehoed Sarbini Sumawinata Mohammad Sadli Soedarpo Sastrosatomo Suhadi Mangkusuwondo Emil Salim Subroto Teuku Mohamad Daud

3

47 67 75 87 103 119 141 165 185 221 251

Index

265

About the Editor

277

© 2003 Institute of Southeast Asian Studies, Singapore

Foreword

A

s Dr Thee makes clear in his preface, the idea of publishing a series of memoir-style articles, based on extended interviews with a number of Indonesians who have played an important role in influencing the evolution of Indonesia’s economy, originated with Professor Anne Booth. She and my immediate predecessor, Professor Hal Hill, deserve great credit for having published these articles over a period of some 14 years. The Surveys of Recent Developments that have appeared in every issue of the Bulletin of Indonesian Economic Studies since its inception in 1965 provide a unique contemporaneous account of Indonesia’s economic development during this period. The Recollections articles nicely complement the Surveys with a series of insider views of this process, as related by some of the individuals who were influential in driving it. As well as bringing all these articles together in a single volume, Dr Thee has provided an introductory overview of Indonesia’s economy in the post-colonial period that enables readers to understand the context in which the individuals concerned were operating. The volume as a whole will thus help students of Indonesia to understand the ideas and political realities that shaped policies of the day. In addition it contains useful

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lessons for policy-makers and others who would influence policy-making — if they care to look hard enough. My impression is that too much policy-making proceeds by trial and error rather than on the basis of careful analysis and design — and, worse, that trials and errors of the past are too often forgotten. As the saying goes: those who fail to learn from history are destined to repeat it. Dr Thee’s introductory chapter gives considerable attention to the “economic technocrats”, several of whom are represented here. Perhaps the most important lesson the technocrats learned from the Sukarno period was that little progress is possible — indeed, that disaster awaits — if macroeconomic policy fails to provide reasonable monetary and price stability. They were able to go close to achieving this by adopting the simple rule that budgets should be balanced — or more precisely, that budget deficits should not be financed by money creation. They also learned of the costs of cutting the national economy off from the global economy, and were able to correct this egregious error of the Old Order, to Indonesia’s great benefit. The technocrats have attracted considerable criticism for the key role they played in the Soeharto regime, and for the fact that the economy they designed could collapse so suddenly as the Asian crisis emerged in 1997. But, as Dr Thee makes clear, the choice that faced them was basically to stay on the inside and do what they could to maintain broadly sound economic policies, or to more strongly oppose specific policies that pandered to narrow interests but which had Soeharto’s support, with the almost inevitable consequence that they would lose their influence entirely. Criticism of the technocrats largely ignores the enormous strides made during Soeharto’s time in office, the benefits of which were very widely spread. Notwithstanding all of Soeharto’s faults, these three decades of progress contrast strongly with economic stagnation and decline under Sukarno, and with the inability of Soeharto’s successors to return the economy to a rapid growth trajectory. This said, future historical studies of Indonesia’s development will surely draw attention to the inability of the economic ministries and the central bank to deal adequately with the crisis that began to emerge in mid 1997, and are bound to ask whether the technocrats could have done more to build up the institutional capacity in these bureaucracies when they were in a position to do so.

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Foreword

As Hal Hill noted in his introduction to a special issue of the Bulletin in 2000 to mark the de jure (but certainly not de facto!) retirement of Thee Kian Wie, our perpetually youthful, old and dear friend has been a “tireless supporter of the Bulletin and its objectives”. Kian Wie has played the key role in bringing every one of these memoirs to readers of the Bulletin, and he has now done us an even greater service by bringing them all together in a single volume. On behalf of the Indonesia Project at The Australian National University, the Editorial and International Advisory Boards of the Bulletin, and of all those who care about Indonesia, where it has been and where it is going, it is my great pleasure to extend sincere thanks to Kian Wie for this remarkable effort.

Ross H. McLeod Editor, Bulletin of Indonesian Economic Studies

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Preface

I

n early 1986 Professor Anne Booth, at the time Editor of the Bulletin of Indonesian Economic Studies (BIES), initiated a series of BIES interviews with a number of Indonesia’s major economic policymakers of the early independence and New Order periods. It was hoped that these interviews could shed more light on how policy-makers attempted to solve the economic problems they encountered, which constraints they faced, and what compromises they had to make in order to achieve their goals. From the outset Professor Booth involved me in her project. We discussed the persons who should be interviewed and what issues should be raised in the interviews. We also jointly conducted the interviews until Professor Booth’s move from The Australian National University, Canberra, to the School of Oriental and African Studies, London, in 1991. From then on I continued to conduct a series of interviews, always together with another member of the editorial board of BIES. Besides former economic policy-makers, interviews were also held with former senior government officials and businessmen. Their personal accounts on past economic events, problems, and policies also offered interesting insights and information on Indonesia’s modern economic

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history. The decision to interview successful indigenous Indonesian businessmen first was based on the consideration that they generally faced greater initial disadvantages in terms of business experience, available capital, and access to business networks compared to ethnic Chinese businessmen. It was expected that their accounts would offer interesting information on how they were able to achieve success in their business despite their initial drawbacks. The selection on whom to interview was quite simple as the number of major economic policy-makers was relatively limited. However, a small number of key policy-makers of the New Order period, specifically Professors Widjojo and Ali Wardhana, could not be interviewed. At the time the BIES interviews were terminated, they both still served as special advisers to President Suharto. I am very grateful to Professor Hal Hill, former Editor of BIES, and Dr Ross McLeod, current Editor of BIES, for encouraging me to publish the series of BIES interviews in one volume. I am also very grateful to Professor Anne Booth for allowing me to act as editor of this volume. I would like to express my great appreciation to my esteemed colleagues and friends, Professors Jamie Mackie, Anne Booth, Robert Elson, and Hal Hill, Dr Thomas Lindblad, Dr Peter McCawley, Dr Ross McLeod, and an anonymous referee, for their valuable and helpful comments and suggestions on an earlier draft of my introductory chapter to this volume. I would also like to thank Professor Chia Siow Yue, former Director of the Institute of Southeast Asian Studies (ISEAS), Singapore, for kindly inviting me to ISEAS for two months in 2002 to work on editing the volume and writing the draft introductory chapter for this volume. I am also grateful to the present ISEAS Director, Mr K. Kesavapany, for his support of this book project. The research and administrative staff at ISEAS provided a conducive work environment for which I am grateful. I would like to mention in particular Mrs Triena Ong, Managing Editor and Head of ISEAS’ Publications Unit, and her staff for their hard work and valuable input and advice on the publication of this volume; Ms Ch’ng Kim See, Head of ISEAS’ library, and her staff, for their valuable help in locating the books I needed; Mrs Y.L. Lee, Head of Administration, and her staff for their administrative support; and Professor Leo Suryadininata, Dr Denis Hew, and Dr Sakulrat Montreevat, Senior Researchers at ISEAS, and Professor J. Soedradjad Djiwandono, former

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Senior Visiting Research Fellow at ISEAS, for their kind hospitality during my stay at ISEAS. I also would like to thank Dr Chris Manning, Head of the Indonesia Project, Division of Economics, Research School of Pacific and Asian Studies, The Australian National University, Canberra, for his generous offer to pay for the work of making an index of this volume. Last but certainly not least, I would like, also on behalf of the Editorial Board of BIES, to express once again my great appreciation to the eleven economic policy-makers, senior officials, and businessmen, who kindly consented to be interviewed by BIES. I have no doubt that their insights and knowledge, as reflected in their interviews, are an important contribution to a better understanding of Indonesia’s modern economic history. It is a matter of deep sorrow to me that a few of them are not here with us anymore to witness the publication of this volume.

Thee Kian Wie Jakarta 14 June 2003

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Acknowledgments

I would like to express my great appreciation to Dr Ross McLeod, Editor of the Bulletin of Indonesian Economic Studies (BIES), and Dr Chris Manning, Head of the Indonesia Project, Research School of Pacific and Asian Studies, The Australian National University, for kindly giving permission to re-publish the following articles published previously in the BIES: 1. Sumitro Djojohadikusumo, “Recollections of My Career”, BIES 22, no. 3 (December 1986): 27–39. 2. Mohammad Saubari, “Reflections on Economic Policy-Making, 1945– 51”, BIES 23, no. 2 (August 1987): 118–21. 3. Sjafruddin Prawiranegara, “Recollections of My Career”, BIES 23, no. 3 (December 1987): 100–8. 4. Abdoel Raoef Soehoed, “Reflections on Industrialisation and Industrial Policy in Indonesia”, BIES 24, no. 2 (August 1988): 43–57. 5. Sarbini Sumawinata, “Recollections of My Career”, BIES 28, no. 2 (August 1992): 43–53. 6. Mohamad Sadli, “Recollections of My Career”, BIES 29, no. 1 (April 1993): 35–51. 7. Soedarpo Sastrosatomo, “Recollections of My Career”, BIES 30, no.

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Acknowledgments

1 (April 1994): 39–58. 8. Suhadi Mangkusuwondo, “Recollections of My Career”, BIES 32, no. 1 (April 1996): 33–49. 9. Emil Salim, “Recollections of My Career”, BIES 33, no. 1 (April 1997): 45–74. 10. Subroto, “Recollections of My Career”, BIES 34, no. 2 (August 1998): 67–92. 11. Teuku Mohamad Daud, “Recollections of My Career”, BIES 35, no. 3 (December 1999): 41–50.

© 2003 Institute of Southeast Asian Studies, Singapore

Introduction

I ntroduction

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Reproduced from Recollections: The Indonesian Economy, 1950s-1990s, edited by Thee Kian Wie (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at < http://bookshop.iseas.edu.sg >

3

Introduction

1

Introduction THEE KIAN WIE

I

ndonesia’s tumultuous political development and dramatic changes in its economic fortunes since its independence have been studied and interpreted by many scholars. Rarely, however, have their accounts been described through the eyes of the major policy-makers, senior government officials and actors. Personal accounts of these persons have, with a few exceptions, also been rare. Yet their accounts could offer interesting information and insights about the events that took place and the challenges and opportunities facing them at the time. This volume, presenting in-depth interviews with a number of former economic policy-makers and senior government officials and private businessmen, is an attempt to fill this lacuna. The interviews were conducted by members of the Editorial Board of the Bulletin of Indonesian Economic Studies (BIES) over the period 1986–97. These interviews, most of them published under the title “Recollections of My Career” in BIES, can enhance our knowledge and understanding of Indonesia’s modern economic history. To have a better appreciation of their accounts, a short review is presented of the major economic challenges which policy-makers faced both during the early independence period and the Soeharto (New Order) era. To highlight several aspects of this review, observations of the persons

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interviewed on the problems they encountered will be interwoven into this account. THE EARLY INDEPENDENCE AND THE LATE SUKARNO ERA (1950–65) Economic Conditions in the Early 1950s

When the Indonesian Government on 27 December 1949 assumed effective control over the main territory of the former Netherlands Indies following the official transfer of sovereignty from the Netherlands to Indonesia, the country faced serious problems. The Japanese occupation and the ensuing armed struggle against the Dutch had greatly impoverished the Indonesian people. The government also faced armed insurrections in certain regions, including Aceh, West Java, South Sulawesi and the Moluccas, which it was able to suppress but at a considerable cost in lives and money. The first order of business in the economic field was to raise the standard of living of the people, lay the foundation for a sound national economy, increase production and stimulate commerce and industry (Sumitro 1952a, p. 5). The pressing short-run economic problem, however, was how to finance the rehabilitation of the infrastructure of the country from the government’s limited budget, which in 1950 recorded an estimated deficit of Rp 1.7 billion. However, in 1951 the estimated budget deficit did not materialize because of an unexpected increase in export revenues. This unexpected increase yielded a balance of payments surplus as well as a budget surplus of Rp 1 billion (Sumitro 1952a, p. 8). The unexpected increase in export revenues was due to the “Korea boom”, caused by the increased demand for strategic raw materials. by the American government during the Korean War. The “Korea boom”, however, proved to be of short duration. By 1952 the balance of payments recorded a worse deficit than in 1950 since export producers had converted their foreign exchange earnings into consumer goods (including luxury consumer durables), which in 1951/52 accounted for half of imports. The end of the “Korea boom” led to a decline in export revenues and a consequent drop in trade taxes. As a result, the budget again recorded a deficit (Dick 2002, p. 174). The budget deficit continued to be a perennial problem in the following years. Growing government expenditures were largely caused

© 2003 Institute of Southeast Asian Studies, Singapore

Introduction

5

by a notable increase in the government payroll for military personnel and an enlarged bureaucracy (Paauw 1963, pp. 186–87). To cover the budget deficit, the government, arguing that a modest budget deficit would do no harm, requested the Parliament to lift the ceiling on bank advances to the government (Higgins 1957, p. 25). Although the target budget deficit of Rp 2.5 billion was relatively modest, the breaching of this ceiling created a dangerous precedent. By the early 1960s this approach was to haunt Indonesia. From mid-1952 to mid-1954 the Indonesian Government lost foreign exchange reserves at a faster rate than any other country in the world. Although subsequently the foreign reserves position improved, the reserves were protected by severe import restrictions, leading to a black market in several goods and foreign exchange. To restrain the demand for scarce foreign exchange, the Indonesian Government resorted to direct import controls and ad hoc measures (Mackie 1971, pp. 66–67). By the mid1960s the gap between the official exchange rate and the black market rate had risen to enormous proportions. The Economic Consequences of the Round T able Conference

Although the transfer of sovereignty to Indonesia in December 1949 was welcomed by most Indonesians, this event did not create any euphoria. Many nationalists were quite unhappy with the severe terms imposed on Indonesia by the Netherlands in return for the transfer of sovereignty. The reason was that the transfer of sovereignty had been the result of a negotiated settlement arranged by the United Nations Commission for Indonesia (UNCI). Consequently, the Indonesian delegation at the Round Table Conference (RTC), convened by UNCI in The Hague in the autumn of 1949, was forced to compromise on several issues in order persuade the Dutch to reach an agreement. From the outset four controversial issues, two political and two economic, bedevilled Indonesia-Dutch relations (Dick 2002, p. 170). These issues ultimately doomed the prospects of amicable relations between former colonial ruler and colony. The first political issue was the Dutch insistence on transferring sovereignty not to the Indonesian Republic which had waged the war of independence, largely on Java and Sumatra, but to the United States of Indonesia (Republik Indonesia Serikat, RIS),

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comprising both the Indonesian Republic and the 15 puppet BFO (Bijeenkomst Federaal Overleg) states, which the Dutch had set up to weaken the nationalist appeal of the Indonesian Republic. Forcing the Indonesian nationalists to accept a federal structure was greatly resented, as it was seen as a Dutch ploy to weaken Indonesia. This artificial political construct proved to be fragile as in the ensuing months following the transfer of sovereignty one puppet state after another dissolved itself and declared itself to become part of the Indonesian Republic. On 17 August 1950, the fifth anniversary of Indonesia’s proclamation of independence, the federal RIS was dissolved to make way for the unitary state of the Republic of Indonesia. The second, more intractable political issue concerned West New Guinea (named West Irian by the Indonesian nationalists). The Indonesian nationalists considered themselves to be the rightful inheritors of the Netherlands Indies. The Dutch had refused to hand over West Irian, arguing that its Papua population was racially, culturally and linguistically not a part of the Indonesian nation. The refusal of the Dutch doomed the prospects of friendly Dutch–Indonesian relations from the outset. It also aggravated the irritation caused by the two economic issues on which the Indonesian delegation at the Round Table Conference had to compromise in order to speed up the transfer of sovereignty. It also enabled more radical nationalists to gain the upper hand at the expense of more moderate, pragmatic leaders. The two economic issues, which rankled Indonesian nationalists, were the foreign debt which Indonesia had to take over from the Dutch administration in Indonesia and the continued operations of Dutch business in Indonesia. During the four-year armed struggle against the Dutch (1945–49), the extensive Dutch business interests in Indonesia had gradually realized that hanging on to Indonesia would be futile. Their top priority was to reconstruct their business establishments which had suffered extensive damage during the Japanese occupation and the armed struggle against the Dutch (Lindblad 2002, p. 141). These business interests exerted heavy pressure on the Dutch Government to ensure that the Round Table Conference had to yield an agreement with the Indonesian delegation which would safeguard their extensive economic interests in an independent Indonesia.

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Introduction

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In trying to safeguard their economic interests in Indonesia, the Dutch Government was also motivated by the need to safeguard revenues it could obtain from these interests. These revenues would be an indispensable source of revenues for the depleted Dutch treasury needed for the postwar reconstruction of the Netherlands. Therefore, the unrestricted transfer of profits and dividends of the Dutch enterprises in Indonesia had to be legally guaranteed (Meijer 1994, p. 46). Guided by these considerations, the Dutch delegation at the Round Table Conference insisted on discussing those financial and economic issues which could achieve as profitable a Financial-Economic Agreement (Financieel-Economische Overeenkomst, Finec), or Finec, as was possible. This determination was reflected in the categorical refusal of the Dutch delegation to make any significant concession on the financial and economic issues being discussed at the Conference. In return, it was prepared to offer political concessions (Meijer 1994, p. 46). Hence, the Finec included a guarantee by the Indonesian Government that Dutch business activities in independent Indonesia could continue to operate without any hindrance. Nationalization of Dutch enterprises would only be allowed if it was considered to be in Indonesia’s national interest and if the affected enterprises would consent. The amount of compensation to the owners would be decided by a judge on the basis of the real value of the enterprise. The Finec also contained other provisions favouring Dutch interests, including a commitment by Indonesia that it would consult with the Netherlands if its financial and monetary policy could affect Dutch economic interests in Indonesia (Meijer 1994, pp. 46–47). No wonder that the late Professor Henri Baudet, a conservative Dutch economic historian, stated that the Finec contained the maximum attainable guarantees for the unhindered continuation of Dutch business (Baudet & Fennema 1983, p. 213). The other economic issue on which the Indonesian delegation at the Round Table Conference had to yield was the demand of the Dutch delegation that the Indonesian Government would have to take over all pre-war debts of the Netherlands Indies government as well as the postwar debts incurred by the Netherlands Indies Civil Administration (NICA). In total these debts included 3 billion guilders of domestic debt and another 3.3 billion guilders of external debt. The Indonesian delegation, however, was only prepared to take over the pre-war domestic debt. It

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argued that the post-war debt, estimated at 2 billion guilders, had been used to finance the Dutch military campaigns against the Indonesian Republic. Commenting on this post-war debt, Sumitro, a member of the Indonesian delegation, stated that “he could not see why Indonesia should assume the debt of an occupation army” (Sumitro 1986). In the end the Dutch delegation agreed to forego its claim on the controversial 2 billion guilders (Meier 1994, p. 47). The achievement of political independence, but without economic independence, posed a serious problem for the Indonesian Government. Not being able to exert any control on important segments of the Indonesian economy greatly restricted the freedom of manoeuvre of Indonesia’s economic policy-makers. According to the late Professor Benjamin Higgins, a United Nations consultant to the Indonesian Government in the early 1950s, most of Indonesia’s modern sectors were still owned and controlled by the Dutch. Many senior positions in the fledgling Indonesian public service were occupied by Dutch officials, whose loyalty to newlyindependent Indonesia could not readily be taken for granted. The Governor and most members of the Board of Directors of the Java Bank (which functioned as the central bank during the colonial period) were still Dutch, as was the Director of the Foreign Exchange Control Board (Higgins 1990, p. 40). Sumitro noted that when he became Minister of Finance in 1952, the Ministry of Finance was full of Dutch officials. He added that they had no clue about economics, but were very good at administrative procedures (Sumitro 1986). Measures to Counter Dutch Economic Dominance and Foster the Growth of an Indigenous Indonesian Business Class

As in other developing countries emerging from colonial rule, economic policies pursued by successive Indonesian governments since independence have been largely shaped by the interplay of the major economic and social problems confronting them, the basic economic ideas of the major economic policy-makers, and the contending interests of various groups in society. During the early independence period the major problem facing policymakers was reconciling the urgent need to rehabilitate the dilapidated physical infrastructure and productive apparatus with the strong national aspiration to “convert the colonial economy into a national economy”.

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Introduction

9

This aspiration was to be realized by owning and controlling the country’s major productive assets. Like many other Indonesian nationalists, the economic policy-makers of the early independence period were strongly attracted to socialist ideals. These nationalists were averse to capitalism as it was associated with colonial rule. However, none of them, except for the communists, were attracted to Marxism-Leninism or other extreme leftist ideas. In fact, many nationalists interpreted “socialism” as “Indonesianization” or “indigenism”, that is breaking the control of foreign capital, mostly Dutch and ethnic Chinese, over the trading and industrial sectors and plantation agriculture. Views differed, however, about whether this should be achieved by state nationalization or by promoting an Indonesian business class (Mackie 1971, p. 44). Many nationalist leaders favoured the development of a strong indigenous Indonesian business class. Other nationalists interpreted “socialism” as a collectivist organization of the economy which should be based on the “family principle”, enshrined in article 33 of the 1945 Constitution. Under this interpretation, co-operatives were regarded as a suitable expression of Indonesian social ideals (Mackie 1971, p. 44). VicePresident Hatta, in particular, was the most prominent advocate of cooperatives. However, with the imposition of “Guided Economy” and “socialism à la Indonesia” by President Sukarno in the late 1950s, government policy emphasized that important branches of production should be owned by state enterprises. Private enterprise would only be allowed in those activities which did not control the supply of the basic needs of the people (Rice 1983, p. 61). Despite their unhappiness with the continuing Dutch dominance over the economy, the major economic policy-makers during the early independence period, including Vice-President Mohammad Hatta, Sumitro Djojohadikusumo (who just like Hatta had studied at the Netherlands School of Economics in Rotterdam), Sjafruddin Prawiranegara (a graduate of the School of Law in Jakarta), and Djuanda (an engineer trained at the School of Engineering in Bandung) (Booth 1986, p. 13) were pragmatic men who, while attracted to socialist ideals, did not adhere to any rigid ideological doctrine. Through their writings, Hatta, Sumitro and Sjafruddin in particular were quite influential on the formation of economic policymaking in the early independence period (Rice 1983, p. 60).

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As pragmatic politicians they realized that top priority had to be given to the country’s economic stabilization and rehabilitation. Higgins characterized this group as “economics-minded” persons (Higgins 1957, p. 103). Since a large part of the modern export industries, including large estates and mines, were still owned and operated by the Dutch, these policy-makers realized that they had, whether they liked it or not, to protect the legal rights of the Dutch enterprises. Hence, the Dutch enterprises were allowed to operate without any hindrance, often in the face of strong opposition from radical nationalists. Higgins called this latter group “history-minded” persons. Their orientation was more militantly anti-foreign and more concerned with retaining the country’s traditional cultural and religious institutions (Higgins 1957, p. 103). Higgins’s classification of the two groups of nationalists competing for political influence in the 1950s is similar, though not identical, to Feith’s distinction between “administrators” and “solidarity makers”. The “administrators” were the leaders with the administrative, technical, legal, and foreign language skills requited to run the modern apparatus of a modern state. The “solidarity makers” included leaders skilled as mediators between groups at different levels of modernity, as mass organisers, and as manipulators of integrative symbols (Feith 1962, p. 113). Facing the country’s serious economic problems, the pragmatic “administrators” attempted to solve the problems of economic rehabilitation and development. Concerned for maximum production, fiscal stability, and legality, they defended the continued prominence of Dutch business (Feith 1962, p. 605). Confronted by strong nationalist sentiment to own and control the country’s productive assets themselves, the “administrators” in the course of the early 1950s lost out to the more radical nationalist solidarity makers. Despite the constraints imposed by the provisions of Finec, the pragmatic economic policy-makers were determined to match Indonesia’s hard-won political independence with meaningful economic sovereignty, even though they realized it would take a long time and much effort. Indonesian nationalists viewed their national revolution as incomplete until they had transformed the colonial economy they had inherited into a national economy owned and controlled by their own nationals (Golay et al. 1969, p. vii).

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Introduction

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As under the provisions of Finec, nationalization of certain economic institutions or enterprises was allowed, albeit with certain conditions attached, the Indonesian Government quickly took steps to nationalize key institutions and large enterprises. These included the nationalization of the Java Bank in 1951, renamed Bank Indonesia. Despite initial Dutch attempts to retain control over the Java Bank, in the end the nationalization of the Java Bank proceeded relatively smoothly. It was recognized that control of money and credit was an essential ingredient of sovereignty (Anspach 1969, p. 137). According to Moh. Saubari, Secretary-General of the Department of Finance in the early 1950s, the nationalization of the Java Bank was implemented through the purchase of shares from both domestic and overseas shareholders (Saubari 1987). The purchase of shares proceeded smoothly, and in a short time 97 per cent of all shares had been purchased by the government. In December 1951 the Java Bank was officially nationalized. Dr Houwink, the last Dutch Governor of the Java Bank, was honourably discharged from his post, and replaced by Sjafruddin Prawiranegara, who became the first Indonesian Governor of Bank Indonesia (Saubari 1987). Other measures to put key enterprises under national control included the transfer of domestic air transport from the Royal Netherlands Indies Airlines (KNILM) to Garuda Indonesian Airways, Indonesia’s new airline company. The railroads on Java and main public utilities were also put under control of the Indonesian Government (Burger 1975, p. 170). The Central Trading Company (CTC), Indonesia’s first government-owned trading company established in Bukittinggi in 1947, was assigned by VicePresident Hatta to challenge the monopoly of the “Big Five”, the five large Dutch trading companies (Daud 1999). According to Teuku Mohamad Daud, former President Director of CTC, the Board of Directors of CTC decided, despite initial misgivings on the part of the Board of Commissioners, to “hijack” Sino-Indonesian managers from the few large companies owned by Sino-Indonesians. They had the required experience and skills to make CTC an efficient and viable corporation. Through their recruitment CTC would be better positioned to challenge the Dutch companies (Daud 1999). The SinoIndonesian managers proved to be loyal Indonesians and their relations

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with the indigenous Indonesian managers and staff were quite good (Daud 1999). The first major programme to develop a strong indigenous Indonesian business class was the Benteng (Fortress) Programme, launched in April 1950 by Djuanda, then Minister for Welfare (Anspach 1969, p. 168). According to Sumitro, Minister for Trade and Industry in 1950–51, the purpose of the Benteng Programme was also to try and set up a counterforce to Dutch economic interests (Sumitro 1986). The Benteng Programme focused on securing national control of the import trade. Under this programme import licences in certain restricted categories of easy-to-sell goods were reserved exclusively for indigenous Indonesian importers. The provisions of the Programme, however, did not specifically exclude ethnic Chinese businessmen who were Indonesian citizens (Mackie 1971, pp. 47–48). In fact, however, the Benteng Programme was aimed at countering Dutch as well as Chinese economic interests. Ethnic Chinese businessmen continued to dominate the intermediate trade in the rural areas and the retail trade in the urban areas, just as in the colonial period. The Benteng Programme’s focus on the import trade was based on the consideration that it was the most susceptible to state control through the allocation of import licences. This sector was also considered the most suitable to promote indigenous businessmen, because it required relatively small amounts of capital and corporate resources compared to other activities, such as manufacturing. It was hoped that through this import trade, indigenous Indonesian entrepreneurs would be able to accumulate sufficient capital to move into other sectors (Robison 1986, p. 44). On paper the requirements needed by prospective indigenous Indonesian importers to qualify for the allocation of import licences were fairly stringent. In practice, however, the Benteng Programme led to considerable abuses as ethnic Chinese importers, excluded from the Benteng Programme, were able to acquire import licences. They learned to operate through puppet indigenous Indonesian licence holders, who were referred to as “briefcase importers” (Mackie 1971, p. 48). Instead of building a strong indigenous Indonesian business class, the “Benteng” Programme had fostered a group of socially unproductive rent-seekers. Sumitro, in charge of the Benteng Programme when he was Minister for Trade and Industry in 1950–51, observed that he had no illusions about the Benteng Programme. He thought, however, that even though

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seven out of the ten beneficiaries of this programme might turn out to be parasites, three entrepreneurs might still emerge (Sumitro 1986). Soedarpo, himself a successful indigenous businessman, commented that the results of the Benteng Programme, were a disaster (Soedarpo 1994). Licences were given to people who were not even remotely businessmen. Many of them neither understood the first steps of the importing business, nor how to document and finance imports. They therefore had to turn mainly to Chinese traders who knew the business (Soedarpo 1994). To its credit the Indonesian Government soon realized the adverse effects of the Benteng Programme and took steps to weed out bogus importers (Burger 1975, p. 171). Since the Benteng Programme had failed in achieving its stated purpose, the government subsequently repudiated the Programme (Anspach 1969, p. 178). Hence, the twin goals of fostering the growth of a strong indigenous Indonesian business class and reducing the control of import trade by the “Big Five” Dutch general trading companies were not achieved. After the mid-1950s relations between Indonesia and the Netherlands deteriorated rapidly because of the Dutch Government’s refusal to discuss the status of West Irian (now renamed Papua province). When the Indonesian Government in November 1957 failed to persuade the United Nations General Assembly to adopt a resolution calling on the Dutch Government to cede West Irian to Indonesia, militant workers took over the management of the Dutch inter-island shipping company KPM. In the following two weeks this action was, under military supervision, followed by similar take-overs of other Dutch enterprises. Although the Indonesian Government had not initiated these take-overs, it did not attempt to resist the “take-over” movement (Glassburner 1971a, p. 92). However, a few senior officials, notably Sjafruddin Prawiranegara, then Governor of Bank Indonesia, openly spoke against these take-overs (Sjafruddin 1987). In February 1959 the formal take-over of all Dutch enterprises was legalized. The nationalized companies were turned into state-owned enterprises (Dick 2002, p. 184). Hence, with one sweep the powerful Dutch business presence, which had operated in Indonesia since the second half of the nineteenth century, was eliminated. Unlike the relatively easy liquidation of Dutch economic interests, curtailing Chinese economic activities proved to be much more difficult. The ethnic Chinese were not only much more numerous than the Dutch,

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but also included Indonesian and foreign citizens. These foreign Chinese included citizens of the People’s Republic of China and “stateless” proKuomintang citizens oriented towards Taiwan. Because of Indonesia’s colonial experience, the government was reluctant to pursue an official policy of discrimination against its non-indigenous citizens. For this reason government measures in the 1950s to curtail the economic activities of the Chinese were only aimed at the foreign Chinese nationals. These measures included the head tax imposed on foreign nationals in 1957 and Government Regulation no. 10 of 1959, which banned retail trade by foreign nationals in rural areas. These were defined as the areas outside the provincial and district capitals (Coppel 1983, p. 37) Although this Regulation also affected Arab and Indian traders, it was mainly aimed at hurting the Chinese (Ricklefs 1993, p. 267). However, due to the serious economic dislocation caused by this Regulation, its further implementation was discontinued. Rehabilitation of Infrastructure and the Productive Apparatus

As a result of eight years of unsettled conditions during the Japanese occupation and the armed struggle against the Dutch, the new Indonesian Government faced the difficult task of rehabilitating the country’s physical infrastructure. Many estates, mines and factories also needed to be rehabilitated. Fortunately, the restoration of food crop production to pre-war levels, both in Java and the regions outside of Java, did not require large expenditures on the rehabilitation of infrastructure (Booth 1996, p. 403). However, the problems facing the export industries, particularly the estates and mines in Java and Sumatra, were much more serious. In Java many sugar factories had suffered great damage during the Japanese occupation and the armed struggle against the Dutch. Moreover, many farmers in Java could no longer be coerced into renting their land at unprofitable rentals to the Dutch sugar companies (Booth 1996, p. 403). The other large estates growing annuals, such as tobacco, and perennials, including rubber, coffee, tea, and oil palm, were not in better shape. During the war the Japanese army had forced the estates to destroy trees to grow food crops. In the mostly Dutch-owned tobacco estates on East Sumatra much of the estate land had been occupied by land-hungry local

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farmers to grow food crops (Booth 1996, p. 404). The only two tree crops whose production reached pre-war levels were rubber and copra. They were mostly grown by smallholders on land not suitable for food crop production (Booth 1996, p. 404). Rubber estates and smallholders in 1950–51 were also stimulated to raise rubber output because of the “Korea boom”. This boom was caused by the increased demand of the United States for strategic materials, including rubber and oil. Despite the decline in rubber output in the ensuing years, these two commodities generated the bulk of Indonesia’s export revenues up to the early 1970s (Glassburner 1971a, p. 14), just like they did in 1930 (Lindblad 2002, p. 126). While foreign-owned estates experienced difficulties in restoring their output to pre-war levels, the important oil industry fared better. Oil exploration in Indonesia had ceased for almost a quarter of a century after the Pacific War broke out in December 1941. However, in 1959 the Indonesian Government signed new oil exploration agreements with the three large foreign oil companies, Caltex, Stanvac and Shell, which had operated in Indonesia during the colonial period. New oil exploration agreements were also signed with several small foreign oil companies. These oil exploration agreements were important to Indonesia to sustain continued oil production at steady levels, as the country’s oil reservoirs, while numerous, are smaller and shallower than the large oil structures in the Middle Eastern countries. Without continuous oil exploration, Indonesia’s oil output would stagnate and eventually decline (Hunter 1965, pp. 68–69). Efforts at Industrialization

Like many other governments of nations emerging from colonial rule, the government of newly-independent Indonesia attributed the country’s economic backwardness to the colonial government’s lack of interest in developing manufacturing industries. During that period only resourceprocessing facilities of the export crops, such as sugar factories and oil refineries, had been set up. Although some degree of import-substituting industrialization had taken place in the Netherlands Indies, after independence Indonesia was still largely an agrarian economy. It was estimated that manufacturing accounted for only 8–10 per cent of net domestic product during the

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period 1951–59, while agriculture accounted for about 56 per cent during the period 1953–58 (Paauw 1963, pp. 176–77). This estimate, however, may be an underestimate as much of handicraft production (produced by cottage industries) was either excluded or included in the contribution of small-scale agriculture (Paauw 1963, p. 177). Not surprisingly, after independence high priority was put on industrialization to achieve a more balanced structure of the economy. Hence, in 1951 Sumitro, then Minister for Trade and Industry, launched an ambitious industrialization plan. Under this Economic Urgency Plan, the manufacturing sector would play a crucial role as the engine of growth. For this reason the Economic Urgency Plan was also referred to as the Industrial Urgency Plan (Siahaan 1996, p. 190). Most Indonesian leaders shared Sumitro’s view on the need to industrialize. However, a few leaders, including Sjafruddin, put a higher priority on developing agriculture first. Sjafruddin argued that manufacturing should be based on agriculture and on Indonesia’s natural resources. This was important as building a manufacturing sector would be difficult if the agricultural sector was deficient. Moreover, Indonesians would have to be educated in management and technology first before rushing into forced industrialization (Sjafruddin 1987). Although during the Plan period of five years a few industrial plants were built, the implementation of the Plan was spotty. In appraising the progress of the large-scale industry programme, Sumitro stressed bad organization, incompetent management, cumbersome government administration and financial regulations, and lack of technical experts as the reasons for the lack of progress (Higgins 1957, p. 75). The disappointing results, together with growing concern about inflationary pressures caused by large development expenditures, led to the scrapping of the plan in 1956 to make way for a new development plan, Indonesia’s First Five-Year Development Plan (Anspach 1969, p. 163). The First Five-Year Plan, which was to run for the period 1956–60, suffered the same fate as the Economic Urgency Plan. The Draft Plan submitted to the Parliament in 1956 was only approved in 1958 (Siahaan 1996, p. 286). By then the Five-Year Plan had become largely irrelevant (Mackie 1971, p. 50). Moreover, the Indonesian Government had become preoccupied with serious political and economic crises. The take-over of

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Dutch enterprises and the armed rebellion of some resource-rich regions in Sumatra and North Sulawesi against the central government also put a heavy burden on government finances. With the gradual attrition of parliamentary democracy in Indonesia, President Sukarno in July 1959 restored the 1945 Constitution. Under this Constitution President Sukarno became the head of government as well as head of state. This step ushered in the period of “Guided Democracy” and “Guided Economy”. Indonesia henceforth was expected to pursue a “socialist” pattern of development, referred to by President Sukarno as “socialism à la Indonesia”. It marked the end of pragmatic economic policies, pursued by the pragmatic economic policy-makers in the early 1950s. A deliberate political shift took place to increasingly anti-Western and anti-capitalist policies and closer alignment with the Soviet bloc countries and the People’s Republic of China. There was also an emphasis on “completing the Indonesian revolution” which paid scant, if any, regard to sound economic policies. In line with the new era of “Guided Economy”, President Sukarno appointed a new National Planning Council headed by Mohammad Yamin, a prominent national leader. The Planning Council was given the task of drawing up a new “Eight-Year Overall Development Plan” Unlike the First Five-Year Plan, which was a purely economic document, the Eight-Year Plan was a political as well as an economic document, as it outlined the kind of society the Plan was expected to achieve (Higgins 1968, p. 699). However, the vast expenditures required for the military campaign to recover West Irian in 1961–62 and the “Crush Malaysia” campaign of 1963–66 and the perpetual political turmoil made implementation of the Plan impossible. Up to the mid-1960s the major hurdles to industrial development included insufficient supplies of raw materials, problems with importing capital goods, problems of management and marketing, and the lack of capital goods-producing facilities in Indonesia (Paauw 1963, p. 180). Besides these technical problems, political problems also made it difficult to realize the ambitious industrial projects. As a result, not many industrial projects planned during the 1950s and early 1960s actually materialized, except for a few large-scale plants. The few industrial projects actually established during this period included the first fertilizer plant (PT Pusri)

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in Palembang, South Sumatra, and the first large cement plant in Gresik (PT Semen Gresik). However, a steel plant to be built with Russian assistance faced many problems and could not be built (Soehoed 1988). However, according to Soehoed, Minister for Industry from 1978 to 1983, during this early period a concept was already adopted of first setting up basic industries, making use of available natural resources, and then developing downstream industries (Soehoed 1988). Moreover, the few large industrial plants set up during this period gave Indonesian engineers, managers and plant workers valuable industrial skills and experience in operating modern plants. Hence, the new government under General Soeharto did not start from scratch when it launched its own industrial drive in the late 1960s. Economic Decline and the End of the Sukarno Era

Under President Sukarno’s increasingly strident anti-Western and anticapitalist policies, economic policy became subordinate to political strategy. Under President Sukarno slogans of “completing the national revolution”, building a “socialist economy à la Indonesia”, self-reliance, and forging closer relations with the socialist countries came first. Political success, and nothing else, it was believed, would ultimately solve Indonesia’s economic problems (S.G.; J.G.; L.C., 1965, p. 1). But having little grasp of the hard economic problems facing the country, President Sukarno had little capacity for seeking economic advice that might have enabled the government to come to grips with them. Moreover, being preoccupied with “completing the national revolution”, Sukarno did not take sufficient precautions to minimize their effect on the economy (Legge 1972, pp. 328–29). Although prices in Indonesia had risen in close conjunction with the volume of money since 1950, the rate of inflation began to accelerate at an alarming rate from the early 1960s. Inflation steadily rose from 19 per cent in 1960 to a peak of 636 per cent in 1966 (Grenville 1981, p. 108). The basic cause of Indonesia’s hyperinflation was the government’s growing budget deficit financed by the simple device of printing money. The runaway inflation had serious political and economic consequences. There was a steady decline in the government’s ability to command the resources it could previously mobilize. As a result, the government had lost much of its ability to take any significant action (Bresnan 1993,

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p. 58). Another casualty of hyperinflation was the commitment to social justice, since the government did not control enough of the total available rice supply to ration rice at fixed prices for all. Only a relatively small proportion of the population had access to the government’s distribution system, including public servants, the military and employees of state enterprises (Bresnan 1993, p. 59). Concerned about the deteriorating economy, Subandrio, the Deputy First Minister and Minister for Foreign Affairs, in 1963 approached Soedjatmoko, a distinguished intellectual, to help in formulating a new economic programme for Indonesia. To help him in designing the economic programme, Soedjatmoko approached Sarbini, Professor of Economics at the University of Indonesia and the first Indonesian head of the Central Bureau of Statistics (BPS). According to Sarbini, the economic programme they designed focused on deconcentration. This term is similar to the terms deregulation and debureaucratization later used by the New Order government. The economic programme, known by its acronym “Dekon” referred not only to deklarasi ekonomi (economic declaration), but also to the focus of the programme (Sarbini 1992). However, at the insistence of PKI, the politically ascendant Indonesian communist party, Dekon had to incorporate several opening statements. These opening statements focused on the need to focus first on anti-imperialism. They therefore neutralized the thrust of “Dekon”, and nothing came of “deconcentration” (Sarbini 1992), and with that the last hope for rational economic policies. The final years of President Sukarno’s reign were characterized by a sharp deterioration in economic conditions. This was reflected in a contraction of the Indonesian economy by 3 per cent in 1963 (World Bank 1998, p. 2.1), hyperinflation, and a sharp decline in productive capacity because of sheer neglect and the shortage of foreign exchange to import spare parts and capital goods. The steady economic deterioration during the early independence period was reflected by the fact that after the economy had recovered in the early 1950s from the ravages of war and revolution, it started stagnating in the late 1950s, and then experienced negative growth in the early to mid-1960s (van der Eng 2001, p. 182). Assessing the Indonesian experience during the late Sukarno period, Suhadi, Professor of Economics at the University of Indonesia and Former Director of Foreign Trade, Department of Trade, observed that the chief economic lesson of this period was that the government would have to

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pay more attention to market forces. An over-ambitious political programme would incur heavy economic and social costs (Suhadi 1996). When the demands of political ambition exceed the capacity of the economy, as was the case with the Sukarno government in the first half of the 1960s, the economy would collapse (Suhadi 1996). Thus the early independence period which had started with much hope ended in economic and social chaos. There was a blood bath triggered by the build-up of severe political and social tensions which the government itself had encouraged or condoned. There was also the fall of a disgraced president, once hailed as Indonesia’s “Great Leader of the Revolution” and one of the two proclamators (together with Mohammad Hatta) of Indonesia’s independence on 17 August 1945. Pragmatism during the Early Independence Period: An Assessment

The steady deterioration which the Indonesian economy had experienced since the late 1950s reflected the steady decline in influence of pragmatic economic policy-makers. More radical nationalist leaders more concerned with revolutionary rhetoric rather than economic development came to the fore. As one foreign observer acutely observed: from the point of view of economic policy, the years 1950 to 1957 in Indonesia are best understood as years of a hopeless losing battle on the part of a very small group of pragmatically conservative political leaders against an increasingly powerful political coalition of generally radical orientation (Glassburner 1971a, p. 71).

In spite of their personal integrity and pragmatic views, the pragmatic policy-makers were not a cohesive group of like-minded people. This contrasted sharply with the strong cohesiveness of the technocrats under the subsequent New Order. Moreover, unlike the apolitical technocrats, two of the most prominent policy-makers of the early 1950s, Sumitro and Sjafruddin, belonged to two different parties. They also debated their differences in public on how to tackle the various economic problems facing the country (Sumitro 1952c). Perhaps the major reason for the decline in political influence of this group was the refusal of the Dutch to discuss the future status of West Irian and the continuing economic domination of Dutch business. These

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Introduction

two factors grated on the Indonesians’ strong sense of nationalism and offered an opportunity for more radical leaders to gain the upper hand. Seen from this point of view, the cards were already stacked against the pragmatic policy-makers right from the early 1950s. THE NEW ORDER ERA UNDER PRESIDENT SOEHARTO, 1966–98 The Rise of the New Order and the Economic Technocrats

Ascendancy of the

General Soeharto, who took over executive power from President Sukarno in early 1966, inherited a bankrupt economy on the verge of breakdown. The country was in default on a foreign debt of US$2.4 billion, hyperinflation was reaching 600 per cent, industrial output was below 20 per cent of capacity, shipping, rail and road transport equipment were run down, while the whole system of government controls of the economy was eroded by pervasive corruption (Panglaykim & Arndt 1966, p. 8). Faced with the urgent need to tackle these serious economic problems, General Soeharto turned to a group of five young economists from the Faculty of Economics, University of Indonesia (FEUI) for economic advice. These economists included Widjojo, Ali Wardhana, Sadli, Subroto, and Emil Salim. Soeharto’s contacts with these economists had started when he had taken courses in economics and other social sciences at the Army Staff and Command School (Seskoad) in Bandung during the late Sukarno era. According to Sadli, Soeharto obtained his basic knowledge about economics from these FEUI economists, just like the other members of the Seskoad course (Sadli 1993). General Suwarto, Commander of Seskoad, had drawn up a curriculum, which included military and non-military courses. These non-military courses included economics, law, political science, and sociology. These non-military courses had been included to prepare the senior army officers for the dual function (dwifungsi) they were expected to perform — their military and their political and social roles (Sadli 1993). According to Subroto, there was something special in the relationship between the economists and the army. They all had participated in the war of independence. Having experienced the same armed struggle and generally having the same ideals and enthusiasm, this military-civilian

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relationship in 1966 was unique (Subroto 1998). The civilian academics included faculty members of the University of Indonesia, Gadjah Mada University and Padjadjaran University. However, at least in the field of economics, the five FEUI economists played the major role (Subroto 1998). Upon Soeharto’s assumption of power, General Suwarto, Seskoad Commander, organized the Second Army Seminar in August 1966. Its purpose was to discuss three major issues, namely political, economic and military issues. Seminar participants were divided into three groups, called “syndicates”. The economists were put in the “Syndicate for Economic Affairs”, while the social and political scientists, including one economist, Sarbini, were put in the “Syndicate for Political Affairs”. According to Sarbini, the aim of this Seminar was to look for ideas from outside Army circles. The Army knew what it did not want, particularly communism, but was less sure about where to go from there. The economists and social scientists participating in this Seminar might have been invited because they were considered rational and anti-communist (Sarbini 1992). Discussions in the Syndicate for Economic Affairs focused on the problems of economic stabilization and rehabilitation. The discussions in this syndicate were led by Widjojo, who had prepared an operational programme to deal with the country’s serious economic problems. Soeharto was evidently impressed. Soon after this Seminar Soeharto appointed the five FEUI economists as his “expert advisers” (Bresnan 1993, p. 62). These appointments marked the ascendancy of the economists, often referred to as the “Berkeley Mafia” (as many of them had studied at the University of California, Berkeley) or the “technocrats”. According to Sadli “technocrats” were top government officials who, in preparing economic policy-making, were guided by rational considerations, having the national interest at heart, and observing the major principles of economics, such as opportunity costs and the scarcity of resources. Instead of ideological “-isms”, their preferred guideline was pragmatism, that is the principle that what is good is what works (Sadli 1997, p. 243). According to Sadli, Widjojo was the right leader of the team, since he had a sound conception of the appropriate economic programme for the country. Widjojo also knew how to play a political role that would achieve the desired ends. Over the years the team of economic advisers grew into a cohesive group under the strong leadership of Widjojo (Sadli

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1993). Emil Salim added that Widjojo was the real architect of the economic policies of the New Order. He was the dalang, the puppeteer, while the other economic technocrats were the wayang, the players (Salim 1997). Widjojo was able to carry out his economic policies because Soeharto trusted him; the President knew he did not have a “hidden agenda”. Widjojo was also able to rely on his fellow technocrats, because they all shared similar views on the need to pursue sound economic policies (Salim 1997). Upon assuming power in 1966, Soeharto asked his economic team to draw up a Programme for Stabilization and Rehabilitation. The main objective of the Programme was the stabilization of the economy by stopping the runaway inflation. The main policy instrument was a balanced budget, based on the principle that the government should not resort to the printing of money to finance budget deficits. To make this policy more feasible, the estimated revenues in the balanced budget would also include revenues from foreign aid (Sadli 1997). The new government’s reliance on foreign aid as a source of financial support for the budget was a far cry from the anti-Western “go to hell with your aid” attitude of President Sukarno. From the outset the New Order government realized that anti-Western attitudes had not only been a characteristic of the discredited Old Order government, but had also been part of the problems it faced (Hollinger 1996, p. 25). The new government therefore decided to abandon the bankrupt “inward-looking” policies of the former government. Henceforth, the aim would be to pursue “outward-looking” policies, as reflected by a more liberal trade and foreign investment regime. To this end, the new government decided to re-establish good relations with the Western countries and Japan. These good relations were deemed crucial in rescheduling repayments of the large foreign debt inherited from the Sukarno government; in seeking foreign aid to support the balance of payments and the budget; and in attracting new foreign direct investment (Posthumus 1971, p. 12). Pleased with the turn away from anti-Western and anti-capitalist policies, the international aid community responded favourably to Indonesia’s request for rescheduling debt repayments and obtaining new foreign aid. In December 1966 representatives of the new government reached an agreement in Paris with the Western countries and Japan to reschedule

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the debt service payments due to these countries (Bresnan 1993, p. 70). At the initiative of the Netherlands government, an international aid consortium for Indonesia, the Inter-Governmental Group on Indonesia (IGGI), chaired by the Netherlands, was established in 1967. The advent of the new government also heralded a period in which the “statism” (the state as dominant player in the economy) of the Sukarno government was decried. The stigma of private enterprise, characteristic of the late Sukarno era, was removed (Sadli 1988, p. 358). Hence, private capital, both domestic and foreign, was encouraged to invest in various economic activities to foster economic growth and employment (Thee 1994, p. 6). In line with a new favourable attitude towards foreign direct investment, a new Foreign Investment Law was enacted in January 1967. This Law contained various incentives and guarantees to prospective foreign investors. These included tax holidays and guarantees that nationalization would not take place unless deemed in the national interest, and then only with full compensation under the rules of current international law (Sadli 1972, p. 204). This open-door policy to foreign investment attracted new foreign investment inflows into the country, particularly into the oil sector, other mining projects and the manufacturing sector (Hill 1988, p. 81). Despite the liberal provisions of the Foreign Investment Law, the Indonesian Government was keenly aware of the continuing appeal of economic nationalism. Recognizing this appeal, the Law also contained several restrictive provisions. For instance, foreign-controlled companies were not accorded national treatment. They were not permitted to establish subsidiaries to market their products, but had to sell their products through local distributors. Foreign companies were also not allowed to borrow rupiah funds from the state banks (Sadli 1988, p. 361). Over time the provisions on foreign investment became even more restrictive, particularly after the oil boom of the 1970s persuaded the government that foreign investment was not as important anymore as in the late 1960s. In 1968 a Domestic Investment Law was enacted which contained the same provisions for investments by domestic investors. Although some people suspected that foreign investors received more incentives than domestic investors, the latter received more incentives. Domestic investors had access to credits provided by the state banks, whereas foreign investors did not. For new domestic investments, the authorities adopted a “whitewash

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policy” to encourage ethnic Chinese businessmen, most of whom were Indonesian citizens, to repatriate their capital. This capital might have been transferred or smuggled overseas during the political turmoil under President Sukarno. This policy was rather risky in view of undercurrents of anti-Chinese feelings. Nevertheless, given that new investment was much needed to revive the economy, the results were well worth the risks. The “whitewash policy” proved to be effective in stimulating new domestic investment (Sadli 1997, pp. 244–45). While the Stabilization Programme focused on the restoration of macroeconomic stability, specifically the control of hyperinflation, the Rehabilitation Programme focused on the rehabilitation of physical infrastructure and productive facilities. The government gave top priority to the repair of infrastructure connected with food production and distribution, such as irrigation and roads and bridges. During this period the government also accorded greater priority to agriculture, specifically the foodcrop subsector, than to manufacturing industry (Sadli 1997, p. 245).

Indonesia’s Economic Performance under the New Order The Achievements of the New Order

The stabilization and rehabilitation programmes carried out by the economic team resulted in an impressive economic recovery. Hyperinflation was quickly brought under control by tight fiscal and monetary policies. This was reflected by a rapid decline in the rate of inflation from 636 per cent in 1966 to 9 per cent in 1970 (Grenville 1981, p. 108). With the restoration of macroeconomic stability in the late 1960s, the Indonesian economy embarked on a period of rapid growth, which on the whole was sustained for the next three decades. Indonesia’s per capita GDP growth over the period 1967–97 grew by an unprecedented average annual growth of 4.5 per cent, as rapid economic growth far exceeded population growth (van der Eng 2001, p. 182). Like the other high-performing Asian economies (HPAEs), Japan, the four Asian “Tigers”, and Malaysia and Thailand, extolled by the World Bank in its report on “The East Asian Miracle”, Indonesia’s rapid growth was underpinned by high rates of domestic capital investment (World

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Bank 1993, p. 8). By the mid-1990s Indonesia had one of the highest rates of gross domestic capital investment among the developing countries. This investment was financed by a high rate of domestic savings, amounting to 33 per cent of GDP in 1996 (World Bank 1997a). Indonesia’s rapid growth was accompanied by a steep reduction in the incidence of absolute poverty from 40 per cent of the population in 1976 to 11 per cent in 1996. Despite population growth, the corresponding number of people living in poverty declined from around 54 million in 1976 to 23 million in 1996 (BPS 1999, p. 576). A World Bank study on poverty reduction in a number of developing countries found that Indonesia had achieved the highest annual reduction in poverty over the period 1970–87 (World Bank 1990, p. 45). This decline in absolute poverty took place in both the rural and urban areas. Poverty decline in the rural areas, where most of the population resided, was made possible because of the high priority which the New Order government put on raising the production of rice, the staple food of most Indonesians. To achieve this goal, the government during the 1970s gave priority to rural development, which turned out to be a highly effective pro-poor policy (McCawley 2002, p. 263). Rapid economic growth was accompanied by rapid social development. Indonesia’s rapid social development is reflected by a number of social indicators, including net primary enrolment ratios which for both males and females were close to 100, infant mortality rates which showed a sharp decline compared to 1970, and a rising percentage of the population having access to safe water (World Bank 1999, pp. 16–19). Hence, Indonesia’s record both in economic and social development is consistent with that of the other East Asian countries, as the only region in the developing world which scored well according to both criteria over a period spanning several decades (Hill 1996, p. 195). Rapid economic growth also transformed Indonesia from a largely agrarian economy in the late 1960s into a newly-industrializing economy (NIE) by the early 1990s. Since the late 1980s Indonesia’s manufacturing sector contributed more to export revenues than did primary exports, including oil and gas exports. The ability of Indonesia’s manufacturing sector to become the major source of export revenues within a period of less than a decade was quite remarkable. During the 1970s up to the early 1980s Indonesia had the most inward-looking industrial orientation. This

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was reflected in the wide array of non-tariff barriers (NTBs) and the highest rate of nominal and effective protection among the ASEAN (Association of Southeast Asian Nations) countries (Ariff & Hill 1985, p. 17; Naya 1988, p. 87). After completing the first phase of “easy” import substitution (replacing imported consumer goods by locally made goods) in the mid-1970s, Indonesia in the late 1970s embarked on an ambitious second phase of import substitution. Based on a long-range industrial strategy he had outlined in the 1970s, Soehoed, Minister for Industry during the period 1978–83, proposed the establishment of 52 upstream basic industries. In Soehoed’s view, these basic industries had to be undertaken by the government. The government had to take the initiative since basic industries needed large amounts of capital, while the gestation period could be quite long, and the profit margins quite low. Once a foundation of basic industries had been established with the aid of rapidly growing oil revenues, industrial development would accelerate by itself (Soehoed 1988). While the oil boom lasted, this long range industrial strategy — referred to as the “structuralist approach to industrialization” could be pursued without much regard to its economic costs. However, once the oil boom ended in 1982, the government was forced to adopt an outwardlooking, export-promoting industrial strategy. To this end the government introduced, albeit initially with some hesitation and opposition by entrenched interests, a series of deregulation measures to encourage the development of a more efficient private sector, including foreign companies. This new reliance on investment by the private sector to sustain economic growth was the reduced fiscal capacity of the government. During the oil boom government investment had played an important role in establishing various development projects. The deregulation measures included a series of trade reforms to reduce the “anti-export bias” of the protectionist trade regime and a liberalization of the restrictive foreign investment regime to encourage more exportoriented investments by foreign investors (Thee 1992, pp. 234–37). These deregulation measures proved to be quite successful. This was reflected in the surge in manufactured exports from 1987 onwards (Hill 1987, p. 20). Since the late 1980s industrial development was being driven by manufactured exports and the private sector (Hill 1996, pp. 154–55), in particular low-skill labour-intensive exports in which Indonesia had a

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comparative advantage, including textiles, garments and footwear. Up to the Asian economic crisis manufactured exports kept growing, albeit at a slower pace than during the late 1980s and early 1990s. Aside from the success in weaning the economy away from its large dependence on oil and gas exports after the end of the oil boom, the government was also successful in reducing its large dependence on oil and gas revenues. After the introduction of tax reforms in the mid1980s, non-oil domestic revenues increased both as a share of total government revenues and relative to GDP. By 1989–90 non-oil domestic revenues amounted to 11 per cent of GDP compared with 7 per cent in 1984–85. This rapid increase was mainly due to a substantial increase in the new value added tax and improvements in income tax collection (Booth 1998, p. 198). The Failings of the New Order

Like most other East Asian countries, rapid economic growth in Indonesia under the New Order took place in a highly centralized, authoritarian and increasingly repressive setting. Leaders of authoritarian states often justify their rule by arguing that the focus on economic development cannot take place in a chaotic democratic setting. They argue that political parties are mostly busy bickering with each other and only concerned with their own political interests rather than the national interest. To a large extent the rapid and sustained growth during the New Order can be attributed to the ability of the economic technocrats to maintain macroeconomic stability. However, in the early 1990s the strict financial discipline which had been maintained by the economic technocrats since the late 1960s began to erode. This was reflected in rising off-budget transactions, that is government transactions not recorded in the official budget of the central government . These financial transactions included the expenditures by lower levels of government, quasi-government institutions (such as Bulog, the Food Logistics Agency), and state-owned enterprises (Nasution 1995, p. 18). These off-budget expenditures were allocated to assist ailing state-owned enterprises, the companies of wellconnected businessmen, and the “strategic industries” controlled by Habibie, the Minister for Research and Technology (Nasution 1995, p. 19), particularly IPTN, the state-owned aircraft industry.

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The erosion of financial discipline was a worrying development. It reflected the declining influence of the economic technocrats in economic policy-making and the rising influence of non-economists, mostly engineers, in the allocation of scarce budgetary resources. As a result, the economic technocrats were no longer able nor sufficiently influential to resist imprudent demands for expensive projects (Nasution 1995, p. 4). Although the New Order government’s achievements in economic and social development were quite impressive, over time public discontent grew stronger. Though muted, this discontent arose as a result of the harsh political oppression and gross violation of human rights, massive corruption, embezzlement of public funds, mutually profitable collusive relationships between political power holders and their business cronies, many of them Sino-Indonesian tycoons, and the proliferation of policy-generated barriers to domestic competition (Thee 2001, p. 178). The policy-generated barriers to domestic competition included marketing controls, cumbersome industrial licensing procedures, public sector dominance in a number of industries, cartels, ad hoc instruments in certain industries, and controls and illegal levies on intra-country trade (World Bank 1997b, p. 118). Aside from raising the costs of doing business and reducing efficiency, these regulations and restrictions on domestic competition, opened the way to lucrative rent-harvesting opportunities to well-connected groups (Thee 2002, p. 332). They also adversely affected the investment climate for bona fide entrepreneurs. Social unrest also arose in certain regions because of the disregard of the legal rights of individuals or groups of individuals. This happened, for instance, when land was forcibly appropriated by the authorities, ostensibly for “development” purposes, without adequate financial compensation. “Development”, however, sometimes meant opening golf courses for the élite or building luxurious housing estates for the new rich. Corruption and embezzlement of public funds, part of it obtained from concessional foreign aid, could not be criticized openly because of the lack of political freedom. Student demonstrations agitating for democracy or against corruption were banned, while some newspapers and magazines reporting on these practices were sometimes banned on the grounds that they endangered political stability and undermined the authority of the government. Concentration of political power was thus accompanied by a concentration of economic wealth in the hands of a

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few. This concentration was reflected by the emergence of big conglomerates, owned and controlled by Soeharto’s relatives and their business cronies, often Sino-Indonesian tycoons. Blatant corruption, collusion and nepotism (referred to by its Indonesian acronym KKN) not only undermined the resilience and competitiveness of the national economy, but also threatened the achievement of the cherished national goal of a “just and prosperous society” (Thee 2001, pp. 177–78). Despite the blatant display of KKN practices, the rhetoric of the New Order government was that it was dedicated to advance the interests of the people. Despite its claims to be a law-abiding state, the New Order state, with its heavy emphasis on political stability, was arguably more ruthlessly repressive than the colonial state (Dick 2001, p. 212). Anyone suspected or accused of communist leanings on the flimsiest evidence were ruthlessly persecuted, if not imprisoned. Military officers and non-commissioned officers were placed in strategic positions in the bureaucracy of the central government or local governments. In this way a clear chain of command could be established from the Department of Internal Affairs, the minister of which during the New Order was always an army general, to the lowest administrative levels in the regions. Hence, development plans and policies and ideological indoctrination in the state ideology of Pancasila could be implemented with a clear line of authority (Dick 2001, p. 212). The corrosive effects of KKN practices greatly damaged public morale and confidence in the government. Despite the statistical evidence of relatively constant Gini ratios over time, indicating that income distribution had not worsened during the period of rapid economic growth, many Indonesians held the view that economic growth, particularly during the late New Order era, had created gross income inequalities. This view was strengthened by the rise of an extremely wealthy and highly visible minority. It gave rise to the widely held view of a “widening economic gap” between the rich and the poor and between indigenous (pribumi) and non-indigenous (non-pribumi) Indonesians, most of whom were Sino-Indonesians (Thee 2001, pp. 178–79). Even before the onset of the Asian economic crisis these social tensions erupted in anti-Chinese riots in various places in Indonesia. The perceived widening economic gap between rich and poor and between the powerful few and powerless many eroded the social cohesion

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required for political stability and national development. A society which increasingly came to depend on only one very strong but not sustainable institution, namely President Soeharto, proved to be very fragile when this one institution tottered as a result of the Asian economic crisis. In the end the weak institutional development under the New Order and its abuses undermined its resilience and political legitimacy. Ultimately these forces led to its infamous downfall in May 1998 in the wake of the Asian crisis. Thus the New Order came to its inglorious end amidst the misery of a greatly damaged economy, which once again became dependent on infusions of foreign aid (Thee 2001, p. 179). An assessment of the legacy left by the Sukarno government in the mid-1960s stated that the old regime has left behind a legacy of moral disorder — of graft and corruption, of breakdown of law enforcement and decline in respect for the law – which can have few precedents in modern history. To repair this damage may be even harder than the damage to the nation’s material capital. Yet unless some minimum standards of government and administration are restored, and some social cohesion and sense of common purpose created among people, it is difficult to see how all the foreign aid can put Indonesia back on the road to economic recovery and development (Panglaykim & Arndt 1966, p. 46).

It is ironic but also very sad that this indictment of the legacy of the Sukarno government can to a large extent also be applied to the legacy of the discredited New Order government. Despite its considerable economic and social achievements, the New Order became inextricably associated with ruthless political repression, blatant corruption and nepotism, and utter lack of legal certainty and impartial law enforcement. The Role of the Economic T echnocrats during the New Order: An Assessment

Indonesia’s rapid and sustained growth during the 32 years of New Order rule can to a large extent be attributed to an able economic team experienced in crisis management and enjoying the confidence of President Soeharto (Woo et al. 1994, pp. 148–49). Another essential ingredient of the success of the economic policies under the New Order was the confidence of the international financial community (IMF, World Bank and Asian

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Development Bank) in the ability of the economic team (Bresnan 1993, p. 282). This was reflected in the strong financial support which the international aid community gave to the New Order government throughout its 32-year long rule. The economic team’s “finest hour” was arguably their success with the Stabilization and Rehabilitation Programme in the late 1960s. This Programme succeeded in taming the hyperinflation, setting in motion again the productive apparatus, rescheduling the repayments of the foreign debt inherited from the Sukarno government, obtaining new credits from the international aid community, and attracting new foreign direct investment (Arndt 1984, p. 32). The favourable attitude of the international aid community towards the New Order government can be attributed to Soeharto’s recognition that the anti-Western and anti-capitalist policies of the Sukarno government had been self-defeating. He therefore fully supported the re-integration of Indonesia into the world economy, as suggested by his economic team. In pursuing this policy of re-integration with the world economy, the New Order government took some calculated risks, as these new economic policies ran counter to the political views of many leaders and intellectuals on the respective roles of foreign aid, foreign investment and the private sector (Hollinger 1996, p. 8). The new conciliatory policies towards the Western countries, however, soon bore fruit as new foreign aid flowed into the country, which strengthened the balance of payments and the government budget (Sadli 2001, p. 122). Because of their success in turning around the economy within a relatively short time, the economic team gained the confidence of President Soeharto. The economic technocrats were able to strengthen their hand following the Pertamina crisis in February 1975 when the powerful state-owned oil company was unable to roll over a short-term loan of US$40 million from a small American bank (Woo et al., 1994, p. 57). It was only after Pertamina’s default that the real extent of Pertamina’s financial problems became known, when it turned out that Pertamina had accumulated a staggering foreign debt of US$10.5 billion, of which approximately US$1.5 billion was short-term debt (Prawiro 1998, p. 108). As a result of Pertamina’s default, the government had to mount a difficult and expensive rescue operation, which was carried out by the economic technocrats. Before the crisis Pertamina had been referred to as “Indonesia’s other development agency” (as contrasted to Bappenas, the official planning

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agency), an “agent of development” and even “a state within a state” by its admirers (Prawiro 1998, p. 105). This was possible because the head of Pertamina, General Ibnu Sutowo, was only answerable to President Soeharto. Because of its vast oil revenues, only part of which it surrendered to the government, Pertamina was able to finance a number of ambitious projects, including the state-owned steel plant, Krakatau Steel, and Batam island (Prawiro 1998, p. 106). Pertamina’s default finally gave the economic technocrats the longawaited opportunity to bring the state-owned oil company under full government control and make it a more accountable and transparent enterprise. Putting Pertamina under more effective control signalled the renewed assertion of prudent economic policies by the economic technocrats. The ability of the technocrats to resolve the Pertamina crisis, albeit with high costs to the state treasury, which should have been awash in oil money, strengthened President Soeharto’s confidence in the technocrats. Indonesia’s success in family planning can to a large extent also be credited to the technocrats. They were able to persuade President Soeharto of the importance of promoting family planning by showing him the connections between rapid population growth, agricultural development, employment and prosperity ((Elson 2001, p. 173). By ensuring that the family planning programme received adequate funding and by providing moral support through highly visible and symbolic efforts, President Soeharto showed the nation that family planning had his unqualified support (Prawiro 1998, pp. 197–98). The last significant policy success of the economic technocrats was the effective implementation of a macroeconomic adjustment and structural reform programme in response to the sharp deterioration in the country’s terms of trade in the first half of the 1980s. This occurred as a result of the steep fall in the price of oil in 1982, and an even steeper fall in early 1986. The macroeconomic adjustment measures proved to be quite effective in restoring macroeconomic stability by 1985/86. In line with the structural reform programme, the technocrats, with the support of President Soeharto, introduced a series of deregulation measures to promote the development of a more efficient and competitive private sector able to generate more non-oil exports. These deregulation measures mostly involved a liberalization of the highly restrictive trade and foreign investment regimes.

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This liberalization amounted to a return to the liberal economic policies introduced during the early years of the New Order government. Even though the New Order government had scaled back the extent of government controls over the economy (inherited from the Sukarno government), the oil boom of the 1970s led the government to create a more highly regulated economy which persisted until the early 1980s (Prawiro 1998, p. 286). The end of the oil boom, however, forced the government to reduce once again its extensive controls over the economy through deregulation. The willingness and ability of the Indonesian Government to shift gears and adopt painful economic reforms in economically difficult times was quite remarkable. Only in 1981 the government had rejected a World Bank report criticizing the industrial and trade policies being pursued by the government. The World Bank report was particularly critical of the highly complex incentive structure and the uneven trade regime, which had fostered inefficient, capital-intensive industries in which Indonesia did not have a comparative advantage (World Bank 1981). The World Bank therefore suggested to the Indonesian Government to introduce several policy reforms in the incentive structure and trade regime to improve the international competitiveness of Indonesia’s manufacturing industries (World Bank 1981). Even after the World Bank amended some of its controversial policy recommendations, the Indonesian Government declined to act on the findings and recommendations of the World Bank study. What is therefore so remarkable about the post-oil boom policy reforms is that they were on the whole the very policy reforms and deregulation measures recommended by the World Bank a few years earlier. The series of deregulation measures introduced after the oil boom combined with an effective exchange rate management proved to be quite successful. The economy soon recovered from the adverse effects of the end of the oil boom. Rapid growth resumed in 1987, and was sustained through 1996 until Indonesia was hit by the Asian economic crisis in 1997. During this period Indonesia emerged for the first time in its modern economic history as a significant industrial exporter, following the path of its East Asian neighbours (Hill 1996, p. 17). Despite this latest success, since the late 1980s the influence of the economic technocrats on economic policy-making experienced a gradual erosion. Economic considerations in economic policy-making were

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increasingly disregarded, as reflected by rising off-budget expenditures to fund expensive projects, the viability of which were questionable. The waning influence of the economists was also evident from the much slower pace of deregulation since the early 1990s (Nasution 1995, p. 5). This occurred even though the deregulation measures had clearly been effective in weaning the economy away from its dependence on oil revenues and in facilitating the resumption of rapid growth since the late 1980s. To some extent this decline in influence could be attributed to the retirement of the first generation of economic technocrats since the late 1970s, including Widjojo, Ali Wardhana, Mohamad Sadli, Subroto and Emil Salim, whom Soeharto had known since the early 1960s. Actually, the younger economic technocrats, including Adrianus Mooy, Arifin Siregar, Mar’ie Muhamad and Soedradjad Djiwandono, were quite capable and also continued to enjoy the confidence of the international aid community. However, they did not enjoy the same degree of trust and rapport, which the older technocrats, particularly Widjojo, had developed with President Soeharto. Another important factor accounting for the waning influence of the economists was the rising influence of the so-called “technologs”, mostly engineers, in economic policy-making. Under the dynamic leadership of B.J. Habibie, the powerful State Minister for Research and Technology, the “technologs” questioned the wisdom of pursuing the economic strategy of the economists. Habibie argued that in the past primacy had been given to a development strategy based on the principle of comparative advantage. However, now the time had come to shift the emphasis to the development of human resources to permit the mastery of science and sophisticated technology (McLeod 1993, p. 4). According to Habibie, such a shift was essential to establish large-scale, capital-intensive, high technology projects. These included the state-owned aircraft assembling enterprise, PT Industri Pesawat Terbang Nusantara (IPTN) (McLeod 1993, p. 5) and the other “strategic industries”, including the shipbuilding and steel industries. The economic ministers in various ways attempted to oppose the costly and uneconomic projects of Habibie. However, their protestations were largely ignored by President Soeharto who was evidently impressed with Habibie’s grandiose visions of a “hi-tech” Indonesia. Habibie’s drive to promote technology- and skill-intensive industries received not only strong support from the President and the “technologs”, but also from a wider public, particularly engineers, intellectuals, students,

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and youth, imbued with an emerging “industrial nationalism” (Thee 1994, p. 18). This “industrial nationalism” derived its inspiration from a strong national aspiration to build advanced industrial plants utilizing advanced technologies. Faced with this rising “industrial nationalism”, Indonesia’s marketoriented economic technocrats were pushed to the defence. Preoccupied with ensuring that the government would not stray from pursuing prudent macroeconomic policies, the technocrats were only able to offer what must have sounded like bland prescriptions for macroeconomic stability. Instead of carefully heeding the technocrats’ caveats that the ambitious hi-tech industries were costly and not economically viable, the technocrats were viewed as obstructionists to these ambitious industrial projects (Thee 1994, p. 19). Yet another significant but adverse influence on economic policymaking was the emergence of companies owned and controlled by the six children of Soeharto and their cronies. The older generation of the economists did not have to contend with the greed of the President’s children, as they were still young when these economists held power in the 1970s and early 1980s. The younger economists, however, had to face the increasing demands for all kinds of facilities and preferential treatment without the power to resist these demands. With a president averse to any criticism of the business activities of his children, the economists had often little recourse but to accede to their demands, no matter how high the economic costs of subsidizing or protecting their ventures. The dilemma faced by the economists was a difficult one. They could have resigned, although at great personal risk. Such a step would have amounted to a personal repudiation of President Soeharto, which he would not have tolerated. Hence, they had little alternative but to stay on and attempt as best as they could to reduce the adverse effects of the distortionary policies forced upon the government by the “technologs” and the President’s children. Since the early days of the New Order the economic technocrats have been criticized, often severely, by a number of Indonesian and foreign observers for various shortcomings in the regime’s economic policies. Particularly after the Asian economic crisis, a number of younger Indonesian economists have severely criticized the technocrats for making the economy

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dependent on foreign aid and foreign private capital inflows, including foreign investment. According to these critics, these policies rendered the Indonesian economy highly vulnerable to the vagaries of the world economy. The economic technocrats were also criticized for allowing economic disparities to widen and for tolerating the rise of predatory conglomerates and monopolies and the proliferation of rampant corruption. These criticisms have often been unfair, including the denial that these economic technocrats were as dedicated to the national interest as any of their detractors. In hindsight it is easy to criticize the economists for forging a good relationship with the international aid community when they assumed responsibility for economic policy-making in the late 1960s. Their detractors appear not to realize the serious economic and widespread poverty which Indonesia faced in the mid-1960s. They also appear to be unaware of how little resources Indonesia had at its disposal to pull itself up by the bootstraps. Turning to the international aid community and convincing them of the need to assist Indonesia by presenting a set of sound economic policies was at the time the only way to extricate Indonesia from its deep economic crisis. Critics of the economic technocrats also fail to recognize that the economists never monopolized economic policy-making. From the early days of the New Order, the economic technocrats had to share their role with both military and civilian competitors. During the early years of the New Order three generals (Ali Moertopo, Sudjono Humardani and Suryo), serving as the President’s personal staff, were assigned economic advisory functions (Glassburner 1978, p. 33). In fact, from the early New Order days onwards the rational economic policies outlined by the economic technocrats were often distorted or undermined by key figures of the regime. Most of the generals, who provided the political backbone of the New Order regime, had long been engaged in various rent-seeking activities, often employing the mediating skills of Sino-Indonesian businessmen (Elson 2001, p. 151). President Soeharto himself approved of the business activities of the military. He allowed close associates who demonstrated energy and entrepreneurial flair, such as General Ibnu Sutowo, then President-Director of Pertamina, a lot of freedom in their economic endeavours (at least until the Pertamina crisis) (Elson 2001, p. 151). The technocrats were, as we have seen, only able to regain the initiative in

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economic policy-making in times of economic difficulties, such as the Pertamina crisis and the end of the oil boom. While the economic technocrats are certainly not blameless, much of the criticisms leveled at them, often of the populist variety, is inaccurate and unfair. Insofar as criticisms could be levelled at them, they could be faulted for mainly focusing on sound macroeconomic policies. However, even this criticism might be inappropriate, as they sometimes had to wage a hard battle to prevent the erosion of sound macroeconomic policies. Another shortcoming of the technocrats was that they, perhaps by default, left industrial policies largely to engineers. These latter people were mostly concerned with the technical rather than the economic feasibility of their pet industrial projects. As a result, the Indonesian technocrats, unlike their counterparts in the East Asian NIEs, did not concern themselves actively with the important issue of developing an internationally competitive manufacturing sector and the need to develop Indonesia’s industrial technological capabilities to achieve this purpose. They were also little concerned with obtaining greater benefits from the presence of foreign firms to enhance the technological capabilities of local firms. However, it could also be argued that the technocrats were not able to fill all the important economic portfolios, including the Department of Industry, with like-minded economists. Since the technocrats were mostly concerned with maintaining macroeconomic stability, they tended to neglect microeconomic issues. In the late Soeharto era these issues were primarily the microeconomic distortions caused by the rising number of policy-generated barriers to domestic competition and trade. However, in view of the waning influence of the technocrats, there was perhaps little they could do to reduce, if not eliminate, these microeconomic distortions and rent-seeking opportunities. In the end a more balanced assessment of the role of the technocrats during the New Order will have to await a more balanced assessment of the New Order itself. A more favourable recognition of the economic and social achievements of the New Order will inevitably point to the crucial role of the technocrats in bringing about these achievements. A harsher judgment of the New Order, however, could either put the entire blame on the technocrats for the economic ills afflicting Indonesia or acknowledge their declining influence in economic policy-making as the New Order grew more repressive and corrupt.

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Order Policies”. Bulletin of Indonesian Economic Studies 19, no. 2 (August 1983): 60–82. Ricklefs, M.C. A History of Modern Indonesia Since c. 1300, Second Edition. London: Macmillan, 1993. Robison, Richard. Indonesia — The Rise of Capital. Sydney: Allen & Unwin, 1986. S.G.; J.G.; L.C. “Survey of Recent Developments”. Bulletin of Indonesian Economic Studies (June 1965): 1–12. Sadli, Mohammad. “Foreign Investment in Developing Countries: Indonesia”. In Peter Drysdale, ed. 1972, Direct Foreign Investment in Asia and the Pacific, pp. 201–25. Canberra: The Australian National University Press, 1972. ——. “The Private Sector”. In Shinichi Ichimura, ed., Indonesian Economic Development — Problems and Analysis. Tokyo: Japan International Cooperation Agency, 1988. ——. “Recollections of My Career”. Bulletin of Indonesian Economic Studies 29, no. 1 (April 1993): 35–51. —— . “Technocratic Decision Making in Economic Policy”. In Moh. Arsyad Anwar, Aris Ananta, & Ari Kuncoro, eds. (1997), pp. 241–52. —— . “Widjojo di Tengah Upaya Penyelesaian Krisis Ekonomi” [Widjojo’s Efforts in Overcoming the Economic Crisis]. TEMPO, 10 June 2001, pp. 122–23. Salim, Emil. “Recollections of My Career”. Bulletin of Indonesian Economic Studies 33, no. 1 (April 1997): 45–74. Sarbini Sumawinata. “Recollections of My Career”. Bulletin of Indonesian Economic Studies 28, no. 2 (August 1992): 43–53. Saubari, Moh. “Reflections on Economic Policy-Making, 1945–51”. Bulletin of Indonesian Economic Studies 23, no. 2 (August 1987): 118–21. Siahaan, Bisuk. Industrialisasi di Indonesia — Sejak Hutang Kehormatan sampai Banting Stir [Industrialization in Indonesia — From the Period of the Debt of Honour to the Time of “Turning the Wheel”]. Jakarta: Departemen Perindustrian dan Perdagangan R.I., 1996. Sjafruddin Prawiranegara. “Recollections of My Career”. Bulletin of Indonesian Economic Studies 23, no. 3 (December 1987): 100–08. Soedarpo Sastrosatomo. “Recollections of My Career”. Bulletin of Indonesian Economic Studies 30, no. 1 (April 1994): 39–58. Soehoed, A.R. “Reflections on Industrialization and Industrial Policy in Indonesia”. Bulletin of Indonesian Economic Studies 24, no. 2 (August 1988): 43–57. Subroto. “Recollections of My Career”. Bulletin of Indonesian Economic Studies 34, no. 2 (August 1998): 67–92. Suhadi Mangkusuwondo. “Recollections of My Career”. Bulletin of Indonesian Economic Studies 32, no. 1 (April 1996): 33–49.

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Sumitro Djojohadikusumo. Facing the Situation. Jakarta: Ministry of Information, Republic of Indonesia, 1952a. —— . “Agraria en industrie” [Agraria and industry]. In Sumitro, 19 March 1952b. —— . “Indonesie’s Economische Opbouw — Aantekeningen op de: beschouwing van mr.Sjafruddin Prawiranegara” [Indonesia’s Economic Development — Notes on the Views of Mr. Sjafruddin Prawiranegara]. Nieuwsgier daily, 17–22 March 1952c. —— . “Recollections of My Career”. Bulletin of Indonesian Economic Studies 22, no. 3 (December 1986): 27–39. Thee, Kian Wie. “The Investment Surge from the Asian Newly-Industrializing Countries into Indonesia”. Asian Economic Journal VI, no. 3 (November 1992): 231–64. —— . “Reflections on Indonesia’s Emerging Industrial Nationalism”. Working Paper no. 41. Asia Research Centre, Murdoch University, Perth, Western Australia, 1994. —— . “Reflections on the New Order ‘Miracle’ ”. In Lloyd & Smitth, eds. (2001), pp. 163–80. —— . “Competition Policy in Indonesia and the New Anti-Monopoly and Fair Competition Law”. Bulletin of Indonesian Economic Studies 38, no. 3 (December 2002): 331–42. Woo, Wing Thye; Bruce Glassburner & Anwar Nasution. Macroeconomic Policies, Crises, and Long-Term Growth in Indonesia, 1965–90. Washington, D.C.: World Bank, 1994. World Bank. “Indonesia — Selected Issues of Industrial Development and Trade Strategy. The Main Report”. 15 July 1981. —— . World Development Report 1990 — Poverty. New York: Oxford University Press, 1990. —— . The East Asian Miracle — Economic Growth and Public Policy. Oxford: Oxford University Press, 1993. —— . World Development Indicators 1997. Washington, D.C.: Development Data Center, 1997a. —— . “Indonesia — Sustaining High Growth With Equity”. Report no. 16433IND, Washington, D.C., 30 May, 1997b. —— . Indonesia in Crisis — A Macroeconomic Update. Washington, D.C., 1998. —— . World Development Indicators 1999. Washington, D.C.: Development Data Center, 1999.

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Professor Sumitro Djojohadikusumo is one of the principal architects of Indonesia’s post-independence economic policy. He has held key economic portfolios in both the immediate post-independence era and in the New Order. In addition, as Professor of Economics at the University of Indonesia, and as a tireless lecturer and writer on economic issues, he has been instrumental in shaping the education of several generations of economics students in Indonesia, many of whom are now in key government positions. Professor Sumitro generously agreed to be interviewed on his long career by two members of the BIES editorial board, Anne Booth and Thee Kian Wie. In preparing this interview for publication, the editors have tried to preserve Professor Sumitro’s own words to the greatest extent possible: his lucid and entertaining remarks are thus reproduced with a minimum of editing. The interview began with a question to Professor Sumitro about his early training in economics. Professor Sumitro passed away in 2001.

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Reproduced from Recollections: The Indonesian Economy, 1950s-1990s, edited by Thee Kian Wie (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at < http://bookshop.iseas.edu.sg >

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am a victim of what Clifford Geertz once in a small paper called the syndrome of being too busy because busyness carries with it social status. He was right. I don’t agree very much with Geertz as I don’t agree usually with any anthropologist or ‘Indologs’ (Indoloog, university graduate in the cultures and languages of the Netherlands Indies), but on that point he was right. But I have done some preparation for this interview so perhaps you could bear with me while I talk about the various stages of my economic thinking, even if it turns out to be a rather rambling account. I am not prone to looking back. Indeed, I am generally speaking suspicious of people who have a predisposition to look back; it is so often an exercise in self-justification — you always tend to see yourself as more important than in fact you were. And then there is the nostalgia syndrome; people tend to talk about the good old times but I don’t think they were

Reprinted from Sumitro Djojohadikusumo, “Recollections of My Career”, Bulletin of Indonesian Economic Studies 22, no. 3 (December 1986): 27–39, with kind permission of the publisher.

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the good times at all. That is my approach and that’s why I haven’t wanted to write much about myself. Now having said ‘Yes’ to Dr Thee Kian Wie, I am almost forced to look back. But bear in mind these caveats. When I look back at what I am and what I was, I realise that I belong to the category of economists who are mainly interested in what was once called ‘political economy’. My approach to economics cannot be detached from the political environment in which I grew up and in which I still operate. But now, with the wisdom of hindsight I can clarify my own role. I can’t divorce my early training from the political environment in which I grew up. My father was a civil servant in the higher-middle echelons of the Dutch administration so I went to Dutch schools. I remember the trial of Sukarno, and that of Hatta in Rotterdam. I think they both made a great impression on me. I finished the Dutch senior secondary school (Hogere Burgerschool, HBS) in Jakarta in 1935, as did Sukarno in Surabaya long before that year. He and other people like Ali Sastroamidjojo and Roeslan Abdulgani later said I was too ‘westernised. They were just as ‘westernised’ as I was! I like to think that my education has made me the least racial kind of person — I have Chinese relations by marriage and a French son-in-law. But I detest two types of people: brown Europeans or brown Dutchmen as we called them (the people to whom the Dutch said, ‘You’re different — you are one of us’, and to observe in disgust how those brownies gloried in such praise); and also the kind of European who thinks it is fashionable to be ‘nice’ to Asians. So I finished my HBS in 1935. Sukarno was in jail for the second time and then exiled to Flores and later to Bengkulu. Hatta was in Digul — strange that I had never heard of Sjahrir in those days — it was always Sukarno and Hatta. No one can accuse me of being a Sukarno henchman seeing that he put a price on my head at a certain stage of my life, but I hold him in high regard despite my severe criticisms of his policies. I still think he was a great political leader. He made Indonesian the national language; it was to his everlasting credit that he chose for the national language a language that was not used by the majority. By sheer political intuition he chose Malay, the lingua franca rather than Javanese. Hatta I met only in 1946. He was an impeccable model of propriety as a person and as a politician. He backed up Sukarno to the hilt during the Japanese period and in the preparations for independence.

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When I was ready for tertiary education, there was no such thing as a scholarship unless you wanted to go in the army or become an ‘Indoloog’ at Leiden. I never wanted to do that because it would mean working later for the Dutch. I didn’t want to study at the Law School in Batavia or at the Engineering School in Bandung. So at great sacrifice, my parents sent me to Rotterdam to study at the Netherlands School of Economics (now Erasmus University). I really wasn’t much interested in economics as such, but I wanted to understand what was going on in my own country and in the world. If I had known there was such a thing as PPE (Politics, Philosophy and Economics) at Oxford University, I think I would have tried to do that, if they would have accepted me. It was really a haphazard choice — I was more interested in philosophy and literature. The writers who influenced me greatly at that time were Malraux, especially Les Conquerants and La Condition Humaine, and Nehru’s autobiography. These works made a very deep impression on me. I tried to work out why my people were oppressed and what could be done about it. Philosophically I was very much attracted to Henri Bergson (l’Evolulion Creatrice) and later I followed courses given by a student of his at the Sorbonne. And then I read Nietzsche and Machiavelli but it was all haphazard I was just a child of the times and wanted to know what was happening and why. Then of course I read the defence speeches of Sukarno and Hatta. Nothing to do with economic analysis but how can I answer your first question about early training without talking about these influences? I was very concerned about the Spanish Civil War and volunteered for the International Brigade but to my mortification they rejected me because I was a minor. I had to have a letter of permission from my parents! So I just made it over the Spanish border and then I was kicked out again. But I remained active and helped in fundraising and so on. Malraux, the commander of the Republican air force, was my hero. I wasn’t motivated by ideology but rather by ‘raw instinct’. I also read writers like Ortega y Gasset and Freud and Jung. I think many of the early leaders of Asian independence movements had the same kind of background as this — many of the Indians and the Vietnamese. Vo Nguyen Giap wrote his thesis on the Indo-Chinese Balance of Payments! By the way, only economists can be good generals, it seems.

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But I think where economics has helped me is in assessing situations without value judgements, then making decisions. It has taught me not to be a captive of my own emotions but rather to establish the facts about the problems and then apply the logical analysis. You must start by identifying the problem and then establish the facts, yet not be carried away by logic for logic’s sake. If you don’t have enough facts, then you must do research to get them. Only then can you apply logical analysis to get to the answer. So many people address themselves to the wrong problems. Or worse still, they don’t identify the problem at all. They have all the techniques, hut can’t identify the problems. So, I became an economist in order to answer problems — why did the Dutch have three types of citizens, why did Mussolini want Abyssinia, etc. My main influences were Ricardo because of his interest in land questions (here I was influenced by my father’s work in rural Java in the depression), and Marx and Schumpeter. I don’t claim that I read Ricardo fully but I read Marx and Schumpeter. I had to read them all in the original, so I read Theorie der Wirtschaftlichen Entwicklung in German. Schumpeter’s concept of the entrepreneur had a great appeal — that’s what I thought I wanted to be. You don’t have to work because others can do it for you — you don’t have to have money because you can borrow it — all you have to do is apply the innovations and bear the risk! That appealed to me. Much later I read and admired Schumpeter’s Capitalism, Socialism and Democracy. Then I had to wade through Business Cycles — it was a marvel. Strangely enough, after I read Schumpeter, I read Frank Knight’s Risk, Uncertainly and Profit; he really made me appreciate the distinction between risks against which you can insure and those against which you cannot. This helps me even today in my crusade against the ‘high cost economy’ which is the result of government creating too many uncertainties against which the businessman cannot insure. I owe that to Knight, even though I couldn’t disagree more in so many respects with the Chicago School doctrines. So you can see how haphazard my training was. Of course, we had to go through the two volumes of Taussig’s Principles of Economics, which really taught me what it was all about — marginal utility and so on. Even more important was Marshall; he really showed me the value of systematic thinking. Then in 1937, I had to read Chamberlin’s Theory of Monopolistic Competition — I never read Joan Robinson’s Theory of Imperfect Competition.

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And then there was Keynes’s General Theory which I waded through and pretended I understood. But I didn’t feel too badly that I didn’t understand it because I had a strong feeling that my teachers didn’t understand it either! Only much later, after the war and mainly owing to Alvin Hansen’s writings (Business Cycles and National Income) did I get a fair comprehension of Keynesian economic and post-Keynesian interpretations. In every discussion of the functioning of markets — the general relations of supply and demand — I always wanted to ask ‘who controls the markets?’; this is why I was impressed in particular by Chamberlin’s book. I recognised so many things there which I had seen as a child in the villages and in Jakarta. I had a grudging admiration for the Dutch because they saw that if you control the trade and the markets, you don’t have to have an army! Then there was the Cultuurstelsel, the Forced Cultivation System, when the Dutch forced the farmers on Java to cultivate export crops, and in my own time, there. was the monopoly of the ‘big five’ Dutch trading houses. When I read Chamberlin, it all seemed so logical. Von Boehm-Bawerk and Irving Fisher also impressed me. They were important for my dissertation, especially Irving Fisher’s Theory of Interest. He introduced the concept of the ‘time shape of the income stream’. That coincided with my own childhood experiences in rural areas — what happened in the paceklik etc. — and helped me understand why the Chinese middleman was often regarded as a benefactor by the small producers. My dissertation ‘Het Volkscredietwezen in de Depressie’ (The People’s Credit System in the Depression) also reflected my interests. I was still very preoccupied by the effects of the depression on the rural economy of Java. I was very angry at the Dutch assertion that there was no unemployment, the claim that those who lost their wage jobs were all absorbed by the ‘traditional’ non-monetised economy. I saw what this meant in my own family — six families all living in one house, and so on. It was then I came to realise that unemployment, disguised unemployment, underemployment, low quality employment, whatever you want to call it, was really a matter of productivity and real income. This is what I mean now when I talk about the dependency burden — how many people are dependent on one income-earner? You still sometimes hear these arguments today: ‘the “rural poor” don’t suffer from economic

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downturns because they are in the “non-monetised economy” ’. You can’t make such a distinction — it is all in the minds of the people who have the money! This also explains my resentment against the writings of Boeke, not against Boeke personally but against those who argue that the Indonesians or the ‘Eastern races’ can never improve their situation because they have different values — those authors who emphasise cultural rather than technological dualism. I knew Boeke quite well; in fact my father was his protege. As a person he was well-meaning and concerned but he was used by the ‘Indologs’ to justify their belief that Indonesia could never develop into a modern economy because the people’s values were different. My whole objection to this type of attitude is that those who profess it consider that the situation at a given point in time is a constant and cannot be changed, rather than seeing the situation as the result of a particular constellation of historical factors — of technology, wars, revolution, and so on. Of course, one can agree with people like Hla Myint, who stress the enclave nature of much colonial enterprise, but one has to take this kind of dualism as a starting point rather than as a fixed constant which cannot be changed. It can and must be changed. This explains my running battle with the anthropologists of the old school. They always tell me you can’t do this or that, because it will make people unhappy! They always want to justify and preserve the status quo. They don’t seem to understand that people respond to outside challenges. Another influence in my student years were the writings of the cycle theorists, Kondratiev and Juglar. That influence showed in the 1970s when we did the study on Indonesia’s long-term growth perspectives, which I considered important for Indonesia’s short- and medium-term planning. I read Kondratiev in German and then in English. I don’t think that their views have been given enough credit; only now people are looking at them again. But to me, the driving forces in a country’s longterm growth are population, technology and natural resources, rather than wars or revolutions. I met Tinbergen in 1938, when he became a young lecturer at the Netherlands School of Economics. He introduced mathematical economics, so I had to learn some mathematics. He was a socialist and was very sympathetic to the independence movement. He always referred to Indonesia rather than the Dutch East Indies. Other influences were Hansen

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and Harrod. I think I subjected Dr Thee to Harrod — I made my students in the 1950s guinea pigs. Then in the 1950s, I read Rostow but didn’t think much of his book — it was too one-dimensional. There were also books and articles by Rosenstein-Rodan, Kurt Martin, Richard Eckaus, Ragnar Nurkse and Hans Singer. Arthur Lewis I met in 1954; I was very much impressed by his erudition. I met Peter Bauer then, too. All these influences came through when I was in charge of the Faculty of Economics, University of Indonesia in the early 1950s. However, I wanted the students to be given a more modem and systematic training than I had received in my haphazard approach to economics. At the same time, I didn’t want to discard the classics — they were a must. This approach showed in my inaugural address in 1953 as Professor1 — a very clumsy first approach but the glimpses are there. I developed that approach with many variations and am still using it now; it is more systematised in my 1955 book, Ekonomi Pembangunan (Economic Development), although that also was still probing. Much to my dismay, it is still being used as a text today. There are many things I would like to revise but the approach, more modernised, is still valid, I think. That approach is simply that you must know economic analysis, hut you must see it in a societal framework. You can see it in the address which I gave the MBA graduates last year where I stressed again that development entails a continuous effort to cope with and to rectify structural disparities and imbalances, especially with regard to resource endowments, allocation of productive resources, the distribution of wealth and income, and the prevailing institutional framework. Of course, I recognise, as do the anthropologists, that institutions can be impediments to modernisation, but they cannot be taken as constants. Public policies have to be aimed at changing the set of conditions imposed by the structural disparities. You have three types of operational policies that are interrelated: those aimed at securing more rapid growth in terms of value added, those aimed at achieving more productive employment and those aimed at safeguarding the external front — the balance of payments. Of course, you have to have the analytical techniques, but they are not enough unless you understand history — how can Indonesian students understand land problems unless they know their own history? When I was teaching in the early 1950s. I started a course on Economic Analysis and Public Policy, to try and bridge the gap between analysis and policy. The students had an awful time — I made them study

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history as well as theory! Had I been more systematic, the students would have had an easier time, but I tried to make them aware of the problems which they would be facing for the rest of their careers. This has also been my approach more recently in the work which I did for international organisations and multinational companies, trying to make them see what the basic problems are which they will be facing for decades. Much of my work is still done ‘in the heat of battle’ rather than in cool reflection; the speech to the MBA graduates is an example of this. I was on a crusade with the President, and everyone else on the issue of our high-cost economy — no one wanted to say these things so I thought it might as well be me. I wrote my book Ekonomi Pembangunan in 1954 in the midst of campaigning for elections; then my later book on Malaysia and Singapore I wrote because I needed the money! I was in exile. I started with the economic history of Malaysia — that didn’t go down well with the British establishment in Malaysia then! Now I am going to write an economic history of Indonesia using my own approach; I tend to like writing sweeping statements and leave it to the clever people to worry about whether it is 2.5 or 2.6. Widjojo and I are completely different in that respect. He wants to have every comma perfect. I tend to rely on others to do the detailed work, but I know what I want as an end product. However, I don’t think I should compete with people in their expertise. I leave the experts to produce the components and I supervise the final product. I don’t belong to any Mafia — I am the buffalo who operates outside the herd. But by 1955, I said to Widjojo — this is as far as I can go as a teacher. So immediately after his graduation as a sarjana ekonomi (graduate in economics), I made him Director of the LPEM (Institute of Economic and Social Research, Faculty of Economics, University of Indonesia). I realised that I would have to send the graduates out for further training abroad, although I didn’t know how. In 1953, when I was Minister of Finance, I had sent people out for training in tax administration, but until 1955 I resisted sending the university people abroad. I did try to encourage foreign experts to work in Indonesia: the Dutch who were left in Indonesia after 1950 had no clue about issues such as national income, so that’s why I had to get Neumark to do the first estimates. Fortunately, I got assistance from the Ford Foundation to send students abroad; to begin with, I sent

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people piecemeal to places like McGill and M.I.T. The Berkeley connection was developed by chance and strangely enough I think the real reason for this link was that I got on very well with the then Chairman of their Economics Department, who was none other than Andreas Papandreou! He was broad gauge and I was broad gauge, and we established a good rapport, so that was the deciding factor in forging the link. Reagan would probably have a heart attack if he knew one of the main reasons for the creation of the ‘Berkeley Mafia’ in Jakarta was Papandreou! Later on, I became friendly with other Americans such as Walter Heller — he was also broad gauge and at the same time had a good command of the analytical tools. When I returned to Indonesia in 1967, I didn’t want to be a dosen tetap (tenured professor); but I still teach and only the other day gave the opening address to the new students. I realised that I was teaching there before they were born! Turning to public life, I came back to Indonesia from Holland in 1946 and became an assistant to Sutan Sjahrir. That was the first time I met him. I had heard about his Manifesto and read Perjuangan Kita (Our Struggle), and later Out of Exile. I was also an assistant to the Minister of Finance — there were two, Surachman and Sjafruddin. There was still Japanese currency in circulation; so I was put in charge of devising ways and means of withdrawing the Japanese currency and issuing Republican currency. It was an awful job, really an organising job, but I had to coordinate the whole thing and get the money printed. Today we say it is easy to print money, but then we didn’t even have the chemicals: I had to travel between Jakarta and Yogyakarta, and organise the printing in Magelang and Solo, and in Malang. We had to run the blockade to Singapore to get the materials and then keep the printing secret. My main concern was to get the Republican currency in circulation right here in Jakarta where the Dutch were still in control. I organised the breaking of the blockade — there was a ship called the Martin Behrman, which was used to run the blockade — it was confiscated hut it made a splash world-wide. There was also the Rice for India campaign in which I played a minor supporting role. The idea was to send some rice from East Java to the famine areas of India. The sole purpose was political — to tell the world that we were in charge. But again there was the organising job — the rice had to be collected and the farmers

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paid. We wanted to prove that we could load and ship thousands of tons. That was in 1946/7. Then it was decided to send me to America to prepare the way for getting the Dutch-Indonesian dispute on the agenda of the U.N. Security Council. I had no funds or passport; it was left to me to arrange everything. I had to run the blockade to Singapore and convince the American Consulate there to give me a visa although my Republican passport was not recognised. Finally, I got a visa provided I did no business in America. In fact, I organised a smuggling operation from Cirebon, mainly kapok (cotton) and vanilla. I arrived in New York with $20 in my pocket but I got some money from the trading operations. I told everyone who wanted to help me that ‘my own government is taking care of me’, although there was no money at all being sent from Indonesia. But to be able to say ‘my own government’ made me very proud. There was no corruption among government people in those days — when we distributed the currency, we lost virtually nothing in spite of having to rely on a large number of volunteers. In 1947, I became deputy to Palar in the Indonesian Delegation to the U.N. Security Council in Lake Success; that was a great honour. I met many of the world’s major statesmen of the time. Bidault and the French were always vetoing us — they were afraid of what would happen in IndoChina if Indonesia was given independence. Gromyko always supported us, until the Madiun affair. Then he completely switched. Later on, in 1949 Hatta appointed me as a full member of the delegation to the Round Table Conference in The Hague in order to prepare the way for the transfer of power. The two most radical delegates were the two youngest — Simatupang and myself. We are the only survivors now. At the conference I had a serious conflict with Hatta on three points: the debt problem, the problem of the Java Bank, and Irian Barat. The Dutch used the debt as a means of maintaining leverage over many facets of economic and commercial policy. They wanted to keep the tin mines as collateral and they wanted to run the Central Bank. I couldn’t see why we should assume the debt of an occupation army — when the American army left Brussels, they paid the Belgians and they were a liberation army! On the role of the Central Bank, I wanted the BNI (Bank Negara Indonesia), the State Bank of Indonesia, to be the Central Bank; that was our own bank. Just as Simatupang wanted the republican army to become the Indonesian National Army (Tentara Nasional Indonesia, TNI) and certainly not the

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KNIL (Royal Netherlands Indies Army), I wanted the BNI to become the Central Bank. Simatupang succeeded and I didn’t! No matter how primitive the TNI, it was our army! The same with the BNI. I felt it was our bank. Then I became the Minister of Trade and Industry in the Natsir cabinet. There were two main jobs. The fist was to dismantle all the puppet states which the Dutch had bequeathed to us and establish a unified trade policy. We abolished the United States of Indonesia which we had accepted from the Dutch. Then I was up against the monopolies of the Dutch, the so-called ‘Big Five’ trading companies. The whole point of the Economic Urgency Plan was not to protect the Indonesian industries but to abolish the protection granted to Dutch concerns. The Dutch always spoke of their ‘historical interests’: they made me accept their socalled advisers in the Java Bank, and in the Ministry of Finance, which were full of Dutch officials. I didn’t have much respect for any of them — they had no clue about economics — but they were very good at administrative procedures. They still had the Foreign Exchange Institute which was not under any Minister; in colonial times it was directly responsible to the Governor-General. So the point of the so-called Benteng (Fortress) Policy was to try and set up a counter-force to Dutch interests. I had no illusions about what might happen but I thought that if you gave assistance to ten people, seven might turn out to be parasites but you might still get three entrepreneurs. I saw my role very much as helping the small producers — that was a legacy from my childhood experiences and from my thesis work on rural credit. I wanted to help the farmer move into non-farm activities — processing, transport, etc. I didn’t believe in policies such as quotas and quantitative restrictions, but neither did I believe in leaving the market as it is. That is the best recipe for political suicide for any regime. You have to ask what can be done to rectify the distortions created by the existing power relations in the market. Unless we made an effort in education, training, vocational guidance, cooperatives and strengthened their bargaining power, the small producers would remain poor. This has been my concern since the 1930s. The Industrial Plan was an outgrowth of these concerns. Now we come to Sjafruddin Prawiranegara, and my policy differences with him. Let me start, in order to prevent any misunderstanding, by saying that I have the highest respect for Sjafruddin’s personal integrity,

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and the utmost admiration for his political record. We had a series of policy differences, but it never affected our personal relationship. But there were several problems. First, I held it against him that when he was Minister of Finance in the first post-independence cabinet, he approved of the Dutch scheme for cutting the rupiah in two. It was schemed by the Dutch before independence! Second, I felt he rather neglected the BNI — it was our bank. Maybe it was his legal training or maybe he knew many of the Dutch advisers when he was Inspector of Finance before the war, but it seemed to me he paid too much attention to the Dutch civil servants in the Java Bank and the Finance Ministry. But to me their technical competence was very dubious. You know one of them told me once that the multiplier was 2%! This was in 1953! Those Dutch experts — like Kraal and Scheffer — who were good economists were ostracised in the Ministry of Finance, and I got them in the Faculty of Economics! Those people who posed as economists had their training in Leiden as ‘Indologs’! Then Sjafruddin wrote that we had to put more emphasis on agriculture. He may have been right but I heard the voice of those who wanted Indonesians to remain small producers of unprocessed agricultural products in perpetuity. Parallel to these debates were the writings of Raul Prebisch, by which I was very influenced; of course, we were too extreme, but I felt that we must industrialise. Knowing what I do now, I would want to make modifications, but in those days I believed that if we industrialised as rapidly as possible, we would be just like the rich countries. When Sjafruddin became President of the Java Bank, he treated the Indonesian banks much as the Dutch had done. On technical grounds, he may have been right, but that was not the point. When I became Minister of Finance, the first thing I did was nationalise the Java Bank; and I got around the debt problem by ‘consulting the Dutch’ as the agreement called for, but not paying any attention to what they said. I nationalised the bank and there was an outcry, but I could tell them ‘I consulted you’. From then on, monetary matters were decided by a monetary board, of which the Minister of Finance was the Chairman. No Dutch experts were allowed to be present. You mention the role of the report written by the German financial expert, Hjalmar Schacht. When I was Minister of Trade and Industry,

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there was a U.N. representative here — an Indian from Hyderabad recommended by Nehru, of all people. He was an arch reactionary — at one stage, he suggested through the Ministry of Finance that it would be a good thing to have Schacht here. This was in the period of the Sukiman cabinet when Jusuf Wibisono was Minister.2 I got along well with Schacht while he was here but his report could have been written by a Dutch reactionary; he was very conservative. It had no impact on economic thinking or policy, but the Dutch were gleeful because the report justified what they were doing in many ways, although to be fair to Schacht, that wasn’t his intention. And now to the Wilopo Cabinet, when I was Minister of Finance. I formalised the beginning of the National Planning Bureau, the Biro Perancang Negara. I had Keyfitz, Neumark and Higgins there. Higgins also assisted in Finance. There was really no budget to speak of — just a cash flow account. But after the Korean War boom tapered off and revenues fell, we still had expenditure commitments. So we ended up with a deficit of Rp 4 million. I wrote about this in the EKI (Ekonomi dan Keuangan) journal in 1953, and also in a popular article, ‘Facing the Situation’.3 I was really trying to get the reins together. We didn’t even make a distinction between the routine and the development budget. The deficit was mainly because of expenditure commitments made by the previous government — sounds familiar, doesn’t it? When the Korean War ended, we first appreciated how vulnerable the economy was to a few prices — then it was rubber, now it is oil. I realised how cyclical fluctuations aggravate the structural problems and make it very difficult to implement development policies. After the Wilopo cabinet came the Ali Sastroamidjojo cabinet and Iskaq was Minister of Economic Affairs and Ong Eng Die, also of the PNl (Indonesian National Party), was in Finance. They couldn’t have cared a hoot about finance — with elections coming up they began blatantly using the import licensing system to buy political supporters. Then I saw how much harm was done, what chaos the uncertainty caused in the business world. My experience was that in boom times the exporters and middlemen get the big profits but in the slump the burden of adjustment is shifted to the small producer. I believe in the active role of the State but I am

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against the licensing system and I don’t believe in regulations. They really give the rope to the gang bosses. You have to organise the small producers. In the Burhanuddin Harahap cabinet, which was briefly in office between the two Ali Sastroamidjojo cabinets, and in which I was again Minister of Finance, the first thing I did was dismantle the licensing system. I even closed up the Import Office. I abolished the Foreign Exchange Institute and put all trade under the control of the Monetary Board. I said that anyone who met certain conditions could get foreign exchange. It was a gamble but it restored confidence and got the flow of goods going. (It was the same in 1967.) My present crusade against the high cost economy is mainly a continuation of what I did then. I got importers to give advance deposits which soaked up excess liquidity. Unfortunately this experiment was short-lived because then came the second Ali government I wrote about this experience in the EKI journal in 1956.4 You ask about the main economic cause of the regional rebellions. I think it was neglect and, ironically, sheer misjudgment on the part of the Masjumi in the early fifties. To date I cannot understand why they didn’t want to give Aceh provincial status — they wanted, like the Dutch, to run it from Medan. Natsir and Roem could have changed this but they never did. The whole thing was aggravated by Ali Sastroamidjojo’s licensing policies; the people close to the decision makers got most of the revenue at the expense of the producers. We tried in the Burhanuddin Harahap government to put some order in the relationship between centre and regions but our rules were not applied. So infrastructure was neglected, the rubber and copra growers suffered. My sympathies were with the regions even though I am a Javanese. Then when the PKI (Indonesian Communist Party) performed so well in Java in 1955, the regions lost hope. Perhaps I should say something about monetary policy: it can work well combating inflation but that is not really enough. While you are soaking up excess liquidity you also have to get the flow of goods going — that’s where trade and industry come in. You have to take away impediments to production and distribution of goods. So you must think of both the flow of money and the flow of goods. I am still taking the same approach. If I may jump to the present, people think that interest rates are too high. But I am against the lowering of interest rates as such;

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I am not at all sure that if you reduce interest rates, that, by itself, will stimulate economic activity. The rate of interest is only one factor, albeit an important one, among several forces that reflect the anticipation of investors; unless you dismantle all the regulations affecting trade and industry, reducing the rate of interest won’t have much impact. And unless you remove the man-made administrative impediments, you can devalue and it won’t have any impact. Like France in the 1950s, like the USA and the UK now — unless you remove the factors leading to immobilisme, monetary policies will have little impact. You can tinker with monetary policy but unless you restructure the real economy there will be little effect. I was already influenced by these views in 1955 — you must get the flow of goods moving as well as soaking up excess liquidity. I don’t think the 6 May 1986 package will be effective; it addresses itself to the wrong issues and only shifts matters from one administrative jurisdiction to another. The whole theme of the 6 May package is to give the same conditions to the foreign investor as to the domestic investor and to avoid discrimination. That’s not the issue. We have to establish the right climate for the domestic investors and make it easier for them to move into sectors like agro-industry. As far as current policies are concerned, I am on the same wave length as Glassburner in the Bulletin of Indonesian Economic Studies (BIES, April, 1986); I have never been a dogmatic adherent of the balanced budget idea. I support the idea as an internal discipline knowing what I do about politicians. When I was facing the parliamentarians in the 1950s, they always wanted more and more. So in 1967 I supported the idea of the balanced budget as an internal discipline. I am against further downward cuts in development expenditure. I think if should be maintained at current levels and then we have to look for means of finance. I already see the same effects of the cuts as I saw in the 1930s, especially their impact on the small growers. The big difference between the 1930s and now is that people can’t go back to the villages. Many of the rural areas are already semi-urban. More than one third of the labour force are in the younger age groups and 60% of them are in urban areas, not in rural areas. This is the big difference between the 1930s and now. The young in the cities are much like the migrant workers in Germany or the Middle East except that these countries can tell the migrants to go back. We can’t tell our

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young people to go back. It’s their country too. I am not worried about the tertiary students; they are already part of the establishment. I am really worried about the high school dropouts. Turning to foreign exchange policies — if you look at my writings in 1954/5, I was a strong protagonist of foreign exchange controls. I felt that we only had the State to fight against the Dutch ‘Big Five’. Then I saw what happened under Ali Sastroamidjojo and Soekarno. In 1983, after the drop in oil prices, there was a movement towards the reimposition of exchange controls. I went to the President and argued strongly against it. I know how easy it is to smuggle goods and I know that those who are close to the sources of power will get their hands on the foreign exchange. And when Jakarta and the Javanese get it, how do you explain this to the people in Manado or Aceh? But I am not a Friedmanite. You can leave the market to function freely, but you have to assist the small producers through education and better institutions. On the issue of long-term planning — I tried in the Indonesia Towards the Year 2000 Project5 to look at the problems which will still be with Indonesia in a generation from now. There were three main issues: first, the demographic problems and second, the problems of use of non-renewable resources. Last, there was the question of education in science and technology. I have little patience with all the discussions about transfer of technology. I don’t think technology can be transferred — only absorbed and adapted, and then further developed. And for that you must have trained people and the development of a scientific community. I thought as I looked through your list of questions that I have never won a political battle but I have learnt how to survive defeats. I had a debate with Sjahrir once about the left wing of the then PSI (Partai Sosialis Indonesia) — people like Amir Sjarifudin and Tan Ling Djie. I asked why he didn’t expel them or put them in jail. (This was long before Lee Kuan Yew did so in the early 1960s in Singapore.) It simply didn’t occur to him that you could put fellow socialists in jail. He thought I was too ruthless and undemocratic! I have come to the conclusion that history doesn’t forgive those who miss an opportunity of historic moments like Sjahrir then or like General Nasution in 1965. Those who are too impetuous (like Lenin and Mao Zedong, and in another context Churchill and De Gaulle) and are eager to force history may get a second chance (if they survive) but never those who miss their historic moments.

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I don’t think I can be called an architect of economic policy — all I can claim is to have carried some of the building materials. The architects will come later, and may have some use of my building blocks.

NOTES 1 ‘Macro-economics and Public Policy in Economically Undeveloped Areas’, Ekonomi dan Keuangan Indonesia 6, no. 4 (April 1953): 170–83. 2 For a further discussion of the Schacht Report see Soebagijo I.N. Jusuf Wibsono: Karang Di Tengah Gelombang (Jakarta, P.T. Gunung Agung, 1980), pp. 107–10. 3 ‘The Budget and Its Implications’, Ekonomi dan Keuangan Indonesia 6, no. 1 (1953): 3–19. ‘Facing the Situation’, Economic Review of Indonesia 6, no. 3 (1952): 57–64. 4 ‘Stabilisation Policies in 1955’, Ekonomi don Keuangan Indonesia 9, no. 1 (1956): 40–75. 5 See Prisma 4, no. 2 (April 1975) for a discussion of this project.

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Mohammad Saubari

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Mohammad Saubari

Mohammad Saubari was Secretary-General of the Department of Finance in the early 1950s. After his suspension from the civil service during the Guided Democracy years, he worked for several United Nations agencies in Indonesia. The following note is based on his comments on the Indonesian translation of the interview with Professor Sumitro (Sumitro 1986), which were published in Kompas daily earlier this year, on his contribution to a commemorative volume published to honour Sjafruddin Prawiranegara in 1986, and on an interview which he gave to Anne Booth and Thee Kian Wie in Jakarta in May 1987. Mr Saubari passed away in 1999.

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Reproduced from Recollections: The Indonesian Economy, 1950s-1990s, edited by Thee Kian Wie (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at < http://bookshop.iseas.edu.sg >

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3 MOHAMMAD SAUBARI

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here are two events in particular on which I would like to comment, which were raised in the interview with Professor Sumitro, and in both of which I was personally involved. The first concerns the issue of new money by the government of the Republic of Indonesia (Oeang Republic Indonesia, ORI) in the months immediately following the proclamation of independence. Immediately after Proklamasi (the proclamation of Indonesia’s independence), one of the most pressing problems confronting the Republican government was that of finding the means to finance both the struggle with the Dutch, and other diplomatic activities essential to its international recognition. It was Sjafruddin Prawiranegara, who at that time was still in charge of the taxation office in Bandung, who persuaded Bung Hatta of the need to issue new money, both as a means of financing essential government activities and of showing the world that the newly proclaimed government was indeed running the

Reprinted from Mohammad Saubari, “Reflections of My Career”, Bulletin of Indonesian Economic Studies 23, no. 2 (August 1987): 118–21, with kind permission from the publisher.

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country.1 At the beginning of 1945 there were two currencies still in circulation; the old Netherlands-Indies money and that issued by the Japanese. When the Dutch returned with the allied forces in September they began to issue new money of their own, although in the first few months they used the Japanese money for most of their transactions. The result of this was that the volume of money in circulation rose rapidly in late 1945 and early 1946, with rising inflation an inevitable consequence, given the acute shortage of most basic goods and services. Vice President Hatta decided that the Republican government would issue currency notes in place of those issued by the Japanese, while those issued by the Dutch would not be considered legal tender in the areas controlled by the Republican forces. The problems of printing money in Java in late 1945 and 1946 were considerable. The two establishments which appeared to be most suitable were the printing firm of G. Kolff in Jakarta, which had printed banknotes for the Japanese and which in 1945 was under trade union control, and sympathetic to the Republican cause, and another Dutch printing establishment near Malang. Essential materials such as paper, ink and chemicals, as well as printing machinery, were lacking. Then the Kolff factory was returned to the Dutch, and owing to the very precarious security situation in Jakarta, it was decided to shift all the workers involved in the project, and the banknotes already printed, to Yogyakarta. Despite the difficulties of securing the necessary materials (many had to be smuggled in from Dutch-controlled areas), the money was finally circulated on 30 October 1946. Although the government tried to prevent the entry of large denomination Japanese banknotes into Republican territory, the value of the Japanese money had greatly diminished by late 1946, so it was decided that the new notes would be exchanged for the Japanese currency at the rate of 50 Japanese rupiah to one new (ORI) rupiah. The advent of the new money was greeted with great celebration in those areas controlled by the Republic. But inevitably given the shortage of goods, its value quickly depreciated. In addition, after Dutch forces occupied Malang in mid-1947, the printing of the money became increasingly difficult. The government began to issue promissory notes as a way of raising money for the payment of its troops. Forged currency notes began to circulate, greatly adding to the difficulties of the government, who found it impossible to raise revenues

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through taxation, and as more government expenditure was financed by the newly printed money, inflation accelerated. Following the launching of the second military action (the so-called ‘Police Action’ ) by the Dutch in December 1948, and the occupation of Yogyakarta, the issue of ORI came to a halt. But after the Roem–van Royen accords in 1949, ORI was accepted as legal tender everywhere in the country along with the currency issued by the Dutch, although the Dutch notes (NICA money) became more widely used. By 1950, the volume of money in circulation far outstripped the supply of goods and services, and Sjafruddin Prawiranegara as the first Minister of Finance was confronted with the difficult task of restoring monetary stability.2 The second event which I wish to discuss is the nationalisation of the Java Bank. In the recently published interview with Professor Sumitro, there was some discussion of his role in this. The sentences which particularly caught my attention were the following: When I became Minister of Finance, the first thing I did was nationalise the Java Bank; and I got around the debt problem by ‘consulting the Dutch’ as the agreement called for, but not paying any attention to what they said. I nationalised the Bank, and there was an outcry, but I could tell them ‘I consulted you’ (Sumitro 1986, p. 36).

This statement of Professor Sumitro’s raises the question: When did he become Minister of Finance, and when and how was the Java Bank nationalised? It turns out that the facts do not entirely square with Professor Sumitro’s account. Professor Sumitro became Minister of Finance in April 1952 in the Wilopo cabinet; however, the Java Bank was formally nationalised on December 15, 1951, when the cabinet of Sukiman Wiryosandjojo was in office, and Jusuf Wibisono was Minister of Finance. It is this discrepancy, perhaps due to an oversight of Professor Sumitro, which persuades me to attempt to set the record straight. I do this on the basis of some knowledge of the issue, and the officials involved, many of whom are no longer with us. It is my belief that those who participated in the event, an important one in our early post-independence history, should be accorded due recognition. According to my recollection, the process of nationalising the Java Bank took place as follows. On 30 April, 1951, the Minister of Finance, Jusuf Wibisono, announced the Indonesian government’s intention to nationalise the Java Bank as

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soon as possible.3 He explained to the press that the Masjumi Party at its conference in Yogyakarta in December 1949 had already decided on nationalisation, and that he felt proud to be able to implement that decision. The government’s decision was then forwarded by Prime Minister Sukiman to the Parliament (DPR) in an official advice dated 28 May, 1951. A committee was established on 3 July, 1951 (Government Decision 118) called the Committee on the Nationalisation of the Java Bank, which was empowered to take all necessary preparatory steps towards nationalisation, and to draw up the legislation. Professor Sumitro was a member of this committee; other members were Moh. Sediono, Soetikno Slamet, T.R.B. Sabaruddin, A. Oudt and Khouw Bian Tie. On the advice of this committee, the government decided to proceed with the nationalisation through the purchase of shares from both domestic and overseas shareholders. To expedite the share purchase, the government sent two officials to Holland in July; they were Khouw Bian Tie, an adviser at the Java Bank and myself. I was at the time Secretary General of the Department of Finance. Our talks with the Dutch Minister of Finance (Mr Lieftinck) and with the Vereniging voor de Effectenhandel (Association of Trade in Securities) in Amsterdam went smoothly, and resulted in a decision to suspend the trading of Java Bank shares on the Amsterdam stock exchange. The announcement was signed by me, and appeared in Het Financieel Dagblad (The Financial Daily), 4 August, 1951, as well as in other papers. Meanwhile in Indonesia Minister of Finance, Jusuf Wibisono, issued a statement regarding the share purchase on August 3, 1951, in several newspapers. Before the announcement of the legislation nationalising the Java Bank, the government gave all holders of Java Bank shares and certificates the opportunity to sell their holdings voluntarily to the government at a price equal to 120% of the listed one in Dutch guilders, or 360% in rupiah. The purchase of shares proceeded smoothly, and in a short time 97% of all shares had been purchased by the government. On December 6, 1951, the nationalisation became law (law No. 24, Lembaran Negara 1951, No. 120). All these steps proceeded smoothly. The one rather unhappy consequence of the nationalisation concerned the last President of the Java Bank, Dr. A. Houwink. Because he was not informed by the government of the nationalisation measure prior to its announcement, he concluded

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that he was not trusted, and tendered his resignation. This was accepted, and he was honourably discharged from his post on 12 July, 1951. He was replaced by Mr. Sjafruddin Prawiranegara.

NOTES 1 Further details on Sjafruddin’s role in the issuing of ORI are given in Mohammad Saubari’s chapter in the commemorative book, Sjafruddin Prawiranegara: 75 Tahun dalam Pandangan Tokoh-Tokoh, which was privately published in Jakarta in 1986. 2 It is hoped that an interview with Sjafruddin Prawiranegara on policy-making in the early 1950s will be published in a forthcoming issue of the Bulletin of Indonesian Economic Studies. 3 For further details, see Soebagio (1980), pp. 106–67.

REFERENCES Soebagio, I.N. Jusuf Wibisono: Karang di Tengah Gelombang. Jakarta: Gunung Agung, 1980. Sumitro Djojohadikusumo. “Recollections of My Career”, Bulletin of Indonesian Economic Studies 22, no. 3 (1986): 27–39.

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Sjafruddin Prawiranegara

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Sjafruddin Prawiranegara was born in Anyar Kidul (West Java) in 1911, into a family descended from the Sultan of Banten. His father was a local official first serving in Banten, and then transferred to East Java, suspected of disloyalty to the Dutch colonial government. After attending school in Madiun and Bandung, he studied at the School of Law (Rechtshogeschool) in Jakarta, and graduated with a degree in law in 1939. He then joined the Department of Finance, and worked in the Tax Inspectorate in Kediri, becoming chief of the office after the Japanese occupation. Later he moved to Bandung, where he made contact with members of the underground resistance movement led by Sutan Sjahrir. In October 1946, he became Minister for Finance in the third cabinet of Sjahrir, and played a key role in subsequent developments leading ultimately to Indonesia’s full Independence on 27 December 1949. He was Minister for Finance in the early post-Independence cabinets of Hatta and Natsir, and then became the first Indonesian governor of the Java Bank (subsequently Bank Indonesia). In the early 1950s his debates with Professor Sumitro on economic policies became famous. In 1958 he became Prime Minister of the ‘Revolutionary Government of the Republic of Indonesia’ (Pemerintah Revolusioner Republik Indonesia, PRRI) established in Bukittinggi in opposition to the government of President Soekarno in Jakarta. Although granted an official amnesty in 1961, Sjafruddin was imprisoned soon after his return to Jakarta in 1962, and released only after the fall of Soekarno. During the past two decades he has been closely associated with various Islamic groups, and has been a forceful spokesperson for their viewpoint on contemporary political and social issues. In September 1986 Sjafruddin talked to Anne Booth and Thee Kian Wie about his career. The interview began with a question about his early years in colonial Indonesia. Mr Sjafruddin has since passed away.

© 2003 Institute of Southeast Asian Studies, Singapore

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Reproduced from Recollections: The Indonesian Economy, 1950s-1990s, edited by Thee Kian Wie (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at < http://bookshop.iseas.edu.sg >

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4 SJAFRUDDIN PRAWIRANEGARA

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had a Western education — I know Dutch perhaps better than many Dutch people. But I never left Indonesia, and I always tried to keep a relationship with all types of people. And as well as a secular Western education I also had an Islamic education. In this respect I was more fortunate than many Muslims in Indonesia, and indeed in many other parts of Asia. They isolated themselves in religious schools (pesantren), and everything that came from the West was prohibited. Even wearing trousers! Just because the Dutch colonisers were Christians, Christianity was seen as the enemy of Islam. This attitude changed after Independence but still has its adherents. I think many mistakes in economics and politics are due to a lack of understanding by many Muslims about what Islam really stands for. I know, because of my religious education, that humanity is ultimately the purpose of all things.

Reprinted from Sjafruddin Prawiranegara, “Recollections of My Career”, Bulletin of Indonesian Economic Studies 23, no. 3 (December 1987): pp 100–08, with kind permission from the publisher.

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At first, as a student in the 1930s, I belonged to the so-called cooperators. I believed in the good intentions of the Dutch — their willingness to educate us and develop the country and then ultimately to give us Independence. But when Germany invaded the Netherlands, and the Indonesians in the Volksraad (People’s Consultative Council) offered to form an Indonesian militia to help the Dutch defend Indonesia, it was bluntly refused by the Dutch members. That was a great disappointment to me. And afterwards when the Japanese invaded Indonesia, and the Dutch surrendered with practically no resistance, then I lost all confidence in them. After the Dutch surrendered and we experienced the cruelty of the Japanese, then I became certain that Indonesia must become independent. That seemed the only solution even though I felt that we were not sufficiently mature for independence. But it was better to be independent than to live under colonialism. During the Dutch colonial period I was an assistant Inspector of Finance; this was really a position held by Dutch nationals but after the German invasion of Holland they began appointing Indonesians. After the Dutch collapse in Indonesia, I became chief of the Tax Office in Kediri and then moved to Bandung. My junior colleagues were followers of Sjahrir so I got to know Sjahrir through them. In a sense I belonged to that group but my religious education was too strong for me to become a socialist materialist. (But now some of Sjahrir’s early followers have returned to Islam and done the haj !) I first met Soekarno after the proclamation of Independence. During the Japanese period I hated Soekarno. I felt that he sold us to the Japanese. I had much more respect for Hatta. He cooperated, but because he was compelled to cooperate. Nevertheless I had the most respect for Sjahrir because he did not cooperate at all. Sometimes it seemed to me that Hatta could be too cautious. When I talked to him about the possibility of printing our own money, he said no. I did not expect such an answer from him! I told Hatta that if he was caught by the Dutch he would be hanged not as a forger but as a rebel against Dutch rule! The first offer Sjahrir made me to become Minister of Finance I refused. I thought I was too inexperienced. I had never been in politics and had no experience in finance, except to collect taxes. That was not

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enough to be Minister of Finance. But in the second cabinet I became a junior Minister, and after I saw how the Minister of Finance discharged his duties I thought: I can do it better than that! (Afterwards I thought that if I were President I could do things better than Soekarno!) After the Solo affair I became Menteri Kemakmuran (Minister of Welfare) in the Hatta cabinet. But what could we do in such a chaotic time? It was really only a name. I could do very little for the welfare of the people. The main goal was to win the struggle against the Dutch. But I am proud to have been the first Minister to have issued the ORI (Oeang Republik Indonesia, Republican money). The idea first came from my friends in Bandung.1 We put it forward to Hatta, and then began to arrange the printing. The first paper money was signed by A..A.. Maramis as Minister of Finance — that was in early 1946. But I distributed the money when I became Minister of Finance later in that year. Then I became leader of the Pemerintah Darurat (Emergency Government) in Sumatra in late December 1948 after the Dutch had launched their second attack on the Republic in December 1948 and imprisoned President Sukarno, Vice President Hatta and other prominent leaders of the Republic. It was decided in Yogyakarta that, should the Dutch launch a second attack and Yogyakarta fall, then Hatta should form an emergency government in Sumatra. So before the planned attack we flew to Sumatra. But the moment we landed in Bukittinggi there came a cable from the United Nations Commission that Hatta should return because the Dutch were willing to negotiate again. So I was left in Sumatra. When the second military action started, and the government was captured and exiled, I was the senior minister in Sumatra. So I felt obliged to form an emergency government. By then I was convinced that we must win our independence at all costs. I was the first Minister of Finance in the Hatta cabinet — that was still the RIS (Republik Indonesia Serikat, the United States of Indonesia) — and then again in the Natsir cabinet. In March 1950 I implemented the money-cutting measures which earnt me the name ‘Gunting Sjafruddin’ (the ‘Sjafruddin cut’). At that time there were two currencies, the Republican money and the Dutch currency. We had to get a uniform currency for the whole of Indonesia. So it was necessary to wipe out the distinction between the two currencies and at the same time reduce the amount of

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money so that we could bring down prices. We cut the Dutch money in two halves one was changed into Republican money and the other converted into a financial obligation, so we could not be accused of robbing the people of half of their money. Afterwards as inflation increased the people were really robbed! This idea of cutting the money was invented by the Greeks — at least according to our Dutch adviser — but it was implemented in Indonesia in a much better way than in Greece. We succeeded in ‘cleaning’ the monetary system, unifying it and restoring public confidence.2 I also initiated the multiple exchange rate system. Foreign exchange needed by importers was priced at 50% more than that earnt by exporters. The difference accrued to the government treasury. That worked for one or two years; then the government unified the rate. By then I was president of the Java Bank. After the fall of the Natsir cabinet I was fed up with confronting such ambitious people, who didn’t understand democracy. Most of them only wanted a seat in parliament. Even nationalists like Yamin and Chairul Saleh and so on — their idealism was merely an idealism to get power but not to use it for the interests of the people. Even Soekarno eventually became like that. Only Sjahrir and Hatta were honest. Initially I was very reluctant to take the job in the Java Bank. I wanted to retire from public life. I was mentally tired. I had fought from 1945 to 1950 through the most critical situations. In addition I felt that I had to earn enough money for the education of my children and I could only do that in a private capacity. At that time — maybe because of my Dutch education — I would not have thought of abusing my power as a public servant to make money! Then, we thought of public service as an honorary job. So I refused to take the Java Bank job, except on my own terms. But the government accepted my conditions — first of all that my salary and that of all the Indonesian staff should not be changed to an Indonesian level! And also that the privileges which the Dutch staff enjoyed should be made available to the Indonesian staff. So then I accepted, especially because of the pressure from the Dutch who had the greatest trust in me! Houwink himself approved of my becoming his successor.3 I still had confidence in the judgement and sincerity of the Dutch. I felt I had fought not against the Dutch but against their regime. I didn’t hate them — I never hate anyone. That is against my religious principles.

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You see human nature is remarkable. The most fierce enemies can become close friends if they approach one another as individual human beings. The Dutch in the Netherlands are very decent people. Only when they were in Indonesia, and they had the power to oppress the people they became barbaric. When we were fighting for our independence, the Dutch felt that ‘if we lose Indonesia there will be a great disaster’ (Indie verloren, rampspoed geboren). But Holland is much more prosperous today without Indonesia, so we can become friends again — like normal human beings with the same God although our religion may be different. So I still have many Dutch friends. After all my education was basically Dutch. It is true that after Independence the Dutch continued to dominate the economy. But we had the political power to reduce their economic power. However it should have been done through reasonable means. Education is the basic tool to reform social problems. Of course it takes time so we must be patient. Then as now I don’t think the situation can be improved in a short time. But we must have a really democratic educational system, with equal access for all. So during the takeover of the Dutch enterprises in late 1957, I spoke against it. As far as the nationalisation of the Java Bank was concerned, Jusuf Wibisono who was then Minister of Finance announced the measure without consulting the Dutch. I felt that was wrong. I used the reports of the Bank Indonesia not to criticise the government but to disagree and to put forward alternative views on economic policy. The management of the central bank consisted of three persons — the chairperson who was the Minister of Finance; his deputy, the Governor of Bank Indonesia; and the Minister of Welfare. Several times I differed with the other two. For example, they decided to exempt cabinet ministers from paying import duties on luxury cars — that was the Ali Sastroamidjojo government with Iskaq as Minister of Welfare, and Ong Eng Die as Minister of Finance. I felt that ministers were not above the law, and should be treated as other citizens, but I lost. I could have resigned but felt the issue wasn’t worth it. It seemed to me a violation of the law. You see, the problem is many of us don’t understand the law — that’s the real difficulty. Even our legal graduates often seem not to understand the law. I thought then and continue to think that the law is above persons, even above the President.

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But the attitude of some in those days was that the President was the law! However I still try to educate people that if we want to have a democratic country then the law must be our master and no one should be exempted from it. Then I had disputes with Sumitro over the Economic Urgency Plan, referred to as the Benteng (Fortress) Plan (the plan to promote indigenous Indonesian businessmen), and the program of crash industrialisation. It seemed to me that most of our people were engaged in agriculture. So we should assist them, and industry should be based on agriculture and on the natural resources found in Indonesia. We must keep in mind that poverty has both a material and a non-material meaning. You can be materially poor, but mentally or spiritually rich. Others can be materially rich but spiritually poor. I was against the Benteng Programme of Sumitro. I thought that people would have to be educated in management and technology first before rushing into forced industrialisation. If we did not educate first we would just create Ali Babas! I was also unhappy about the situation regarding regional autonomy. I was very unhappy that Aceh was not given provincial status. Everything seemed to be regulated and imposed from above. I wanted real autonomy for the people in the daerah (regions). They should have a say in their own affairs, to raise their living standards. This would include the ability to raise taxes and carry out their own development projects. Provinces which had the natural resources should have been given a reasonable share to develop their regions. In that way I think we could have prevented the abnormal growth of Jakarta. The provinces could have developed themselves. But I was not in agreement with the RIS; it was a Dutch creation of a federal Indonesia — it was also not based on natural boundaries. We could have changed the federal structure after the Dutch recognition of our Independence, without completely abandoning it. I was not against federation in principle and I think it would have been better in some respects if Indonesia had been based on a federal system. At least there would be greater autonomy for the daerah (regions). But I advised against the PRRI (Revolutionary Government of the Republic of Indonesia), even though I was opposed to what Sukarno and the PKI (Indonesian Communist Party) were doing. I thought it was quite possible that we would be defeated because the military commander of

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South Sumatra, one of the richest provinces and of strategic importance to PRRI, seemed to side with Sukarno. You see, the regional commanders had their own ambitions; some wanted to make Sumatra a separate state. We could not agree with that. On the subject of transmigration — it seemed to me that it should take place as spontaneous transmigration. If it is regulated by the government it only gives an opportunity for corruption. In the 1950s we didn’t have the money so we could not do it the way it is done now. But I am far from convinced that it has proved to be the right way to have gone about it. People who have migrated successfully will attract others. Planned transmigration is very costly and often not very successful. There are some projects where the people would like to return to Java. I was not against foreign investment; in fact I felt that we needed capital from all sources. But I felt then and continue to feel that we should not put capital above people. The law must be such that Indonesians should become partners of foreigners, and then eventually take over the foreign capital. So I agree with the idea of technology transfer. Also I think that foreign investment should be directed towards exports rather than home consumption. I don’t think we need Coca Cola and so on. Better to let people make their own drinks! I feel you must develop the human being through education rather than the economy through capital investment. Capital is a creation of human beings and so we must first develop human beings rather than developing an economy based on capital. Capital is a dead thing; it doesn’t work without people who can handle it. So when the ‘New Order’ regime started with the proposition that Indonesia should first develop its economy, I told them that was wrong. I felt we must begin with human development. My difference with Sumitro and other economists is a difference in human approach. I regard people as the most important factor of production — not dead matter. The economy must develop according to the needs of society so when we became independent my idea was that first of all we must rehabilitate agriculture, and industry should be based on agriculture. I felt that if we were agriculturally insufficient, how could we build an industry which is profitable for the people? But I didn’t put as much emphasis on cooperatives as Bung Hatta. You can organise the economy in some

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fields according to cooperatives, but not everywhere. In some sectors you need intensive capital investment, and you can’t get that from cooperatives. Industry should be based primarily on material resources within Indonesia. Not like now when practically all industry is based on imported material and spare parts. It seems to me that this point has never been understood because most of our economists have been educated in the advanced countries. For instance, Dr Sumitro followed Keynes in his monetary policies, emphasising pump priming and deficit spending. I told him; you can’t apply these theories in Indonesia because Indonesia is not an industrial country. Keynes’ theories can only be applied in a country where production can be changed overnight, according to demand. But we are an agricultural economy, so deficit spending seemed to me basically wrong. Inevitably it entailed inflation. I feel that since Independence we have been suffering from people who don’t clearly understand the relation between human beings and economic development. In the early years of independence in most parts of Asia, many intellectuals were affected by Marxist ideas — socialist ideas — but for me human beings are the first thing. Everything depends upon human beings. That is also, I think, the basic difference between myself and Professor Sumitro. Professor Sumitro thinks too much along Western lines because he had a Western education. He studied economics in Rotterdam, in a highly industrialised country. I also had a Western education but I never left Indonesia before Independence. Apart from the fact that I studied law, my background was religious. Nevertheless, we still appreciate each other despite our differences. I feel I now belong to the past but nevertheless my ideas may be helpful in the future. Especially my interpretation of Islam. Even with Natsir I often differ. He was brought up in an environment where the Dutch had come to be regarded as enemies not so much because of colonialism but because of their religion. Sadly, most Muslims in Indonesia were taught to identify other religions, especially the Christian faith adhered to by the Dutch, with oppression. In other parts of the world where Muslims were once colonised by a Western power, they are also afflicted by this misconception. I hope to be one of those pioneers who will introduce a new vision of Islam, as in the early stages of its history when it was very liberal and humanist. We must bring Islam back to

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its real function as a moral force to improve the state of the world. The most important problem in the world today is to find the tolerance to live together without violence and force. This liberal approach must be made attractive and inspiring to the younger generation of Muslims in Indonesia. In my opinion the sovereignty of nation states is out of date with the advance of science and technology. If we had one world stage consisting of autonomous, instead of the present sovereign states, much of the capital now wasted on arms could be used to improve living standards and boost education. Within limits, I see no reason why Islam cannot be compatible with an economic system run along capitalist lines. You see, Islam has the concept of riba. I don’t agree with those who interpret riba as interest. In my opinion it means profit gained by inhuman means. By cheating and oppressing people — that’s riba — and as such it as forbidden in Islam. And gambling — that means getting rich by doing nothing, and you make others poor at the same time. That is also forbidden. Capitalism is quite in accordance with Islam but it has its limits. You should only get profit by honest means, and trade should be carried out only by voluntary mutual agreement so both parties feel they profit from the deal. The idea that you can only get profit by cheating or oppressing people is abhorrent to Islam. Cooperatives are sanctioned by our religion. We should not have a single ideology — capitalism or socialism. The tenets of either capitalism or socialism should be applied according to circumstances, in the common interest of the people, not dogmatically. You cannot have cooperatives if people don’t understand the meaning and handling of this form of economic effort. In such a case, capitalistic forms of economic endeavour like the limited company should be allowed. What should be avoided is the exploitation of people by others which can occur in any form of economic endeavour. To cope with this abuse is the task of society and government. When I criticised the economic policies in the 1950s, I was impelled by my conscience; I felt I couldn’t avoid saying what I had to. History will evaluate who was right and wrong. We must learn from our faults and mistakes. There must always be somebody to remind people to remain reasonable human beings. I still think it is less humiliating to be oppressed by our own government than exploited by foreigners. It is easier to

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improve the country now than under Dutch rule. Probably the course of Indonesian history since Independence was inevitable — things worked out the way they did because we were immature. You can’t catch up with the modern world in 25 years.

NOTES 1 For further discussion of the ORI, see Saubari (1987) and Rosidi (1986), pp. 75–88. 2 Rosidi (1986, pp. 153–63) gives further information on this episode. 3 See Saubari (1986) for further details on the nationalisation of the Java Bank.

REFERENCES Rosidi, Ajip. Sjafruddin Prawiranegara Lebih Takut Kepada Allah SWT. Jakarta: Inti Idayu Press, 1986. Saubari, Mohammad. “Reflections on Economic Policy Making, 1945–51”. Bulletin of Indonesian Economic Studies 23, no. 2 (August 1987).

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Abdoel Raoef Soehoed

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Abdoel Raoef Soehoed was born in Jakarta in 1920. After graduating from senior high school in Jakarta in 1939, he studied engineering in Bandung and subsequently graduated after the independence struggle. In 1956 Soehoed, who had become an officer of the Indonesian Air Force, resigned from military service and became an engineering consultant with a private firm. His career as a public servant started with his appointment as an Advisor to the Senior Minister for Development and Industries. He was then appointed a member of the Technical Committee for Capital Investment, which became the Coordinating Board for Capital Investment (BKPM). Soehoed was made Deputy Chairman of the Board, and head of BKPM’s Division for Promotion of Foreign Capital Investment. In 1976 he was also appointed Chairman of the Asahan Development Authority, a position he still occupies. In 1978, he became Minister for Industry in the Third Development Cabinet (1978–83) and in May 1983 he was appointed Member of the Supreme Advisory Council. As a forceful and articulate advocate of what has come to be called the structuralist approach to industrialization, Soehoed can rightly be considered the prime architect of Indonesia’s industrial policy in the late 1970s and early 1980s. On 7 September 1987 he talked to Thee Kian Wie and Hal Hill about his views on the development of Indonesia’s manufacturing sector.

© 2003 Institute of Southeast Asian Studies, Singapore

Reproduced from Recollections: The Indonesian Economy, 1950s-1990s, edited by Thee Kian Wie (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at < http://bookshop.iseas.edu.sg >

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5 ABDOEL RAOEF SOEHOED

THE OLD ORDER

In the Old Order period, I was, as a private businessman, very much involved in industrial development. Very early it had been recognised by the government that the best way to transform the country into an industrialised society is to set up basic industries, although what was meant by basic industries was not clearly defined. As I remember, the Chief of the Planning Board at this time, Ir. Djuanda, proposed a twopronged approach to industrialisation: (1) industry to produce goods needed in the country, and (2) industry to provide revenues to finance development of other industries; it was a complementary system. Not many of the projects planned during the years before 1965 actually materialised, although there was the first fertiliser plant in Palembang and the first large cement plant in Surabaya, presently known respectively

Reprinted from Abdoel Raoef Soehoed, “Reflections on Industralization and Industrial Policy in Indonesia”, Bulletin of Indonesian Economic Studies 24, no. 2 (August 1988): 43–57, with kind permission from the publisher.

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as PT PUSRI and PT Semen Gresik. A steel plant to be built with Russian aid encountered many problems and did not eventuate. There were several plants which were initiated in the Old Order period but stalled because of the political problems around 1965, and were finally completed in the 1970s. Nevertheless a concept was already adopted, of first setting up basic industries, making use of available natural resources, and then developing downstream industries. NEW ORDER INDUSTRIAL GROWTH

In the New Order period I believe this concept to be even more valid. Whilst during the Old Order the means were very limited, in the New Order period conditions were different. First of all the new government adopted a policy, which is a very wise one, of opening the country to overseas private capital investment and introducing policies aimed at developing natural resources. In the late 1960s the latter was still limited mainly to oil, owing to financial constraints. By the early 1970s, it was time to develop a long-range strategy, centred on basic industries and natural resources, to be initiated by the government, leaving downstream manufacturing to private enterprise. The former were to be funded by oil and very considerable aid flows, generally on favourable terms. Resource development later on went beyond oil, to include other minerals and forestry products. At that time aluminium was already thought of as one of the possible basic industries. In the meantime, private foreign and domestic investment had been growing rapidly. This tempted many enterprises to produce new goods in an import substitution fever, particularly in the domestic sector. I am not in favour of this import substitution. Although at that time I did approve a number of import substitution projects, this was simply to act as a primer to get the economy on the move again and to create job opportunities as quickly as possible. I propagated the idea that it was time for the government to put all available resources into infrastructure and basic industries. But I did not have many supporters for this idea. In certain circles there was a belief that this was simply repeating what the Old Order had unsuccessfully attempted. But such a comparison was invalid. The Old Order failed because the means were not available, the country was not open, and there

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was insufficient political and social stability to promote major developments. There was not much time to think seriously about economics. Under the New Order government conditions have changed entirely. The means are available, the market for a lot of commodities has been favourable, and the nation itself is geared towards development; consequently there is more community support. BASIC INDUSTRIES AND INDUSTRIAL DEEPENING

In certain circles there was the view that downstream industries should be developed first because they create employment and contribute to socalled equitable distribution of development. This is indeed true, but those industries can be left to private enterprise provided the right incentives can be offered. This will allow the government to concentrate on the development of basic industries and infrastructure. Gradually the downstream sector can then be matched to the upstream sector in order to arrive at long-range strategies for industrial growth. That was my way of thinking, but until I became Minister of Industry in 1978 I was not able to get the message across. I proposed about 52 basic industries in which the government should take the initiative, because private entrepreneurs were not ready. The problem with basic industries, usually, is that a considerable amount of capital is needed, the gestation period can be quite long, the infrastructure has to be laid out, and the profit margins are generally low. I was able to convince the government that, once we had established a foundation with the aid of the rapidly growing oil revenues, industrial development would accelerate by itself. The concept was approved but I was not able in my term to finish the implementation of the whole program. All the same, many projects were completed including cement and fertiliser plants, the Asahan aluminium smelter, paper and plywood mills and the nucleus of a steel and engineering industry. I regret, however, that not enough funds were allocated for training of personnel, particularly in the engineering industry. There was a general conviction that existing plants would do this training job. Unfortunately also, although I intended to leave the downstream sector to private enterprise, there were not enough long-term guidelines for the private sector; overlapping authority between government agencies has often caused

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erratic changes in rules, regulations and procedures. For example, in the case of the automotive industry, where standardisation could have been an important regulating factor, instead everything was left to market forces. Everyone tried to enter the game and there was such a proliferation of brands and types (72 brands and more than 150 types, at the time I became Minister) that under the circumstances it was impossible even to think of a national automotive industry as an ultimate aim. I gradually imposed limitations and promoted standardisation. When I left, the number of brands had more than halved, and the situation had become more conducive to making components for standardised equipment, and to building long-term policies. I mention the automotive industry in particular, because motor transport is crucial in Indonesia and certain sections of the industry are still quite labour intensive, which could very well accommodate the need for new employment opportunities. In countries with a longer industrial history, basic industries usually develop from downstream activities upwards to secure supplies of raw and basic materials. The process grows naturally with the market. This growth pattern, following market forces, would not have been possible in a developing country like Indonesia. In the early days of the New Order, private enterprise was reluctant to enter the upstream sector because of the smaller profit margins and higher risks involved, as well as the huge capital requirements. Hence my suggestion that the government should take the lead. Nowadays private business has become a lot stronger and I think it is proper to allow it, and even to encourage, a greater initiative and participation on their part. It is very unfortunate that there is some friction between competing views on the need for ‘high-tech’ industries. ‘High-tech’ industries will certainly be needed at some stage in the future, and building the foundations now would not necessarily be unwise. The current programs may be a bit overstretched under the present situation, but one should not be apprehensive per se towards high-tech or large projects, when their feasibility has been established. I understand the arguments of economists and the need for caution, but prudence can easily lead to vacillation, and major projects can get bogged down because of indecisiveness while others elsewhere have already started. For instance, plans were in the pipeline for over ten years for an Olefin Centre in North Sumatra. When the plan was under negotiation it was

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very feasible; if it had been started right away it would have been profitable. But in the meantime, Saudi Arabia has developed huge plants, and it doesn’t make sense now for us to invest in this sector. We are in a period of very rapid technological change and so we have to treat technologyrelated and technology-sensitive projects seriously. IMPORT SUBSTITUTION VERSUS EXPORT PROMOTION

To anticipate a rapid shift from import substitution to export orientation does not seem very realistic to me. During the first three Repelita (Five Year Development Plans), there was strong emphasis on producing basic necessities, so all industries were focused on the domestic market and were very well protected. It would be inconceivable to expect that these products can be quickly redirected to export. One certainly should try to export as much as possible, but it will not be an overnight affair. An adjustment of currency exchange rates may help initially, but the positive effects of this will soon be eroded, without more long term follow-up steps. An alternative way, in the current recession, of maintaining a reasonable balance of payments could be found by paying more attention to the spending side, instead of focusing entirely on revenues. It would certainly save a significant amount of foreign exchange if funds appropriations were more carefully scrutinised in terms of technology applied and foreign exchange needs, in order to achieve certain economic benefits. The counterargument often heard is that the consequently increased local currency spending may eventually lead to more inflation. Without rejecting this possibility, it is nevertheless still worthwhile to consider the trade-off in increased employment and use of local goods and services. Consider for instance the construction of a bridge somewhere in the interior of Sumatra or Kalimantan which, on current traffic volumes, could well be made from wood, naturally much cheaper than one made of steel or concrete. It does not contribute as much as an expensive one in terms of development spending, but in terms of economic benefit it certainly yields the same effect; at the same time it will require less foreign exchange. In my opinion, too much emphasis is placed on the amount of development expenditure as a measure of growth, and not enough on the actual effective value, which naturally will lead to increasing pressures on revenues. There is enormous scope for the development of infrastructure,

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not just highways and big bridges in the cities, but also in rural areas, including small dams and irrigation all over the country. These can employ appropriate technology, using labour-intensive construction methods and local material, and equipment produced by local industry, or even smallscale industries. Government spending can create more effective development in this manner, and I feel we can balance the monetary equation and provide employment much faster than by focusing solely on exports, considering that we are not yet entirely ready for this redirection. Moreover, although many industries have already been developed, marketing and distribution remain major bottlenecks. Domestic transport is still very expensive. There is a need for some reallocation of industries to ensure that transport becomes more effective and efficient. Investment in improved internal transport will promote industrial development and create jobs, and help compensate for the decline in oil earnings. There is need for a more comprehensive perception of trade and marketing. We are still influenced by a view of trade which was born in times when goods were in short supply, and quite a lot of petty trade and brokerage developed. The view that seems to have resulted is one of trade as a simple exercise of buying and selling. Trade in a modern sense is to me a more complicated affair. There is the need to have correct and timely information and the ability for quick dissemination. One should be able to follow the changing patterns of consumer demand and to react accordingly. Our trading houses — if they may be called so — are poorly equipped and are hardly traders in my definition. My feeling is that trade is one of the weakest sectors of the economy. We still have not mastered the ‘science of trade’. INDONESIA AS A ‘NIC’?

In a country like Indonesia, with so many islands, plentiful natural resources and such a large population, it is not as easy to develop a clear, aggressive policy as in Japan, Taiwan or Korea. I don’t see, at the moment, how we can follow their pattern, and I don’t think that simply copying their model would be right for Indonesia. We need, first of all, to increase our own domestic purchasing power, and that requires, among other things, improved efficiency in agriculture and more public works. This will create buying capacity which is needed for domestic industry to develop and be exposed gradually to competition from abroad.

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Korea and Taiwan adopted their policies because there were not many other options. They had to apply whatever was possible to support their policies, even sacrificing domestic interests in favour of exports. For Indonesia, however, there are many options, including the development of public works with real social effective value, and increased efficiency in agriculture. This will expand the domestic market, and enable exports to grow in a more natural way. Then there are non-economic factors which make their policies difficult for Indonesia to imitate. The geography of Indonesia, for example, makes stringent control of the coastline impossible. Also, Indonesia has a lot of foreign production centres nearby, almost in its backyard. Secondly — and this is very often overlooked — compared with other developing nations, the Indonesian people have been exposed over a much longer period of time to a large number of outside influences. Indonesia has always been a crossroad of trade and cultures and a blend of numerous ethnic backgrounds. With this exposure, policies which are easily imposed on societies like Korea, or even India, may not be so easy to implement in Indonesia. THE DEVELOPMENT OF ASAHAN

I have been closely involved with the development of Asahan; its purpose is to harness the hydroelectrical potential of the Asahan River in North Sumatra, in order to develop products, such as aluminium ingots, initially for export and eventually for domestic industries. This primary aluminium production is only the beginning, to be followed by intermediate, downstream and other related industries. It is now time to think about developing a bauxite refinery to produce alumina from local bauxite as input for the smelter. Bintan Island in the Riau Archipelago has large deposits, although it has already been mined for quite a while. Also, West Kalimantan has huge deposits still untapped. Plans are in the pipeline for an alumina plant on Bintan Island. The island of Bintan may not be the most ideal location for a number of reasons, but a decision has been taken by the government in favour of the island. Despite the less than ideal location, however, Bintan may still be feasible, as more and more smelters are being built in the Middle East, South and Southeast Asia which at present have only Australia to rely on for their input. India is now coming into the picture too. In the long run this situation will not be sustainable; a large number of smelters will

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certainly require a broader supply base. It would not be inconceivable that more smelters will be built in Southeast Asia to serve the large Japanese market, now totally devoid of its own smelting capacity, or even Europe. Thus, there is a good opportunity for the Bintan Alumina Refinery to become viable as an additional source for alumina, and there is scope for sharing the market properly without out-competing each other. The same concept may apply to carbon products needed by the smelters. Strategically, Asahan and subsequent developments related to aluminium should prove the merits of an industrial development policy based on viable natural resources and basic commodities, provided they are selected correctly, with a long-term view. So far this concept seems already to be working in the oil and gas, timber products, aluminium and textiles sectors. With regard to the selection of North Sumatra for the application of this concept, considerations were not limited to available natural resources, but were also based on socio-economic factors, such as a reasonably well developed infrastructure, adequate educational facilities, and a fairly high general level of socio-economic achievement in the region, all increasing its potential to become the second industrial region in Indonesia after Java. In this process Asahan and the Lhok Seumawe gas and fertiliser complex have become additional prime movers, next to the estates which for decades have been the single locomotive for the region’s prosperity. THE ROLE OF ST ATE ENTERPRISES

I am in favour of a greater role for private enterprise, but not only for alleviating our present revenue problems. As has been said, the government had to take the initiative in the initial stages because of the absence of strong private enterprises at that particular period of time. Unfortunately most state enterprises have not been very well planned, nor well managed either. After all, their management has mostly been drawn from civil servants, with views and attitudes strongly influenced by bureaucratic experience and not really geared to business; consequently the majority of state enterprises are not very efficiently run. I therefore see privatisation primarily as a means of increasing efficiency and productivity within government-owned enterprises. This may eventually help to create some new revenues for the government, but the main objective should be to

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increase efficiency rather than to dispose of unprofitable enterprises. I would favour an effort to transfer state enterprises into joint ventures with private or even foreign enterprises, or at least to have some state enterprises operated by private domestic or foreign management teams or entities, until a sufficient number of capable Indonesian managers has been developed. Therefore more important than ‘whether you privatise or not’, is the question ‘what is meant by privatisation’ and ‘how to privatise’. Certain perceptions have to be reviewed and modified in order to give privatisation a fair chance of success. For instance there are deep-seated differences of opinion towards the interpretation of Article 33 of the Constitution, as related to large land holdings, which will have a bearing on privatisation of government-owned estates and foreign participation. Whilst there is a bias in favour of small holdings vis-a-vis large commercially operated estates, the question is often raised, whether owning land is still an overriding objective among rural people, or whether benefits can be secured from working on land, without necessarily owning it. Although land ownership within rural society is indeed still a strong focal point, I have the impression that, for a growing section of this society, primary objectives are becoming spread over a large array of basic needs such as stable income, education, health services, housing, and so on. Perhaps the ownership of land is now less dominant vis-a-vis the benefits of a secure job and earnings of modern estate work. I believe rural dwellers would be better served and more content with a good job in an estate which pays a proper wage, and that land ownership may not be so predominant any more. Of course the government should outline clearly to estates their socio-economic obligations, and see to it that these obligations are fulfilled. This policy should not prejudice the government’s current smallholding programs, as the two concepts can be applied according to the suitability of an area, and in some instances even side by side, without interference to each other’s domain. The issue therefore is not simply to ask whether privatisation is the right course to follow, but to analyse and evaluate what is involved as a consequence of privatisation. I believe a variety of means should be adopted. The smaller companies of no strategic value could be sold off, probably at discounted prices. For other sectors the capital market could be utilised. If there is some interest in Asahan from the private sector, I would personally welcome their involvement.

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There may be a number of state enterprises which have to be kept entirely in government hands for political or strategic reasons. For example, PERTAMINA, because of its strategic importance, particularly in terms of revenue, should be left to the government. There may be a number of such cases; the selection should be based on overall national development considerations. TECHNOLOGY TRANSFER AND ‘HIGH-TECH’ INDUSTRIES

To build a national engineering industry, a prerequisite is the existence of national industrial standards and adequate training facilities; both are not yet fully developed. There is clearly enormous potential for building rather than importing machinery. For example, road building, even with labour-intensive methods, still needs the road roller. Likewise small irrigation dams built by labour-intensive methods still need a couple of concrete mixers, and one or two simple earthmovers. It is better to develop standards for local manufacture than to import sophisticated but very expensive equipment, which will decrease instead of increase labour involvement. Foreign exchange can be saved in favour of a domestic engineering industry. Appropriate standards could enhance local production. From simple equipment for public works, the housing industry, and small-scale industries, to rubber manufacturing plants, palm-oil extracting plants and sugar factories, the basis is there for an engineering industry. For example, with about 50 sugar plants now in operation, and assuming their economic lifetime to be 20 years, in terms of workload we have to produce at least the equivalent of two sugar plants every year, which is a good basis for some engineering industries to develop. Add to that the palm oil and cooking oil industries, soap plants, and small rolling mills for roofing material and so on, and one already has a basis for a solid domestic engineering industry. From these beginnings, with well-trained people, it would not be difficult to move up into more sophisticated engineering operations, including advanced technology products. For a country with 170 million people, there is not only a need for advanced technology — simple conventional technology and engineering skills at a lower level are equally important. Although we are moving in the direction of advanced technology, the development of more conventional technology is still a necessity. Take the case of power development. In Java

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we now have a technically very advanced power grid, covering the entire island. This has been a costly affair which at present certainly could not be duplicated on the other islands. For sparsely populated areas we need to develop localised systems, including micro-hydro and mini-hydro, which also provide a good basis for local manufacturing, especially if a high rate of standardisation can be employed. The People’s Republic of China, for instance, developed about 70% of their electric power through minisystems for rural use. Only the big cities and industrial areas are connected to a grid. Their apparently valid argument is that the smaller plants do not need to be imported. It is cheaper to build these locally, although probably not to the same level of quality as an imported one. Some projects have to be imported entirely. The most important point here is proper assessment of technology and the right timing — firm decisions at the right time. A good example is the previously quoted Olefin Project, planned for North Sumatra at a time when the market was still favourably inclined. There was a reasonable investment offer, which may not have been the best one, but, at least from appearances, could be implemented quickly on the basis of sound feasibility. As has been said, negotiations dragged on for years to get a better deal, resulting only in a total cancellation of the project. There are times when quick decisions should be taken, even with a measure of calculated risk. We should now assess investments not only in terms of size of capital, but also in terms of returns, tangible as well as intangible. We need also to go for quality of investment — industries which can introduce new working methods, better quality products, and efficient use of the available material and resources. Although finance remains a problem, basically the biggest problem is management. As long as we do not have sufficient training facilities for labour and for management, it is very difficult to develop a sound industrial structure. Hopefully we will overcome this problem within not too long a time, but at present the only way, although not the ideal one, to introduce the required skills and discipline is through foreign investment. Therefore it may not be the time now to stress sensitive issues such as ownership and the role of foreign experts. Of course we would like to have knowledge and certain positions transferred. But it is not just a matter of training, or putting it all in extensive manuals. Assuming foreign experts are sincerely willing to train, there is still the question of whether our workers can absorb the know-

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how fast enough and really master it. It seems to me that the absorptive capacity of our young professionals is still quite limited. Therefore if localisation is pushed too hard, you may lose the experts and our people will still not have learned the job. This is particularly so because technology is changing so rapidly. One example is horticulture — it is not like the old days, when plants grew easily in very fertile land and everything went smoothly. Nowadays, you have to master new knowledge which comes up almost on a weekly basis, and produce better quality products. The Japanese and Koreans have aggressively developed nationwide training programs and information systems. This is lacking in Indonesia. We need to put more emphasis on education, information and the role of the youth. These are three very important departments, but so far I do not have the impression that problems have really been tackled in these areas. This also relates to the question of foreign cooperation through the private sector. Such cooperation need not necessarily mean direct investment; it can include licencing arrangements, technical assistance contracts, or profit sharing. I hope that BKPM will be able to develop a number of different modes of cooperation and not simply rely on the straightforward method of foreign direct investment. THE ROLE OF JAP AN

I still believe Japan can play an important role in helping the countries in this part of the world to get off the ground and to become really equal partners. Japan has the potential, it has the advantage of proximity, and there is a large measure of complementarity between Japan and Indonesia. There is, however, still a problem, and it exists on both sides. Maybe only time and closer relations will solve the problem. For the receiving Asian countries, especially those who were occupied by the Japanese during the war, there are still traumas. These fears have been kept alive, unconsciously, by the brisk and aggressive business attitudes of the present day Japanese. I have tried to explain this to my Japanese friends many times, but apparently it is still not well understood, because the same attitude seems to prevail in their own environment, a similar ruthless, competitive way of life. People are fearful of the Japanese because of their relentless way of pursuing their interests. Of course, everybody is perfectly entitled to take care of his own

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interests, but there are many ways of doing this. It seems to me that there is still an undercurrent of archaic fear in the Japanese mind, bred over centuries of threat. Japan, with a very industrious and intelligent population, but which still harbours a kind of siege mentality, has to be aware of its prominent position now in the world, a prominence which brings with it responsibilities, if it is to be maintained. It has to be able to carry these responsibilities and to get rid of its prejudices. In academic and political circles I already see signs of change, in particular in the former. But in the private sector, a lot of adjustment still has to be made before the advantages of cooperation are really shared by all concerned. With regard to Indonesia’s industrial policy, the Japanese system of industrial policy guidelines would probably have more merit than the freefor-all western model. In principle, I would not be apprehensive about adopting something like a MITI (Ministry of International Trade and Industry), which plays a very active role in Japan’s economic development. However, it would require time to build up the staff needed to operate such an institution. The system and the personnel of MITI were developed over a long period of time before it became the prominent body it is now, staffed with able bureaucrats, well trained for specific objectives. PRIBUMI BUSINESS

How do you overcome ethnic ‘imbalances’ in business? This is a point which we have not yet been able to resolve. One way is to invest in the members of the indigenous society so that they can conduct business on a more equal level; this was the idea behind the setting-up of subsidised mini-industrial estates during my tenure as Minister of Industry. These estates have, however, not been able to reach their objectives because they are not allowed budget resources, but have had to rely on bank financing, which has certainly been detrimental to their success. The problem of ethnic imbalances has its roots in Indonesia’s colonial history. Colonial policies have created imbalances not only in terms of business but socially as well. During my term, I tried to develop policies through a combination of regulatory guidance in certain sectors of business and preferential treatment to indigenous business, without denying a fair chance to the non-indigenous society; but since my departure, much has again been left entirely to market forces.

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Preference to indigenous business should not be given in terms of credit-finance, but more in terms of provision of assets and opportunities; this indeed will involve subsidies, which I prefer to call investment in society. The concept of investing in the society, more specifically the indigenous sector of the society, could be extended, as an example, to big shopping centres, which are built by non-indigenous Indonesians. Establishing these centres should not be discouraged, but the government should buy, say, one-third at the commercial price and turn it over to indigenous Indonesian traders to be used at discounted rents. This will create the ability within the indigenous sector to compete with nonindigenous groups on a more equal footing without undue political pressure. Initiatives of the non-indigenous groups should not be curbed, but the benefits should be made accessible also to indigenous business groups, and this will require certain policies and subsidies. Unfortunately, ‘subsidy’ carries nowadays rather a negative connotation in policy circles. The question is whether this kind of support is a subsidy in the ordinary sense or an investment in the future welfare of the society as a whole. Personally, I believe it is the latter.

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Sarbini Sumawinata

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Sarbini Sumawinata, Professor in the Faculty of Economics at the University of Indonesia and Chairman of the Board of the Indonesian bilingual newsmagazine Business News, was born in Madiun, East Java, in 1918. In the early 1950s he spent time in the Netherlands, the United States and Canada, returning to Indonesia in 1955 to become the first Indonesian head of the Central Bureau of Statistics, a post which he held for almost eleven years. During this period he also taught international economics at the University of Indonesia, and in the politically turbulent late 1950s and early 1960s was chairman of the Association of Indonesian Economists (ISEI). In 1963, Sarbini and the late Dr Soedjatmoko drafted a document outlining a development plan for Indonesia which became known as the Economic Declaration (Dekon). During the early years of the New Order he was Coordinator of Experts in the field of politics, advising President Soeharto on political matters. In April 1989 and again in October 1991 Professor Sarbini granted interviews to members of the Editorial Board of the Bulletin of Indonesian Economic Studies (Anne Booth, J.A.C. Mackie and Thee Kian Wie), during which he discussed his career and his views about the economic and social problems facing Indonesia.

© 2003 Institute of Southeast Asian Studies, Singapore

Reproduced from Recollections: The Indonesian Economy, 1950s-1990s, edited by Thee Kian Wie (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at < http://bookshop.iseas.edu.sg >

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6 SARBINI SUMAWINATA

EARLY LIFE AND EDUCATION

I was born in Madiun, where I received my primary and junior high school education. On graduation from senior high school (Algemene Middelbare School, AMS) in Yogyakarta, I enrolled in civil engineering at the School of Engineering (Technische Hogeschool, TH) in Bandung. However, not long afterwards the Japanese occupied Indonesia, and I and most other Indonesian students dropped out of the TH, reluctant to study at what had become a Japanese-sponsored institute. Convinced that the Japanese occupation would only be temporary, we set up an informal study group to prepare ourselves for independence. The group included some former cadets from the Dutch Military Academy in Bandung, including Nasution. As most of us were engineering students, each prepared himself to be proficient in a particular field of engineering. Wiweko, who later became the director-general of the national airline

Reprinted from Sarbini Sumawinata, “Recollections of My Career”, Bulletin of Indonesian Economic Studies 28, no. 2 (August 1992): 43–53, with kind permission from the publisher.

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company, Garuda Indonesia, decided to study the iron and steel industry. I chose to work on economic planning, an area I had become interested in after reading an article in a Dutch engineering journal about the Gosplan (central planning) in the Soviet Union. I knew nothing about economics at the time, but I had developed some ideas about this subject. I had a very happy family life, although we were from a lower middleclass family. My father was a technician at the Office of Public Works in Madiun. Growing up in Madiun, I became aware of Dutch colonial rule at an early age, and of the existence of social differences between us and the Dutch. We were also aware of Sukarno and his campaign for freedom, and became nationalists even in our early teens. In fact, there was already an atmosphere of revolt at that time. During the revolution I went to Yogyakarta to resume my engineering studies at a Technical Institute which was later to become the Faculty of Engineering of Gadjah Mada University. I had decided to switch from civil to mechanical engineering, but unfortunately there were no mechanical engineers on the faculty, so I was stalled in my study, while others, including Sadli, were able to graduate as civil engineers. In 1947, however, an offer came to continue my engineering studies in India. I was enrolled in one of India’s best universities, the Hindu University of Benares. As I had become interested in economics, I asked to be admitted to the economics department of the Faculty of Engineering, having in mind the department of business economics (bedrijfseconomische richting) at the Technical University in Delft, the Netherlands. Unfortunately, the University of Benares did not have such a department, so without beginning my studies I returned to Madiun in 1948, just after the PKI (Indonesian Communist Party) had launched its abortive coup. EARLY CAREER AND ECONOMICS EDUCATION

While I was still attending lectures at the Technical Institute in Yogyakarta during the revolution, I had also joined the Ministry of Economic Affairs as an employee, because of my growing interest in economics. After the Dutch recognition of Indonesian independence on 27 December 1949 I went to Jakarta, and in 1951 I was sent to Paris as a technical member of the Indonesian delegation to a United Nations conference.

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Afterwards, with the consent of Wilopo, who was then Minister of Economic Affairs, I went to The Hague to work with the Central Planning Bureau (Centraal Plan Bureau) under Professor Tinbergen. It was here that I had my first exposure to economic theory. I wanted to work at the Planning Bureau in the Netherlands because I had been placed in the planning section of the Indonesian Ministry of Economic Affairs, and was scheduled to replace its Dutch head. Knowing little about economic planning, I sought this opportunity to study its problems and to learn about national income and its distribution. When I arrived in The Hague, I asked the head of the economics section of our embassy to put me in touch with Professor Tinbergen, who gave me a warm welcome. After one year at the Central Planning Bureau, I went to Washington DC, where I was attached to the Indonesian Embassy as a staff member on study assignment (tugas belajar). I fulfilled this assignment by visiting economic experts at the World Bank, the International Monetary Fund (IMF), the US Department of Agriculture and the like, discussing with them problems of economic development, particularly those faced by Latin American countries, with which many of the experts I talked to were familiar. At the US Department of Agriculture I was interested in learning more about the agricultural price support (parity price) policies of the US government as they related to the country’s terms of trade. As part of my study assignment in Washington DC, I also took courses in economics at The American University. My examination results led an American consultant to the Indonesian embassy to suggest that I enroll for a degree in economics, rather than just take courses. After some difficulties, which arose from my having no formal economics degree and being unable to stay the two years required for the course, I went to Harvard University to study for the Master’s degree in economics, and was able to finish the program within one year. Professor Alvin Hansen was chairman of my examination committee, and Professors Edward Chamberlin and Guy Orcutt were examiners for economic theory and statistics respectively. During my study at Harvard I took courses with Professors Gottfried Haberler, Alvin Hansen, Edward Chamberlin and Wassily Leontieff. Haberler and Leontieff in particular impressed me greatly.

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Sarbini Sumawinata THE BPS PERIOD

After I had finished my Master’s study at Harvard, I received a cable from the Ministry of Economic Affairs in Jakarta instructing me to return to Indonesia immediately to replace the then Dutch director of the Central Bureau of Statistics (BPS). I replied that the BPS was no place for an economist like me, but that if they insisted, they should let me at least see how a large, well run statistical office was managed. My request was granted and with a scholarship from the Canadian government I went to Ottawa to work for three months at the Dominion Bureau of Statistics (DBS). While there I met Nathan Keyfitz, who was then the senior statistician at the Bureau. Because my visit was so brief, I did not concentrate on statistics as such, but rather on the problems of organisation and management of a statistical bureau. I returned to Indonesia in 1955 to become head of BPS, a post I held for almost eleven years. That gave me the chance to reorganise the Bureau and try to transform it from a relatively small and very centralised office into an agency which could collect statistical data throughout the whole country. I set up sections in all the provinces, right down to kecamatan (sub-district) level. Thus we had thousands of branch offices all over the country, but alas without statisticians. During the Dutch colonial period the Central Statistical Office (CKS) consisted of only one branch. The professional statisticians there were Dutch, while the middle and lower-middle level employees were Indonesian. The latter received training in data compilation, the lowest level of statistical work. In a relatively small office with a couple of hundred employees charged with producing a variety of statistics, there were not many people to collect data directly from primary sources. I thought the best way to start at BPS was by collecting data generated as a by-product of public administration, including statistics on administrative and policy questions and on economic matters such as the production of various commodities, rice prices and the like. The data we collected at that time were not very reliable. The degree of reliability was dependent on the source of the data — the administration — rather than on the quality of the BPS employees. A high degree of discipline on the part of the administration would have facilitated the generation of more reliable data. The CKS during the colonial era functioned well, because the Dutch colonial administration was well managed. Most of the employees

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of the BPS during my time had been employees of the CKS and still had the discipline they had acquired while working under the Dutch. Discipline and honesty in public administration were quite high, certainly higher than today, although still lower than during the Dutch colonial administration. This was because the controlling layer (pimpinan), generally had less education than the Dutch. I am afraid to say that culturally we were not yet up to the standard of strict discipline maintained during the colonial period. While in charge of the BPS I used to participate in annual conferences on statistics in Bangkok organised by ECAFE (the Economic Commission for Asia and the Far East).1 Most of the participants were, like me, new to their jobs, and by participating in these conferences I gained a much better understanding of the business of collecting statistics, including the problems of holding a population census. None of us was really a trained statistician in the modern sense of the word. It was only when we were making preparations in 1959 and 1960 for the Population Census of 1961 that we had the chance to set up a nationwide operational organisation.2 This meant establishing branch offices of the BPS in every province, the Kantor Statistik Propinsi (Provincial Statistical Offices). To prepare for the Census two or three people from each provincial office, including the head, were required to attend a series of conferences organised by the central office of the BPS. In these conferences, attended by about 60 people, the participants were informed about the meaning and importance of the Census, and were given technical instructions and reading material. In turn, the provincial offices were required to organise similar conferences in their respective provinces to instruct the statistical officers at the kabupaten (district) and kecamatan (sub-district) levels about the Census. Around that time the BPS acquired a simple computer (Univac 1004), for which the information on the Census forms had to be transferred to punch-cards. This was very time-consuming, and required well trained punchers. Eventually we purchased better computers, but they still required the same manual procedure of transferring the information to punch-cards. There were of course more modern computers which could read or sense the information from paper and did not require the punching of cards, but at the time we could not afford machines of this type.

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Nevertheless, we were able to produce the provisional Census results quite speedily. It was such an event that Djuanda (the First Minister) himself announced the results: for the first time Indonesia was recognised by the United Nations as having one of the largest populations in the world. During the late 1950s we were busy with preparations not only for the Population Census, but also for the Agricultural Census, the Industrial Census, and the National Socio-Economic Survey (Susenas). However, we were not yet involved in producing national income statistics. That work was initiated by the Biro Perancang Nasional (National Planning Bureau), which had recruited an expatriate expert, Dr Daniel Neumark, assisted by an Indonesian economist, Mulyatno, to produce the first national income accounts of independent Indonesia. Later on this work was indeed taken over by the BPS. One of the first things I did at BPS was to establish an Academy of Statistics (Akademi Statistik) which provided a three-year training course for graduates from senior high school. The lecturers at the Academy were all foreigners, statistical experts from Finland, Sweden and India, all of whom were recruited and paid by the United Nations. At the Academy the young employees of BPS were given courses in modern statistics and survey methods, particularly sampling techniques. THE ISEI CHAIRMANSHIP AND THE LAST YEARS AT BPS

By the early 1960s Sukarno and the Indonesian Communist Party (PKI) were trying to concentrate everything under their command, on the basis of Sukarno’s Manipol (Political Manifesto). This attempt extended to those government bodies and organisations of university graduates (ikatan sarjana) considered most important by the Party. Foremost among them were the BPS on the one hand and the Association of Indonesian Economists (ISEI) on the other. At that time I was not only head of the BPS, but also chairman of ISEI, so I had to face the PKI’s attempts at control on two fronts. Communists consider the bureau of statistics very important, and by the early 1960s, Aidit, the chairman of the PKI, and his cohorts had decided that the BPS had to be under their control. To this end they made several attempts to have me replaced by Ir. Sakirman, a prominent PKI

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leader and an engineer by training. I do not think the PKI had their people within the BPS at that time. I resisted pressure from various government ministers to resign voluntarily, but about three weeks before the Gestapu (30 September Movement) affair I received a letter of dismissal, stating that I was relieved of my duties (dibebas-tugaskan) as head of BPS. I remained a professor in the Faculty of Economics at the University of Indonesia (FEUI) and a government official attached to the State Secretariat. Luckily, the PKI failed to gain control of the BPS. For a long time no new head was appointed, but my former deputy was made acting head of the Bureau. Although like most Indonesian employees at the BPS he had no formal training in statistics, he had been on the staff of the CKS during the colonial period; at the time of my dismissal he was the most senior person at BPS and thus an obvious choice to be put in charge. I was also urged to hand over the chairmanship of ISEI to Carmel Budiardjo, a graduate from FEUI, and a card-carrying member of the PKI. I was able to defend ISEI against the PKI with the assistance of a group of economists trained at Gadjah Mada University and the Rotterdam School of Economics, and managed to prevent the Party from taking over the chairmanship. I put forward a compromise candidate for chairman, namely Mulyatno, who was, I think, a member of HSI (Himpunan Sarjana Indonesia), the Association of Indonesian University Graduates, which was controlled by the PKI. However, in my view, Mulyatno was too rational to be a true communist; he became the new chairman of ISEI, which was thus saved from communist control. ISEI refused to support and participate in a major economics meeting initiated by the PKI, even though the meeting was sponsored and attended by President Sukarno. THE DEKLARASI EKONOMI (DEKON)

Those of us who were formers members of the Partai Sosialis Indonesia (PSI), the discredited Indonesian Socialist Party, were of course persona non grata to President Sukarno. But Subandrio, the Deputy First Minister and Minister of Foreign Affairs, was very close to Soedjatmoko,3 their friendship dating back to the revolutionary period in the late 1940s, when they were both staff members of the delegation of the struggling Republic of Indonesia to the United Nations in New York. One day Subandrio came to Soedjatmoko and asked him for his help in formulating a new economic

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program for Indonesia. That meeting took place at a time when Soedjatmoko and I were members of a group which met regularly to discuss the problems facing our country, particularly the political problems. I was the economist in that group. Soedjatmoko discussed with me Subandrio’s need for an economic program for the nation. He and I and some others who were consulted agreed that it might be politically important for us to accede to Subandrio’s request, because we saw it as an opportunity to drive a wedge between Sukarno and the communists. This wedge would be an economic program which would, we hoped, jeopardise the struggle of the PKI to make the whole country communist, by drawing attention to its economic problems. In highlighting the economic problems, we could also highlight the problem of state control. The focus of the economic program was to be deconcentration (dekonsentrasi), which actually involved what we now call deregulation and debureaucratisation. Hence, the acronym ‘Dekon’ referred not only to deklarasi ekonomi (economic declaration), but also to the focus of the program. We used the term deconcentration, and not decentralisation, because the latter might not have been acceptable to Sukarno. In our draft of the Dekon we also dwelt on the issues of freedom and creativity. As an intellectual product, the Dekon was a combination of Soedjatmoko’s and my views, with Soedjatmoko dealing with the social and political issues, such as democracy,4 freedom, creativity of the people, and so forth. When Subandrio read our draft, he was elated and exclaimed: ‘This is just what we need!’ As we had expected, however, the PKI was furious and fought against it. Very cleverly, they nevertheless accepted the whole draft, and suggested that a few points be added at the beginning. In the official Dekon that was eventually presented by the government, the ‘real’ Dekon which we had formulated began at about point 13, while the opening points were the items suggested by the PKI. What they did to achieve this was very simple: they agreed to the proposed draft of the Dekon, but insisted that we accept the statement that the national struggle consisted of several phases, and that Indonesia was now (in 1963) going through the national-democratic phase of the people’s struggle. In this phase, the focus should be on anti-imperialism. So the Dekon — at least ‘our’ Dekon — was completely neutralised, and nothing came of ‘deconcentration’ and ‘debureaucratisation’.

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Recollections THE SECOND ARMY SEMINAR OF 1966

Soedjatmoko and I also cooperated in writing a paper on ‘The Problem of Political Stabilisation’ [Masalah Stabilisasi Politik] for the Second Army Seminar held in Bandung on 25 August 1966, during the early days of the New Order. The Seminar was organised by the late Lt General Soewarto, then head of the Army Staff and Command School (Sekolah Staf dan Komando Angkatan Darat, Seskoad). Its purpose was to discuss three areas: political, economic and military issues. To write papers on these three sets of issues, Lt General Soewarto formed three ‘syndicates’, including a number of people whose work he knew because they had taught at Seskoad. For example, the economists’ team consisted of people such as Widjojo Nitisastro, Mohammad Sadli and Emil Salim, while the political team included Selo Soemardjan and Fuad Hasan. I believe the aim of the Seminar was to look for ideas from outside Army circles. The Army knew what it did not want, for example, communism, but was less sure about where to go from there. I think that I and the other economists and social scientists were recruited to speak at the Seminar because we were considered to be rational and anticommunist. The three ‘syndicates’ were chaired by members of the military, so the chair of the political section was Major-General Darjatmo. However, the speeches were all given by the vice-chairmen, who were civilians. Hence, I gave the speech for the political team and Widjojo the economics speech. The first reaction to our speech came from the late Soedjono Hoemardani who remarked that it was very daring, perhaps because we mentioned the danger of creeping militarism, the need for an equal partnership between military and civilians, and the need for press freedom. (The term ‘creeping militarism’ came from Soedjatmoko.) Another comment came, I think, from the then commander of the Military Police (CPM), who described the speech as ‘hair-raising’. I think what he meant was that it was rather offensive. ECONOMIC AND OTHER IDEAS

I started out as a strong believer in economic development. To me this meant investment and technical assistance, which were the very same ideas underlying the Point 4 program of President Truman and later the programs

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of the various United Nations organisations. We were all good students of Harrod and Domar, Rosenstein-Rodan and others such as Raul Prebisch (although I think his views were rather beside the point of development itself ). In the late 1950s, however, I was exposed to the social and cultural aspects of development, perhaps because of my close association with Soedjatmoko. To put it simply, development is not just economic development, not only building roads and factories: there is the problem of social justice and the problem of cultural underdevelopment. There may be disagreement about the use of this latter term, but what I understand by it is that if we view development as change from an agricultural to an industrial culture, then we must overcome the problems of cultural change. In this sense culture becomes an integral part of development and should not be ignored. If we look at the history of the development effort, for instance as reflected by the development programs of the United Nations, we see that after more than three decades of economic development most Third World countries are still struggling with the problems we were facing at that time — poverty, unemployment, misery and widening gaps between rich and poor. In fact, certain gaps have become wider. What then is the meaning of development, if those essential problems of the Third World are still with us? We may be technically more advanced, but the problems faced by the majority of people have changed little. This has led me to think that development, as conceived and implemented by the so-called developmentalists, and as reflected by their concentration on growth, investment and rising productivity, was simply not enough. Of course, these goals are necessary, but if you neglect the other aspects of life, then you not only do not solve these problems, but the unsolved problems can become obstacles to further development at a later stage. If the social and cultural development of our society remains as it is, or is turned back, then the whole educational effort to date will produce a population which is technically better educated, but culturally with still the same mental attitude, which may become an obstacle to development. You can have well trained engineers or economists and the like, but if they still have a feudal or traditionalist attitude, you cannot expect them to offer leadership or management which is conducive to industrial development.

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I am now convinced, through education and experience, that a market economy is more productive and efficient than a centrally planned economy. The extent to which a market economy should be free must, however, be considered case by case. I joined the Indonesian Socialist Party (PSI) because I was attracted to certain essentials of socialism, but I no longer adhere to any doctrine. I am against doctrine, including socialist doctrine. However, I still adhere to the essential principles of socialism — democracy, social justice, and populism, the latter term meaning the need to side with the people. Any development of Indonesia will have meaning only if it is oriented towards overcoming the problems faced by the people, towards helping the people. These principles are in essence what have remained in me as a socialist. Notions such as emphasis on state enterprises, opposition to private enterprise, or preference for a planned economy, I consider as doctrines, which are against my intellectual convictions. If you want to help the people materially and culturally, and at the same time invest in them in real terms, you must give them better tools to increase their productivity and ability to improve their own lot. That is why, in my view of industrialisation, the industrialisation of the village has become central as a means not only to improve the productivity of the rural population, but also to bring them into modern industrial society. This will not be achieved by slogans or by persuasion, but by exposing them to the real industrial world. That is why I believe you must industrialise all the way down to the village. A development plan which is oriented toward the people would concentrate the development effort on a large scale in the rural areas. Of course urban areas and harbours also need to be developed properly, but in accordance with and oriented toward the development requirements of the rural areas. Especially in the establishment of basic industries, export industries and large-scale mass production industries to support the industrialisation of the rural areas, the most sophisticated technology must be adopted in order to achieve the highest productivity and efficiency and to guarantee competitiveness in the international marketplace. Rural industrialisation in this context must be viewed in a wider sense than merely the establishment of factories. It must aim at the mechanisation

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of all economic activities including agriculture, manufacturing and transport, by introducing intermediate technology and gradually upgrading it to modern technology. Activities such as commerce and public administration will also be modernised in the wake of rural industrialisation. The successes in various fields which have been achieved to date are in the first place the successes of the Indonesian people, the result of their willingness and ability to adapt. These achievements should demonstrate to everyone, first, the intelligence of the Indonesian people, and second, that in every situation they reserve for themselves a certain degree of freedom. The Indonesian people have never been completely colonised by anyone. Freedom is important to them, and this is, I believe, the essential ingredient in the successes achieved in the rural areas, including rice production, family planning and other matters close to their own interests. It is therefore unfortunate if the rural people’s intelligence and love of freedom is not developed in further positive directions. The Green Revolution has shown that if modernisation is introduced on a large scale and in an intensive way over a long period of time, the Indonesian people are flexible and intelligent enough to adopt it. If this was the case with the Green Revolution, why should it not be so with industrialisation and other forms of revolution toward emancipation? DEMOCRACY AND DEVELOPMENT

With the possible exception of Malaysia, all other cases in this region contradict my views in that democracy follows development rather that the other way round. However, where there is no democracy, development gets stuck. Eastern Europe and the USSR became stuck in the middle of the road, and their development slowed down. When there is no democracy, there is a problem of motivation of the people, of creativity, and all the other things that go together with freedom. On the other hand, in cases such as Japan, where the people are living within a relatively limited area and are culturally homogeneous, it seems to be possible to drive them with regimentation. My own personal experience indicates that the Indonesian people would not be very happy with such regimentation. Compared with the people of India, for instance, Indonesians have always had greater freedom, even now. In speaking about freedom, I am not limiting myself to political

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freedom: freedom must be viewed in a broader sense. I go back to ourselves, the Sarbinis, the Sadlis, and so forth; wherever we were or are, it was freedom that made us as we are. We have never been regimented, have never been ordered to think in a certain way. It was freedom which gave the intellectuals their development. In speaking about democracy, I do not view it in a doctrinaire fashion, but in an essential sense.

NOTES 1 Now ESCAP (the Economic and Social Commission for Asia and the Pacific). 2 The Census was originally to be held in 1960, but was postponed until 1961, largely for technical reasons. It was certainly not postponed for political or economic reasons, as some have suggested. In fact, the timing of the Census was also discussed at the ECAFE conference on statistics in Bangkok. 3 One of Indonesia’s most distinguished intellectuals and a former PSI member. 4 I think the term demokrasi ekonomi (economic democracy) is from the Dekon — certainly it had already been introduced before the People’s Consultative Assembly (Majelis Permusyawaratan Rakyat, MPR) used it in its Resolutions of 1968 on the General Guidelines for State Policy (Ketetapan-ketetapan MPR tentang Garis-garis Besar Haluan Negara).

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Mohammad Sadli

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Mohammad Sadli, Professor Emeritus in the University of Indonesia’s Faculty of Economics and Chairman of the Institute for Research and Development (LP3E) of the Indonesian Chamber of Commerce and Industry (KADIN), is one of the group of economists who fashioned Indonesian economic policy under the New Order government after it took power in 1966. He was Chairman of the Technical Committee for Capital Investment (1967–73), Minister for Manpower (1971–73), Minister for Mining (1973–78), Secretary-General of KADIN, and later LP3EKADIN’s first director. Despite retiring from the University in 1987, Professor Sadli continues to write and give seminars in Indonesia and abroad. In 1992 he granted an interview to Thee Kian Wie and Chris Manning of the BIES Editorial Board, and discussed his career, economic policy formulation in the early years of the New Order, and issues such as foreign investment, manpower and labour relations, the 1975 Pertamina crisis and government–private sector interaction.

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Reproduced from Recollections: The Indonesian Economy, 1950s-1990s, edited by Thee Kian Wie (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at < http://bookshop.iseas.edu.sg >

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7 MOHAMMAD SADLI

EARLY LIFE AND EDUCATION

I was born in Sumedang, West Java on 10 June 1922. After attending a Dutch primary school I studied at the Hogere Burgerschool, HBS (Dutch secondary school) in Semarang, graduating in 1940. I then enrolled in civil engineering at the School of Engineering (Technische Hogeschool) in Bandung. The best part of my Dutch education was the five-year HBS, which was thorough and broad. I am thus a product of Dutch prewar education, which has been an important influence on my career. I did not continue my engineering studies during the Japanese occupation, but went to Yogyakarta to become a teacher. Those years were another important influence in my life: through my contacts with other young people such as Sarbini Sumawinata I became interested in politics and economics. Because the Japanese had banned the use of Dutch, my

Reprinted from Mohammad Sadli, “Recollections of My Career”, Bulletin of Indonesian Economic Studies 29, no. 1 (April 1993): 35–51, with kind permission from the publisher.

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friends and I for the first time had to converse in Indonesian; during the Dutch colonial period, we had spoken either Dutch or Javanese. Even though I had never been a political activist during my student days in Bandung, I and my friends in Yogyakarta were immediately drawn into the fight for Indonesia’s Independence in 1945. During the revolutionary period after Independence, I resumed my studies in the School of Engineering at the newly established Gadjah Mada University in Yogyakarta, and graduated in 1952. I taught theoretical mechanics at this School for one year, and in 1953 went to Jakarta at the invitation of Professor Sumitro, who was then Dean of the new Faculty of Economics of the University of Indonesia (FEUI). EARLY CAREER AND ECONOMICS EDUCATION

I wondered how Professor Sumitro had come to know about me. Perhaps it was through friends, and because in Yogyakarta, as my interest in economics developed, I had begun writing articles about economic problems in student magazines. After I had joined FEUI, I was given a chance to participate in the Harvard Summer Seminar Program organised by Dr Henry Kissinger, then a young assistant professor. This involved a six-week course on economic development, and was my first encounter with American economics. While at Harvard, I heard about a research project on three countries — Italy, India and Indonesia — being conducted by the Center for International Studies of the Massachusetts Institute of Technology (MIT), which, like Harvard, was located in the town of Cambridge, Massachusetts. The Head of the Indonesia Project was Professor Benjamin Higgins. Because of this Project, I wanted to study economics at MIT. My hope was realised when I received a scholarship in 1954 from the International Cooperation Administration (ICA), the American government’s foreign aid agency.1 Although I had not had an undergraduate training in economics, I was allowed to pursue postgraduate economic studies on the strength of my engineering degree. MIT at that time offered only a graduate economics program leading towards the PhD degree. Upon successful completion of a one or two year course, a BSc graduate was awarded an MSc degree in engineering and economics.

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I was able to finish my Master’s in two years. One of my distinguished professors at MIT was Paul Samuelson, whose approach was completely mathematical. His lectures were based on his PhD thesis, ‘Foundations of Economic Analysis’. Microeconomics was taught by Professor Bishop, who used diagrams with which I had no difficulty. I got an A from Bishop and a B+ from Samuelson, which was good enough for me. The instructor in statistics was Robert Solow who, like Samuelson, won a Nobel Prize for Economics. In the meantime Professor Sumitro had set up an affiliation program with the University of California, Berkeley, financed by the Ford Foundation. My contemporaries, Widjojo, Suhadi and others, had not yet finished their studies at FEUI, so I was given the first Ford Foundation scholarship; after completing my MSc degree at MIT, I went to the University of California, Berkeley, for a further year of postgraduate study. My academic supervisor there was Professor Fred Balderston, a mathematical economist. I used the year at Berkeley to prepare a textbook on industrial economics and to collect material for the doctoral dissertation I wanted to submit at FEUI. In preparing an industrial economics textbook suitable for Indonesian students, I faced a difficulty in that there were no courses in the US which could readily be transplanted to Indonesia. I thought the best way to go about the task was to combine two relevant subjects, industrial organisation and development economics, in particular the economics of industrialisation. I also included material from a course by Walter Isard on the problems of industrial location and transport economics. In this way I tried to give the industrial economics students at FEUI a basic understanding of the workings of the market, industrial organisation, and industrial development in developing countries. TEACHING AT FEUI

When I returned to Indonesia in 1957, I found FEUI almost empty. Widjojo, Suhadi and a number of other young lecturers, having finished their courses there, had just left for the US to do postgraduate study. Professor Sumitro, the Dean, had departed for Padang because of his political differences with the central government, while Professor Tan Goan Po, the Secretary of FEUI and a close associate of Sumitro, was

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making preparations to leave the country. There were only three Indonesian faculty members left to take care of FEUI: Subroto, who had returned from McGill University with a Master’s degree, Maryono, and I. Fortunately, Professor Djokosutono, Dean of the University’s Faculty of Law, who had been teaching Introduction to Legal Science to first-year economics students, was appointed Acting Dean of FEUI, and gave political protection to Subroto and me. Subroto was made Secretary of the Faculty, succeeding Tan Goan Po, while I became Director of FEUI’s Institute of Economic and Social Research (LPEM). The day-to-day affairs of the Faculty were managed by Subroto, Maryono and me. The affiliation program with the University of California, Berkeley, which had begun in 1957 allowed the vacuum left by Indonesian and Dutch faculty members who had resigned because of the West Irian dispute to be filled by American professors and lecturers, including Professor Bruce Glassburner, the head of the University of California affiliation team, Professor Leon Mears, Professor Leonard Doyle, and Hans Schmitt, who was then still working on his PhD dissertation. Hence, most of the faculty of FEUI during this time were Americans. Why was Professor Djokosutono needed to give political protection to Subroto and me? While political pressures at this time were not as bad as in the early 1960s, there was tension because of the conflict with the Dutch, and nationalism had become strident. We needed a senior person who was respected and whom we could trust as Dean, a post for which Subroto, Maryono and I were too junior. When Professor Djokosutono resigned as Acting Dean of FEUI, another senior person was appointed Dean — Professor Soeriaatmadja, who was teaching the courses on Cooperatives and Rural Development. Subroto and I had another problem on our hands: Professor Tan Goan Po’s impending departure required us to finish our doctoral dissertations within a few months. We submitted our dissertations on the same day in November 1957. (Nowadays it is rather more difficult to complete a doctoral dissertation at FEUI!) LPEM–FEUI, which I led during the late 1950s, was established by Sumitro a few years earlier, while I was in Yogyakarta. He had assigned Widjojo, who was still his student, to take care of the Institute, which was then staffed entirely by graduate students. Widjojo’s first field survey for LPEM was conducted in Kebumen, Central Java, and was an important experience for him.

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FEUI was really Sumitro’s creation. He wanted it to be called the Jakarta School of Economics, to have its own identity and philosophical orientation, like the London School of Economics, and to emphasise economic development, not simply economics. In line with this view, which was shared by the other faculty members, he introduced courses such as Cooperatives and Rural Development, to inculcate in students an awareness of economics at grassroots level. The prevailing ideology throughout this period was certainly not an adherence to the free market; rather it was a belief in planning and a strong role for government in promoting economic development and controlling the commanding heights of the economy. There was an attraction to the Indian model of planning, along the lines of Mahalanobis. The theoretical basis of the planning we envisaged was the Harrod–Domar model, which emphasised the great importance of capital investment. Hence the problem was seen in terms of mobilising the required capital funds. It was only at a much later date that we discovered the importance of markets. In 1963–64 I was given another opportunity to visit the US for a year, as a Visiting Fellow at Harvard University, because Widjojo, Ali Wardhana and other faculty members had returned from their postgraduate studies in the US. Upon my return to Indonesia I found that much had happened, and political polarisation had grown worse. Within FEUI there was a political struggle with Carmel Budiardjo and other leftwingers in the Faculty. All these political pressures had to be absorbed by Widjojo who, in the absence of Sumitro, had easily established himself as the unchallenged leader of the younger faculty members of FEUI, because he was the brightest and had the most forceful personality. (Even in the 1950s, when Widjojo was still a student, Sumitro had already identified him as the leading future economist of his generation.) Despite the political pressures facing us from outside and within FEUI itself, which really intensified in 1964, the fraternity of economists was still largely intact, although we needed all our wits to survive. THE LATE OLD ORDER PERIOD

During this dangerous period of the late Old Order, Lt. General Soewarto, Commander of the Staff and Command School of the Army (SESKOAD) in Bandung, and an old friend of mine from the early days in Yogyakarta, invited me and my FEUI colleagues to teach at SESKOAD. He held the

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view that the senior army officers being trained there should be prepared to become social leaders beyond their military roles. To prepare them for this, Soewarto had drawn up a curriculum of which only 50% comprised military courses, while the remainder consisted of economics, law, political science, sociology and philosophy. The economics course was given by members of FEUI, including Widjojo, Subroto, Emil Salim and me, while the course on political science and philosophy was entrusted to staff of Gadjah Mada University; faculty members from Padjadjaran University in Bandung taught the courses on law. Among the senior army officers who followed the eight-month SESKOAD course was General Soeharto, who later became the second President of the Republic of Indonesia. Like the other members of the course, Soeharto obtained his basic knowledge about economics, law, social and political science at SESKOAD. At first the relationship between the military and the academics was exploratory, but over time the bond became institutional because of the regularity of the courses, which were later given at SESKOAU and SESKOAL (the Air Force and Navy Staff and Command Schools) as well. However, the Army was the most committed to the curriculum given at SESKOAD; it viewed the non-military courses as an essential input in preparing the Armed Forces for the dual function (dwifungsi) they were expected to perform — their military and their political and social roles. The institutional links between the military and the academics which developed as a result of these courses at SESKOAD, SESKOAU and SESKOAL became an important part of the military–civilian alliance which in 1966 overthrew the Old Order (Orla) government and established the New Order (Orba). THE EARLY YEARS OF THE NEW ORDER GOVERNMENT

The basis for the economic policy to be pursued by the New Order government was laid at the Second Army Seminar, held in Bandung on 25 August 1966, during the early days of the New Order.2 This Seminar was arranged by Lt.General Soewarto to prepare a program for the Army in the New Order, and was to discuss three major sets of issues facing the country: the political, the economic and the military problems. Seminar participants were divided into three groups (called ‘syndicates’). The

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discussions in the economics syndicate were led by Widjojo, who prepared an operational program to deal with the country’s serious economic problems. I was not a member of the economics group; together with Sarbini, Selo Soemardjan and a few others, I was part of the political syndicate. Unlike the economics group, which was under the firm control of Widjojo, our political group was rather loose. I wrote a speech for Soewarto which later formed the basis of a speech given by General Panggabean. I also wrote a paper for the political syndicate on the role of state enterprises. A few months before this seminar, in January 1966, the FEUI branch of the Indonesian Students Action Group (KAMI), which had played an important role in the mass student actions against the Old Order government, had, in cooperation with the faculty of FEUI, organised a ten-day seminar on the economic and social problems facing Indonesia. Both the KAMI–FEUI Seminar and the Second Army Seminar were important forums for the discussion of new economic policy outlines for the New Order government. The KAMI–FEUI Seminar was referred to as the ‘Tracee Baru’ (New Path) Seminar, because for the first time policy measures to deal with Indonesia’s serious economic problems could be discussed openly and realistically without political pressure. Widjojo, Ali Wardhana, Emil Salim, Selo Soemardjan and I all presented papers at the ‘Tracee Baru’ Seminar. My own paper dealt with structural economic and monetary issues, specifically inflation, price relationships, the bloated government bureaucracy, declining exports, and Indonesia’s state of mind, which was too much focused on political targets rather than on the solution of the country’s structural economic problems (Sadli 1984). The Second Army Seminar in Bandung was even more important in the early history of the New Order, because it presented to the Army leadership — the crucial element in the New Order — a ‘cookbook’ of ‘recipes’ for dealing with Indonesia’s serious economic problems. General Soeharto as the top Army commander not only accepted the cookbook, but also wanted the authors of the ‘recipes’ as his economic advisers. And so we became members of the team of economic advisers of General Soeharto, who in 1968 was appointed by the Provisional People’s Consultative Assembly (MPR Sementara), the highest legislative body in Indonesia, as the Acting President of the Republic. The team of economic experts to the President (Tim Ahli Ekonomi Presiden Republik Indonesia)

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consisted of Widjojo, Subroto, Ali Wardhana, Emil Salim and me, and was of course led by Widjojo. THE ROLE OF THE ECONOMIC ADVISERS

Widjojo proved to be the right leader for the team. He not only had a sound conception of the appropriate economic program for the country, but he also knew how to play a political role that would achieve the desired ends. Emil Salim too proved to be politically adept, having been a prominent student leader. I myself was not very good at this, as I found myself to be too much of an economist. Over the years the team of economic advisers, who came to be known as ‘the technocrats’, grew into a cohesive group under the strong leadership of Widjojo. Its members were together for a long time, and, particularly during the early days, met often to discuss the broad direction of economic policy, as well as the measures needed to restore macroeconomic stability and to rehabilitate the Indonesian economy, including the decrepit physical infrastructure. After macroeconomic stability was achieved in the late 1960s and the most urgent rehabilitation of the economy had been completed, the team continued to meet often to prepare the First Five-Year Development Plan (Repelita I) for the period 1969/70–1973/74. Widjojo assigned every member of the group a specific operational task. I was put in charge of promoting domestic and foreign investment, which had become important after the enactment of new Foreign and Domestic Investment Laws in 1967 and 1968 respectively. Following the enactment of the Foreign Investment Law, the New Order government established a Technical Team for Foreign Investment (Tim Teknis Penanaman Modal Asing). I was appointed its first chairman. As members of this team, I and my associates, including Suryo Sediono, Soehoed, Pamungkas and Priasmoro, were assigned to collect information about prospective foreign investors and their investment plans. This information was submitted to the Cabinet, which decided whether to approve the planned investment. The Technical Team was also put in charge of foreign investment promotion. In the early 1970s the economic advisory team as a think tank ceased to exist, with each member concentrating on his special assignment. Only at times such as the Pertamina crisis did the group come together — one

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of Widjojo’s major strengths was crisis management. After the crisis was over, everyone went his own way again. However, because of the importance of relations with the World Bank and the IMF, an inner group emerged among the economic advisers. Its members were those in charge of the Coordination of Economic, Financial and Industrial Affairs (Ekuin), Finance, the Central Bank (Bank Indonesia), and the National Planning Board (Bappenas). Those in charge of other areas such as foreign investment were really outside this inner circle. After all, in those days the big decisions and the major efforts concerned the problem of obtaining official aid (ODA) from the Western donor countries (including Japan) which had formed the Intergovernmental Group on Indonesia (IGGI) under the chairmanship of the Netherlands. It was this inner group which was in charge of maintaining good relations with the IGGI. (Before the IGGI, of course, we had the problem of rescheduling the debt we had inherited from the Old Order government; this was deftly handled by Widjojo and Emil Salim, with important roles being played by Sultan Hamengku Buwono IX and Frans Seda, then Finance Minister.) In the matter of foreign investment, the Technical Team largely acted like fishermen; we just waited. Relations between the technocrats and the representatives of the IMF and the World Bank in Indonesia were very good and grew more personal over time. The IMF’s chief representative in Indonesia was Kemal Siber, a Turk, while Bernard Bell was the chief representative of the World Bank Mission. Widjojo, Emil Salim and Sumarlin developed close relations with both men, based on mutual trust and respect. Perhaps this was partly because they too were academic economists, and hence spoke the same language. Another important reason was the full support which President Soeharto gave to the economic technocrats, which shielded them from outside political pressure and enabled them to do their job properly. Because the Indonesian military in general had also accepted the economic program prepared by the technocrats, they did not interfere with our work. During the early 1970s the first rumblings began among the students, who were having doubts about the benefits of foreign investment. In those early days, however, the technocrats could still talk with the students, particularly the economics students, because we were their teachers. However, by 1973 the honeymoon between the professors and the students

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was over. In late 1973 Professor Sumitro tried to lead a dialogue between the technocrats and students of the Bandung Institute of Technology (ITB), but it was not a success: in the end Professor Sumitro just left the meeting. While the technocrats could still talk to their own students in Jakarta and win them over, this could not be done in Bandung. After Bandung, relations between the technocrats and the students grew from bad to worse. Where the students of 1966 had been the standard-bearers of the New Order, a younger generation of students emerged in 1973– 74 who were becoming disillusioned with recent economic developments such as the pervasive presence of Japanese direct investment. THE TECHNICAL TEAM FOR FOREIGN INVESTMENT

During the early years of the New Order, attracting foreign direct investment (FDI) to Indonesia was seen as very important in view of the shortage of domestic savings for capital investment, and because the ODA from the IGGI was to be used mainly for restructuring, achieving macroeconomic stability and rehabilitating the run-down economy. Widjojo was very busy with the IGGI, and gave me complete freedom in running the Technical Team for Foreign Investment. Although the ‘open door’ policy of the New Order government was quite different from the ‘closed door’ approach of its predecessor, foreign investment policy recognised the importance of economic nationalism, reflecting a new realism about the need to attract and use foreign capital without sacrificing national sovereignty and the national interest. During the late 1960s I often travelled overseas for investment promotion purposes. It was not a difficult time to attract foreign investment, because Indonesia did not face much competition from other countries. During those years the government had not yet introduced the requirement that FDI could only enter Indonesia in the form of joint ventures (JVs), though we did recommend that foreign investors form JVs with Indonesian partners. Thailand and the Philippines in those days had more restrictive rules on FDI, insisting on local capital participation. Another factor in Indonesia’s favour was the abolition of foreign exchange controls, although even today their complete abolition remains a controversial matter in Indonesia. Some critics argue that a developing country like Indonesia cannot afford an open capital account. But whatever the demerits of an absence of foreign exchange controls, it was a very good thing for foreign

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investment promotion. In addition, we were able to offer foreign investors tax holidays. Thus 100% foreign equity ownership, absence of exchange controls, tax holidays, and the opportunity of exploiting Indonesia’s abundant natural resources were all factors recommending Indonesia as a suitable place for foreign investment. Japanese investors were at first particularly interested in resourceoriented investment, and later in the import substitution industries. Once a foreign investor entered a certain industry, others followed suit. This was very much in accordance with the theory of foreign investment in oligopolistic industries, that once a firm enters a certain industry, its rivals cannot afford not to do likewise. In trying to attract foreign investment, I believed that the most important thing was to lure foreign investors to Indonesia. Once they had entered and made their investments, they could not easily leave: they had become like hostages to us. I was chairman of the Technical Team from 1967 to 1973, but in September 1971 I was also appointed Minister of Manpower, a post I held until 1973, when the Second Development Cabinet was installed. In 1973 the Technical Team for Foreign Investment was reorganised as the Coordinating Board for Capital Investment (Badan Koordinasi Penanaman Modal, BKPM) , with wider responsibilities for promoting and regulating not only foreign investment, but also Domestic Investment. Professor Barli Halim of FEUI became the new chairman of BKPM, while I was appointed Minister of Mining in the Second Development Cabinet. THE DEPARTMENT OF MANPOWER

Why was the Department of Manpower not called the Department of Labour (Departemen Perburuhan)? The term perburuhan (labour) had acquired a bad connotation from the Old Order period, being associated with communist labour agitation. More importantly, the New Order government wanted to stress the role of manpower, or the workforce, as a crucial factor in economic development. From an orientation towards industrial relations, the Department’s emphasis shifted to economic development and the creation of employment. One of my more difficult assignments as Minister of Manpower concerned the role of the labour movement in the New Order. I was looking for a suitable model, since the activities of the highly politicised

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labour unions so common during the late Old Order period were clearly no longer appropriate. The model I considered most suited to the New Order was the postwar West German model; labour unions in that country were not affiliated with the major political parties, but were more like industry-wide labour unions. I did not think the British or American model of industrial relations suitable for Indonesia, as it involved hard bargaining between labour and management before a contract was signed. Indonesia accepts the idea of collective bargaining and collective labour agreements, but not the adversarial bargaining that occurs between American labour and management and the often antagonistic position of labour. At the end of my term as Minister of Manpower in 1973, the All Indonesia Labour Federation (Serikat Buruh Seluruh Indonesia, SBSI) was formed, more or less patterned after the German labour union model. We knew a great deal about the role of the postwar West German labour movement because of the activities of the Friedrich Ebert Foundation (Friedrich Ebert Stiftung) in Indonesia. This Foundation spent a lot of money training labour union leaders in the techniques of collective bargaining. As Chairman of the Technical Team for Foreign Investment, I supported its work because it provided a countervailing power to foreign investors. There was not a similar view that strong labour unions were necessary in domestic investment projects and state-owned enterprises, so almost by design their development in national private and state enterprises was never encouraged very much. Now the situation is different. There are more strikes in domestically owned firms (PMDN) than in foreign firms (PMA) (though there have been disputes in some Korean enterprises). I believe this is because there are no organised labour unions in the PMDN projects. Some of the big PMDN ventures, however, are actually PMA in disguise; for instance, overseas Chinese capital sometimes enters Indonesia through the local Chinese network and is then invested in the form of a PMDN project to achieve greater flexibility. It would be useful to investigate whether the absence or infrequency of strikes in a firm is related to the presence of a recognised labour union and associated collective labour agreements. I believe there is such a relationship. Moreover, where there are collective labour agreements, wages are usually higher than in other firms. After all, the labour market in a developing country such as Indonesia is usually fragmented, and wages

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therefore cannot be uniform. If the labour market were not fragmented, the prevailing wage rate would tend to be low in a labour-surplus economy, which would benefit the foreign investor too greatly. In a fragmented labour market such as Indonesia’s it is difficult for job seekers and enterprises looking for workers to be brought together. The labour market does work, but it is not an open, transparent market which operates efficiently and equitably. The Department of Manpower gained a wealth of ideas about manpower issues from the ILO (International Labour Organisation), whose annual meeting in Geneva I attended every year during my term as Manpower Minister. The ILO has institutions concerned with every aspect of manpower development, which put forward a stream of ideas with which one can become brainwashed. In theory we accepted the views of ILO on such issues as democratic labour movements and basic rights, but our practice had to be integrated into the prevailing system. THE DEPARTMENT OF MINING

Following the first general elections under the New Order in June 1971 and the reappointment of President Soeharto by the newly elected People’s Consultative Assembly (Majelis Permusyawaratan Rakyat, MPR), the Second Development Cabinet was installed 28 March 1973. I was appointed Minister of Mining, a post I held until late March 1978. One of the important problems I faced during my term as Minister of Mining concerned the changes the Indonesian government wanted to make to the original contracts with foreign firms operating in the natural resource-based industries, specifically mining, in order to make them more profitable to Indonesia. The government had signed a ‘first generation’ contract with the American company Freeport Sulphur, which was mining copper in the province of Irian Jaya. Under the terms of this contract, Freeport received a three-year tax holiday, a concessionary tax rate of 35% for the following seven years, and an exemption from all other taxes or royalties except for a 5% tax on sales (World Bank 1980, p. 10). Soon after this ‘first generation’ contract was signed, however, the government realised it needed to be revised to yield more economic benefits to the country. Hence the ‘second generation’ contracts were made more restrictive and less favourable to the foreign investors, who included the Canadian

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company INCO which was mining nickel in Soroako, South Sulawesi. During my term as Minister of Mining I had the opportunity to negotiate only ‘second generation’ contracts: most of the ‘third generation’ contracts were negotiated after my term was over. With every subsequent generation of contracts, the government tried to squeeze more fiscal benefits from the arrangement, while ensuring that the new contract still remained attractive to the foreign investor. The greatest crisis I faced as Minister of Mining was the Pertamina3 crisis of 1975. From the beginning I found handling Pertamina frustrating. Although it was officially under the Department of Mining, its PresidentDirector, Ibnu Sutowo, was a very senior general. Because of Indonesia’s open capital account, Pertamina was free to engage in all kinds of foreign exchange transactions and many of its projects were financed from abroad. As a result, the company had incurred many dollar commitments over which the government had no control. The crisis broke out in early 1975, when Pertamina was unable to repay some of its short-term debts. It was such a serious national affair that it was taken out of the hands of the Minister of Mining and put under the control of the technocrats in charge of finance, notably Sumarlin. As a result of the crisis, a dispute arose between Ibnu Sutowo and the technocrats about the production-sharing contracts between Pertamina and the foreign oil companies. These contracts involved a 65%–35% profit split between Pertamina and the foreign oil companies; they were designed by Ibnu Sutowo, and were appropriate for the late 1960s and early 1970s when the price of oil was still $3.50 per barrel. When it climbed to $15 and later to $30, the question arose whether this split should be modified to Indonesia’s advantage, or whether Indonesia should uphold the principle of the sanctity of a contract — once a deal, always a deal. Ibnu Sutowo held that Indonesia should adhere to the original contracts Pertamina had signed with the foreign oil companies, because he had given his word to do so even if circumstances changed. The economic technocrats, on the other hand, argued that the Pertamina crisis and swollen oil prices had transformed the situation, and that Indonesia now needed a substantial sum of money to pay off Pertamina’s huge debt: there was no alternative but to modify the contracts. In the end the technocrats prevailed, and the split was changed to 85% in Pertamina’s favour (plus an extra dollar per barrel for the contract with Caltex).4

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The principle of the sanctity of a contract was indeed a very basic issue in dealing with the Western countries, particularly the Anglo-Saxon countries; it was less so with the Germans and Japanese. Resource-rich developing countries, on the other hand, argued that changing conditions must be reflected in the contracts over time. Hence, the evolution from ‘first generation’ to ‘second generation’ to ‘third generation’ contracts with foreign mining companies, including oil companies. The Pertamina crisis was managed by Widjojo himself. The involvement of the financial technocrats, particularly Sumarlin, in the attempts to solve the problem was understandable, because it was the government’s money which had been lost. Before the crisis Ibnu Sutowo held that the foreign oil companies were contractors of Pertamina, not of the Indonesian government, as the contracts had been signed by Pertamina. So the oil output was split between Pertamina and the oil companies according to the agreed ratio, and the proceeds from its sale which accrued to Pertamina were only transferred to the government after a certain period, during which the company could keep the money to spend as it deemed fit. The production-sharing contracts between Pertamina and the foreign oil companies were quite different from the ‘contracts of work’ (kontrak karya) signed by the Indonesian government with foreign mining companies operating in other fields. Because oil was considered a strategic sector, its management was left to Pertamina as the day-to-day overseer. However, in the clash between Pertamina and the government about the change in the production-sharing contracts, the government won on all counts, including the financial autonomy of Pertamina. This was a very important victory for the technocrats as Pertamina had been the bulwark of some of the military. It is to the credit of President Soeharto that he did not give absolute protection to Pertamina, but supported the technocrats, because he saw the necessity of safeguarding state revenues. Soeharto was both head of the government and Supreme Commander of the Armed Forces. However, in times such as the Pertamina crisis he acted like a responsible head of government. I tend to attribute this in part to the persuasive power of the technocrats, particularly Widjojo, in being able to convince the President that he had to act as the head of the government, as well as to Soeharto’s ability to see the country’s long-term interest. (This was again evident during the crisis following the Dili Incident of November 1991, when Soeharto acted as the head of government rather than as a ‘godfather’ to the Army.)

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One might wonder whether the Pertamina crisis could have been avoided if Ibnu Sutowo had not been given so much freedom in running the company. Ibnu Sutowo was older than the President, and had been senior in Army rank and a fighter for Indonesia’s independence. President Soeharto had a high regard for him not only as a general but also as a medical doctor and an intellectual. In short, the President viewed Ibnu Sutowo as a man who could do no wrong. Ibnu Sutowo, on the other hand, may have taken President Soeharto too much for granted. Did the technocrats learn from the Pertamina crisis? Yes, though in fact during the early years of the New Order they had already identified the major problems of Indonesia’s state-owned enterprises (BUMN). One of the results was the 1969 Law on State-Owned Enterprises which classified the BUMN into three major categories according to their specific mission: Perusahaan Umum, Perum (which provide basic services to the public), Perusahaan Jawatan, Perjan (enterprises set up by a government agency to provide a specific service, such as railroads), and Perusahaan Persero, Persero (limited liability enterprises with a commercial orientation). Persero were expected to operate like ordinary commercial enterprises and to be profit oriented. The difficulty with Pertamina was that right from start it resisted being classified as a Persero. As a result of its power, a special law was designed for Pertamina which put it in a separate category, Perusahaan Negara, PN (state enterprise by law). Because of its huge revenues, it was asked to contribute to many extrabudgetary areas, and a special relationship thus developed between Pertamina and the government. After the technocrats had solved the Pertamina crisis, Widjojo designed a new law for Pertamina. This law provided for a Board of Supervisors (Dewan Pengawas), the members of which all had ministerial rank. As Minister of Mining I was made ex-officio Chairman of this Board. Other ex-officio members included the Chairman of the National Planning Board (Bappenas) and the State Secretary (Sekretaris Negara). In this way the power and autonomy of Pertamina were gradually trimmed. First, Pertamina was not permitted to keep revenues from the productionsharing arrangements, but was required to hand them over directly to the government. In the end Ibnu Sutowo was dismissed as President-Director of Pertamina. The dismissal was a personal decision of the President. In his place Piet Haryono, a director-general in the Department of Finance

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who was close to Finance Minister Ali Wardhana, was appointed as the new President-Director. THE ECONOMIC TECHNOCRATS: A PERSONAL VIEW

The economic technocrats were personally not very close to each other. Widjojo was very close to Emil Salim, Ali Wardhana and Sumarlin, but I was more of an outsider, coming from Gadjah Mada. Even Emil Salim was no longer so close to the technocrats after he became Minister of the Environment. The bond between us was more a functional bond. But if important problems such as the Pertamina crisis arose, we worked closely with each other, sitting together all day long to discuss the problem and ways to solve it. This bond was based on loyalty to the group and to the national interest, and may be unique in the economic history of developing countries. We might be critical of each other but we were never disloyal. Even after Widjojo and Ali Wardhana had resigned from the Cabinet, they were always there to advise the younger colleagues who had succeeded them as Cabinet Ministers, particularly in times of crisis. Such a bond of mutual loyalty among technocrats was never duplicated in the other Southeast Asian countries — not in the Philippines and not in Thailand. I think our only weak spot was that we were not good managers. Widjojo did not place much emphasis on management when he was head of Bappenas. He was able to produce the five-year development plans (Repelita) and the Development Budget on time for many years, but Bappenas was not highly regarded as an organisation at that time. INDONESIA’S CHAMBER OF COMMERCE AND INDUSTRY

Until recently the private sector in Indonesia was considered inferior and socially insignificant, perhaps because the first generation of businessmen were as a rule not well educated. Because of the relatively small size of the private sector — the domestic private sector, not the foreign investors — it was no match for the government. But over time Indonesia’s private sector has become stronger and should in the near future be able to match the professional strength of the foreign private entrepreneurs operating in the country. I see the interaction between the private sector and the government as involving a policy dialogue. While the government makes policy for the private sector, the private sector should be able to respond

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and hold a dialogue with the government on an equal footing. But the fruitfulness of such a dialogue depends on parity between the government and the private sector, a parity which did not exist in the past and still has not quite been achieved. When Sukamdani was General Chairman of the Indonesian Chamber of Commerce and Industry (KADIN), he recognised this problem and created a ‘think tank’ for KADIN, the Institute for Economic Research and Development (LP3E), which consisted of people who were not businessmen, people such as academics and professionals. The purpose of LP3E–KADIN was to provide policy inputs to the Governing Board and the members of KADIN, in the form of analyses of domestic and international economic developments. When I was no longer a member of the Cabinet, Sukamdani wanted me to become active in KADIN. Perhaps his idea was ‘to catch a thief with a thief ’, in this case to ‘handle’ government technocrats with a former technocrat. I accepted Sukamdani’s invitation and became Secretary-General of KADIN for three years. After that I remained director of LP3E– KADIN, a post I still hold. In my view KADIN’s effort to become a partner of the government, albeit a junior partner in terms of intellectual strength, has been rather successful. At least there is a growing appreciation on the part of the government of the role and importance of KADIN as an institution representing the private sector in Indonesia. KADIN’s significance is increasing because the private sector has been growing in size, in part because of the rise of the conglomerates. The private sector has now become more respectable. The upcoming generation of businessmen are generally better educated than their predecessors, and over time parity will be established between Indonesia’s private sector and the government. But will the country be better off with parity between a vibrant private sector and the government, with KADIN holding a powerful position somewhat like that enjoyed by Japan’s Keidanren (Federation of Economic Organisations)? Although to some unsuspecting outsiders KADIN may look like a powerful organisation, it has not by any means achieved the pre-eminent status of the Keidanren. As an academic I am rather ambivalent about a powerful private sector. In Indonesia, as in other countries, the private sector sometimes engages in double-talk. On the one hand it adheres to the liberal principle of free markets, but on the other hand each firm likes its particular market to be protected. Private

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businessmen often talk about the national interest, but their public pronouncements and their practice are sometimes at variance. The private sector has in principle supported the government’s deregulation policies, but in practice several manufacturing industries have requested protection for the time being. At present the major issues for KADIN are fair trade, transparency in regulations, stability of government policies and the undesirability of monopolies. As a democrat I believe in a ‘balance of power and influence’, in each power having a countervailing one to ‘put it right and keep it right’.

NOTES 1 Later renamed the United States Agency for International Development (USAID). 2 See also Sarbini (1992); Toruan and Sasongko (1988), p. xxx. 3 Indonesia’s state-owned oil company. 4 The profit split for natural gas, on the other hand, was left untouched because this was a new industry requiring substantial investment.

REFERENCES Sadli, Mohammad. ‘Masalah-masalah Ekonomi dan Moneter Kita yang Strukturil’ [Our Structural Economic and Monetary Problems], KAMI–Fakultas Ekonomi Universitas Indonesia, Jalan Baru Sesudah Runtuhnya Ekonomi Terpimpin: The Leader, the Man and the Gun. Jakarta: Sinar Harapan, 1984, 2nd printing, pp. 98–109. Sarbini Sumawinata. “Recollections of My Career”. Bulletin of Indonesian Economic Studies 28, no. 2 (1992). Toruan, Raymond and Indrawan Sasongko. ‘Tentang Manusia Sarbini Sumawinata’, in Syahrir et al. (eds), Menuju Masyarakat Adil dan Makmur: 70 Tahun Professor Sarbini Sumawinata [Towards a Just and Prosperous Society: Professor Sarbini Sumawinata at 70 Years]. Jakarta: Gramedia, 1988. World Bank. Selected Issues of Industrial Development and Trade Strategy, Annex 5: Direct Private Foreign Investment. Washington, DC: East Asia and Pacific Regional Office, 15 July 1980.

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The Bulletin’s occasional series of interviews with the older generation of economists had so far focused upon those who had served as ministers or held high positions in the civil service. A rather different perspective on economic conditions and economic policy under the Old Order is offered here by one of Indonesia’s veteran pribumi (indigenous) entrepreneurs, Soedarpo Sastrosatomo, best known for his involvement with Bank Niaga and the Samudera Indonesia shipping group. Notable as one of the few indigenous (pribumi) businessmen to have survived in the forefront of business since the early years of Independence, he aimed in his business ventures to be an agent of socio-economic progress, a goal for which he is still working. His experience covers the fields of importing, office machines and computers (Soedarpo Corporation, est. 1952), insurance (Asuransi Bintang, est. early 1955), banking (Bank Niaga, est. late 1955) and, in the transport industry, agencies, stevedoring, shipping and freight forwarding (Samudera Indonesia and associated firms, 1964 onwards). In view of the priority given after Independence to fostering the emergence of an indigenous Indonesian business elite and the generally disappointing results, an underlying theme is that elusive factor of production, entrepreneurship. The interview1 therefore devotes some attention to Soedarpo’s atypical family and educational background, as a prelude to his acquisition of banking skills and foreign contacts during a posting to the United Nations in New York (1948–50). By 1952, when he embarked on a business career, he was still inexperienced but better prepared than most of his contemporaries. The middle sections of the interview focus on the problems of capital formation, import licensing and inflation under the Old Order. Finally, Samudera Indonesia’s role in the development of Indonesia’s deep sea liner shipping is traced from the mid-1960s into the 1980s, showing how, even for a mature enterprise, survival still depends upon a judicious combination of local knowledge, foreign connections, and scarce capital.

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Reproduced from Recollections: The Indonesian Economy, 1950s-1990s, edited by Thee Kian Wie (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at < http://bookshop.iseas.edu.sg >

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8 SOEDARPO SASTROSATOMO

FAMILY BACKGROUND AND EDUCATION

Looking at my family background, some of which I discovered only recently, I can better understand my own unconventional behaviour. If I had been a true son of a village family and had gone on to become a civil servant, I doubt that I would ever have done the things that I have done. Some other gene must have been there, something else must have been passed down. I came from a family of nine children, of whom two eventually went into private business, myself (number seven) and the youngest, Soegianto. My father would have been classified as a government official, but his career reveals some elements which may help to explain why two of his sons were later able to succeed in business. Growing up in a village close to Klaten (between Solo and Yogyakarta) at the end of the 19th century, he was one of the few who went to what is now called a teachers college

Reprinted from Soedarpo Sastrosatomo, “Recollections of My Career”, Bulletin of Indonesian Economic Studies 30, no. 1 (April 1994): 39–58, with kind permission from the publisher.

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(sekolah guru; Dutch kweekschool ), which in those days was something special. His mentor was one of the founders not only of the nationalist study group Budi Utomo but also of the pioneer Indonesian life insurance company Bumiputera 1912. At the time my father graduated, the Dutch government was involved in the ‘pacification’ of the archipelago and needed many government officials to extend the administration. The only source was the sekolah guru — which for Indonesians were the only decent ones in existence. This teacher told my father to apply, because he was too restless for teaching and, besides, he would make more money. He was accepted, put in the service of the Opium Regie (the state opium monopoly) and posted to Buleleng in North Bali (the back door for smuggling opium into Java). Later he was transferred from Buleleng to Pangkalan Brandan in North Sumatra, where in the panglong (coastal timber-cutting settlements) there were many Chinese, all of whom smoked opium. My mother was the daughter of an assistant wedana in Surakarta who was dismissed by the administration for opposing the leasing of the best irrigated riceland to the nearby Dutch sugar mill. Going back further, it turns out that my maternal grandfather was descended from government officials whom Sunan Pakubuwono (of Surakarta) had brought from Demak (Kadilangu) to restructure his administration, because he did not trust the local people. Sunan Kalijogo was buried in Kadilangu, and its people never accepted Dutch rule.2 So from both sides of the family I inherited a rather independent streak. I was born in North Sumatra in the oil field town of Pangkalan Susu in 1920. We then moved to Medan, where I went to elementary school. While in Pangkalan Brandan my father, although a government official, had under the influence of his teacher set up a branch of the study group Budi Utomo. So the atmosphere of our household was already coloured by nationalism. Our house in Medan was frequented by young people who were teachers at Taman Siswa schools (independent nationalist schools) or members of Indonesia Muda (Young Indonesia) and followers of the nationalist Mr Iwa Kusumasumantri, then a lawyer in Medan. These friends of my elder brothers taught us such things as the Indonesian national anthem. In 1929, when I was nine years old, my father died. With our fares paid for by the government, my mother took us back to my father’s village

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near Klaten where there was a place to live, a house with some land around it. She had some money left over because, amazingly for that time — again the influence of his teacher — my father had taken out life insurance through Bumiputera 1912. However, as not one of us nine children yet had a job — only two years later did my eldest brother become a doctor — my mother had to find a good source of income. At first she leased in coconut trees in the village for one or two years and then employed two people to break open the coconuts. In that way, she was able to sell a lot of coconuts. Then, at harvest time, she would buy rice in the field, knowing what quality of rice she was buying. The farmers were always short of ready cash. She would pay the reapers in kind at the end of the harvest, have the padi pounded into husked rice, and then sell it. At the same time, she opened a little general store (warung) selling anything that was needed. That is how we survived. For the daughter of an assistant wedana to be doing such things was almost inconceivable. Both my brother and I started to be independent very early. While in secondary school in Yogyakarta, my brother Soebadio was a clandestine member of Indonesia Muda, which was a proscribed organisation. During a commemorative celebration of the school, this group held a protest, to the great embarrassment of the Dutch director. In those days such a thing was unthinkable. Later, when we all went to the Medical School in Jakarta (Geneeskundige Hogeschool, GH), it was natural that we sat together in a group and did the same sorts of things. In March 1942, when the Japanese landed on Java, the student body split into three: one quite large group believed that the Japanese were liberators and would give us our freedom; the second group was indifferent, and even a bit pro-Dutch; and thirdly, our small group, associated with Sjahrir, regarded the Japanese as fascists. Fascism is something about which you are either very enthusiastic or which you abhor. We abhorred it. This small group formed the core of the student body that revolted against the Japanese, the legacy of which was the student share in the Declaration of Independence. Meanwhile, because of our antics, such as refusing to have our heads shaved, we were expelled from the Medical School. Soedjatmoko was one of us. Sjahrir, who was our leader, realised that the Japanese would never win the war; we could not provide real resistance — that would have been suicide — but we tried to find other people who could keep a clear mind. And we took other initiatives. My brother was arrested by the

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Japanese because, with Takdir Alisjahbana, he had drafted in 1944 the constitution of Indonesia Merdeka (Independent Indonesia). The Japanese wanted to interpret it as a revolt, but it became clear that there was no strength for a revolt, so eventually they were released. FOREIGN SERVICE IN NEW YORK (1948–50)

Our group acquired some proficiency in English during the Japanese time by listening to the foreign broadcasts of the BBC and Voice of America. After the Declaration of Independence in August 1945, Soedjatmoko and I were asked to head the Foreign Section of the Ministry of Information, because at that time we had been dealing mainly with English-speaking foreign war correspondents who came down from Vietnam. When the British came in October 1945, we became the intermediaries between the British and our government, for by then Sjahrir was Prime Minister. Our interpretation of the Linggadjati agreement (the UN-sponsored Dutch–Indonesian accord of March 1947) was that we now had the right to our own foreign relations and foreign trade. Sjahrir therefore sent Sumitro, Soedjatmoko and journalist Charlie Tamboe to New York to represent the Republic as an independent nation and to open trade relations with the United States. After the Dutch had broken the Linggadjati agreement by launching the first ‘Police Action’ of July 1947, our case was brought before the UN Security Council and these people became the core of our observer delegation. As a party in dispute, we were entitled to a seat when our case was being discussed. When the delegation arrived they could find no one in the business world who would even consider talking to the Republic. Then along came film producer Matthew Fox, who thought that he could do a lot of business along the lines of the monopoly foreign trade contract that he had earlier worked out with, I think, Liberia. Sumitro had full powers to sign contracts and he granted Fox a monopoly of foreign trade between the Republic and the United States. We made a lot of foreign exchange through that contract but ran into strong opposition from the State Department. The official line was that the monopoly was out of order but the real concern was that the United States government had no grip on us. So because of this contract there was strain between the State Department and our people right from the beginning. Yet the

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relationship with Matthew Fox was doubly valuable because through him we were able to make many contacts. In 1948 I was asked to join the Republic’s delegation in New York as press officer, and so entered the Foreign Service. What a fascinating time! Everything was up to us. The only instructions were to argue and win the case, to put Indonesia on the map. I landed in New York in July 1948. With the help of Matthew Fox and his friends, by October we had an office at 40 Wall Street, in the middle of the financial district. The achievement was all the more remarkable because at that time racial discrimination was still very strong in the United States and we Indonesians were a ‘coloured’ delegation from an unrecognised republic. I was given the task of administering our foreign exchange, the proceeds of the Republic’s foreign trade. What the Dutch referred to as ‘smuggling’ was trade in the usual export commodities such as rubber and coffee and also in opium. In colonial times the production and trade of opium was a Dutch monopoly (regie), selling mostly to the Chinese. The factory was on the site of the present Economics Faculty of the University of Indonesia — the remains of the railway siding can still be seen at the back. The Japanese did not touch the factory. When we proclaimed Independence, we seized the whole valuable stock and took it to Yogyakarta. With ‘perfidious Albion’ turning a blind eye, the trade went through Singapore and Malaya and from there, and also from cities such as Karachi, Delhi, Cairo, Manila and Bangkok, the proceeds went to other places through New York. Having a lot of funds to invest but knowing nothing at all, on the advice of a friend of a friend I went to a certain bank. To avoid sequestration by the Dutch, I was advised to place the funds in an account under fictitious names but with notarial authority to draw on it. In addition, we were to keep some funds in a safety deposit box. We followed the advice and every month we had to disburse the money. That is how I learned about arbitrage. In 1950, as Bankers’ Trust, that bank became the first correspondent bank of the state-owned Bank Negara Indonesia (BNI), the State Bank of Indonesia. The Republic’s exports to the United States were carried by an American shipping company called Isthmian Lines, which was owned by the United States Steel Corporation. Strangely enough, its Executive Vice-President was a man who supported us. In 1950, just after the recognition of Independence, the Republic was granted a loan of $100 million by the

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United States Export-Import (EXIM) Bank. We regarded this as repayment of a moral debt, the United States having treated us so badly a year earlier after the second Dutch ‘Police Action’ (December 1948, when the Dutch seized the Republican capital of Yogyakarta and imprisoned the Cabinet). It financed a lot of purchases and naturally we shipped them all back with Isthmian Lines, much to the chagrin of the Dutch-flag ‘Kongsi Tiga’ (a consortium of three Dutch lines), which was the other party to the New York/Java conference agreement. I told them point blank: ‘You are our enemies; they are our friends. Why should I patronise you!’ All this led on to my subsequent career in shipping. By late 1950 I could no longer live in what had become a bureaucratic straightjacket. Before, you could do whatever you wanted without consulting anyone. Now, if you were asked to give a speech, you had to write the outline and send it to your superior (i.e. the ambassador) for approval. That was not something I could change. So I tendered my resignation. It was not accepted and I was called home for talks. They knew that I could not get along with the ambassador and assumed that this was the root of the problem. Only Hatta, then acting Foreign Minister, understood my frustration with the bureaucracy, but he asked me to wait. Roeslan Abdulgani, who was Secretary-General of the Ministry of Information, suggested that I tour the rest of the archipelago, getting to know the situation outside Java and perhaps finding someone who could replace me. I did that for three months. Then I went back to New York with the names of two people who could take over my job. After tossing it around, and trying to entice me with postings to London and other attractive places, late in 1950 they accepted my resignation. So I left New York in February 1952, went to Rotterdam on the Rijndam and returned to Indonesia on the Oranje. PRIVATE BUSINESS

Looking around Indonesia for those three months, I had seen business opportunities galore and I was afraid of being too late. At first I became director in a company owned by Matthew Fox called Zorro Corporation (Spanish for ‘fox’). After the recognition of Indonesia’s Independence, he had acquired Indonesian franchises for Dodge, Chrysler and the popular Willys Overland jeep, and at Tanjung Priok had established an assembly

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plant called Indonesia Service Corporation (ISC). The minority Indonesian partner was PT Putera. When Sumitro insisted that ISC should not be under foreign control, the shareholding was rearranged: Hasjim Ning, who had been aide-de-camp to Hatta but had since set up an automobile workshop, was appointed president-director, and I became a director of the Zorro Corporation. Meanwhile Zorro also held franchises for Remington (typewriters and office machines) and Radio Corporation of America (RCA) but could not obtain licences for domestic distribution, because these had to be in Indonesian hands. There were also difficulties with the country representative of Zorro Corporation, who was an alcoholic. So I resigned from Zorro and in October 1952 set up my own trading company, Soedarpo Corporation, obtained the necessary import licences and subsequently took over the Remington and RCA distributorships, splitting the earnings with Matthew Fox, who still held the franchises. In 1958, when Indonesia broke off relations with the Dutch, Soedarpo Corporation also took over the distributorship for Univac computers from the Dutch trading house which had handled all Remington’s business before the War. That is how we got into computers. Meanwhile, I had been really enjoying life. If I worked six hours a day it was plenty. Having started to play golf while in Washington DC, back in Jakarta I had joined the golf club. At two o’clock in the afternoon you would find me on the course in Rawamangun. But in November 1952 some people from Isthmian Lines came to Jakarta. After an enjoyable social lunch, Archibald (Archie) King, the Executive Vice-President, asked that I come that evening to the Hotel des Indes to discuss a few things over drinks. Coming straight to the point, he alluded to past favours, and sought a favour in return: that I take over the Dutch-owned local firm ISTA (Indonesian Shipping and Transport Agency), which acted as their agents, and Indonesianise it. With three ships a month Isthmian Lines wanted to expand the agency but the handicap was its Dutch ownership. The principals had already been told to expect a takeover offer. I had to open negotiations. The two shareholders, Jacobsen van den Berg (one of the Big Five Dutch trading houses) and a Dutch company in Holland, sent out the head of Jacobsen van den Berg and a banker to negotiate. I sought the assistance of the late Professor Tan Goan Po (of the Faculty of Economics at the University of Indonesia). At first the Dutch treated me rather

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suspiciously, as one of those characters who just wanted to pluck the fruits of the Revolution, but we soon got onto a business footing. The Dutch were willing to sell up to 75% of the shares but put a high value on goodwill. I told them that their goodwill was a lot of humbug. If their principal pulled out, there was no goodwill. I already held the goodwill! Besides, I did not really need their company. I was living very happily without it and only making the offer as a favour to their principals. So they consulted, and after a few days we got together again and they accepted my offer. By that time it was February 1953 . On 1 March 1953 I became Managing Director of ISTA with a 75% shareholding. That was the start of my career in shipping. The unspoken rationale behind my negotiations was realised in January 1954 when I was able to secure for ISTA the two important agencies of Hapag (Hamburg America Line, later Hapag-Lloyd, and before the Pacific War the main non-Dutch line to Europe) and Tokyo Senpaku Kaisha (prewar the main Japanese line), which is still operating to Indonesia. The Dutch minority shareholders were happy and this soon led to other ventures. A cousin of the head of Jacobsen van den Berg was also head of the insurance company Nationale Nederlanden 1835. We had played a round of golf and, on the nineteenth hole, he broached the subject of insurance: ‘We need an Indonesian counterpart in the insurance business. The existing Indonesian insurance companies don’t play the game. My cousin told me that I can talk some sense with you!’ After a long talk, I agreed to set up an Indonesian insurance company on condition that the Dutch firm provide us with one of their own people while training two of our staff in Holland. This company, Asuransi Bintang, still exists today. Asuransi Bintang was planned as nothing more than an insurance company but it soon dawned on us that there was not much money to be made just from insurance. We were already in the money business but to make big money out of money you needed a bank to manage that money. That was how Bank Niaga was born. The idea came from our own circle of friends, people like Sumitro, the late Panglaykim, and the late Wibowo, who became the one responsible for carrying out the idea. Wibowo was a former fellow medical student who during the Revolution had become a soldier. Because of his military background, in 1950 he became an adviser to Oerlikon and a representative of Bofors,3 and thereby

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made his money. But he was a true nationalist and did not care about money except as a means to carry out his big ideas. In fact he was a very bad businessman. The man appointed as president-director of the bank, as already of Asuransi Bintang, was Idham, another former medical student — that medical faculty was a breeding ground for entrepreneurs! I became the bank’s chairman and we served together in those positions for 30 years. Both these ventures flowed from the original negotiations over ISTA. The Dutch recognised that there was somebody with whom they could talk business, not one of these ‘revolutionary characters’ who wanted to take everything from them. In the years from 1952 to 1958 (when the Dutch were expelled), we built up a very friendly relationship. When we set up Bank Niaga and needed to gain entry to bank clearing, we went through a Dutch bank, the Nationale Handelsbank (later Bank Bumi Daya), not Bank Negara Indonesia. So it does pay off to be friends with your former enemies! CAPITAL FORMATION

The capital to buy out the controlling interest in ISTA was raised, in the modern jargon, by ‘leverage’. My contribution — about two-thirds — came from two sources, some money set aside and some trading profits. The other third came from the late Sultan Hamengku Buwono IX of Yogyakarta. We were friends, and I approached him. He explained that his policy was not to lend to Indonesian entrepreneurs because of the things he had seen happening, including money lost by the Mangkunegaran (one of the two royal courts of Surakarta), but he nevertheless agreed to subscribe on condition that we never mentioned his name. In 1964, when we were forming the shipping company Samudera Indonesia and needed to give the names of the real shareholders, he waived that condition, saying that it no longer mattered. My own initial capital was raised from currency speculation during the Japanese occupation. After being expelled from medical school, I stayed with my brother in Tasikmalaya (West Java). There I was adopted by an Indian textile merchant, who had been treated by my brother for a serious liver condition. The man was such a bad patient that my brother refused to have anything more to do with him. Taken aback, the merchant came up with the idea that I could supervise him, because

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I was still studying to become a doctor, with ideas of sitting a clandestine exam. That man was a real merchant. What he did was very cheaply to buy up Dutch money, which was no longer valid currency, and to hoard it for better times. In a small way, I followed his example. When I left Tasikmalaya in August 1945 at the time of the Declaration of Independence, I left in his keeping my stock of Dutch money. After my return from America, he came to Jakarta and gave me the money as capital to go into private business. The other part of my capital was the profits from importing (Soedarpo Corporation). It was then a seller’s market. There were a lot of people coming to us, offering the best prices, because they wanted to establish a market in Indonesia. We dealt with a Scandinavian supplier of newsprint and writing paper; later we were distributors for Remington typewriters and RCA. In those days, importing required first of all an import licence and an import allocation, with which you would apply to the Foreign Exchange Institute (Lembaga Alat-alat Pembayaran Luar Negeri, LAAPLN) for a permit to buy foreign exchange at the official rate. Then you would request a pro forma invoice from your supplier for an amount perhaps 10–15% higher than the actual price of the goods, so that you had a way of remitting an additional sum at the official rate. The difference between what you remitted and the actual price would be held by the supplier. In addition, the supplier would allow a good commission — this was a seller’s market — which could also accumulate in overseas accounts (in the currency of the supplier). Meanwhile you used the working capital to import high-priced goods which you could easily resell — I was reselling everything when it was still on the ship — to get money to pay the customs and the bank, and leave just a small margin for expenses. This part you declared for taxation but the profit — still unremitted — was tax free! When eventually you needed to bring home your profits, you created another channel to remit them ‘black’ (at the unofficial rate), which was a further source of capital. Then you had a lot of rupiah! Despite the very rigid foreign exchange controls, it was not difficult for a good importer to generate funds for capital formation. But you had to have an honest supplier who did not walk away with your money. The difference between people like us and the Benteng group (licensed pribumi importers) is that they did not know their suppliers. What they did was to sell their foreign exchange permit for so many rupiah. They never used

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the opportunity to form a real organisation with a source of funds for capital formation. Establishing Asuransi Bintang and Bank Niaga did not require much capital. In each we had some 30 shareholders. Little heaps make a little mountain! There were quite a lot of shareholders but we knew each other. And most of those people are still shareholders today. When somebody died, the heirs would sell their shares to someone else but the group held together. When we set up Bank Niaga, Asuransi Bintang was a shareholder (and still is). There was nothing fancy about it. We met the minimum requirements for paid up capital. The real skill was on the operational side. In setting up Bank Niaga, which was one of the first private banks, the main difficulty was obtaining the banking licence from Bank Indonesia. Fortunately Sumitro was then Minister of Finance, which made it a bit easier. Our office was downtown in Kota (then still Jakarta’s Chinese business district). The practice in Kota then was that if you knew the client, you gave him money in the morning and in the afternoon he paid you back. Or, if you knew him better, you might give him a week at a time. The turnover was quite fast and the interest rate a bit higher, but if you kept the procedures simple, as we did, you built up a good customer base. A lot of firms did not know where to go to buy, so they would use a middleman, but the middleman had no money, so he would borrow from you, buy the goods, resell them to the buyer, and repay you. Most of the business was as straightforward as that. Sometimes a regular client, an importer, would open an account with only a 30% margin and then find that he could not immediately resell and needed more funds to get the goods out of the port. In contrast to the established practices in Kota, what Bank Niaga did was to create a customer base first by offering a lower interest rate to a prospective customer. He would have no collateral but you knew him: as soon as he could dispose of the goods he would repay you. As long as you kept to your regular clientele you could maintain a fast turnover of funds. A little is paid back, and you start using the money for the next fellow and so on. CENTRAL TRADING AND THE BENTENG POLICY

After creating a state, we found that we needed a central bank, and so BNI came into being. The Central Trading Company (CTC) was set up

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by Hatta to generate foreign exchange to finance the Revolution by trading with the outside world — what the Dutch called ‘smuggling’. He entrusted the management to two people who in his eyes were not encumbered by feudal Javanese attitudes. These two directors were both Acehnese, Teuku Abdul Hamid Azwar and Teuku Mohamad Daud — also involved was a man from Palembang, Haji Tahir, who later worked for Pertamina. CTC’s main business was exporting rubber to Singapore, Malaya and Thailand. After Independence it developed into one of the big import-export houses in competition with the Dutch ‘Big Five’. CTC was a success, a good solid company with offices around the world. It fell apart only later when the government made it bureaucratic. At the time of Independence the whole distribution system was in disarray. In the Dutch time distribution had been handled by cooperation between the big Dutch firms and the Chinese. The nationalist view was that we ourselves should be controlling imports and exports. Imports were easy to organise because the government already controlled the issuing of licences. The consequent ‘Benteng’ (Fortress) policy gave rise to a new class of importers. Licences were given to people who were not even remotely businessmen but who believed that they were entitled to enjoy these facilities as the fruits of the Revolution. The result was disaster. Because they did not understand even the first steps of the importing business, not even how to document imports, or how to finance them, they had to turn mainly to Chinese traders who knew the business; but they carried this feudal idea that these traders were an inferior class. The association was therefore hardly a smooth one. It was not a partnership but a civil service situation. The result was the creation of a trading community that was doomed from the beginning. Whatever the impression, there was no switch from central trading to the Benteng policy. The trading houses still carried on the serious business of import-export. CTC was a government apparatus. The Benteng policy was intended to complement this by giving facilities to import essential consumer goods such as textiles to those who would form the basis of a new middle class. From colonial times we had been imbued with the idea that there was no Indonesian middle class. People like Hatta, Sumitro and his father (Margono) all believed this. The idea was to create a real middle class growing out of society itself, not controlled by government, but private. It was also expected that these people would build up good business organisations. But none of that happened.

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I came into business in late 1952 after the Benteng system had been modified and there was no longer privileged and easy access to new import licences. The Benteng licences were seen as having been transferred to Chinese. By 1952 the government was trying, feebly, to restrict the allocation of import licences to bonafide pribumi businessmen who wanted to set up genuine trading enterprises. THE SUKARNO PERIOD

When Sukarno nationalised all Dutch business and expelled the Dutch in 1958, it was in theory a good opportunity for us to develop. The trouble was that those in power now thought that everything should be done by the government. Groothandel (wholesale trade) and banking especially were to be in government hands. Let me give an example. At that time shipping was in disarray. I put together a concise proposal to improve its operations. Deputy Prime Minister Leimena looked at it and said, ‘We have not formed a nationalist government to set up strong capitalists!’ So the proposal was killed, because in his view it would have turned us into capitalists. If we take this as an example of the prevailing philosophy, then it is clear that there was no way you could be a good private businessman. Later, when they put forward economic programs such as Dekon (the Economic Declaration),4 it was quite clear that the role of private business would be minimised. We private businessmen became outcasts, at most tolerated. To take our case, Soedarpo Corporation was distributor for Remington and RCA but the state-owned trading company Panca Niaga (formerly CTC) was given the monopoly of electronics and office equipment. The manager of Panca Niaga asked me to transfer the business to them. He was not pleased when I protested that he should know that he had to talk to the principals! After 1958 the only way to maintain an import business was to secure a contract, generally a government contract, and then to work through a licensed intermediary. I worked through another pribumi businessman, Hasjim Ning, who now held the franchise for Chrysler Motors, and who allowed us to do transactions in his name in return for a certain percentage. That is how you survived at that time. On the other hand, it was to our advantage that the people who took over the Dutch businesses were military people, not commercial people. They knew nothing about how to do business! Their main concern was how to get a nice

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position, a nice house, a car. So in the event we were able to maintain the franchises. But you had to have a connection. Everyone had connections one way or another. You can imagine how it was. This situation lasted until the free foreign exchange market was introduced in 1968. When the foreign investment law came into being in 1967, a free exchange market was part of the package. Our main problem under the Old Order was political. I started with the handicap of being associated with the PSI (Indonesian Socialist Party — former PSI leader and Prime Minister Sjahrir was imprisoned by Sukarno). To survive as a businessman, the less you talked politics the better. That was the political stance that you had to take: avoid getting embroiled in political issues. Steer clear of politics. And appear before them as just a very dirty businessman! Inflation was not such a problem. Because of my trading activities, I lived on just $150 a month. Converted at the black market rate, that $150 became a fortune. You could live like a prince because of all the rupiah that you got for $150 at the black market rate. As for business, you just kept it going. It did not pay to invest. Not that there were not a lot of offers. For example, Bakri asked me to join him in NV Kawat, his first venture into industry. But up to now, I have not invested in any sort of manufacturing. I am scared of it. The government has been too fickle with its regulations. It offers all kinds of facilities, but the extra costs are too high. The customs bleed you dry. We could allow for that and still make money, but it goes against the grain. If you went ahead and set up, in two years they might change the regulations. There is too much uncertainty. I haven’t the courage to face this situation. However, by continuing to hold that attitude in recent years, I have missed out on a lot of good things. My business outlook is that of someone who provides a service. To succeed in manufacturing you need a different outlook. In the Sukarno period the opportunity for Bank Niaga to grow was also minimal. In fact, we were lucky that we survived. Many banks went under because of political pressures and trying to get away with things that according to the book cannot be done. We sat in the background. Bank Niaga was one of the few to follow the book and survive. Idham cut his teeth in these circumstances and the character of Bank Niaga as prudent and conservative dates from this period. The bank did not begin to flourish until the ‘New Order’ but at first we were held back by our

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small capital base. Things started opening up in 1968 after the enactment in 1967 of the new Foreign Investment Law, but we were determined to remain a pribumi enterprise. After looking around for another strong pribumi shareholder, in 1971 we invited in Julius Tahija. Unlike Hasjim Ning and Ibnu Sutowo, he had no commitments to other banks and since 1964 had served as chairman of Samudera Indonesia — as a deepsea shipping company we needed an internationally respected figure. SHIPPING

In late November 1953, when I took over the shipping agency, ISTA, we acted only for Isthmian Lines, but we already had the idea that we could get the agency for the German Hapag and the Japanese Tokyo Senpaku Kaisha lines, which were both intending to resume sailing to Indonesia. Having established ISTA myself, I discovered that the money was better in stevedoring. As an agent you earned a commission on export freight and a much smaller handling fee on import freight, but that was only a small fraction of the total. If you handled the cargo as a stevedore, however, you earned much more. And of course as agent you had the say in who was appointed as stevedore. At the end of 1953 we therefore joined with some people already in the business (Indonesia Veem) to establish Instel (Indonesian Stevedoring Ltd). From this start in Jakarta, Instel soon opened branches in Surabaya and in Makassar, which in those days was a very busy city, the distribution centre for the whole of East Indonesia. In 1956 came the implementation of regulation PP 61/1954, whereby stevedoring companies were to be in national hands. The biggest stevedoring and warehousing company in Surabaya was Stroohoeden Veem. In the last months of 1956 we negotiated with the Dutch owners, the ‘Factorij’ (Netherlands Trading Company, NHM) to buy them out through Instel. Since we as agents controlled most of their business, we were in a strong bargaining position and were able to pay off most of the purchase price out of earnings. We kept on three Dutch people until 1958, when they had to go home. And as all Dutch possessions were taken over by the government, the Indonesian government now became our creditors. We had to go on paying off the same amount to the agency controlling ‘enemy’ property. Later we also set up an agency (Desta) in Medan and a small office in Palembang.

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In 1964 President Sukarno decided that Indonesia as an archipelago needed a strong, viable merchant marine. So the ‘Great Commander’ created the Ministry of Shipping and put Ali Sadikin in charge. Sadikin sought the advice of people in the industry. We explained that stevedoring and agencies were sources of foreign exchange because they were paid as part of the freight, but that we had to surrender those earnings to the Foreign Exchange Institute in return for rupiah at the low official rate. There was no way around that because they knew the stevedoring and agency rates. You could not create a false invoice. So you lost money badly. I told Sadikin that if he wanted us to buy ships, he should give us the freedom to use that foreign exchange. He went not to the Minister of Finance, but to the President, and said, ‘You have given the order that you want a merchant marine. If you give this order, I guarantee you that we will have a merchant marine.’ And that’s what happened. He promulgated Government Decree No. 5 of 1964, which specified that all shipping activities must be carried out by shipping companies: agencies, stevedoring and warehousing. He also rationalised the number of shipping companies and created booking offices to guarantee the load factor of shipping companies, in both domestic and foreign trade. At the same time, he introduced a regulation that every shipping company, domestic or foreign, needed a licence for discharging and loading, which was the origin of the ‘infamous’ SKU (loading permit — abolished by Inpres No. 4/1985). That was the basis for cargo reservation: all government project cargo had to be carried under the Indonesian flag, and if a foreign-flag ship tried to carry such cargo, it would be denied an SKU. In one of my speeches to commemorate our company I said that Ali Sadikin was the father of the Indonesian merchant marine. This was not very well received, but it is true. That was the only success of the Old Order. Samudera Indonesia was thus formed in 1964 around the core of ISTA and our stevedoring companies. We consolidated what we already had. At the outset we were obliged to bring in two other nominal shipping companies, but this lapsed after three months when they failed to contribute any ships. Having no political backing as such, we financed our ships through hire purchase, buying them from our principals, Hapag-Lloyd, against the leverage of our agency. We told them that if they wanted to keep us as their agents, they should give us the ships cheaply or we could not afford to pay for them! They knew how much money they were paying

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us in agency fees. We started with the hire purchase of two ships and built up a fleet of eleven, operating first to Europe and then also to Japan. Those were glorious days! Meanwhile, to provide a better service, we continued to build up our network of agencies and stevedoring companies. In 1964, during the Confrontation campaign against Malaysia, when Indonesian cargoes were no longer shipped through Singapore, we established branches at Panjang (Lampung) and Balikpapan. By 1966 we had something like 12 branches. Now we have 24 or 25. There was always a profit to be made from stevedoring, but not a large one. The main benefit was that, with all links in the shipping chain under your direct control, you could provide your principals with a reliable standard of service. We became known in Japan, for instance, and also in Europe, as the agency which could deliver cargo earlier than anybody else and in better condition. For example, with other companies, if you went to the port godown with your delivery order (exchanged for the bill of lading) the warehouse chief would play games: ‘Let me see, some of the goods are over there, but where are the rest of them?’ Until the whole consignment was found, you could not go to Customs to clear it, so you would have to pay up to avoid further delay. Whereas in our case anyone who came down with a delivery order was asked the number and there on the chart of the godown was the consignment. That reputation gave us an advantage in canvassing cargo overseas. When the oil price collapsed in 1982 , so did the project cargo which had been our mainstay. That was the time to pull out of conventional shipping. By then containers had come into the picture. Project cargo was difficult to containerise but without that cargo base our fleet was obsolete. We sought the advice of our principals. The head of HapagLloyd explained that whether you operated with 1,000-TEU5 ships or 2,000-TEU ships, the total costs were the same: for a 2,000-TEU ship the unit cost was lower and you could offer slots at a lower freight. But the investment that would be required was frightening. Little companies like ours could not raise such huge sums. And it was not just the ships. There were also the containers, the shore equipment and the computer systems. Moreover, our people had no knowledge of containers. Intellectually they might be able to comprehend the concept but to adapt to a completely new way of doing things, almost to a new culture,

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took almost ten years. In the meantime we had to pension off a lot of good staff who could not learn the new skills. Some of our competitors such as Gesuri Lloyd and Trikora Lloyd invested in multi-purpose ships (designed for both breakbulk and containerised cargo), but after much soul-searching we decided against it. Profitability would have depended upon the ship’s turnaround time, which would still have been determined by the breakbulk cargo. Besides, we did not have the capital to buy such new ships. We therefore decided to go out of long distance deep sea shipping. Between 1982 and 1985 we gradually sold off all our conventional ships, while chartering to keep a foothold in the trades. That converted our firm to a viable, safe organisation that could win cargo for our principals. It was the right business decision but it was not popular at the time. I was scolded by the Director-General of Sea Communications as a traitor to the concept of Wawasan Nusantara (the Archipelagic Principle). But look at what happened to our competitors! Trikora Lloyd had to be rescued by the Bimantara group and the ships of Gesuri Lloyd were repossessed by their financiers; Djakarta Lloyd had to be rationalised by the government. We were the only firm which did not have to seek assistance. We made a book loss on the sale of our conventional ships, but instead of pouring good money after bad we got back cash, as well as enjoying a steady cash flow from agencies and stevedoring. With that cash we could do anything. The main reason that Samudera Indonesia has been able to survive and become the company that it is today is therefore our relationship with our principals. We keep talking to them, not just about the current level of service but also about future trends in shipping. To give a final example, after SKU permits were abolished in 1985, we discussed how to create a feeder service to connect with the deep sea container ships in Singapore. We now provide 16 fixed-day sailings per week between Indonesian ports and Singapore: five from Jakarta, three from Surabaya, two each from Semarang, Belawan and Palembang and one each from Jambi and Panjang. But we no longer own the ships, we only operate them. We see ourselves now not as a shipping company but as a transportation company. ON ORGANISATION-BUILDING

Very late in life I came to appreciate that the skill of building organisations is a product of environment and circumstances. Last year we had a

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biennial reunion of former students of the Algemene Middelbare School (AMS, General Upper Secondary School) in Yogyakarta, which before the War had been one of the first of just six in the whole of the Netherlands Indies. The youngest of us is now 70 years old. We realised that we had a special bond and strength. One reason is that we pribumi had had to prove that we were the equal of or better than the more privileged who went to the elite Dutch secondary school (Hogere Burgerschool, HBS). So we formed sports clubs and cultural clubs. Later, as we went on to university and working life this attitude of needing to prove ourselves remained. In the Japanese time we banded together because we trusted each other. That was our basis for organisation. The feeling of nationalism, of self-worth, was born at that time as a product of organisation. After 1950 we realised that without an organisation we could not achieve anything. It took me a couple of decades to turn this organisation into a rational business. Let me give an example of the difficulties. After 1964 when Samudera Indonesia became a real shipping company, I realised that we faced new requirements in administration and financing. So in 1967 I turned to the International Service Corps of retired business people and asked for a retired finance director to advise us. After about six months we came to the decision that we needed to concentrate upon building up our cargo volume and the speed and accuracy of our reporting, which led to the recognition that we needed to computerise. Since Soedarpo Corporation was already in computers, this was a natural development. The finance director laid down guidelines in the form of organisational charts, job descriptions and so on. In 1971/72 when we decided with Soedarpo Corporation to have our own in-house system, we constructed a new building as a service centre in anticipation of eventual containerisation. My daughter came back from Germany to run this and we called in Arthur Andersen as advisers. But our own people did not believe in computers. They knew our operations and the man in charge of accounts believed that we could do it all manually. It took until the late 1980s to change that. We faced similar conservative attitudes in turning to the capital market. The intention in 1989 was to float on the Jakarta Stock Exchange, but we ended up raising venture capital through the bond market. The challenge of going public is that you lose some control over the company but you gain the means to expand, to participate in the growth of the country.

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The other aspect of organisation is looking after the employees. The group currently employs about 2,500 people — when we were still in conventional shipping that number were employed by Samudera Indonesia alone. The main problem is how to keep people in the company. You cannot afford to pay more than the going rate. But when we set up Samudera Indonesia we were one of the first companies to establish a provident fund (yayasan), which acquired 10% of the shares on behalf of the employees. In that way the employees gained not only a shareholding in the company but also a share of the profits. The funds were to be used for social purposes. As trading conditions improved, we were able to start paying out a mid-year bonus at the time when the school year begins and parents need money for their children’s enrolment. A four-month bonus is now paid out at that time and another at both Lebaran and Christmas, when people want to take holidays. At the beginning of the 1970s we built a hundred houses at Depok for the lower ranks, such as drivers, and arranged the repayments so that they would own the houses after 15 years. This cost the company no more than the previous rental subsidy and it helped to create a good atmosphere. For the seafaring officers we did something similar about eight years ago, so that they could finance hire purchase repayments from the foreign currency per diems they were paid while in overseas ports. An indication of the sort of loyalty this has helped to create is that when one of our principals recently decided to set up its own agency and tried to attract our staff with much higher wages, 95% of our people decided to stay with us. They were good people and we were able to relocate them in other parts of the group where we were weak. We think that in this way we contribute in our own little world to the betterment of things. But it is hard to transfer this model to the whole society. There are too many vested interests.

NOTES 1 The interview was held in Jakarta on 4 October 1991 by Thee Kian Wie and Howard Dick, who edited the transcript and wrote the introduction. Follow-up interviews took place in July 1993. Information in brackets has been added by the editors. 2 Sunan Kalijogo was one of the nine wali (‘saints’) credited with bringing Islam to Java (c. 14th century).

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Arms suppliers. See the Bulletin’s interview with Sarbini Sumawinata, BIES 28, no. 2 (August 1992): 49–50. TEU (twenty-foot equivalent unit) is the recognised measure of a ship’s container carrying capacity.

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Suhadi Mangkusuwondo

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Suhadi Mangkusuwondo, Professor Emeritus of the Faculty of Economics at the University of Indonesia (FEUI), was born in Solo, Central Java, in December 1927. After participating in the war of independence, he resumed his secondary education in Malang, completing it in 1949. He then studied economics at the University of Indonesia (UI) and later became a teaching assistant there. Suhadi spent two years doing postgraduate study at the Massachusetts Institute of Technology and later obtained a PhD in economics at the University of California at Berkeley. Returning to Indonesia and his teaching post at FEUI, he became editor of the journal Economics and Finance in Indonesia (EKI). He was Head of the R&D Agency in the Department of Trade from 1973 to 1975 and again in 1983–88, and Director General of Foreign Trade from 1975 to 1983. Professor Suhadi served as the Representative of the Government of Indonesia in the Uruguay Round when it was launched in 1986, and since 1992 has been a member of the Eminent Persons Group of the APEC (Asia-Pacific Economic Cooperation) forum. His other activities include membership of Indonesia’s National Research Council (DRN), and of organisations such as the Regional Advisory Board of the ASEAN Economic Bulletin, the journal of the ASEAN Economic Research Unit of the Institute of Southeast Asian Studies in Singapore. He is now also Vice Chairman of the Jakartabased Trade and Development Institute. On 8 July 1994, Professor Suhadi talked with H.W. Arndt, Hal Hill and Thee Kian Wie about his views on Indonesia’s economic development under the New Order, and particularly about trade policy. On 19 September 1995, in a second interview with H.W. Arndt, Mari Pangestu and Thee Kian Wie, he elaborated further on his work at the Ministry of Trade and his participation in the Uruguay Round and the APEC Eminent Persons Group (EPG).

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Reproduced from Recollections: The Indonesian Economy, 1950s-1990s, edited by Thee Kian Wie (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at < http://bookshop.iseas.edu.sg >

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9 SUHADI MANGKUSUWONDO

YOUTH AND EARLY EDUCATION

I was born in Solo on 27 December 1927, the son of a civil servant with the colonial government’s Department of Finance. Having completed primary education at the Dutch Native School (Hollands-Inlandse School, HIS) in Bondowoso, East Java, in 1940, I attended a Dutch high school, the Higher Civilian School (Hogere Burgerschool, HBS) in Malang, where I was one of only two Indonesians among the 40 pupils enrolled in the first grade. The following year the Pacific war broke out, and my parents moved to Bandung. During the Japanese occupation I attended a Japanese junior high school in Bandung, which gave me the opportunity to learn to speak and read some Japanese, particularly the katakana script. As a result I was able to read Japanese newspapers printed in katakana and hiragana.

Reprinted from Suhadi Mangkusuwondo, “Recollections of My Career”, Bulletin of Indonesian Economic Studies 32, no. 1 (April 1996): 33–49, with kind permission from the publisher.

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When the revolution broke out in 1945, young people like me used to listen to Sukarno’s speeches, which aroused our revolutionary fervour. Together with my two elder brothers I joined the nationalist independence fighters who took up arms, and later joined the students’ army (TRIP) in Malang. We set out to wrest power from the Japanese by trying to obtain their arms. These actions, however, had sad consequences for our family: the Japanese military raided our house and took away my father. We learned from other people that he was taken to a Japanese prison camp, and we never saw him again. In the students’ army I was made commander of a company of about 60 men, including a young soldier, Widjojo,1 who already at that time was considered extremely intelligent by his friends. The student army was not part of the newly established Tentara Nasional Indonesia, TNI (Indonesia’s National Army). We were fighting side by side with the TNI against the Dutch, and were only lightly armed with rifles and a few machine guns and mortars. When the Dutch army occupied Malang in July 1947, our student army left for the mountains to continue guerilla warfare. My career as a revolutionary fighter came to an end when I was captured by the Dutch and put in a prison camp, first in Bondowoso for one month and then in Surabaya for nine months.2 While in prison I was physically abused, and had to do hard labour for the Dutch military. It took me some time to recover, physically and mentally, from this experience after my release following the Renville Agreement in early 1948. I then returned to Malang to complete my secondary education, and left for Jakarta after the Dutch recognition of Indonesia’s independence in December 1949. UNIVERSITY EDUCATION AT FEUI

I graduated from senior high school in Malang with two classmates, Widjojo and Rachmat Saleh,3 and then enrolled at the National University (Universitas Nasional) in Jakarta together with Daud Jusuf,4 before entering the newly established Faculty of Economics of the University of Indonesia in Jakarta. I had wanted to study political science, but since this discipline was not taught, I decided to take up economics instead.

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As with many other young Indonesians at the time, my interest in social and political issues arose as a result of the revolution. I read mainly books by Dutch scholars, such as Professor Wertheim, a sociologist who had written extensively about Indonesian society and social history. After the Dutch recognition of Indonesia’s independence in December 1949, I briefly joined Indonesia’s national army. Soon I received a scholarship from the army to continue my tertiary education at the University of Indonesia. When I had finished my undergraduate (Sarjana Muda) course, Professor Sumitro asked me to become a teaching assistant. I did not have any difficulty in getting permission to leave the army, as the then Minister of Defence, Sultan Hamengku Buwono IX, was close to Sumitro. My duties as a teaching assistant included teaching introductory economics and an introductory course on the Indonesian economy. When I started my university study, there were as yet no Indonesian professors of economics. The only Indonesian professors were Professor Sunarjo Kolopaking, a sociologist, and Professor Djokosutono who taught law. Most of the Faculty staff were Dutch professors and lecturers who taught in Dutch and required us to read mainly Dutch textbooks. When a separate Faculty of Economics was established, I was elected as the first chairman of the student governing body (Senat Mahasiswa), and together with a few colleagues I asked Sumitro, then Minister of Finance, to become the Dean of the Faculty. Sumitro modified the economics curriculum by putting more emphasis on the teaching of macroeconomics and less on business economics (bedrijfseconomie), which had been the main focus of the Dutch faculty members. Many economics students, including me, were influenced by socialist ideas because of our concern about the welfare of the people. As a result, we also became interested in studying the problems of a planned economy. During the period of Guided Democracy and Guided Economy in the early 1960s, our attention was focused on the question of how to operate a planned economy based on socialist principles, in which state-owned enterprises (SOEs) were to occupy the ‘commanding heights of the economy’ and to be its driving force. As economists, we were concerned that the market mechanism be allowed to operate in a planned economy based on socialist principles. Hence, Oscar Lange’s views on a socialist market economy became the model for our own views on how to run Indonesia’s Guided Economy.

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Suhadi Mangkusuwondo POSTGRADUATE EDUCATION IN THE US

I belonged to the first batch of FEUI’s young faculty staff who were sent to the US for postgraduate study in 1957. Widjojo and Barli Halim were sent to the University of California at Berkeley, J.E. Ismael and Teuku Umar Ali to Cornell University in Ithaca, and I to the Massachusetts Institute of Technology (MIT) at Cambridge, Massachusetts. I found the intellectual atmosphere at MIT excellent because of the large number of great economists teaching there — Charles Kindleberger, RosensteinRodan, Paul Samuelson, Robert Solow, Everett Hagen, Evsey Domar and others. There was also the close proximity of Harvard University with its own distinguished Department of Economics. While I was at MIT, Professor Charles Kindleberger suggested that I undertake a PhD degree, but when my two-year fellowship from the Ford Foundation expired, I was told to return to my teaching post at FEUI. Fortunately, after four years of teaching at UI in Jakarta, I was able to resume postgraduate study in 1963 at the University of California at Berkeley. ”I received a PhD degree in economics in 1967 for a thesis on ‘Industrialisation Efforts in Indonesia: The Role of Agriculture and Foreign Trade in the Development of the Industrial Sector’. I chose this topic because it had not received much attention from Indonesian or foreign economists, compared with topics such as agriculture, foreign trade, public finance, money and banking; this was due mainly to lack of statistical data. When I conducted my research in the mid-1960s the results of the first Industrial Census of 1964 had not yet been published. There was, to be sure, a continuous primary data series dating back to the colonial period, but it existed only for the industries covered by the colonial Industry Control Ordinance, and not for the whole of the manufacturing sector. The Central Bureau of Statistics (BPS) in Jakarta had been collecting additional data on large and medium scale industries that had to register with the Ministry of Labour under the law of industrial safety; these statistics, however, excluded certain manufacturing industries such as those attached to plantations (sugar, rubber and tea factories) and to mining activities (tin smelting, oil refineries). My PhD study sought to analyse whether and to what extent the growth of the manufacturing sector was hampered or stimulated by developments in the agricultural and foreign trade sectors. At the time

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there was in Indonesia a tendency to view the economic development of the country in terms of a closed two-sector model. This conception, known as ‘Berdikari’ (derived from berdiri di atas kaki sendiri, or ‘standing on one’s own feet’), received widespread support in official circles during the period 1960–65, and was adopted as the government’s basic economic policy for development. In the end, however, none of it was really implemented. Although the ‘Berdikari’ principle was never clearly defined, it generally connoted a pattern of development with a minimum of foreign capital and foreign trade. A ‘closed’ model resembling the Soviet type of industrial development, it was a radical departure from the pattern in Indonesia during the colonial period, when economic growth was closely associated with foreign investment and foreign trade. Hence, I wanted to look further into the role of foreign trade and foreign capital in the growth of the Indonesian economy, and in particular of the manufacturing sector. One of the major purposes of the study was to investigate whether the conditions and potentialities of the Indonesian economy justified a closed market, or whether the underlying social and economic conditions needed an ‘open’ model of growth. Another reason I chose this topic was a statement by H.W. Sitsen, a Dutch scholar who, in his pioneering study of the development of Indonesia’s manufacturing sector (Sitsen 1943), argued that the principal cause of rapid growth in the manufacturing sector during the colonial period was an increase in the income of the rural population above subsistence level. The chief lesson I drew from the Indonesian experience during the Old Order period was that the government would have to pay more attention to the forces of the market; an over-ambitious political program would incur heavy economic and social costs. When the demands of political ambition exceed the capacity of the economy, the economy will collapse. This was the experience of the Old Order government. Thus the safest way for a government to proceed is not to tamper too much with the price mechanism in fostering industrial development, but to assist industries with credits, training, reorganisation and rationalisation, in order to increase efficiency, if necessary with the help of experienced foreign consultants.

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Suhadi Mangkusuwondo TEACHING AT FEUI AND GOVERNMENT SER VICE IN THE DEPARTMENT OF TRADE

Upon my return from Berkeley to Indonesia in 1967 I resumed my teaching job at FEUI. In addition I was given other assignments. I served as Vice Dean for Academic Affairs and as the Director of Extension of FEUI, and edited the journal Economics and Finance in Indonesia (Ekonomi dan Keuangan Indonesia, EKI), published by the Faculty’s Institute of Economic and Social Research (LPEM-FEUI). To foster education in economics at state universities I was also appointed chairman of the Sub-consortium for Economics in the Consortium for the Social Sciences at the Ministry of Education and Culture, a position I held for four years (1972–76). During this period I was also a member of the editorial board for the publication of economics textbooks, an activity initiated by the Indonesian Society for the Promotion of Economics and the Social Sciences (Bineksos). By the early 1980s this society had produced a series of useful economics textbooks, for example, on statistics and mathematical economics, and, with the assistance of Professor Arndt, an introductory textbook on macroeconomics. I also taught at the National Defence Institute (Lembaga Pertahanan Nasional, Lemhanas) and the Armed Forces Staff Command School (Sekolah Staf dan Komando Angkatan Bersenjata Republik Indonesia, SESKO-ABRI). From 1968 I was drawn for the first time into government service, by Professor Sumitro, then Minister of Trade. During his term (1968–73) Sumitro established a policy research team that was not a part of the organisational structure of the Department of Trade. Besides academic economists like Billy Joedono, Soedradjad Djiwandono and me, this team also included businessmen such as Achmad Bakrie and Ciputra. It was charged with examining various trade policy issues facing Indonesia, such as what policies on rubber, cloves, cement, fertilisers and insecticides were required to ensure stable supplies of these basic commodities for the domestic market rather than for export. The team also looked at specific issues such as the further processing of latex into crumb rubber, rather than only into smoked sheets. As Trade Minister, Sumitro was also concerned about the fact that the world markets for some of Indonesia’s export commodities, such as pepper, were dominated by one or two major buyers. He believed Indonesia

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needed to strengthen the supply side of the market so that her exporters could face monopsonistic buyers on more equal terms. In 1973 I became an official in the Department of Trade, when the new Minister of Trade, Radius Prawiro, asked me to be head of the Department’s R&D Agency. The Department was then not yet concerned to promote manufactured exports. A focus on export promotion emerged only after the end of the oil boom. Instead the main concern was to ensure that basic commodities and industrial raw materials were readily available. At that time this was the responsibility of the state trading companies. Later more private trading companies began to operate, though state trading companies remained important. Within the Department of Trade there was a separate Directorate General for Research and Marketing, subsequently reorganised and named the Agency for Research and Development (Badan Penelitian dan Pengembangan). I headed it twice, during the period 1973–75 when Radius Prawiro was Minister of Trade and then again in 1983–88 when Rachmat Saleh was Minister. The R&D Agency consisted of three Centres, respectively concerned with foreign trade, domestic trade, and trade institutions. Since the mid 1980s the R&D Centre for Foreign Trade has mainly been engaged in studying the export potential of various commodities. It also studies the implications of the Uruguay Round for Indonesia, and the potential of various countries as export markets for Indonesia’s products. The major function of the R&D Agency was to prepare policies for the Trade Minister based on economically sound arguments and empirical evidence. The Agency was charged with: • • •

preparing research reports; evaluating existing trade policies; and providing guidelines to policies (for example, setting the appropriate check or reference prices for most export commodities).5

When oil prices dropped in 1982, the Department of Trade was under strong pressure to protect the manufacturing industries established during the period of import-substituting industrialisation in the 1970s. As Director General of Foreign Trade, I had to discuss import policy with Dr R.B. Suhartono, then Head of the R&D Agency of the Department of Industry,

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who was arguing for more protection for domestic industries. We eventually came to an agreement that the approved importer system of import restrictions (tata niaga impor) should be subject to a time limit of two years. Unfortunately, in later decrees this stipulation was dropped altogether because of strong protectionist pressures. One episode I remember clearly during my tenure as Director General of Foreign Trade is the confrontation with the United Kingdom in 1982 concerning Indonesia’s exports of textiles to that country. At the time we had an agreement with the European Commission that for certain categories of garments the EC could request consultations with the Indonesian government with a view to limiting its exports if they had exceeded a certain level. In 1982 the UK government took unilateral action prohibiting imports of a few categories of garments from Indonesia on the grounds that they had substantially exceeded the stated threshold levels. The Indonesian government retaliated by prohibiting British companies from participating in bidding for Pertamina projects. This could have led to the loss of more than $1 billion worth of contracts for British companies. The episode attracted a great deal of attention, especially from other developing countries who were facing similar restriction of their textile exports to the EC market. In the end a compromise was reached. Indonesia was given a larger quota, to the dismay of the European Commission in Brussels, and the ban on British companies was lifted. We later learned that Prime Minister Margaret Thatcher did not sympathise with the British textile industry’s desire for continued protection from cheaper imports, and refused to take action against Indonesia. I remember this episode clearly because I was directly involved in the negotiations, which on the Indonesian side were directed by Minister of Trade Radius Prawiro and Coordinating Minister for Economic Affairs Widjojo Nitisastro. THE NORTH–SOUTH DIALOGUE

In 1975 I moved from the R&D Agency to become Director General of Foreign Trade in the Department of Trade. In the same year the International Conference on Economic Cooperation (ICEC), better known by its popular name ‘The North–South Dialogue’, was held in Paris. Following the energy crisis of 1973–74 when OPEC (the Organisation of Petroleum-

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Exporting Countries) unilaterally raised the price of oil, the developing countries, encouraged by OPEC’s success, began to call for a New International Economic Order (NIEO). In response to this demand, ICEC was convened to discuss the outstanding economic issues between the developed and developing countries. I was appointed chairman of Indonesia’s delegation to ICEC. The other members were Dr Adrianus Mooy, Deputy Chairman at Bappenas, Ali Alatas, Indonesia’s ambassador in Geneva, and Dr Arifin Siregar, a Director of Bank Indonesia. One of the major items discussed at ICEC was international trade in primary commodities. Developing countries, most of which were primary exporters, were concerned about the need to stabilise commodity prices in world markets. Indonesia supported this, particularly since the prices of some of its own primary commodities, such as coffee, rubber and tin, were fluctuating wildly. One of the outcomes of the ICEC discussions was the idea of a Common Fund for commodities, which was subsequently developed in greater detail at UNCTAD IV in Nairobi in 1976. Although its own priorities have since shifted, in line with its rapid industrial development and its concern about developed country market access for its manufactured exports, Indonesia naturally sided with the other developing countries in supporting a Common Fund for the financing of international buffer stock schemes. At UNCTAD IV Indonesia’s delegation was led by Professor Widjojo, who played an important role in the crucial discussions leading to the establishment of the Common Fund. In the past two decades the Third World has changed as many developing countries have experienced rapid industrialisation, and have reduced their over-dependence on primary exports. They therefore no longer have a common rallying point, such as they had in the mid 1970s with the Common Fund. As is well known, the Common Fund has two windows. The first, which is concerned with commodity price stabilisation, has so far not been an effective operation, but the second, concerned with technical cooperation in primary commodities, is still functioning. Another more durable achievement of ICEC was the establishment of the International Fund for Agricultural Development (IFAD), to promote agricultural development (especially of food crops) and employment in developing countries.

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Suhadi Mangkusuwondo ASEAN AFFAIRS

The Department of Trade has from the outset been involved in ASEAN economic affairs, particularly in the ASEAN Committee on Trade and Tourism (COTT). COTT was concerned mainly with basic commodities, such as rice and oil. Adequate supplies of rice were considered important for the food security of the ASEAN countries, particularly Indonesia. On the other hand, the ASEAN oil-importing countries were more interested in energy security. To achieve both food and energy security, a scheme was devised in which all the ASEAN member countries contributed to common reserves of rice and oil which could be drawn upon in times of emergency. The 1972 Kansu Report on regional industrial cooperation had put forward several proposals for ASEAN industrial projects, industrial joint ventures, and industrial complementation schemes. From the outset, however, Indonesia had expressed its opposition to the concept of free trade in the region, even as a long-term objective. The free trade idea had first been floated by Singapore, and was supported by the Philippines. Because of Indonesia’s strong opposition, however, the goal of an ASEAN free trade area was shelved for two decades. Instead, ASEAN adopted the ASEAN Preferential Trading Arrangement (PTA). At the ASEAN Summit in Singapore in January 1992 Indonesia finally agreed to the establishment of an ASEAN Free Trade Area (AFTA) within 15 years. This change of heart was due to Indonesia’s recent success in manufactured exports and its growing confidence that it could meet the competition of its ASEAN neighbours. It now felt able to move in the direction of regional free trade. Before AFTA, Indonesia’s Department of Trade, together with the Departments of Agriculture, Industry, and Health, drew up a long list of products to be excluded from the ASEAN PTA. However, in drawing up the list the Interdepartmental Team did not have at its disposal estimates of the rates of effective protection enjoyed by all these products. The pace of ASEAN trade liberalisation through the PTA scheme was slow, as it was subject to bureaucratic procedures. In the end, the scheme produced negligible results because the products it covered were not the most important items traded intra-regionally. Furthermore, it took account only of tariff barriers, while non-tariff barriers (NTBs) were often more important in restraining intra-regional trade.

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Recollections THE URUGUAY ROUND

When the Uruguay Round of multilateral trade negotiations was launched in Punta del Este, Uruguay, in September 1986, Rachmat Saleh, then Minister of Trade, was designated leader of Indonesia’s delegation. In September 1986, however, Indonesia devalued its currency in response to the sharp drop in the price of oil in early 1986, and Rachmat Saleh had to attend to the many unpleasant problems associated with the devaluation. I was therefore appointed leader of the Indonesian delegation to the official launch of the Uruguay Round of the GATT (General Agreement on Tariffs and Trade). Many new matters, such as protection of intellectual property rights (IPRs), trade-related investment measures (TRIMs) and trade in services, were discussed in the Uruguay Round. The developing countries in general objected to negotiating these new trade issues, as they felt that the GATT negotiations had not yet satisfactorily resolved older trade questions such as better access to developed country markets for their primary and manufactured exports. Hence, they attempted to hold off or slow down negotiations on the new issues. Where this was not possible they tried, with little success, to delink the new issues from traditional market access issues. They also tried to obtain larger quota allocations for their textile exports under the Multi-Fibre Agreement (MFA) and to press for the eventual phase-out of MFA, a battle they won. For the sake of ASEAN solidarity, Indonesia also supported a move by Thailand to open up markets for agricultural products, even though Indonesia was now more of an importer than an exporter of agricultural products, particularly food crops. APEC

The ASEAN countries, including Indonesia, joined APEC in 1989 with some reluctance. The major causes of this reluctance were: • •

concern about the erosion of ASEAN regional economic cooperation, including AFTA, if they were to join APEC; concern that APEC would become a forum for trade negotiation dominated by the big industrial countries, particularly the US and Japan.

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The ASEAN countries preferred GATT as the multilateral forum for trade negotiations. After intensive lobbying (particularly by Australia), Indonesia and the other ASEAN countries agreed to join APEC and attend its first Ministerial Meeting in Canberra in November 1989. Before joining, the ASEAN countries insisted on agreement about some basic principles governing economic cooperation within APEC: • • •

that APEC would not evolve into a regional economic bloc; that the interests of the APEC members at different levels of development would be taken into account; that the trade arrangements and agreements adopted by APEC would be consistent with GATT principles.

As the APEC process began to gain momentum, an important difference became apparent between what I would call the ‘Asian’ evolutionary approach and the ‘American’ legalistic and institutional approach to regional economic cooperation. The ‘Asian’ approach is to agree on principles first, and then let things evolve gradually, relying on the market to set the pace for economic integration with a minimum of government intervention or direction. Governments should intervene only to facilitate the market-driven process of economic integration through trade and investment. The ‘American’ approach is viewed by many in Asia as being too legalistic and too institutional. This difference can perhaps best be illustrated by comparing the volume of documents relating to the NAFTA (North American Free Trade Area) agreement, which I understand runs to about 2,000 pages, with the AFTA agreement, which is only six pages long. To start with legally binding commitments covering a wide range of issues tends to alarm many Asians. This, I think, is the reason many preferred APEC to remain a forum for consultation rather than for negotiation. This hope may be a little unrealistic, but some compromise involving the following principles should be possible and acceptable to everybody: • • •

giving the market the opportunity to play a greater role; selective and restrained government intervention; allowing the ‘architecture’ of the scheme to emerge gradually.

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If the goal of APEC is to sustain the rapid growth of the region, it is crucial that national policies of unilateral trade and investment liberalisation be continued. Such measures have been taken in recent years by many Asian developing countries, including Indonesia, and have turned out to be beneficial for the rapid growth of these countries. The question now is how APEC can facilitate unilateral liberalisation measures, which by their nature are non-discriminatory and applied on an MFN (Most Favoured Nation) basis, and are therefore GATT-consistent. They do not require the lengthy, costly and often contentious bilateral negotiations which usually accompany regional or global trade liberalisation schemes. Encouragement of unilateral liberalisation measures should be an essential part of the APEC process. I also believe that the developing country members of APEC, including Indonesia, should be given a reasonable chance to catch up with the advanced members before they are required to participate fully in negotiations on trade and investment liberalisation schemes at the regional Asia–Pacific level. I do not consider that APEC should engage in a scheme of regional preferential trading arrangements. To start with an exclusive trade agreement, even if it was intended to be temporary, would be a first step towards the creation of an economic bloc. Other regional economic groupings might then react by hardening their protective posture, which could easily lead to economic confrontation among rival blocs. There is, I think, another reason why Indonesia has not supported the idea of an APEC-wide preferential trading arrangement. Indonesia was until November 1995 the chairman of the Non-Aligned Movement (NAM), and in this forum has actively promoted South–South cooperation aimed at achieving faster growth of trade, investment and technical cooperation among developing countries. It would therefore be difficult for Indonesia to enter into regional preferential arrangements with the advanced industrial countries that would exclude many developing countries from the fastgrowing markets of the Asia–Pacific region. In my view the best policy for Indonesia would be to continue to promote greater South–South cooperation, while at the same time it could enter into an open regional trading arrangement with the advanced member countries of APEC. An interesting feature of APEC is that, as at the ASEAN Summit of 1992, so at the First APEC Leaders’ Meeting in Seattle in November

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1993, the leaders turned out to be ahead of their ministers in their views. After the Seattle meeting President Soeharto immediately proceeded to appoint a ministerial-level committee coordinated by Hartarto, the Coordinating Minister for Trade and Industry, and a Special Assistant in charge of preparing for the Second ASEAN Leaders’ Meeting in Bogor in November 1994. When the Eminent Persons Group (EPG) of APEC was formed in 1992, I was appointed as its Indonesian member. The EPG was to develop a vision about the evolution of APEC that might be a few steps ahead of prevailing views on Asia-Pacific economic cooperation. Not, however, too far ahead, lest it provoke a backlash. One of the highlights of my career as member of the EPG was a meeting with President Soeharto in his hotel suite in Seattle on the eve of the 1993 APEC Leaders’ Meeting at Blake Island. I had the opportunity to explain to him the main thrust of the recommendations contained in the EPG’s first Vision Report. The President listened carefully, and I am quite sure he understood what the EPG Report was all about when he went the next day to Blake Island for the historic first meeting of APEC Economic Leaders. The first task of the EPG was to provide a vision for the Seattle meeting. It was then asked to elaborate on how to achieve this long-term vision, and to report to the Second APEC Leaders’ Meeting in Bogor. Following this Second Meeting, the Group was asked to produce a third report, evaluating the progress so far achieved by APEC, and making further recommendations on the enhancement of APEC cooperation; this was submitted to the leaders in time for their third meeting in Osaka in November 1995. In my view, after Osaka the EPG should cease operating. It is not desirable that it should get involved in elaborating further on the details of its recommendations. It would be better if APEC henceforth set up ad hoc groups to study selected issues, such as capital flows within the region. The APEC leaders do not, in any case, rely only on the reports prepared by the EPG, but also refer to other reports such as those prepared by the Pacific Business Forum (PBF).

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Recollections THE NON-ALIGNED MOVEMENT

As chairman of the Non-Aligned Movement (NAM) from 1992 to 1995, President Soeharto set out to focus on three issues: •

• •

promoting and expanding technical cooperation among the developing countries (TCDC), for instance, by the exchange of teachers and by training of technical experts in various fields; promoting and expanding cooperation among developing countries in family planning programs; helping the highly indebted developing countries, particularly the debt-ridden low income countries of Africa, to solve their debt problems. To this end President Soeharto asked seven Indonesian economists, including me, to advise him on solutions to the debt problem. Of this group, six were former cabinet ministers — Widjojo, Sadli, Emil Salim, Ali Wardhana, Radius Prawiro and Rachmat Saleh. I was the only member who had never been a cabinet minister.

The advisory group adopted two approaches to the debt problem. The first was to draw the attention of the developed donor countries to its seriousness and to the need to solve it internationally. Some members of the group visited the major donor countries to discuss the debt problem. I went to the OECD headquarters in Paris and to the European Commission in Brussels. In general, the donor countries were quite receptive to the ideas put forward by Indonesia in its capacity as chairman of NAM. A second and more difficult approach was to persuade the highly indebted African countries that they would have to ‘put their own house in order’ if they were ever to solve their debt problem. In August 1994 President Soeharto invited leaders of the highly indebted countries to visit Jakarta for discussions on how they could help solve the problem, particularly by ensuring macroeconomic stability, which would encourage private domestic and foreign investment. This implied the implementation of sound fiscal, monetary and exchange rate policies. THE CONSORTIUM FOR ECONOMICS

During the early 1970s and again in the early 1990s I also served as chairman of the Sub-consortium for Economics of the Consortium for

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the Social Sciences, established by the Department of Education and Culture to give advice on how to improve the teaching of economics in universities. The Sub-consortium, later upgraded to a full Consortium, was charged with advising the Department about four major issues: • • • •

a standard curriculum for the teaching of economics; upgrading of teaching staff; rating of the various Faculties of Economics; the selection of textbooks.

The standard curriculum turned out to be a major issue. It was thought that all Faculties of Economics should adhere to the same curriculum, particularly for core courses such as macroeconomics and microeconomics, and that this standard curriculum should be reviewed every five years. The Consortium for Economics was formed primarily to decide what should be taught in the Faculties of Economics in the light of rapid developments in economic science and in the Indonesian economy. The Consortium was well aware that adoption of the standard curriculum could pose budgetary problems for some Faculties, particularly in the less well endowed universities, many of which are located in outlying regions. Improving the teaching of economics in universities continues to be a matter of concern to the Consortium, which is currently headed by Professor M. Arsyad Anwar, former dean of FEUI. NOTES The Editor gratefully acknowledges the valuable assistance of Tjoe Thee in transcribing this interview. 1

2

3

Professor Widjojo Nitisastro was Chairman of Indonesia’s National Planning Board (Bappenas) and Minister of State for Economic, Financial and Industrial Affairs (Ekuin) from 1969 to 1983. At present he holds the position of economic adviser to President Soeharto. One episode I will never forget during this time was the death from suffocation of a cargo wagon full of prisoners during their transfer from Bondowoso to Surabaya. This was later known as the ‘death train incident’ (peristiwa kereta maut). Drs Rachmat Saleh was Governor of the Bank of Indonesia from 1973 to 1983, and Minister of Trade from 1983 to 1988.

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Dr Daud Jusuf was Minister of Education and Culture from 1978 to 1983. In the early 1970s the government set check prices for most export items. This practice was based on the belief that Indonesian exporters, particularly small exporters and farmers, sold their products without much knowledge of prevailing world market prices. Check prices set by the Department of Trade were designed to give exporters and farmers some protection against strong buyers.

REFERENCE Sitsen, Peter H.W. Industrial Development of the Netherlands Indies. New York: Bulletin 2 of the Netherlands and Netherlands Indies Council of the Institute of Pacific Relations, 1943.

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Recollections

Emil Salim

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As part of the occasional series of interviews with economists who have helped shape the New Order period, in January 1996 Anne Booth and Thee Kian Wie, members of the BIES Editorial Board, spoke to Professor Emil Salim. Professor Salim graduated from the Faculty of Economics, University of Indonesia (FEUI) in 1959. After obtaining a PhD Degree in Economics from the University of California, Berkeley, in 1964, he returned to Indonesia, to a teaching post at FEUI. In 1977 he was appointed Professor of Economic Development at the Faculty. Professor Salim has held a number of important senior executive and cabinet positions in the New Order government. In 1966 he served on the Team of Economic Advisers to General Soeharto, and in 1967–68 was a member of the Team of Advisers to the Minister for Manpower. He was Chairman of the Technical Team of the Council for Economic Stability and a member of the Gotong Royong Parliament from 1967 to 1969. In 1969 he was appointed Vice Chairman of Bappenas, the National Planning Board, and in 1971 also became Minister of State for the Improvement of the State Apparatus. From 1973 to 1978 he served as Minister for Communications, from 1978 to 1983 as Minister of State for Development Supervision and the Environment, and from 1983 to 1993 as Minister of State for Population and the Environment. Professor Salim maintains an active interest in sustainable development and the preservation of the environment, chairing both the Foundation for Sustainable Development and the Kehati Foundation to preserve bio-diversity. He continues to teach at FEUI and is a member of ICMI, the Association of Indonesian Moslem Intellectuals. In this interview he talked about his early life, his career, and his views on Indonesia’s development experience since independence.

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Reproduced from Recollections: The Indonesian Economy, 1950s-1990s, edited by Thee Kian Wie (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at < http://bookshop.iseas.edu.sg >

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10 EMIL SALIM

FAMILY BACKGROUND AND EARLY YOUTH

I was born in Lahat, South Sumatra, of Minang parents. Both my parents came from the same village, Koto Gedang in West Sumatra. I had five brothers — four older than me — and a sister. My father’s older brother was Haji Agus Salim, one of the founding fathers of the Republic of Indonesia and Minister of Foreign Affairs in the early 1950s. Although my mother’s only education was in a religious school, she exerted a great influence on the upbringing of her children. As a devout Muslim, she encouraged us to find out more about the Islamic religion. Perhaps because of her own lack of schooling, she urged us to get as much education as possible, hoping that all her children would become medical doctors.

Reprinted from Emil Salim, “Recollections of My Career”, Bulletin of Indonesian Economic Studies 33, no. 1 (April 1997): 45–74, with kind permission from the publisher.

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During the Dutch colonial period my father was an employee of the Department of Public Works, working on road and building construction. He designed the Immigration Office at the end of Jalan Teuku Umar in Central Jakarta, which is still standing. Although he did not have any formal academic training as an engineer, my father was good at mathematics and was able to do engineering work. He later became head of the Department’s Regional Office in South Sumatra. As an employee of the Department of Public Works, my father was posted to various parts of Indonesia, including Kalimantan and Sumatra, and so we got to see many parts of our country. When he was stationed in South Sumatra, he used to take us children for walks in the forest during our holidays to look for durian, a delicious fruit, in elephant droppings. The elephants digested the thorns but not the contents of the fruit, which therefore remained clean. Thus from my mother I acquired an interest in religion and education, and from my father a capacity for logic and a love of nature. My father used to advise us to work hard to reach the top in whatever job we held. I started preschool in Banjarmasin, South Kalimantan, in 1935. Because my father was an employee of the Dutch colonial service, in 1936 I was able to enroll in a European Primary School (Europese Lagere School, ELS) attended mainly by Dutch pupils. When I was in fifth grade my family moved back to Lahat, where I again attended an ELS. I was still in fifth grade when the Pacific War broke out and Indonesia was occupied by the Japanese. I then transferred to an Indonesian primary school in Palembang, South Sumatra. Because the language of instruction was Indonesian rather than Dutch, I had to repeat fifth grade — at home we used to speak Dutch. After completing my primary education, I gained entry to a Japanese secondary school, also in Palembang. We lived in dormitories, had to speak Japanese all the time, and were drilled Japanese style. We mainly ate food that we had grown ourselves, such as cassava, sweet potatoes and other vegetables. Those three and a half years of Japanese education were quite an experience for me. After the proclamation of Indonesia’s independence in August 1945, I again transferred to an Indonesian secondary school. It was very unorganised, with too many students and too few buildings. This was also a period of widespread national confusion. During the war of independence I was active in the Association of Indonesian Youth and

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Students (Ikatan Pemuda dan Pelajar Indonesia or IPPI) and became Chairman of the Defence Body, the forerunner of the Students’ Army. One of my brothers was a leader in the youth movement, so I often joined in their activities. In January 1947, a few months before the First Clash with the Dutch in July, we took part in a fight in Palembang. I was of no use to the group because my gun did not work when I tried to fire it. It turned out to be rusty, as we used to hide our weapons in the ground. That was my first experience of a fight in which I was facing real bullets. After the battle our group retreated to Prabumulih, and I was appointed commander of the Students’ Army there. The problem we faced at the time was a lack of communications with the front. Our group had to walk along the railroad tracks to reach the front as the roads were blockaded by the Dutch. We finally arrived at a small station where we stopped and rested for the night. The next morning Dutch troops occupied the railway tracks and I was captured. I was put in a room in Kertapati station in Palembang which was so dark that I could not even see the people who interrogated me. Fortunately for me, my father found out where I was and used his connections to secure my release. However, I was prohibited from leaving Palembang except to study in another city. I agreed to this condition and left for Bogor, where many of my friends were studying at a ‘republican’ secondary school, that is, one controlled by the Indonesian nationalists. Then, in December 1948, the Second Clash with the Dutch erupted, and students of the republican high schools were mobilised to assist the Siliwangi Division. I was put in charge of the Division’s logistics in the Pelabuhan Ratu region south of Sukabumi. My commander was Captain Burhanuddin, who later died after being shot in the stomach by the Dutch. I had to obtain basic foodstuffs, such as rice, cooking oil and salt, and transport them from one place to another within the area controlled by the republicans. This had to be done while avoiding the main roads, which were patrolled by Dutch troops. My job was thus a combination of food logistics and traffic planning. We also taught the local people, and to do this I had to read a lot. Although I was still only a high school student, I read everything on economics I could find, including Hatta’s books. This early exposure to the subject influenced my later decision to study economics after graduating from high school.

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TERTIARY EDUCATION AT THE UNIVERSITY OF INDONESIA AND THE UNIVERSITY OF CALIFORNIA Hatta’s Discussion Group

Upon the cessation of hostilities with the Dutch in December 1949, I resumed my secondary school studies, graduating in 1951. I then enrolled in the Faculty of Law and Social Sciences at the University of Indonesia, studying economics. When a separate Faculty of Economics was established in 1951, I immediately transferred to it. During this period, I was greatly influenced by Hatta1 and by Sukarno. We all looked up to Hatta as the role model for an Indonesian economist. I admired him as a national leader, as an economist and as a student leader — he had been chairman of the Indonesian Association (Perhimpunan Indonesia) during his student days in the Netherlands. I was also very impressed by President Sukarno’s speeches criticising capitalism — ‘Under the Banner of Revolution’, for example — and always tried to be present when he gave a speech. But what was the alternative to capitalism? Hatta’s concept of a cooperative society gave us the answer.2 When he was Vice President in the early 1950s, Hatta organised a discussion group in his official residence in Jalan Medan Merdeka Selatan, usually on Wednesday afternoons. The group consisted of about ten students, including Suhadi Mangkusuwondo,3 Kartomo, Benny Mulyana, Deliar Noer and myself. Hatta talked a lot about cooperatives during those discussions, stimulating my interest in the search for a ‘middle way’ between capitalism and socialism. I felt that neither capitalism nor communism was right for Indonesia, and that the best economic system would be one that somehow lay between the two. I later explored this subject further in my PhD thesis, submitted to the University of California at Berkeley. In it I discussed the role of institutions in economic development. I looked specifically at institutional arrangements which were neither capitalist nor socialist, but which could promote economic development, such as those outlined by Marcuse for Sweden or by Gamal Abdel Nasser (1955) for Egypt. In my writings on the Indonesian economy, I used the expression ‘Pancasila Economic System’ (Sistem Ekonomi Pancasila) to describe this middle way.4 It was my belief that the market mechanism should be allowed to operate even in a planned economy, but that the government should interfere at times of market

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failure to help the poor. Later, when in government, this view strongly influenced our economic policies. Hatta always made an effort to talk to us students, and in 1956 he told us that he intended to resign as Vice President. I opposed him, arguing that a political leader should never resign because in politics once you resigned you were out for good. I was very unhappy when he did resign, though I later understood his decision better. After the 1955 general election, and the inauguration of the Constituent Assembly (Konstituante) in 1956 to formulate the Constitution and determine the rules governing the election of the President and Vice President, Hatta felt it proper that the Vice President should be elected by the people. Hatta’s resignation had several consequences: first, the idea of a noncommunist socialist society lost ground; and second, the Outer Islands lost a powerful leader. As a result Indonesia became more centralised and Sukarno’s leadership was strengthened. With hindsight one could say that this was a good thing, as it was mainly through Sukarno that Indonesia became a unified nation. I myself felt that I was a West Sumatran before I was an Indonesian. So from that point of view Sukarno was right to establish strong central government, even a strong policy of ‘guided democracy’, and to push nation building. Hatta, by contrast, was more an educator or persuader. He wanted to promote his ideas, not by force, but through education. That approach might have worked if he had had ample time, and indeed it may have been better for the country if Hatta’s substance had been linked to Sukarno’s tactics. When the dual leadership (dwitunggal ) of Sukarno and Hatta came apart, it had unfortunate consequences for Indonesia. Field Work in Lampung

When rebellion broke out in West Sumatra in 1958, I was still an undergraduate student at FEUI. As a Sumatran I sympathised with the economic grievances of the Outer Islands. The source of their discontent was brought home to me during a field trip I made to Lampung province in Southern Sumatra. As part of the requirements for my kandidaats (third year) exams, I wrote a thesis on transmigration in South Sumatra. To do the research for that thesis I spent three months in Lampung conducting a field survey. It was coordinated by Dr Heeren, a Dutch lecturer in

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sociology at FEUI who wrote a book on transmigration in Indonesia based on his research. During that visit I noticed how much worse economic conditions were in Lampung than in Jakarta. It was difficult for us to carry out proper field research: the roads were bad, there was no public transport, and we had to get around by bicycle. One of the places we visited was Sri Bawono, later designated a transmigration site for army veterans. Part of our research involved the identification of suitable sites for transmigration; the main requirements, we soon realised, were sufficient water and good soil. Sri Bawono had both of these, and I became convinced that it was in fact the best place for transmigration in the whole province of Lampung. We discussed this with the Army, and in time Sri Bawono grew into a thriving centre of transmigration and a large, bustling town. My interest in transmigration was stimulated by Hatta, who believed in it not only as a way of relieving population pressure in Java and populating the sparsely populated areas of Sumatra, but also as a means of building a unified nation. This view of transmigration was also reflected in Heeren’s book (Heeren 1967), which was concerned with how conflicts between locals and migrants about land tenure and other issues could be avoided or minimised by cultural assimilation. This concern later proved to be justified. In Lampung province cultural assimilation is taking place among the different ethnic groups, indicating the emergence of an Indonesian society. Early Involvement with Community Development

As a result of my experiences in Lampung I became very interested in the problems of community development. After passing my kandidaats exams, I followed Widjojo Nitisastro to the National Planning Bureau (Biro Perancang Nasional, BPN), which was entrusted with formulating Indonesia’s first Five-Year Development Plan (1956–60). Two Indian experts in community development, S.K. Dey and Bongirwar, were working there. I was attached to them as assistant during their field trips to various parts of Indonesia, from Java all the way to Eastern Indonesia, even though I did not know anything about community development at the time. That was when I got to know Eastern Indonesia. Based on these trips and the recommendations of the Indian experts, a rural community development

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program was developed for Indonesia. It was implemented by the newly established Directorate General for Rural Community Development under the Department of the Interior. Mr Boediono, the former governor of East Java, was its first Director General. The basic principle of community development, as taught to us by Dey, was that workers at the village level would act as intermediaries between the villagers and the government’s technical experts; they would convey the needs and aspirations of the villagers to the technical experts, and pass on agricultural technologies and advice from them. In my view, this ‘bottom-up’ approach to community development was a good one. As it turned out, this was also the approach adopted by non-government organisations (NGOs) for their community development schemes, which is why, when I became Minister for the Environment, I was so in favour of the NGOs. In the late 1950s and early 1960s, the concept of community development came into disrepute for political reasons and was discontinued. The program was administered by Achmadi, a young, idealistic politician. Under the left-leaning political climate prevailing in the early 1960s, community development became equated with ‘people’s mobilisation’. The concept and spirit of community development suffered greatly, setting it back for several decades. In the 1990s the ‘bottom-up’ approach to community development has re-emerged in the new policy package of centre–regional transfers known as Inpres Desa Tertinggal, IDT. Under this program government funds are channelled directly to poor villages, and development activities are determined by the village communities themselves. So you could say that community development has come full circle in Indonesia. I believe this puts us far ahead in the implementation of ‘people-centred development’ — even though such phrases were not being used when we started out in 1955. Teaching at FEUI and Student Activities

After completing my work with BPN I returned to my studies at FEUI and my job as a teaching assistant to Professor Sumitro.5 In teaching economic development to the undergraduate students, I drew on the experience and insights I had gained as an officer in the Students’ Army, my field research in Lampung, and my work on community development

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at BPN, including the various trips I had made throughout Indonesia. I enjoyed teaching, and the discussions I had with students in which I would give my views on Indonesia’s economic development as seen by a ‘non-Javanese’ or ‘Outer Island’ Indonesian. Of the teaching assistants at FEUI, I was the only one who was not from Java. The others — Widjojo, Sadli,6 Subroto and Ali Wardhana — were all Javanese. As Professor Sumitro’s teaching assistant I learned to adjust Western economic theory to conditions in developing countries. The Keynesian ‘pump-priming’ theory, for instance, argues that stimulating aggregate demand will stimulate aggregate supply, resulting in economic growth. Sumitro, however, argued that in Indonesia aggregate supply would not be stimulated because the productive capacity is either not there or inadequate. Instead, imports would be stimulated, adversely affecting the balance of payments. Hence, Sumitro insisted that established economic theories from the West should not be taken for granted, but their validity questioned and tested critically against the existing economic conditions. He called this the ‘Jakarta School of Economics’. As Professor Sumitro was very busy — he was Minister of Finance at the time — he had to entrust some of his teaching load to his assistants. Sumitro’s textbook on development economics (Sumitro 1955) was to be the basis of the lectures. In addition he asked us to read Harvey Leibenstein’s work, R.N. Rosenstein-Rodan’s paper on the ‘big push’ theory and Ragnar Nurkse’s lectures on ‘balanced growth’ theory. My task was to translate these pieces into Indonesian and discuss them with the students. I was also able to use the notes Sumitro had prepared for his lectures. During my time at FEUI I was also active in a number of student organisations. At the time students did not have to adhere to a rigid study schedule, as with the current semester system, but were required only to take their propaedeuse (first-year), kandidaats (third-year) and doktoraal (fifth-year) exams within a specified period of time. This left us with enough free time for other activities. However, quite early on I was bothered by the intrusion of politics into student life, and by the infiltration of political parties on campus. I was concerned that students were not being allowed to make up their own minds, but were, rather, being ‘remote controlled’ from the headquarters of the political parties. I had a major debate on this topic with the late Maruli Silitonga —

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husband of Sumitro’s younger sister — who was then chairman of the Socialist Student Movement (GMS). Maruli argued that students had an important role to play in politics. I, on the other hand, felt that while students should have an understanding of politics, they should not become involved in party politics. This led me to the idea of a students’ ‘parliament’ or ‘government’ in which students would be trained to become politically aware citizens. We at the University of Indonesia were the first to set up such a Students’ Council. The Council decided that no party politics would be allowed on campus, a situation that still prevails today. This did not mean, however, that the students were apolitical. For instance, during the 1950s the Students’ Council held demonstrations in support of Algeria’s fight for independence, because of our abhorrence of colonialism. We subsequently established the Assembly of Indonesian Students’ Councils, representing all the Students’ Councils of Indonesia’s universities. Together with the Federation of Indonesian Student Organisations (PPMI), we organised the First AfroAsian Students’ Conference in 1956 in Bandung. I was disappointed by the strong anti-Western orientation of the Indian participants and by the pro-America orientation of the Philippine delegates. What in fact transpired was a clash between East and West, between capitalism and communism, reflecting the Cold War between the two major blocs. It became clear that the students from the various countries were unable to distance themselves from Cold War politics. After this disillusionment I decided to concentrate on my studies, and finally graduated from FEUI in 1959. Postgraduate Study at the University of California

As part of the upgrading of the FEUI teaching staff, I was selected for postgraduate study at the University of California. I went to Berkeley in June 1959 and graduated with a PhD in Economics in June 1964. Both Widjojo and Ali Wardhana were already there when our group of 1959, which included Saleh Afiff and Arief Djanin, arrived. Widjojo told us that there were two ways of studying at Berkeley. The ‘easy’ way was to aim at obtaining a Master’s degree and spend the beautiful summer season travelling around the US. The ‘difficult’ way was to take summer sessions during the holidays to earn the extra credits required for a PhD.

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At Widjojo’s urging, and remembering my father’s advice always to try to reach the top, I decided to pursue PhD study in spite of my inadequate English. I had to take a beginner’s course in calculus, as this subject was a prerequisite for econometrics, and a foreign language. It was full-time work, so I was not politically active during my time at Berkeley. My professors at Berkeley included Gregory Grossman (economic systems), Harvey Leibenstein (development economics), Henry Rosovsky (Japanese and general economic history), and Andreas Papandreou and Tibor Scitovsky (economic theory). Later several of them went to Harvard. I enjoyed the lectures of these five professors very much, particularly those of Leibenstein, even though they were very difficult. As my major thesis supervisor, Leibenstein taught me to write clearly and concisely. He advised me to write down everything I had to say on a subject in, say, 100 pages, and then to condense it into ten pages. It was hard but good training. My PhD thesis came to 300 pages, condensed from an original five to six times as long! My thesis dealt with institutional arrangements and economic development in Egypt. I chose Egypt because it was a socialist rather than a capitalist-oriented country, and because comprehensive data and information on its economy were available, particularly from the Central Bank of Egypt. Very little was available at the time on the contemporary Indonesian economy. What interested me about Egypt was that it appeared to be taking a ‘middle road’ between capitalism and communism. In writing my thesis I benefited greatly from the insights and knowledge of Leibenstein, who took a great interest in the role of institutions in economic development. I basically believe in a market economy, but that markets themselves are ‘value free’. It is the actors in the market, and the institutions which affect their actions, which are important. Government has a crucial role to play in creating the conditions in which institutions operate to stimulate the ‘enlightened self-interest’ of the actors. Nonetheless, after reading Gregory Grossman’s comparative study of economic systems and Peter Wiles’ writings on communist economic performance, I became convinced that the Soviet economic system was not an appropriate model for Indonesia. Grossman translated a number of Soviet economic texts into English. His analysis was based not only on the work of American economists, but also on Soviet sources such as Malishev and Kantorovich. So when we economists started our work for the New Order government,

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we were guided by the basic principle of relying on the market economy. We tried not to interfere in the market except to strengthen actors who were not facing a level playing field. At Berkeley, Widjojo initiated discussions on Saturdays among the Indonesian economics students, including Ali Wardhana, Sumarlin, Harun Zain and myself. They always revolved around the theme of how Indonesia should be developed. (You could perhaps say that the origins of the ‘Berkeley Mafia’ could be traced to this Saturday discussion group.) In discussing this question each of us attempted to draw on our own field of specialisation. For instance, Sumarlin discussed the public finance aspects of development, while Harun Zain, who had specialised in labour economics, discussed labour issues. Sumarlin later became Minister of Finance, while Harun Zain served as Minister of Manpower. Although Widjojo was interested in the problems of Indonesian economic development in general, his PhD thesis dealt with Indonesia’s population problems. This was because at the time demographic data were the only relatively complete data available for Indonesia. It was only during my postgraduate years at Berkeley that I began to gain a deeper understanding of economics. My earlier training was given by the Dutch professors at FEUI, including Weinreb, Kraal, Konijnenburg, Scheffer, van der Velde, van der Straaten and Beerling. They gave me an understanding of the philosophical aspects of economics, while from my professors at Berkeley I learned about economic policy tools. In Professor Weinreb’s lectures on economic theory, for instance, I learned a great deal about the philosophy underlying the concept of capital but very little about how to formulate a policy to encourage capital formation. It was in this respect that my postgraduate study in the US was so useful. I was lucky that my professors at Berkeley were of such high quality.

THE LAST PHASE OF THE OLD ORDER AND THE EARLY YEARS OF THE NEW ORDER Return to Indonesia

It was a big shock to return to Indonesia in July 1964. After becoming accustomed in the US to speaking my mind, I returned to Jakarta to be told that President Sukarno had instructed that Western economics

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textbooks were to be destroyed. Many of the friends I had studied with at FEUI had in the intervening years developed ideas and views quite different from my own. A few had become active leaders in left-leaning organisations like Democratic Youth or People’s Youth. I did not recognise my own country. Fortunately, the faculty members at FEUI had a strong esprit de corps and were united in facing external challenges. As a faculty member, I was assigned to work at the newly established National Institute of Economic and Social Research (Lembaga Ekonomi dan Kemasyarakatan Nasional, Leknas) of the Indonesian Council of Sciences (Majelis Ilmu Pengetahuan Indonesia, MIPI), which was headed by Widjojo. Actually this was more than a research institute, because the group of economists and social scientists working in it — Widjojo, Sadli, Sarbini, Koentjaraningrat, Selo Soemardjan, Nathanael Iskandar and myself — also discussed the burning issues of the day. Leknas had a relatively free atmosphere based on mutual trust, and I enjoyed working there. As I had lived overseas for several years and did not fully understand what was happening in my country, I needed to be enlightened about recent developments. I must admit that I had difficulty in adjusting. The whole atmosphere had changed since I had left for the US five years earlier. It was during this time that I learned to understand Javanese culture. We Minang people call a spade a spade. But the Javanese speak in an indirect way, saying, when something is black, rather that it is ‘not white’. My Javanese friends considered me too Americanised and helped to ‘brainwash’ me in Javanese ways. I was an obedient servant, listening carefully to the fascinating advice of my Javanese friends. One instance of the difficulties I experienced in adjusting to Javanese culture occurred during the early years of the New Order at a meeting held to introduce an artificial rice called beras tekad. At the meeting, which was chaired by General Soeharto, then Chairman of the Presidium of the new government, the person who wanted to introduce beras tekad explained its virtues. I thought the whole idea was nonsensical: the artificial rice had not succeeded in any other country and was backed by lobbyists who simply wanted to sell the equipment to produce it. After the exposition Soeharto asked the audience for comments. Most people behaved in the typical Javanese way and politely stayed quiet. I, however, had not yet been fully ‘brainwashed’, and stated bluntly that the whole idea was nonsense

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and amounted to cheating the people. Widjojo later advised me never to speak up like that again! So beras tekad was introduced (although it disappeared after a few months) and I became a converted Javanese. During my time at Leknas we discussed the serious economic problems facing Indonesia, especially inflation. At a meeting of President Sukarno’s economic ministers in Cipanas, someone suggested tackling inflation by cutting banknotes in circulation in half! I was very surprised. How could supposedly clever people trained in economics even think of lowering inflation by cutting up banknotes? I did not understand what seemed to me to be mistaken views, but Professor Sumitro later told me that my political sensitivity was still rather weak. Seskoad and the Second Army Seminar

Another important assignment upon my return to Indonesia was to teach at the Army Staff and Command School (Seskoad) in Bandung, together with Widjojo, Sadli, Subroto and Ali Wardhana, for periods of 10 days at a time. When we had to give lectures we would all take a bus to Bandung with our families. I had the privilege of teaching several prominent generals, including General Umar Wirahadikusuma, who later became Vice President during the period 1983–88. I did not lecture to General Soeharto, but Sadli did. One evening after dinner, General Suwarto, the head of Seskoad, invited us economists to a meeting. He started by saying that we could speak our minds, and that he would be fully responsible for whatever transpired at the meeting. We discussed the measures needed to aid the recovery of the Indonesian economy, including financial stabilisation and physical rehabilitation of infrastructure. That discussion eventually led to the famous Second Army Seminar, held on 25 August 1966 during the early days of the New Order, at which the problems of economic stabilisation and rehabilitation were discussed extensively. We economists were put in the so-called Syndicate of Economic Affairs, one of three groups formed to discuss the political, economic and military problems facing the new government. That was where we first met Soeharto, who was then Chairman of the Presidium of the new government. Soeharto asked us about Indonesia’s economic problems, such as inflation and budget deficits, and we explained what measures were

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needed to tackle them. Our proposals were accepted, and we were asked to draw up a Program for Stabilisation and Rehabilitation. This was subsequently incorporated exactly as we had written it in the Decree of the Provisional People’s Consultative Assembly No. 23 of 1966. The economic policy of 3 October 1966, formulated on the basis of this decree, set out policies on a balanced budget, the balance of payments, rehabilitation of physical infrastructure, food production, agricultural development in general, and so forth. Economic Policies in the New Order

The strategies to be pursued in coming years in the area of agricultural development, particularly food crop production, were a matter of debate in Indonesia. India and China had embarked on ambitious industrialisation drives, and the question arose as to whether Indonesia should not launch a similar effort. We economic technocrats argued, however, that as the great proportion of Indonesia’s population still lived and worked on the land, their purchasing power should first be raised by increasing agricultural productivity. During this early period priority needed to be given to agricultural and rural development — in other words, community development; large-scale industrialisation, which would mainly benefit the large urban centres, was not considered desirable. Raising rice production, for example, was to be done not by the state nor by large estates, but by individual farmers. In my acceptance speech as Professor of Economic Development at FEUI in 1977, I elaborated further on the notion of planning development with equity. Hence from the outset we were concerned with development with equity. I am therefore puzzled by the allegation that the technocrats only became concerned about equity (pemerataan) at a later stage. In fact, it was an important consideration right from the start. There was unanimous agreement among General Soeharto’s Personal Staff — including his political advisers, Sarbini Sumawinata, Deliar Noer, Hariry Hadi and Fuad Hasan — on the need to give priority to agricultural development. We pushed from the beginning for the rehabilitation of Indonesia’s poor physical infrastructure, including the expansion and improvement of irrigation, roads, water supply and sanitation. This was intended to benefit the rural population, particularly farmers. Later, when

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we had more money because of the oil boom, we initiated the Presidential Instruction (Instruksi Presiden, Inpres) projects such as Inpres Desa (Village Inpres) and Inpres Kabupaten (District Inpres), which were focused largely on the rural population. In today’s terminology, these projects were aimed at ‘empowering’ the people. We did not use such terms in the early years, but all the same those development projects were aimed at strengthening the economic position of the rural population. POSITIONS IN THE NEW ORDER GOVERNMENT Vice Chairman of Bappenas (1969–73)

In the early years of the New Order era we became obsessed with controlling inflation. Why was this? When I was Vice Chairman of Bappenas, the National Planning Board, I was often faced with bureaucrats who asked for the money to carry out a project without having a clear idea of what the job entailed or how to prioritise the tasks involved. Of course, they knew what they were doing, but often they did not know why and had not considered all the alternatives. Feasibility studies were, of course, unknown at the time. This led to the introduction of the Project Content Form (Daftar Isian Proyek, DIP) as the basis for determining the allocation of resources. This form required bureaucrats to put down on paper what they wanted and how much it would cost, forcing them to establish priorities. Bappenas then allocated financial resources to the various projects on the basis of need as set out in these forms. Minister of State for the Improvement of the State (1971–73)

Apparatus

While serving as Minister of State for the Improvement of the State Apparatus I learned about the various types of bureaucratic corruption. I also discovered that ministers need to be firm in closing the door on those who would like to bribe them or their families, especially when issuing lucrative tenders. The basic issue in Indonesia is one of conflict of interest: if the boss wants something, he gets it, and you don’t ask him how he obtained it. This feudal pattern continues to prevail in modern Indonesia, with its cabinet ministers, directors general and so on being

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‘served’ by their subordinates. With the prevalence of such a mentality, how can you even start to talk about ‘conflict of interest’? I had great trouble just explaining what a conflict of interest was. Where I come from we have an egalitarian community, so I did not have an instinctive ‘feel’ for this Javanese feudalism. In West Sumatra the village head (kepala desa) is not the only boss in the community; the datuk,7 the teacher and the religious leader are also community leaders, and socially rank equal. During a religious ceremony the religious leader takes precedence over the village head and sits on the mat. At an adat ceremony the adat leader is the most important person present. To counter the conflicts of interest I encountered in Java, I proposed that cabinet ministers and directors general should not be allowed to do favours for subordinates, and that their relatives should not be permitted to serve in sectors they controlled. As a West Sumatran not familiar with the Javanese feudal mentality, I had difficulty conveying what seemed to me to be fairly obvious arguments. In short, I could not get my message across. Moreover, my term as Minister of State for the Improvement of the State Apparatus was too short to achieve concrete results. While internal control of corruption, that is, control from within the system, is necessary to prevent collusion, it should also be supplemented by external control, that is, control and audit from outside the system by a free press, NGOs and so on. I found that this principle of outside control, of ‘someone looking over your shoulder’, was difficult for most Indonesian bureaucrats to accept. I was even toying with the idea of introducing an ombudsman, as I was fascinated by the role of the ombudsman in Scandinavia. However, because of the short time I served as minister, the only procedure I was able to introduce was that of transparent and open hiring of new government employees on the basis of work load (formasi) and professionalism, as specified by the government agency concerned. Minister of Communications (1973–78)

As Minister of Communications, I was able to draw on my experience in the Army: all the directors general in the department were generals. When I first assumed the post I tried to solicit their views on various matters by playing devil’s advocate. However, I soon discovered that

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when you work with the military, you have to tell them clearly what to do, and so I was forced to begin issuing instructions. I, being the Minister, was the leader, the decision maker who knew what had to be done. This was very different from my experience at Bappenas, a fairly academic institution at which the ‘back and forth’ style of academic dialogue was commonly used. Academic debate was difficult at the Department of Communications, but its members were very committed to striving for the unity of the country. While still a member of General Soeharto’s Team of Economic Advisers, I had often been sent to the outer regions (daerah) because I was from the daerah (the regions outside of Java). For instance, I was sent to Eastern Indonesia to explain the new economic policies of 3 October 1966, visiting Makassar, Manado, Ambon, Kupang and Jayapura. Those visits took place at a time when interisland transportation was still poor. At every place, you hopped on to a different type of plane to fly to the next. I noticed that in some places the military commanders were still acting like ‘warlords’, and upon my return to Jakarta I reported the matter to General Soeharto. He subsequently recalled these ‘warlords’ to Jakarta and had them replaced forthwith. Through experiences like these I realised the importance of having a strong central government to create one nation, one country and one united economy. The shortcut to achieving these objectives was to acquire the Palapa satellite communications system. At the time, though, this was considered an expensive ‘white elephant’ project (proyek mercu suar) that the country could ill afford, particularly as it was suggested at the time of the Pertamina crisis.8 The only countries that had such a system were the US and Canada. There was always the risk that the project might fail and that the millions of dollars spent on it could be lost. The counterargument was that this was the only efficient means I could see of uniting our vast country. After all, communication by ship or even by plane takes time, and requires the building or expansion of harbours and airports. In the event the project was successful. At the opening ceremony President Soeharto talked by phone to the Governor of Aceh province in Banda Aceh and with the Governor of Irian Jaya (now Papua) in Jayapura. The symbolic importance of this was very evident. As Minister of Communications I could see that a major constraint to the development of Eastern Indonesia was its inadequate physical

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infrastructure. Many ships were unable to sail to some parts of Indonesia because of the lack of fuelling facilities. For instance, to cover the islands of Maluku, we needed a base for oil tankers as well as supporting facilities for the maintenance of tankers and other ships. South Sulawesi, which was in a very poor state in the 1950s, is now booming because of the improvements that have been achieved in infrastructure. Because of the crucial importance of infrastructure in uniting and developing our country — and because private enterprise was not moving into this field — I felt that government intervention was needed. That is why a pioneer (perintis) airline and shipping line were introduced. It was based on the simple logic that if the private sector was not interested in moving into these sectors, the government would have to do so. The government subsidised airline services to distant isolated regions which sometimes had only a football field to serve as a landing strip. This was the only way that medical services could be provided to isolated areas in Kalimantan, Sulawesi, Nusa Tenggara, Maluku and Irian Jaya. Minister of State for Development Supervision and the Environment (1978–83)

As Minister of State for Development Supervision and the Environment, I tried to continue my earlier work as Minister of State for the Improvement of the State Apparatus by pushing for external control of the system to prevent corruption. However, I came to realise that there was also a risk involved, because the agent exercising external control — the press, for instance — might have a hidden agenda. When someone starts criticising something, you begin to wonder who the fellow is, why he is focusing on one aspect of an issue rather than another, and why he is calling for external control. This bothered me, and led me to realise that external control is a necessary but not sufficient condition for curtailing corruption. One needs to deal as well with the issue of institutional arrangements, which is so important in economic development. I looked at Malaysia and India, both of which had a good civil service corps left behind by the British. Their civil servants had a strong esprit de corps; officers were loyal not to the various departments, but to the civil service corps itself. This was not the case in Indonesia. Our civil servants were more loyal to the various departments they served than to their country. Why? Because it was the department that

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‘appreciated’ them, providing them with fringe benefits such as housing and cars. I tried to establish a single, interdepartmental Staff School for Civil Servants (Sespanas), akin to Seskoad, mentioned earlier. Unfortunately, however, Sespanas was absorbed within the organisation of individual departments. When I started to set up the organisation for the Office of State Minister for the Environment, I felt the hard reality of not having a national civil service corps. As Minister of State I did not have any staff, and so I needed to recruit people from other departments — the Departments of Public Works, Health and so forth. But because I was unable to provide the customary benefits, such as housing and a car, they did not want to work for me. Fortunately several NGOs helped me out during the first years. Strengthened by my earlier experience in ‘bottom-up’ development, and supported by NGOs who worked with me without asking for payment, I began to appreciate the calibre of the NGOs’ young workers. Admittedly, some NGO people are radical, but in general I found them to be good to work with and very idealistic. However, to avoid trouble the NGOs need to learn how to manoeuvre rather than confronting the government head-on. In the book Tulisan-Tulisan dari Sahabat-Sahabat Soeharto [Writings by Soeharto’s Friends], I wrote an article in which I discussed Soeharto’s views on menang tanpa ngasorake, or ‘getting things done without hurting anyone’s feelings’. That is one thing I have learned during my years working with the President: to stick to my main objectives while manoeuvring to get things done. Incidentally, that was also Widjojo’s style. But because I had learned not to be confrontational, some NGOs and several of my students accused me of being an opportunist. The first thing I did as Minister for the Environment was to convey the message to industry that I had the President’s ear. I had asked President Soeharto what he expected of me in my new position, and he had assured me that he wanted me to make a serious effort to tackle environmental problems. He said that he did not want Indonesia, as it industrialised, to make the same mistake of environmental degradation and depletion as the developed countries. He instructed me to find a path of sustainable development on which economic development could be combined with protection of the environment. So it was not an either/or choice between development and protection of the environment, but rather a merging of the two.

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During my term as Minister, I was also a member of the World Commission on Environment and Development (the Brundtland Commission). It was very helpful to work under a supportive President while also sitting on such a commission. It was chaired by Gro Brundtland, the Prime Minister of Norway, who wanted to promote global economic growth, but at the same time was also interested in preserving the global environment. I was lucky to serve as Minister at a time when environmental issues had become a matter of international concern, as reflected, for instance, in the debate on the limits of growth. When talking with businessmen, I made it clear that I was not against business as such, but against actions that damaged the environment. For instance, in my talks with representatives of the timber industry, I pointed out that Indonesia’s forests were a strategic resource which could be exploited, but only in a sustainable way. I adopted the Javanese approach of not engaging them in confrontation, but trying rather to gain their confidence and reassure them that I did not have a hidden agenda. I also used this approach when discussing the Clean Rivers (Program Kali Bersih, Prokasih) program with industry representatives. I mentioned the companies that were guilty of polluting the environment, and that also happened to be owned by politically well-connected businessmen. I told their representatives to inform their bosses that I wanted them to clean up the rivers they had polluted, and warned them that I would report to the President if the clean-up was not carried out within a specified period of time. President Soeharto always backed me up fully. But you had to be honest with him and tell him what measures were being taken against the offending companies, some of which were owned by influential citizens. In all cases President Soeharto told me to proceed, although he advised me to inform the offending companies first about the steps that were to be taken against them. He also asked me to report back to him on any further developments. I had the feeling that President Soeharto was genuinely interested in environmental protection. For instance, when I was first appointed Minister for the Environment, he told me that he was a village man: he had been born in a village, and had grown up playing in the nearby forests and rivers. Once President Soeharto gave a beautiful speech in Wonogiri to inaugurate a dam. He spoke of how, near where he now stood, there had once been a forest in which he had walked and seen many animals, and

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a river in which he had once swum. Now nothing of that was left. ‘How can we be responsible for this to our children and grandchildren?’ he asked. I noticed that he spoke these words with some emotion. Minister of State for Population and the Environment (1983–93)

President Soeharto was a keen fisherman. He used to fish in the Bay of Jakarta, but later had to move to the Sunda Straits and eventually to waters near the nature reserve of Ujung Kulon because of dwindling fish stocks. In 1983 I had an appointment with the President on his boat in the Bay of Jakarta. We talked about many things, including fishing. Then, looking at the bay, the President commented on how dirty the water was and told me he wanted it cleaned up. That was the start of my new assignment as Minister of State for Population and the Environment. I rarely became discouraged in this position, although I sometimes felt frustrated when talking with other ministers about what needed to be done in the sectors they controlled. One minister assured me that he was keen to cooperate but that he would like five years first to prove himself in his own portfolio; then I could move in to tackle the environmental problems. If all ministers thought along these lines, I would get nowhere. This problem is what we in Indonesia call ‘sectoral egoism’. To address this problem I followed the tactic of ‘putting sugar in the tea’. If ‘sugar’ represents the environment and ‘tea’ sectoral development, then it could be argued that the environment is a necessary ingredient in the success of the sector concerned, just as sugar enhances the taste of tea. Thus Hartarto, then Minister of Industry, would be considered successful in his portfolio if manufacturing industries were also concerned with environmental protection. My main constraint was that I was not an executive agent and had to work through the other ministers. Although the ideas I had for tackling environmental matters had to be implemented through other ministers, of course, some did not like my ideas, let alone want to implement them. However, if environmental problems did arise, I was held responsible. So the difficulty I faced was to convince the President and Bappenas, which was in charge of budget allocations to ministries and other government agencies, that I needed an agency for implementing environmental protection. Finally it was agreed to set up such an agency:

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the Environmental Impact Management Agency (Badan Pengelola Dampak Lingkungan, Bapedal). In tackling environmental problems, timing is very important. It would have been far more difficult to set up Bapedal in 1978, when very few people would have recognised its importance. The conditions had to be created for people to feel that environmental protection was necessary. Even so, conflicts on the environment were inevitable, including, regrettably, conflicts with colleagues. For instance, in the case of the Pantai Indah Kapuk (PIK) real estate project, which was being built on what were once protected mangrove forests, I came into conflict with a large conglomerate. I knew that my concern about the adverse environmental impact of this project was warranted, and that the conglomerate was wrong to persist with it. Knowing that I had a strong case, I fought very hard to annul the project. However, when I met the owner of the conglomerate to discuss the matter, he told me that my opposition was futile because he had already been granted a licence by another minister. If I took steps against the conglomerate, I would also be taking steps against the minister concerned, leading to an internal fight between ministers. It later turned out that the licence and other supporting documents had been granted to the conglomerate long before I became Minister for the Environment, although it was only during my term that the project was being implemented. The owner said that he was not to blame as he had formally applied for and obtained a licence for the project from the Indonesian government. I then asked my colleague why a licence had been granted in the first place. His excuse was that at the time there had been no Minister for the Environment, and so no consideration was given to the environmental impact of a project when granting licences. Unfortunately, environmental considerations could not be applied retroactively, and approval, once given, could not be withdrawn. It was also unfortunate that all the evidence about the adverse environmental impact of the project came to light only after all the necessary documents from the minister, the regional government and various agencies had been provided. In the end, however, I did reach agreement with the conglomerate to preserve the protected mangrove forest in the development of the project. In spite of such setbacks, I drew great satisfaction from my work as Minister for the Environment. I was able to establish a good rapport with

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a number of religious groups that had a good understanding of environmental issues. I was also able to form good working relations with youth groups, women’s organisations and NGOs, and they gave me a lot of support and encouragement. In a sense the activities of these various groups also marked the emergence of a civil society, although at the time that grand term was not being used. Looking back on my experience as a cabinet minister for over two decades, I would like to point out that it was Widjojo who was the real architect of the economic policies of the New Order. He was the dalang, or puppeteer, who directed the play, while we, the other economic technocrats, were the players, the wayang. We used to call him lurah (village head), and we still do. Widjojo was able to carry out his economic policies because Soeharto trusted him; the President knew that he did not have a ‘hidden agenda’. Widjojo was also able to rely on us, his fellow economists, because we all shared similar views on the need to pursue sound economic policies. POST-MINISTERIAL ACTIVITIES Professor of Economics at FEUI

At present my main activity is teaching at FEUI — specifically in the postgraduate program — which I like very much. I teach environmental economics, sustainable development and policy issues, and I find that the students are quite interested in these subjects. I use texts by Pearce, Tietenberg, Warford, Kahn and others. Environmental economics is a new subject still in the initial stages of development. I hope to write a book on this topic. Environment and Development-Related Activities

Since my term as Minister of State for Population and the Environment ended in 1993, I have continued to be involved in various activities related to development and the environment. In 1994 and 1995 I was engaged at the international level in preparations for the UN-sponsored Conference on Social Development in Copenhagen. At preparatory meetings there was a lot of talk about the emergence of a civil society in developing countries. Listening to these discussions, I had the feeling that I had

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already witnessed such a development in my own country: nothing was said that we in Indonesia did not already know. I had the same experience when I became involved in preparations at the international level for the UN-sponsored Conference on Population in Cairo. At the Conference it was pointed out that population was not just a demographic problem, but also a qualitative and family issue. We had already reached that view a long time ago, and as a matter of fact our Law on Population No. 10/1992 explicitly mentions this. Unfortunately, though, our views had not been translated into English. I get rather bothered when people from the developed countries tell the developing countries about the importance of ‘people-centred development’ or ‘another road of development’, as happened at Copenhagen. We have been trying to implement ‘peoplecentred development’ for years. Both Kismadi — my assistant when I was Minister for the Environment — and I had been active in the World Commission on the Environment and Development. After retiring from the Commission we established the Foundation for Sustainable Development (Yayasan Pembangunan Berkelanjutan, YPB). We believe that the prerequisite for achieving sustainable development is not so much skills as capacity building. To achieve this, the Foundation is cooperating with Leaders on Environment and Development (LEAD), which is chaired by Sridath Ramphal, the former Commonwealth Secretary General. LEAD provides a global training program for leaders in environment and development, in which Indonesia, specifically the Foundation, is a participant. We select promising young ‘rising stars’ in business, academia, the press and so forth — people we feel can play an important role in promoting and realising sustainable development — to participate in the training program. Maria Hartiningsih from the Kompas daily, for instance, who is now active in writing about the problems of sustainable development, went through this program. At the request of Sarwono Kusumaatmadja, the new Minister of State for the Environment, I also recently established the Yayasan Kehati (Biodiversity Foundation). Sarwono told me that President Soeharto had asked him to approach me about setting up this Foundation. It has received financial assistance of $16 million from the US government on the condition that the money be channelled not to the government but directly to NGOs. My work with NGOs has confirmed my opinion that in general they are a very good community, and not corrupt. At present the government

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is very strong in terms of the skills, brainpower and overall capacity it has at its disposal, especially in the Ministry of Finance and Bappenas. Because of this it needs a countervailing influence, such as could be provided by the NGOs. To play such a role, the non-government sector, including the NGOs, needs to concentrate urgently on capacity building. We now have a strong private business sector employing a lot of highly trained PhDs and MBAs as well as a strong government sector, but a weak civil sector. I think our society needs organisations like the NGOs in which young, idealistic and well-educated people are active. A third institute that I recently established, this time at the request of the Minister of Forestry, was the Eco-labelling Institute. This was considered important as Indonesia had agreed to fulfil its commitments to the International Tropical Timber Organisation (ITTO) by the year 2000. In addition to these activities, I am involved in UN-related work. For instance, I am a member of the UN’s high-level Advisory Board on Sustainable Development. I am invited to meetings almost every month but attend only the most interesting. Member of ICMI

I am an active member of the Indonesian Association of Muslim Intellectuals (Ikatan Cendekiawan Muslimin Indonesia, ICMI). Some people have wondered why I joined this Association. The fact is that in Indonesia we are still searching for a development path that is not so ‘Western’. What bothers me about the Western model of development is its overemphasis on materialism and its neglect, even ignorance, of religion; if I talk about religion in the US or Europe, I know it sounds a bit odd. Indonesia wants to develop its economy, but having met the basic needs of its people, the idea arises as to how to give more emphasis to non-materialistic, spiritual goals. Islam provides some answers in this respect as it can be considered a universal religion, that is, one not only for Moslems, or even for all mankind, but for the universe as a whole, including all living organisms. How can we promote development without overemphasising materialism; how can we achieve a balance between the material and the spiritual? I discovered that I was not alone in asking these questions, and that other Moslem intellectuals, such as Nurcholis Madjid, Abdurrachman Wahid and Amien Rais, shared my concerns. Of course, when ICMI was

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established there were some opportunists who joined for ulterior motives or to get close to its chairman, Habibie, the Minister of State for Research and Technology. However, most people did so because they wanted to achieve a balance between material and spiritual concerns, feeling as I did that neither the Western development model nor the ‘fundamentalist Islamic’ model provided the answers. It is important to emphasise that the existence of ICMI will not lead to sectarianism. One will not need to be a Moslem in order to become a director general, lecturer or whatever. In other words, being a Moslem should certainly not be a prerequisite for career development. Islam is not a religion which favours sectarianism. When the prophet Mohammad conquered Medina, where there were a lot of religious groups, he proclaimed that everybody had the right to continue to observe his own religion as long as it was helping them become a person of better character (akhlak), a better human being. The essence of Islam is character, soul. What we want to project into the future is a better balance between material and spiritual development, a more balanced society. Basically, Indonesia has a harmonious society; for want of a better name it could be called a Pancasila society. ICMI does, of course, play a political role, largely because of Habibie’s close association with the President. However, if you attend ICMI meetings you notice a great concern, an uneasiness, about the overemphasis on material development. It is therefore of interest to note that during the last Christmas and New Year holiday season more middle class people went to Mecca for the umroh than went to the US. Even the military are organising groups to go to Mecca for the umroh. Member of T im P-7

I am a member of the Team of Advisers (Tim P-7) to the President on the Pancasila, chaired by Sudharmono, the former Vice President. Other members have included the late Ali Said, Ismail Saleh, Bintoro Tjokroamidjojo, Bustanul Arifin, Cosmas Batubara and a few others. What I find interesting about Tim P-7 is our discussions on such topics as Indonesia’s essential nature and the meaning of Pancasila. Indonesia is different from Malaysia, even though its people are of the same Malay race, and so must have a different character or, perhaps, ‘soul’.

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Adviser on Africa

In recent years the old group of economic advisers — Widjojo, Ali Wardhana, Sadli, Suhadi and myself — received a new assignment from President Soeharto. In his capacity as Chairman of the Non-Aligned Movement (NAM) from 1992 to 1995, he asked us to explore ways of assisting African countries. Even after his term ended in 1995, the President wanted us to continue our work on Africa. With Sadli, I visited a number of African countries, including Zambia, Ghana, Mozambique, Ethiopia, the Ivory Coast, Tanzania, Kenya and Zimbabwe. I found it fascinating that these countries had the same problems we faced in the late 1950s and early 1960s. What were the similarities? A strong leader, a centralised government, runaway inflation and poor infrastructure. Many African countries were experiencing great difficulty in carrying out structural adjustment reforms, just as we had. To balance the budget they had to reduce expenditures on social development, including spending on public health and pensions — although I noticed that military expenditures were not affected. When I raised this issue, I was told that such expenditures were outside the normal budget. Many African countries have two budgets, a normal budget and an army budget, and this has led, of course, to widespread corruption. The funds obtained from corruption are transferred and invested overseas, instead of being spent within the country on the development of infrastructure. Even city roads in these countries are terrible! Of course Indonesia, too, has a lot of corruption, but at least most of the funds are reinvested within the country. A meeting chaired by Robert McNamara, then Chairman of the Global Coalition on Africa, and attended by its co-chairman, Jan Pronk (the Dutch Minister for Development Cooperation), and all the presidents of Africa, looked at the issues facing these countries: military spending, inflation, corruption and poor infrastructure. McNamara advised the Africans to learn from Indonesia how to get their economies in order. Taking the decision to control inflation is hard and requires courage. I think that in this respect Soeharto made a major contribution in the late 1960s. That making tough economic decisions does make a difference is evident from the relative economic performance of Indonesia compared to some other major developing countries. When I was in Bappenas, the

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World Bank advised us to visit Nigeria — which, like Indonesia, had oil — and Pakistan. These countries were then considered to be success stories that Indonesia could emulate. Now Indonesia has a higher per capita income than both Nigeria and Pakistan. REFLECTIONS ON THE PRESENT AND THE FUTURE

A major problem at present is the Presidential succession. I recall that in 1964, too, we were worried about the lack of possible successors to President Sukarno, and when people talk about the succession problem it reminds me of similar discussions we had then. There will certainly be a solution to this problem in Indonesia, if not by design or any plan. My worry is more whether we will have a ‘soft’ landing, or a ‘hard landing’ as in 1965. However, unlike in the past, we now have many highly educated and highly trained people. There is bound to be one among them who can do the job. The demands on a president depend on the spirit of the times, with each time period requiring a different type of leadership. During the Sukarno period it was difficult, if not impossible, to have economic development as the country was not united; we were still split into many ethnic groups. We needed a Sukarno to hold the country together. Sukarno’s great contribution was that, with his magic and charisma, he built Indonesia into one nation. Later we needed a low-profile president like Soeharto to initiate economic development. In our next stage of development I sense that we will need a leader who places more emphasis on democracy and decentralisation, to give substance to the notion of diversity with unity. I believe that the right leader will emerge at the right time. One problem which must be faced is the need for greater decentralisation. That is why the policy of regional autonomy, which was proclaimed in April 1995, is so important. This trend towards decentralisation follows the increasing deregulation of the economy: you cannot have deregulation without decentralisation of the government administration. I also believe that in the year 2003 there could be a change in the electoral system towards a modified proportional system based on districts. Such a system would be more suitable for a more decentralised political system. Anyway, we are moving in the right direction, even if the pace of change is a little too slow.

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Soeharto still believes in the virtues of stability. When President Cory Aquino visited Indonesia, he advised her to make stabilisation her priority. But what does stabilisation mean for the pace of democratisation? If stabilisation is emphasised over everything else, progress towards democracy will be slow. But with development, democracy can grow. The crucial question, then, is how tight the grip on democracy should be. Perhaps an apt metaphor would be that your grip should not kill the bird in your hand, but also should not permit the bird to fly away. There is no fixed formula for such a policy, and you just have to feel your way. The Philippines, for instance, is an example of a country with much democracy but little stability. Indonesia must now move towards having greater democracy for the sake of stability. Although Indonesia’s national motto is bhinneka tunggal ika (unity in diversity), we have over the past 25 years placed too much stress on tunggal (unity) at the expense of bhinneka (diversity). With decentralisation, the problem arises as to how far we can or should go in furthering the bhinneka principle. My feeling is that we can maintain the cultural identity of the various ethnic groups — in my case, for instance, my Minang identity — while still preserving Indonesia’s national system. Over time people are definitely identifying more with ‘Indonesia’ than with a particular ethnic group; I see this tendency in my own son. I therefore feel that on the whole we are on the right track. While some would argue that the speed of change should be faster, it should not be so fast as to become destabilising. Admittedly the system is not perfect, but we are going in the right direction, as indicated by current efforts towards deregulation, decentralisation and democratisation. That we are headed in the right direction is also indicated by Soeharto’s strong commitment to APEC.9 This was his own decision, and was based simply on commonsense. Soeharto reasoned that Indonesia, faced with increasing globalisation and the information revolution, and located between two oceans and two continents, was bound to become an open economy; therefore it would have to join APEC. Unlike many other leaders, Soeharto picked up this argument, developed it, and then made a full commitment to APEC — recognising, of course, that it would not be easy. A number of people, including some of his own ministers, were uncertain about the President’s strong commitment to APEC, and thus Soeharto was ahead of his ministers in this respect.

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Commonsense is Soeharto’s particular strength. During the early years of his rule he took notes on what he heard; now we are the ones taking notes! I hope, though, that he can continue to appreciate good advice. Once Soeharto has taken a decision, he doesn’t easily change it. An example of this was the decision to devalue the rupiah in September 1986. In a speech to Parliament on 16 August, President Soeharto had stated that there would be no devaluation of the rupiah, but because of the steep drop in the price of oil and the appreciation of the yen, commonsense dictated that it should be devalued. The question was, would political considerations or commonsense prevail? Although many people around the President, including businessmen and the Army, were against devaluation, Soeharto nevertheless took the difficult and unpopular decision to devalue. Another unpopular decision Soeharto took was to open the capital account of the balance of payments. In the early years of the New Order. I attended a meeting on the Plan to Import Goods (Rencana Impor Barang, RIB) at which we had to decide how to spend Japanese aid money of about $60 million (actually a stop-gap loan). I was shocked to learn that it was to be spent on vetsin (monosodium glutamate), tyres, cement and other products that the bureaucrats thought were important for the stabilisation of the economy. As a market economist I was horrified at the way in which this large amount of aid was to be disbursed, and I told Widjojo so. Widjojo went to Soeharto to discuss the wider problems of a command economy, including the RIB policy. After listening to Widjojo, Soeharto, using commonsense, took the decision to lift foreign exchange control as early as 1967, making Indonesia the first developing country to do so. This decision turned out to be a good one, and it has reduced corruption. In fact, many businessmen and bureaucrats who had profited from the RIB were aghast when it was abolished. Despite what has been achieved over the past 25 years, today quite a few Indonesians are dissatisfied. To address their concerns, in the next 25 years Indonesia will need to swing more towards decentralisation and a democratic political system, with my personal preference being for a district electoral system. We will also need to relax the emphasis on stability. When I talk with the students, they accuse me, or the technocrats in general, of being responsible for the rise of conglomerates, for widening social and economic disparities, and for the lack of social development;

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they advocate a new model of development. I don’t blame them, because they are not aware of the difficult economic conditions my generation experienced in the early 1960s, such as queuing to obtain certain goods. I still remember having to go all the way to Tanjung Priok to get Camelpo (dried milk powder) for my newborn son. But my son does not know what I am talking about when I tell him about such things. However, the solution to the problem lies not in changing the development model, but rather in improving the implementation of the model. In many cases the market is being distorted by managed trading, with preference being given to particular business people or monopolies. In our economic system, connections and nepotism play an important role at the expense of the proper functioning of the market; the byproducts are corruption, collusion and immoral conduct. Opening the market and eliminating price distortions must therefore become the major task of the Second 25-Year Long-Term Development Plan. When I look at the statistics published by the BPS, the Central Bureau of Statistics — in Fifty Years of Indonesia’s Statistics (BPS 1995), for example — they give a very rosy picture of the Indonesian economy. I worry a little whether everything really is that good, or whether something has not been overlooked. The incidence of absolute poverty has indeed declined, regardless of which poverty line is used, as has the infant mortality rate, while life expectancy has risen. Considering that Indonesia has a population of about 200 million, the progress in socioeconomic development has been remarkable. The problem now is to reduce not only the number of people living under the poverty line, but also the discrepancy between rich and poor. The success of development has made people more conscious of equity issues. Equal accessibility for all to credit, opportunities, technology and advancement must be the basic rule of development if we are to reduce resentment and dissatisfaction. I am also very concerned about the quality of education. My students write poor papers, and there is little debate or discussion in my classes. It is as though what I tell the students is the absolute truth. It is true that I myself only learned how to write papers and how to debate and discuss course material while at Berkeley. I was surprised when the students there questioned the professors, as until then I had always thought of a professor as an infallible ‘guru’. This attitude, although understandable in an agrarian underdeveloped economy, must change as we move towards industrialisation

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and globalisation. To assist the student to adapt to a changing environment, the ‘guru’ must now become a ‘sparring partner’. The same logic applies to our attitude towards our leaders. Although formerly leaders were not questioned, the change of times will require a more transparent and equal relationship. This must, of course, be done politely, while still upholding respect, ethics and high moral standards. I notice that the students also suffer from an inability to reason. My own feeling is that logical thinking should be taught in elementary school, starting with mathematics. Through mathematics one learns to think logically. That is what is missing in contemporary education in Indonesia. Indonesia has undergone significant changes during the past three decades of development. The Indonesia of today is nothing like the Indonesia of 1966; similarly, the Indonesia of 2020 will not be the same as the Indonesia of today. In the process of change we must make use of science, technology and rational thinking, but without losing sight of the need to develop our morals, ethics and culture. Although Indonesia will change, it must not lose its basic character. A new generation will emerge that is well equipped to meet these challenges. Looking back over the past 30 years in which Indonesia has successfully undergone significant change, I am confident that we have the capacity and capability to meet the challenges of the next 30 years. It is in this spirit that I am optimistic about Indonesia’s future. NOTES 1 Hatta was a leader of the independence movement who served as Prime Minister and Vice President of Indonesia in the Old Order period. He was born in West Sumatra and represented Outer Island interests in the early post-independence years. A moderate, he resigned in 1956 because of increasing disagreement with President Sukarno’s policy of ‘guided democracy’. He later served as special adviser to President Soeharto. 2 Hatta has been called ‘the father of the Indonesian cooperative movement’. Translations of some of his economic writings are found in Feith and Castles (1970). 3 An interview with Suhadi appeared in the BIES in April 1996 (Suhadi 1996). 4 Pancasila is the official state ideology. 5 Dean of the Faculty in the 1950s and a minister in both the ‘Old Order’ and ‘New Order’ governments. See his memoirs in the BIES (Sumitro 1986).

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An interview with Sadli appeared in the BIES (Sadli 1993). Datuk is the adat (traditional) custom leader in a Minang family clan. Pertamina is Indonesia’s state-owned oil company. In 1975 it had to be rescued from insolvency by the government. Suhadi (1996, pp. 45–8) also discusses Indonesia’s and ASEAN’s involvement in APEC.

REFERENCES BPS. Fifty Years of Indonesia’s Statistics. Jakarta, 1995. Feith, Herbert, and Lance Castles eds. Indonesian Political Thinking, 1945–65. Ithaca NY: Cornell University Press, 1970. Heeren, H.J. Transmigratie in Indonesie [Internal Migration in Indonesia], J.A. Boom en Zoon, Meppel. Translated into Indonesian in 1979 as Transmigrasi di Indonesia [Transmigration in Indonesia]. Jakarta: PT Gramedia, 1967. Nasser, Gamal Abdel. Egypt’s Liberation: The Philosophy of the Revolution. Washington DC: Public Affairs Press, 1955. Sadli, Mohammad. “Recollections of My Career”. Bulletin of Indonesian Economic Studies 29, no. 1 (1993): 35–51. Suhadi, Mangkusuwondo. “Recollections of My Career”. Bulletin of Indonesian Economic Studies 32, no. 1 (1996): 33–49. Sumitro, Djojohadikusumo. Ekonomi Pembangunan. Jakarta: PT Pembangunan, 1955. —— . “Recollections of My Career”. Bulletin of Indonesian Economic Studies 22, no. 3 (1986): 27–39.

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Subroto, Professor at the Faculty of Economics, University of Indonesia (FEUI), is one of the architects of the economic policies that brought growing prosperity to Indonesia over the New Order years. Educated in Dutch colonial and Japanese occupation schools, he joined Indonesia’s independence struggle, and later studied economics at FEUI, McGill University, MIT, and Stanford and Harvard Universities. He taught international economics and business cycles at FEUI and was Secretary of the Faculty. With Widjojo Nitisastro, Mohammad Sadli, Ali Wardhana and Emil Salim, Subroto was appointed a Personal Economic Adviser to General (later President) Soeharto’s new government in 1966. In 1968 he joined the Department of Trade, and later was minister of departments responsible for transmigration, cooperatives, mining and energy. After a 17-year ministerial career serving in four consecutive cabinets, Subroto was Secretary General of OPEC for six years from 1988. He remains active in Indonesia’s non-governmental Indonesian Institute for Energy Economics (IIEE), writing on energy problems, and is also Rector of the private Pancasila University in South Jakarta. As part of the occasional series of interviews with economists who have helped shape New Order Indonesia, Professor Subroto talked with Chris Manning and Thee Kian Wie of the Bulletin’s Editorial Board about his experience as a cabinet minister and as Secretary General of OPEC, and about his views on Indonesia’s economic development, particularly its energy problems.

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Reproduced from Recollections: The Indonesian Economy, 1950s-1990s, edited by Thee Kian Wie (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at < http://bookshop.iseas.edu.sg >

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FAMILY BACKGROUND AND EARLY YOUTH

I was born on 19 September 1928 in Solo, a son of Bapak Sinduredjo, a civil servant at the court of the Sunan of Surakarta, and later a bupati (district head). I was raised in religious surroundings, as both my father and mother were activists in Muhammadiyah, the moderate modernist Muslim organisation. At a young age I joined Hisbulwathon, the boy scout movement of Muhammadiyah. Hisbulwathon means the ‘army of Allah’, and its slogan was ‘Fastabikulkhairot’ — ‘compete in doing good things’. This value of ‘giving service’ greatly influenced me in later life. It was stressed by both my father and my mother. In Indonesian philosophy it is called dharma — doing something for the community (masyarakat). As my father was an official of Sunan Paku Buwono X, who was considered the last great Sunan of Surakarta, I was enrolled at the local Dutch–Indonesian primary school (HIS). Here I was taught Dutch as well as Javanese, the major medium of instruction. Reprinted from Subroto, “Recollections of My Career”, Bulletin of Indonesian Economic Studies 34, no. 2 (August 1998): 67–92, with kind permission from the publisher.

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After graduating from the HIS I continued my Dutch education at the MULO (Meer Uitgebreid Lager Onderwijs), a junior high school in Solo which provided more elaborate three-year instruction in the courses already offered in primary school. Those more fortunate, for example, Professor Sadli, entered the HBS (Hogere Burgerschool, Higher Civilian School) which, in terms of intellectual thoroughness, gave a better education than the MULO. I was in the second year of the MULO when the Pacific War broke out. After the Japanese army had occupied Solo in early 1942 they established the SMP, Sekolah Menengah Pertama (First Level Secondary School), a Japanese version of the MULO. I continued my secondary education at an SMP in a neighbourhood known during the Dutch colonial period as Villapark, but now called Banjarsari. Here we were taught Japanese, which I managed to learn rather well. After graduating from the SMP in 1944, I went to Yogyakarta to attend the SMT (Sekolah Menengah Tinggi, Higher Secondary School), which after independence became the SMA (Sekolah Menengah Atas, Senior Secondary School)). The Japanese-style SMT was equivalent to the AMS or Algemene Middelbare School (General Secondary School) of the Dutch colonial period. In the SMT I decided to apply to join the PETA (Pembela Tanah Air, Defenders of the Fatherland), the Indonesian army corps created by the Japanese army to defend Indonesia against possible attack by the Allied troops. However, I was turned down because I was considered too thin, perhaps because of malnutrition, which was common at that time. During the Japanese occupation there was a shortage of food, so the most basic foodstuffs, such as rice and sugar, were rationed. THE WAR OF INDEPENDENCE

After Indonesia’s proclamation of independence on 17 August 1945, we students of the SMT in Yogyakarta joined the PETA in fighting and disarming the Japanese army, which was encamped at Kotabaru outside the old city. During that time the Minister of Defence of Indonesia’s young cabinet announced a plan to open the country’s first military academy. General Soedirman, the commander of the fledgling Indonesian army, instructed General Oerip Soemohardjo, a Dutch-trained military officer,

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to set up the academy in Yogyakarta. I applied and was accepted as a cadet (taruna) at the academy in October 1945. I was 17 years old. My only objective was to participate in speeding up the decolonisation of Indonesia, rather than to become a professional soldier for the rest of my life. The most interesting aspect of my military training was that as cadets we immediately participated in actual fighting. In October 1945 General Mansergh, the British commander of the Allied Forces in Surabaya, sent an ultimatum to the Indonesian freedom fighters in that city to surrender all the weapons they had acquired from the Japanese army. In response to this threat Bung Tomo (Soetomo), one of the leaders of Indonesia’s freedom fighters in Surabaya, issued a call for volunteers to participate in fighting the Allied Forces in Surabaya. We fledgling cadets heeded this call, and went to Surabaya under the leadership of Major General Soewardi, commander of the military academy and trained as an artillery officer under the Dutch. It so happened that two guns had been left by the Japanese army in a Catholic school (the Don Bosco school) in Surabaya. Under the instruction of Major General Soewardi we moved these guns to a place outside of Surabaya with the intention of bombarding Tanjung Perak, Surabaya’s harbour. We did not have a compass and relied only on a map to direct the guns at Tanjung Perak as best as we could. The first projectiles did not land in Tanjung Perak but in an empty field, and thus did not cause any harm to the enemy. We then tried to make a better estimate of where to direct the guns. According to reports we succeeded in hitting some ships in the harbour, but we were never able to verify the reports. Nonetheless, it was an interesting experience for us young cadets to participate in this way in the Surabaya battle. The Allied forces in Surabaya were much stronger than the freedom fighters, so we resorted to guerrilla warfare, avoiding direct contact with the enemy but attempting to harass them as much as possible. Gradually we were pushed out of Surabaya, and had to withdraw all the way to Malang and other places outside of Surabaya. Later we had another experience of battle in Bandung and around Lembang. Bandung was then occupied by the Netherlands Indies Civil Administration (NICA), who were supported by the disarmed Japanese army. The latter had been put under the Dutch-led Allied military command.

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In 1948 I graduated from the Military Academy with the distinction of being the second best graduate. I continued to be active in the army, as we were still fighting the Dutch. After the Netherlands finally recognised Indonesia’s independence on 27 December 1949, under the terms of the agreement achieved at the Round Table Conference in The Hague in late 1949, I considered my military career to be over. I reported to my commander and sought his permission to resign from the army and resume my studies, since it had not been my intention to pursue a military career. UNIVERSITY STUDIES

On resigning from the army, I applied for admission to the Faculty of Economics of the University of Indonesia (FEUI), which had been set up by Professor Sumitro Djojohadikusumo. At that time there were still a large number of Dutch professors teaching in the Faculty, and only two Indonesian economics professors, Sumitro and Tan Goan Po. I was active in the student movement and was chairman of the Indonesian Students Association of the University of Indonesia. After I had passed the propaedeuse (first year) exams at FEUI, I happened, in my capacity as chairman of the Students Association, to meet a representative of a Canadian university who was visiting Indonesia under the auspices of the World University Service (WUS) to promote student exchanges. WUS wanted to invite an Indonesian student to study in Canada, with a Canadian student being given the opportunity to study in Indonesia. After the meeting, however, the representative concluded that he had found me to be the right candidate. So in 1952 I received a scholarship to study economics at McGill University in Montreal, and enrolled for the Master’s degree. Normally it takes two years to complete this course, but as I came from Indonesia I needed a more extended period to complete the program. Since at the time not many Asian students were studying in Canada, I became something of a curiosity at the university. I was very well received, and was accepted as a member of a student fraternity, PhiKappaPi. I greatly enjoyed my time and my studies at McGill University. Although it was considered one of the best universities in Canada, McGill’s Department of Economics was not particularly strong at that time, having no well known professors. The school for which McGill

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University was famous was the Medical School, which had developed a particular strength in neurosurgery. I majored in international trade, and my Master’s thesis dealt with the problem of the strong fluctuations in the prices of primary commodities and the related swings in the terms of trade, a serious problem for developing countries in the 1950s. I received my Master’s degree in 1956. I considered going on to a PhD degree, but could not get additional funding from WUS. As an organisation for students and financed by students, WUS naturally did not have ample funds at its disposal. I therefore had to terminate my studies at McGill. Before returning to Indonesia, I received a phone call from Professor Sumitro, informing me that there was still some money from the Ford Foundation that I could use to prepare myself for a doctoral degree. It was suggested that I should go to MIT (Massachusetts Institute of Technology), which at that time had an Indonesia Project led by Professor Benjamin Higgins. I was put under the care of Professors Benjamin Higgins and William Hollinger to prepare my doctoral dissertation. At MIT I got to know Professor Charles Kindleberger, the leading international trade expert at the time. I also met Pak Sadli, who was then doing a Master’s degree study in economics. Although I was a non-degree student, I found it useful to attend the lectures of Professors Kindleberger, Samuelson and Bishop. I spent a lot of time with Professor Kindleberger, discussing with him my proposed doctoral research on ‘The Terms of Trade: An Indonesian Case Study’. He was very helpful, and showed me a great deal of material on the terms of trade that was most valuable for my research. THE FEUI PERIOD

After a year at MIT, I returned to Indonesia in late 1956. Around the same time Pak Sadli also received his Master’s degree in economics from MIT. However, not long after the two of us had returned to Indonesia, Professor Sumitro, the Dean of the Faculty of Economics, University of Indonesia (FEUI), had to leave the country for political reasons; Professor Tan Goan Po, the Secretary of FEUI, was also about to go abroad. Although Professor Tan Goan Po was the promotor (thesis supervisor) of my doctoral dissertation, circumstances did not permit much interaction between us. He did, however, give me some academic guidance and some

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useful material for my thesis. I was therefore able to complete my dissertation, which I defended at an open session at the University of Indonesia in late 1957. Professor Tan Goan Po acted as official promotor for both me and Pak Sadli, who also defended his doctoral dissertation on the same day, one hour earlier than I did. Pak Sadli’s one hour earlier defence of his doctoral dissertation set the pattern for our future careers — I was always one step behind him. I became Minister of Manpower after Pak Sadli and later took over the post of Minister of Mining and Energy from him. After Professor Sumitro’s departure, Pak Sadli and I were responsible not only for teaching, but also for running FEUI. I taught a course on business cycles, became Secretary of FEUI and was put in charge of the administrative affairs of the Faculty, while Pak Sadli was entrusted with running the Institute of Economic and Social Research (LPEM–FEUI). After Professor Sumitro there was no Dean at FEUI, although Professor Djokosutono, Dean of the Faculty of Law, acted as our ‘protector’ and ‘supervisor’. It was a difficult period, as leftist elements were trying to infiltrate and influence FEUI. Fortunately, Professor Sumitro had laid the groundwork for the further development of the Faculty, and to that end had established an affiliation program with the University of California at Berkeley. As part of this program several American professors and lecturers came to teach at FEUI, including Professors Bruce Glassburner, Leon Mears and Donald Blake. In 1960 I relinquished the post of Secretary of FEUI, and was succeeded by Pak Barli Halim. I then received an offer to do postgraduate study in management, in those days a relatively neglected field of study at FEUI. Professor Sumitro had established an extension program at the Faculty, Perguruan Ketatalaksanaan dan Ketataniagaan (College for Management and Commerce), in which I also served as Secretary. This program eventually grew into the Division of Business Administration at FEUI, which provided the first training in this field in Indonesia. I was offered a fellowship by the Ford Foundation to study business administration at Stanford University in Palo Alto, California, at the International Center for the Advancement of Management Education (ICAME), which was sponsored by the Foundation. This Center ran four management training programs, in finance, production, marketing and

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manpower; they were run in a sequence, each lasting for one year. As I had only a one-year fellowship, I took the first training program offered — in finance. This was my first acquaintance with the problems of financial management. On completion of the training program at Stanford, I received another offer, this time from Harvard University, to participate in its International Teachers Program (ITP), which introduced university lecturers to the ‘Case Study Method’ developed by Harvard University. Upon my return to FEUI I used this method in my teaching. In the early 1960s the Communist Party of Indonesia (PKI) tried to infiltrate the University of Indonesia, but particularly FEUI. Professor Widjojo, who had returned to Indonesia in 1961, was fast emerging as a prominent economist, in part because of his role in the ‘Deklarasi Ekonomi’, ‘Dekon’ (Economic Declaration).1 In 1963 Professor Widjojo for the first time enunciated his views about how to manage an economy through state planning. In that same year Professor Sadli too gave an important speech about managing a planned economy. The ideas of these two economists set the stage for economic thinking during the Guided Economy period. Economists were in a very disadvantaged position in those days, because the profession was looked down on by President Sukarno and his regime. It was therefore a courageous act of Professors Widjojo and Sadli to state openly their views on how to run a planned economy, views which ran against the mainstream. I believe it was very important that these ideas were aired at that time. Not surprisingly, the leftist newspapers played down the importance of Widjojo’s and Sadli’s views. THE STUDENT AND ARMY SEMINARS AND THE TEAM OF ECONOMIC EXPERTS

From 10 through 20 January 1966, the Indonesian Students Action Association (Kesatuan Aksi Mahasiswa Indonesia, KAMI) and the Association of Indonesian University Graduates (Kesatuan Aksi Sarjana Indonesia, KASI) organised the first Seminar on the Economy and Finance at FEUI, whose Dean at the time was Professor Widjojo. A number of prominent people spoke at the Seminar, including Major General Soeharto in his position as Army Commander. Other speakers included General

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Nasution, Sultan Hamengkubuwono IX of Yogyakarta, and Adam Malik. FEUI economists also spoke, including Widjojo, Sadli, Ali Wardhana, Emil Salim, and I myself, as did other faculty members of the University of Indonesia, among them Selo Soemardjan and Fuad Hasan. The speeches sought to outline strategies for tackling the serious economic and financial problems besetting Indonesia and for managing the economy. This Seminar was later dubbed the Seminar on ‘The Leader, the Man, and the Gun’,2 referring to the need for a ‘Leader’ to change the conditions of the ‘Old Order’ into a ‘New Order’, a plan (‘the Gun’), and people (‘the Man’) to execute the plan. A second important seminar was held by KAMI and KASI on 6–9 May 1966, at the University of Indonesia. It was later referred to as the Seminar ‘Kebangkitan Semangat 1966 — Menjelajah Tracee Baru’ (The Awakening of the Spirit of 1966 — Exploring a New Track). In this Seminar ideas about a ‘new track’ in Indonesia’s economic development were formulated. Ali Wardhana acted as chairman and Emil Salim as rapporteur. The importance of the Seminar lay in its focus on economic, political, and cultural problems as well as on Indonesia’s foreign policy. It was a wide-ranging discussion, in essence a discourse on the further development of Indonesia. The ‘Tracee Baru’ was subsequently discussed and accepted by the Provisional People’s Consultative Assembly (Majelis Permusyawaratan Rakyat Sementara, MPRS) as the blueprint for Indonesia’s economic development. An important follow-up was the Second Army Seminar, held in August 1966 and convened by the late General Soewarto, Commander of the Army Staff and Command School (Seskoad).3 The five FEUI economists, Widjojo, Sadli, Ali Wardhana, Emil Salim and I, also presented papers at this Seminar, where we met General Soeharto for the first time. There was something special in the relationship between us economists and the army, because all of us had participated in the war of independence. After independence was achieved, some of us continued to ‘wear a green shirt’, while others ‘wore a white shirt’. But since we had all experienced the same struggle for independence and had more or less the same ideals and enthusiasm, this military–civilian relationship in 1966 was unique. The civilian academics included not only faculty members of the University of Indonesia, but also academics from Gadjah Mada and Padjadjaran Universities. However, at least in the field of economics, the five FEUI economists played the major role.

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At this time Pak Sadli talked for the first time about the army’s ‘dual function’ (dwifungsi). The original idea came from General Soewarto, who developed the concept of a ‘double weapon system’: the ‘military weapon system’ and the ‘socio-economic weapon system’. This idea eventually grew into the concept of the military’s ‘dual function’. Our performance at the Army Seminar attracted the attention of General Soeharto. Major General Alamsyah was then entrusted by General Soeharto with continuing the working relationship with the five FEUI economists. On 12 September 1966 General Soeharto in his capacity as Head of the Cabinet Presidium (Ketua Presidium Kabinet) issued a Decree establishing a Team of Experts in the Field of Economics and Finance (Tim Ahli Bidang Ekonomi dan Keuangan) and a Team of Experts in the Field of Politics (Tim Ahli Bidang Politik). The Team of Economic Experts consisted of the five FEUI economists, while the Team of Political Experts consisted of Professor Sarbini, Sulaiman Sumardi, Fuad Hasan, Deliar Nur and Hariry Hadi. The Team of Political Experts was coordinated by Major General Alamsyah, while the Team of Economic Experts was under the coordination of Major General Sudjono Humardani. On 13 September 1966 General Soeharto issued another Decree commissioning the Team of Economists to provide a ‘synchronous formulation of planning and coordination by four teams, for exports; the rehabilitation of industry and textiles (sandang); infrastructure planning; and food production’. On 25 June 1968 a further Presidential Decree was issued, officially dissolving the Team of Economic Experts. We continued to serve the new government, but now in a personal capacity. I think it was Ali Wardhana who was first appointed Minister of Finance, while I was appointed Director General of Marketing at the Department of Trade. The Minister of Trade was General Yusuf; he was later replaced by Ashari, who in turn was succeeded by Professor Sumitro. As Director General of Marketing I therefore served under three Ministers of Trade between 1968 and 1971. Widjojo and Sadli were still outside the government at that stage. As Minister of Trade, Sumitro tried to remove the various administrative hurdles to foreign trade, particularly those caused by the multiple foreign exchange rate regime. Under this regime all foreign exchange earnings had to be handed over to the Bank of Indonesia, which then allocated them to importers for the import of various goods classified by their relative importance. Differential rates of exchange applied to various categories of

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imported goods. It was Professors Sumitro and Ali Wardhana who were responsible for the abolition of this cumbersome regime. In the Department we tried to reduce other impediments to foreign trade, including tariff protection. It was also part of my responsibility to try to help Indonesia penetrate new export markets. However, we were not yet engaged in multilateral trade negotiations. During his term as Minister of Trade Sumitro tried to promote indigenous (pribumi) Indonesian importers and exporters. I found him an excellent mentor and tutor, and the experience I gained during my term at the Department of Trade was very useful when I later became a cabinet minister. Even while serving in the government I and the other four FEUI economists continued teaching at the Faculty, as a result of an understanding between President Soeharto and FEUI. In other words, we were ‘on loan’ to the government. When we were on an overseas assignment, our teaching responsibilities were carried out by our teaching assistants. I continued to teach a course on international economics. MINISTER OF TRANSMIGRATION AND COOPERATIVES

In 1971, in the middle of the First Five-Year Development Plan (Repelita I), I was appointed Minister of Transmigration and Cooperatives. My appointment as Minister was not part of a cabinet reshuffle. I replaced General Sarbini, who had been an artillery officer, as Minister of Transmigration. Cooperatives was then under the Department of Home Affairs, but was subsequently moved from one Department to another, combined first with Transmigration when I was Minister, then with Trade in the Department of Trade and Cooperatives, and later with Small Business Development under the Department of Cooperatives and the Development of Small Business. In 1971, however, the embryo had developed of a Department of Cooperatives, albeit combined with Transmigration: until that time there had been a Directorate General rather than a Department of Cooperatives, so I was the first Minister of Cooperatives. Transmigration

While in this post I had to devote equal attention and energy to transmigration and to cooperatives. During my term we developed a rationale for transmigration that was not based purely on demographic

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considerations. In the Dutch colonial period transmigration was seen as a way to resettle people from densely populated Java to the underpopulated regions outside of Java. Instead, we developed a transmigration model that was part of the national development effort. We used this model to estimate how transmigration might cause not only ‘push’ but also ‘pull’ effects. The ‘push’ effect was due to the fact that Java was becoming overpopulated and many farmers were becoming landless. The ‘pull’ effect was created by moving these landless farmers to regions outside of Java and establishing new ‘development centres’ in those regions. The ‘development centres’ would generate new activities and attract people from Java. These ‘pull’ and ‘push’ effects were to become the mechanism for moving people; the movements were initially to be completely sponsored and financed by the government, but it was hoped they would later become entirely voluntary. During my term as Minister of Transmigration we also introduced the first Law on Transmigration, putting the rationale for transmigration into a legal framework. Looking at the philosophy of development in Indonesia at the time, the approach to transmigration was initially driven by the goal of self-sufficiency in rice. The transmigration program was in effect an extensification of agricultural development, opening new land for cultivation. Later it involved the expansion not only of food crops, but also of commercial (cash) crops. This was the purpose of the ‘new development centres’ which, it was hoped, would generate multiplier effects in the regions, at the same time lessening population pressures on Java. However, Java’s population pressure could not be lessened by transmigration alone, because more people were moving to Java for educational and economic reasons. Hence, the net migration effect of interregional population movements within Indonesia was positive for Java in the early years. The desirability or effectiveness of the transmigration program cannot be assessed on demographic grounds alone, as it could not solve Indonesia’s demographic problem. Its objective was to create ‘new development centres’ in the regions outside of Java, and in historical perspective President Soeharto’s decision to make transmigration a priority development program was a wise one. A major transmigration problem faced at the time was how to match the demand for suitable transmigration areas with the available supply. There was a surge in demand for transmigration from landless farmers in

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Java, where population growth in the early 1970s was still very high, around 2% per year. Empirical evidence indicated that the plots of land available to farmers in Java were becoming smaller and smaller through population pressure, and that the number of landless farmers was increasing steadily. When we opened up the new transmigration areas, there was excess demand for these lands, as we could only accommodate a relatively limited number of people. Since the purpose of transmigration at the time was to open up areas ready for cultivation, the preparation of new land proved a major bottleneck. We did not have the resources to tackle this in an integrated fashion, using bulldozers and other equipment. There were two types of land available for transmigration: governmentowned land and land owned by the marga (traditional groups or clans). To acquire land owned by the marga, one had to negotiate with them, and the outcome had to be based on a win–win proposition. The marga themselves were also entitled to develop certain pieces of land that we had, and we were required to reserve a certain percentage of the available land for their use. Of course, sometimes problems arose with the transfer of land, but these were settled peacefully through negotiations. Difficulties occurred because the local (kabupaten, district) governments wanted to attract migrants, but sometimes placed them in rather isolated locations in order to develop those areas. Some were so difficult to reach that they had no links with the major consumer centres. In these cases transmigration was not very successful. The lesson of this experience was that transmigration areas should not be located far from existing centres unless roads were built to link the transmigration area with the nearest centre. There were two land settlement programs I was studying at the time. The first was the Brazilian scheme to open up the northeast region along the Amazon. This was a large-scale program: farmers were allotted plots of 150 hectares, which were opened up with large bulldozers. Such a large-scale program was not feasible in Indonesia. The second program I studied was Malaysia’s FELDA (Federal Land Development Authority) scheme for providing new land to smallholders, a scheme that was, however, very expensive. We had to develop a scheme that was not too costly but was attractive to farmers. We gave two hectares of land to each new farmer. One-quarter

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of the allotted land was to be used for the homestead, and three-quarters for the cultivation of rice or other crops. One hectare was to be used for cash crops, to enable the farmers to sustain themselves economically. A disadvantage of moving people in groups from Java to the transmigration areas was that there were often elderly people in the groups. While it was an advantage to move people as a community, so that they did not feel estranged in their new environment, one drawback was that productivity was adversely affected by the presence of these older people. Cooperatives

With the government’s emphasis on developing cooperatives, agricultural intensification was to be achieved through the establishment of ‘village cooperatives’ (Koperasi Unit Desa, KUD) and ‘village enterprises’ (Badan Usaha Unit Desa, BUUD). Through the KUD and BUUD, the ‘Mass Guidance’ (Bimbingan Masal, BIMAS) and ‘Mass Intensification’ (Intensifikasi Masal, INMAS) agricultural intensification programs were launched. The BIMAS campaign included five elements or ‘efforts’ (panca usaha): the provision of fertilisers; the use of pesticides; the use of new hybrid rice (high-yielding varieties, or HYVs); the expansion and improvement of irrigation; and improved cultivation techniques — sowing seeds in rows instead of broadcasting them randomly, to facilitate the clearing of plots. The increased output of the farmers (rice) was handed over to the KUD, which purchased it at or above a guaranteed floor price. In other words, while farmers were free to sell their rice, the KUD was required to help them by purchasing it at prices that guaranteed the farmers a minimum level of income. During my term as Minister of Cooperatives we also introduced the Law on Cooperatives. The rationale for establishing village cooperatives in the early years of the ‘New Order’ government was that the economic development process in Indonesia should start with development in rural areas, as the majority of Indonesia’s population was living and working there. By developing the rural areas first, effective demand for manufactured products would be created by the expected increase in productivity and in real and disposable incomes. The development of the manufacturing sector would be stimulated through this increase in effective demand. The

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purpose of the village cooperative movement was to help the agricultural sector in marketing its products, and to provide it with loans and important inputs, including fertilisers and high-yielding seeds. The idea of developing the agricultural sector first was discussed intensively among the five economic technocrats. A popular model of development was the Indian model which from the beginning emphasised the development of heavy industry. Our emphasis, however, was to begin by developing the rural sector. Fortunately in promoting this idea we had a very sympathetic ear from President Soeharto because of his background. Our simple model was based on the assumption that an ‘upward spiral movement’ would result from increased effective demand by the agricultural sector and from the increased supply of agricultural inputs to stimulate the growth of the industrial sector. The industrial sector would make use of the agricultural inputs to produce outputs which would in turn be used by the agricultural sector as inputs. I believe cooperatives should develop as part of a voluntary movement, driven by the desire of members to improve their standard of living. When I was Minister, we did not ‘pamper’ new cooperatives, but instead trained them to become active and self-motivated. We only provided credit to cooperatives if they could clearly indicate how they would use it, and if they had good prospects for further growth. The present approach to cooperatives is different. They are being pampered, which is not pedagogically sound, because they are not stimulated to be ‘self-starting’. Hence, although at present there is a larger number of cooperatives, the quality of most of them is not what it should be. I think this trend began when responsibility for the KUD was taken over by Bulog (Badan Usaha Logistik, the Logistics Agency). MINISTER OF MANPOWER, TRANSMIGRA TION AND COOPERATIVES

After Professor Sadli left the Department of Manpower in March 1973 to become Minister of Mining in the Second Development Cabinet, his former department and my own were merged to become the Department of Manpower, Transmigration and Cooperatives, of which I became Minister. During his term as Manpower Minister, Professor Sadli had laid the basis of the labour movement by encouraging the formation of a new

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government-sponsored labour union (Serikat Pekerja Seluruh Indonesia, SPSI). I believe it was important to have a labour organisation at that time. I remember visiting Yugoslavia with Sadli to study worker–management relations: there, labour was not so subordinated to management, but worked together with management on an equal basis. Sadli thought that SPSI could, on the basis of collective bargaining with management, determine the wages and conditions of workers. I did not introduce significant changes in manpower policy, but more or less continued the policies set out by Sadli. But to protect workers in case of accident I introduced the ASTEK (Asuransi Tenaga Kerja, Workers Insurance) scheme, which was essentially a Provident Fund for workers. It was not a life insurance scheme, but was intended to insure workers against accidents, and at the same time to encourage them to save. While workers had to set aside a portion of their earnings for insurance, it was the employers who had the major obligation to provide insurance. The ASTEK insurance scheme was only available to workers who belonged to a trade union and who were employed in an established large or mediumsized company. We were not able to provide protection to casual workers employed on a daily basis, who moved from one company to another. In fact, the number of these casual, unorganised workers was quite large. In general, the ASTEK scheme was well received, as accidents do happen in the workplace, and when a worker had an accident, his family was supported by ASTEK. Another program was the BUTSI (Badan Usaha Tenaga Kerja Sukarela) scheme for sarjana (university graduates); it was a kind of Peace Corps, under which sarjana would work in village development programs on a voluntary basis. Originally, the scheme was not related to the further careers of the participating sarjana, but if they later applied for employment in the public sector, they were given priority. The BUTSI was not initiated to create job opportunities for unemployed university graduates, as we did not have the problem of graduate unemployment at the time. We felt that graduates could gain useful experience working with real development problems at the village level, and viewed the scheme rather as providing them with an educational opportunity. Young graduates from medical school who worked under a different scheme were required to serve in rural areas for two to three years, and accountancy graduates faced a similar obligation to work in small

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towns for a certain period. For economists, law graduates and others who did not have such an obligation, the BUTSI provided the opportunity to gain first-hand knowledge of development problems at the village level. During my term as Minister of Manpower we also established Technical Training Centres (Balai Latihan Kerja, BLK) in the provincial capitals. These training facilities were started with a grant from the (West) German government, and were established for people in certain technical occupations, such as electrical technicians, mechanical workers and carpenters. Particular types of centres were established in provincial capitals in accordance with the preferences of each province, so that the technicians trained were those the provinces really needed. Indonesia was a member of the International Labour Organisation (ILO), and we had to accept the ILO’s convention on labour rights, including the right to strike and the right to establish a labour union. Although we accepted the convention, we slightly modified the interpretation of the rights; for instance, although we respected the right of the workers to strike, we added the stipulation that they must first inform the Manpower Department of their plans. Once we knew about such plans, we set in motion the machinery to bring the management of the affected company and the workers together, with a representative of the Department as a mediator. In this way we were able to create a coolingdown period which often enabled us to avoid a strike, at least if some of the major demands of the workers could be met. However, it should be admitted that in those years labour discontent was not yet a major problem. MINISTER OF MINING AND ENERGY

After my term as Minister of Manpower ended in 1978, I was appointed Minister of Mining and Energy, a post I held for two terms (1978–88). During Professor Sadli’s term as Minister of Mining, energy affairs, such as electric power and nuclear energy, were outside the purview of the Department of Mining, but as Minister of Mining and Energy I was put in charge not only of the exploitation of minerals, but also of energy matters. By the time I assumed this post most of the major problems associated with the Pertamina crisis of 1975, which Professor Sadli had faced during his term, had already been settled, and General Ibnu Sutowo had

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been replaced by Piet Haryono as head of Pertamina, the state-owned oil company. The remaining problems that I inherited were manageable; the main challenge was encouraging Pertamina to undertake new oil exploration activities. To encourage exploration the following concepts were introduced, which remain to this day the major elements of Indonesia’s energy policy. The first is intensification of exploration. There are many potential energy reserves in Indonesia, but they are spread all over the country in small stratigraphic traps. If Indonesia wishes to continue producing and exporting oil, it must intensify exploration for new oil reserves. The second pillar of Indonesia’s energy policy was diversification of energy resources. This meant that Indonesia should not rely solely on oil, but should use all the types of energy resources available in the country, including coal, natural gas and geothermal energy. This was the time when we encouraged use of coal in power plants, exploration for geothermal energy resources, and construction of hydro-power plants near large newly built dams in West, Central and East Java. The third pillar of energy policy was conservation of energy resources. Although the possible exhaustion of energy resources was not yet an urgent problem, we could foresee that it would become so in the near future. Hence it was considered advisable to make a start on conservation sooner rather than later. To this end we introduced a national program for energy conservation, spreading the message through government directives, lectures, offices of the government, and industry. However, we were not very successful: we soon discovered that energy conservation is a lifestyle value that must be internalised as part of one’s value system. The fourth pillar of energy policy was what we then called indexation. By this we meant that for a particular activity one should use a particular type of energy. For instance, for transportation one still had to use petrol, but for power generation one could use coal, natural gas, or hydroelectric power. For industry one could use natural gas, which was then being rapidly developed in Indonesia. The main idea was that we should continue to export oil, while domestic energy use should rely, as far as possible, on resources that could not be exported, such as geothermal energy. Indonesia possesses ample coal reserves, but the bulk of these consist of low quality brown coal, which is highly polluting, as its carbon dioxide (CO2) and sulphur dioxide (SO2) content is quite high. The best quality

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coal is anthracite, but Indonesia possesses only limited amounts of this. Second best in quality is bituminous coal, third best is sub-bituminous coal, and the lowest quality coal is brown coal. Unfortunately, most of Indonesia’s coal reserves are of the latter two types, which are not exportable. This low quality coal can, however, be used for power generation, as we can now use clean coal technology to reduce the sulphur content of coal substantially, thus lessening pollution effects. The exploitation of natural gas began in 1976 when Pertamina, at the time still headed by General Ibnu Sutowo, opened the first gas field at Arun, in Aceh province. The General had the daring and foresight to develop the abundant natural gas deposits in Arun and in Badak, East Kalimantan, in cooperation with Mobil Oil and the Huffington company, both from the US. Mobil was to develop the Arun field and Huffington the Badak field. During my term as Minister of Mining and Energy we also developed the Duri field in Minas, Sumatra. This contained very heavy oil that could not be exploited in a conventional way. Instead, it was necessary to pump water, chemicals or other substances into the well to make the heavy oil more liquid and push it upwards. This was called the enhanced oil recovery (EOR) method. An interesting experience of my time in Mining and Energy was an OPEC meeting I convened in Bali in late 1980, right after the outbreak of the Iran–Iraq war. One of our first tasks was to organise an OPEC Ministerial Conference. At that meeting everybody was against bringing the representatives of Iraq and Iran together in one room, because of the possibility of violent conflict between them. However, I felt that it was essential to show the world that even a war between two founding members could not disrupt OPEC’s operation. When I became Minister in early 1978 I quickly realised the importance and power of OPEC: in the late 1970s the OPEC countries combined were the major source of petroleum, producing 30 millions barrels a day, while the non-OPEC countries combined were producing only 18 million barrels a day. No wonder OPEC was such a powerful international organisation, and feared by Western countries. For this reason I felt it essential to preserve the integrity and unity of OPEC, even though a war had broken out between two of its founding members. Fortunately I was able to persuade the other OPEC member countries that we should have a meeting to prove to the outside world that OPEC

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was still an effective organisation. I was also able to persuade them to hold the meeting in Indonesia. To the surprise of everybody, representatives of both Iraq and Iran attended. Before the OPEC meeting I had visited both countries to persuade them that it was essential they attend, because economic cooperation within OPEC had to continue in spite of the war. The danger of the Iran–Iraq war was that Iran would close the Straits of Hormuz. If this were to occur, oil from the Middle East, amounting to 5–6 million barrels a day, would be unable to enter the international market. This possibility aroused panic in the world oil market, and as a result the price of oil shot up from $12 a barrel before the Iran–Iraq war to $24 a barrel immediately after the war had broken out in 1980. Subsequently, it rose even further, to $32 a barrel. In hindsight I think it was a mistake for OPEC to defend the oil price at this level, because the steep rise was due not to its own efforts but to an extraneous factor, the Iran–Iraq war. The outside world wrongly believed that OPEC was behind the rise. But OPEC’s mistake was its defence of the oil price at such a high level. OPEC tried to defend the price by so-called ‘supply management’. This later led to the setting of export quotas for each of the OPEC member countries. However, when the oil price shot up to $32 a barrel, the oil-importing countries experienced great difficulty in paying their oil bill. Not surprisingly, they then sought ways to reduce their dependence on oil. The organisation of oil-importing countries, the International Energy Agency (IEA), which had been established after the first oil shock in 1973/74, intensified its efforts to coordinate all the measures of its member countries to lessen their dependence on oil. As a result of these efforts, on the demand side there was downward pressure on the price of oil. However, on the supply side the oil-producing regions that were economically not directly affected by the Iran–Iraq war, such as those around the Gulf of Mexico, the Alaska North Slope and the North Sea, were encouraged to intensify oil exploration and production. These efforts were successful and led to a rapid increase in oil production by the nonOPEC oil-producing countries. OPEC now faced a problem in defending the high price of oil. It tried to limit oil production, but increased production by the non-OPEC countries entered the oil spot market, putting downward pressure on the price of oil. To recapture its market share, OPEC then had to lower its selling price. This set in motion a race between the OPEC and non-OPEC

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countries to maintain market share. The non-OPEC countries steadily increased production which, in turn, put further downward pressure on the price of oil. The declining trend in the price eventually led to an intolerable situation in October 1986, when a reduction in oil production became imperative to maintain the prevailing price. The critical nature of the situation was evident from the fact that Saudi Arabia, the largest oil producer in OPEC, which in 1979 was producing 11 million barrels a day, had reduced its oil production to only 3 million barrels a day in 1986. This was felt necessary because Saudi Arabia, being the largest oil producer in OPEC, was the organisation’s ‘swing supplier’. This steep reduction in its production was considered unacceptable by Saudi Arabia. It refused to continue being the ‘swing supplier’ or ‘residual supplier’ of OPEC, and began to increase its oil production again to 4–5 million barrels a day. As a result, the price declined once more. Several OPEC meetings were convened in Vienna to come to grips with this problem and reach agreement with Saudi Arabia about limiting production again. As a result, the price of oil recovered. OPEC members were of course jubilant about the steep increase in the oil price, which was truly a source of windfall profits. Indonesia had invested a large part of the windfall in agricultural and rural development, and this investment eventually led to the achievement of rice self-sufficiency in 1985. The price of oil stayed at a high level until 1982, when it began to decline as a result of a weakening in the world oil market which, in turn, was caused by increased production in the non-OPEC countries. It was the wisdom of Professor Widjojo and President Soeharto that they both foresaw the inevitable decline in the price of oil that indeed took place in 1982. During a cabinet session in 1983 the Indonesian government for the first time decided to seek new sources of government revenue and foreign exchange earnings, as it realised that it could no longer depend on oil revenues. To this end new tax laws were designed to tap new sources of non-oil tax revenues, in order to compensate for the steep decline in oil tax receipts. A problem remained in regard to domestic fuel consumption, because the price of crude oil in the world market was still relatively high, hovering around $23–25 a barrel. During the early stages of economic development, many poor Indonesians continued to use kerosene as a fuel for lighting and cooking. As economic development proceeded and a growing middle

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class emerged, the demand for petrol increased, to fuel the growing number of motor vehicles these people could now afford. The problem was that while the crude oil price was high, the price of kerosene for the large majority of low income people had to be held at a relatively low level. The provision of government subsidies to bridge this price differential was considered essential. As the price of crude oil went up, the subsidies had to be increased accordingly. The situation now is quite different, as the price of crude oil has steadily gone down, and has now stayed below $20 a barrel for a long time. On the other hand, the domestic price of fuel has been steadily increased in line with the rising incomes of the population, with the fuel subsidy declining accordingly. In fact we no longer need the fuel subsidy. In the early days it was in my view essential, at least when the price of crude oil was still above $20 a barrel and per capita income was below $500. By the mid-1990s (before the financial crisis) it was no longer necessary. It has now been terminated except for kerosene, whose domestic price is still below the international price of crude oil. The subsidy for kerosene is being financed through cross-subsidisation by the price of petrol. SECRETARY GENERAL OF OPEC

During my term as Minister of Mining and Energy between 1978 and 1988 I had to serve as OPEC President many times. Usually the term of an OPEC President is one year, but this could be extended. In fact, I served in this capacity five or six times. The position of OPEC Secretary General is rotated alphabetically on the basis of country name. The Secretary General is responsible for handling the day-to-day administrative and organisational affairs of OPEC and is the spokesman for the organisation. In 1963–64 an Indonesian, Dr Sanger, a Pertamina official, served for the first time as OPEC Secretary General. The first Secretary General had been Dr Rohani, an Iranian delegate, who had been very active in OPEC. After Iran, a representative from Iraq was the second Secretary General, followed by an Indonesian delegate. During the period 1978–83 the Minister of Mining from Gabon served as OPEC Secretary General, while an Iraqi served as his deputy. After the Iran–Iraq war broke out in 1980, OPEC was split into two opposing camps, with Iran on one side and the Arab countries on the

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other. In addition to these two camps there was a third, neutral camp consisting of Indonesia, Nigeria and Venezuela. When the election of a new Secretary General was due in 1983, the Iraqi camp came up with a candidate who was vetoed by Iran. Iran then proposed a candidate who was in turn vetoed by Iraq. Between 1983 and 1988 OPEC did not have a Secretary General, being unable to reach a consensus about the appointment. Because of this stalemate, the Deputy Secretary General of OPEC, an Iraqi, served as Acting Secretary General during this period. By the time my term as Minister of Mining and Energy ended in March 1988, OPEC was discussing the possibility of appointing an Indonesian as Secretary General, since Indonesia was neutral. As the OPEC members already knew me, I was summarily drafted to the position in July 1988. According to the Statutes of OPEC, the selection of the Secretary General should be based on merit, and the appointment should be for a three-year term, with a possible extension for one further term. In 1991 I was re-elected for a second term, covering the period 1991– 94. This was rather a record, as no one had ever served two terms as Secretary General. OPEC confronted several challenges during the 1970s. One of the major ones I faced was the unremitting struggle between the oil-producing and the oil-consuming countries. OPEC was regarded as a ‘big boy’ by the industrial world, as never before in history had a group of developing countries dared to set the price of a very important, strategic commodity. The main architect of the strategy against OPEC at that time was Henry Kissinger, then the US Secretary of State, who wanted to destroy the organisation. The prevailing spirit was one of sharp confrontation between the oil-producing and the oil-consuming countries. This confrontational stance has persisted until now. It is reflected by the fact that foreign oil companies are still viewed with great suspicion, not least in Indonesia. They are believed to come into the country only to pursue maximum profits and then disappear as fast as possible. This is seen as the cause of the roller-coaster movement of the oil price: $1 a barrel in 1970, $4 after the Arab–Israeli war of late 1973, then up to $12, up further to $32 after the outbreak of the Iran–Iraq war in 1980, then down to $9 in 1986, up again to $40 during the Gulf war against Iraq in early 1991, and then down again to $11. These price fluctuations were not good for either oil producers or oil consumers. Both parties needed a more stable price level that would only

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fluctuate within a certain band. I think there is now a better understanding between oil producers and oil consumers. This is reflected by the fact that both parties now can sit down together and exchange ideas about oil production and demand. As a result, the oil market has become more transparent and stable. When I became Secretary General of OPEC, my chief concern was to bring oil producers and consumers — OPEC and the IEA — together. It happened that the Executive Director of the IEA at the time, Mrs Helga Steeg, was someone I had met during a visit to West Germany when I was Minister of Manpower. This was very helpful when we met again as the respective representatives of OPEC and the IEA, and tried to improve relations between the two organisations. The rationale for this effort was that both organisations were actually in ‘one ship’. I stressed that it was not in the interests of OPEC to achieve the highest price for oil, nor was it in the interests of the oil-consuming countries to get the lowest price possible, since a low oil price would again raise demand. In other words, efforts to achieve either the highest or the lowest price would lead to an inherently unstable and volatile situation. I therefore felt that we needed to achieve a pricing mechanism that was both acceptable to consumers and workable for producers. Through the establishment of regular contact between OPEC and the IEA, a working relationship was developed at the technical level. However, a good relationship on the political level could not yet be established, since the Western oil-consuming countries still considered OPEC a ‘dirty’ organisation out to harm them. But by paying regular visits to the IEA and giving talks, I attempted to create a better understanding of the aims of OPEC on the part of the oil-consuming countries. These efforts proved fruitful, with the first dialogue between the oil-producing and oil-consuming countries being established in Paris in 1991. This was indeed a breakthrough, as it was the first time that representatives of the oil-producing and oil-consuming countries had sat together around a table to discuss matters of common interest. Although at this first dialogue we did not agree on anything substantive, we nevertheless concluded that sitting together and discussing matters of mutual interest was useful. Hence, a second meeting was convened in Sarpsborg, Norway, in 1992, and a third was to be convened in Cartagena, Spain, in 1993. This third meeting was postponed when the Gonzales government of Spain fell, and instead was held in 1994 in Madrid. In

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1995 a fourth meeting was held in Caracas, Venezuela; this also happened to be the first time that a meeting was held in an OPEC member country. It was very gratifying to see the gradual transition from confrontation to cooperation between OPEC and the IEA. This shift in approach was the outcome of an increasing awareness on the part of both parties that each stood to gain from reducing uncertainty and increasing transparency in order to achieve stability. There were of course some sceptics who wondered about the usefulness of such meetings in which the most essential issue — the price of oil — was not discussed. The reason for this was that the Americans as a matter of principle objected to discussing the issue of price. They considered OPEC to be a cartel, and fixing the selling price of a cartel was objectionable to them. Moreover, American anti-trust law would not allow the US government to participate in negotiations with a cartel to set the price of its product. In view of the American objections we attempted to tackle the issue of price in an indirect manner, by discussing demand and supply in the world market. In this way we came to a tacit understanding about the major question of price without explicitly mentioning it. Avoiding discussion of price was actually the only unwritten, mutually agreed rule of these meetings. The fifth OPEC–IEA meeting has been held in India. Although a member neither of OPEC nor of the IEA, India will become a very important net oil consumer in the near future. Although India produces some oil in an area near Bombay, the so-called Bombay High, amounting to about 800,000 barrels a day, the quantity is far from adequate for India’s rapidly growing demand. When I was Secretary General of OPEC my other passion was to establish a good working relationship with the non-OPEC oil producers. This was of course not easy, as the oil producers were all in fierce competition with each other. (Indeed, even within OPEC the respective member countries were intense competitors.) Not surprisingly, there was some scepticism about my efforts to achieve a working relationship with the non-OPEC oil producers. However, I felt that at the very least we could establish a forum where we could sit together and, for example, exchange market information. The efforts to promote cooperation between OPEC and the nonOPEC oil producers proved successful and led to the establishment of a

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new organisation called IPEC, the Independent Petroleum Exporting Countries. The major IPEC member countries include all the non-OPEC oil producers that are still developing countries. Developed country nonOPEC oil producers such as Britain are not members of IPEC. The only developed country IPEC oil producer is Norway. The IPEC member countries include Mexico, Angola, China, Malaysia, Egypt, Oman and Norway. During my term as Secretary General, OPEC and IPEC held frequent meetings to discuss matters of mutual interest. Malaysia had never joined OPEC, because Prime Minister Mahathir considered it too small an oil producer, with an output of only around 300,000 barrels a day. I told him that OPEC members included small oil producers, such as Ecuador — which produced even less oil than Malaysia — and Gabon. But Mahathir was actually very shrewd in not joining OPEC, because member countries had to pay a contribution to the organisation and to subject themselves to OPEC’s supply management, having to agree under certain conditions to restrict their oil production. By not belonging, a country avoids these requirements: if oil prices go up, the country will benefit, and if prices go down it will not have to make the sacrifice of reducing its oil production. Moreover, as Malaysia is a relatively small producer, its actions will not affect the price of oil in the world market. Unlike OPEC, IPEC is a loose organisation without a permanent secretariat. OPEC and IPEC met periodically to discuss matters of mutual interest, such as technology and exchange of market information. However, with Norway being a member of IPEC and also of the IEA, it was difficult to discuss the price of oil. Having succeeded in bringing OPEC and IPEC together comfortably to discuss matters of common interest gave me great satisfaction, as such a climate of mutual understanding had not existed before. Admittedly, in terms of concrete results not much was achieved, but the fact that the two organisations were willing to sit together was in itself already an achievement in my view. In fact, I consider this the high point of my career as Secretary General of OPEC. On the other hand, the low point was the Gulf war, which led to the international blockade and embargo of Iraq that has lasted for such a long time, and which I have found very sad. Iraq was after all one of the founding member countries of OPEC, along with Iran, Saudi Arabia, Kuwait and Venezuela, when the organisation was established

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in 1960 in Baghdad. Moreover, the United Nations ban on Iraqi exports of oil deeply hurt the Iraqi people. I remember a meeting in Riyadh, Saudi Arabia, in early 1990, before Iraq marched into Kuwait, where Iraqi Oil Minister Hisyam Challabi demanded that the price of oil be set at $23 a barrel. At the time it was hovering around $18 a barrel. Challabi stated that he had been instructed by President Saddam Hussein to persuade OPEC to increase the price to $23 a barrel, and that if he were not able to do this he might well be replaced by another minister. Saudi Arabia and Kuwait did not agree with Iraq’s demand, and two days later Iraq marched into Kuwait. The relationships between the various oil ministers of the OPEC countries depended very much on their personalities. There was nevertheless a feeling of camaraderie, particularly when Sheikh Zaki Yamani was still Saudi Arabia’s oil minister. Yamani was a person of outstanding qualities and charisma. He was a very smooth and suave diplomat who could get others to agree with him not through overt pressure, but because of the power of his arguments. Yamani was highly regarded in OPEC, but unfortunately there are no longer such figures in the organisation. Yamani did not trigger the first oil shock, as is alleged by some people. In fact, the first oil shock was caused by an exogenous factor, the Arab–Israeli war of late 1973. As a result of that war the Arab countries introduced an embargo on the export of oil. At the time the embargo worked, because there was a big ‘swing supplier’, Saudi Arabia, which agreed to restrict its oil production. During my own and later Ginandjar Kartasasmita’s term as Minister of Mining and Energy, Indonesia played a modest but nevertheless important role as a moderator and facilitator among the various OPEC member countries. However, these days I detect a change in the character of the representatives. In the past, although they were technocrats, the various oil ministers did have political weight. The present ministers are technocrats only, and as a result the turnover of ministers seems to be very rapid. There has been a decline in the continuity of certain policies, and OPEC has steadily been losing its political influence. THE OUTLOOK FOR INDONESIA ’S ENERGY RESOURCES

Indonesia still has a number of indigenous energy resources that can be exploited at lower cost than nuclear power. For this reason I am not in

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favour of relying on nuclear power as a major source of energy in the future. A nuclear plant such as has been envisaged for Indonesia that would generate 2 times 900 MW (megawatts) would cost $7 billion, while a plant that could generate 3 times 900 MW would cost $9 billion. In terms of cost per kwh (kilowatt hour), a 600 MW nuclear plant would cost $5.58, while a gas-powered combined cycle plant would cost $4.10. Hence a gas-powered plant would be cheaper than a nuclear one. A coal-powered plant generating 600 MW with diesel-pulverisation equipment would cost $6.30 per kwh, and thus be more expensive than a nuclear plant. Therefore, of the three viable alternative sources of energy for Indonesia in the future, a gas-powered plant would be the cheapest and a coal-powered plant the most expensive. Although a coal-powered plant would be slightly more expensive than a nuclear plant, Indonesia could rely on its own coal resources, whereas the fuel for a nuclear plant would have to be imported. POSTSCRIPT: THE PRESENT CRISIS

I feel very sad about what has been happening in Indonesia since the monetary and financial crisis hit the country in July 1997. The work of the past 30 years has been evaporating before our eyes. Rapid economic growth of 7–8% per annum is a thing of the past, and in 1998 the gloomy forecast is that the economy will shrink by more than 10%. The inflation rate, held to single digits for many years, is predicted to reach at least 80% by the end of the 1998. Gone is the balanced budget that dominated most of the last three decades. With subsidies for food and fuel running into trillions of rupiah, and revenues declining because of a shrinking economy, a huge budget deficit is unavoidable. The rupiah, whose value before July 1997 was around Rp 2,500/$, is almost worthless at Rp 12,000– 15,000/$. Indonesia faces, in a particularly vicious form, the downward spiral seen in Thailand and, to a lesser extent, Malaysia. On the political side the outlook is also uncertain, few expect President Habibie to be more than a transitional figure. Some predictions of what might follow him give Indonesians many sleepless nights. There are worries about the rise of political Islam; the army may decide the economic outlook is too grim to allow fractious politicking; the country could descend into chaos and even break up. Or perhaps, somehow, we can reverse the economic decline and avoid political breakdown.

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It may take three or four years to rebuild the economy. A huge catchup process has to be undertaken, and we must work hard and efficiently, applying modern management and production techniques. My sincere hope is that within a couple of years Indonesia will be ‘leaping’ again.’

NOTES 1 See the interview with Professor Sarbini Sumawinata, “Recollections of My Career”, Bulletin of Indonesian Economic Studies 28, no. 2 (1992): 43–54, for a detailed account of the origins and content of the Dekon. 2 The papers presented at the Seminar were first published in 1966 in a book entitled ‘The Leader, the Man, and the Gun’ by PT Matoa, Jakarta; they were subsequently republished in 1984 under the title Jalur Baru Sesudah Runtuhnya Ekonomi Terpimpin (The Leader, the Man, and the Gun) — Seminar KAMI, by Sinar Harapan, Jakarta. 3 Mohammad Sadli, “Recollections of My Career”, Bulletin of Indonesian Economic Studies 29, no. 1 (1993): 35–51.

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Teuku Mohamad Daud

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Teuku Mohamad Daud, a pioneer Indonesian entrepreneur, was born in Perlak, Aceh, in 1920. Educated in Aceh and Jakarta, he joined the fledgling Indonesian National Army (TNI) at the proclamation of independence in 1945. Charged with procuring military equipment for the TNI Sumatra Command based at Bukittinggi, West Sumatra, Mr Daud was forced to finance the procurement by smuggling agricultural commodities, with the help of his uncle, Teuku Abdul Hamid Azwar. In 1947, at the suggestion of Vice President Hatta, Mr Daud and his uncle established Indonesia’s first state-owned general trading company, the Central Trading Corporation (CTC, renamed PN Tri Bhakti in 1961, and later PN Panca Niaga), based in Bukittinggi. Mr Daud became a director of CTC while remaining on the TNI staff, and was later President Director until his resignation in 1966. He and several colleagues then established a group of private companies, engaged mainly in construction work. On 1 October 1996 and again in June 1997, Mr Daud talked with Howard Dick and Thee Kian Wie of the BIES Editorial Board about his experiences in running CTC, both during Indonesia’s revolutionary struggle and in the early period of independence, and about his views on the role of government in commerce. References to current government policy relate to the Soeharto administration. Teuku Mohamad Daud passed away in 1999.

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Reproduced from Recollections: The Indonesian Economy, 1950s-1990s, edited by Thee Kian Wie (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at < http://bookshop.iseas.edu.sg >

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12 TEUKU MOHAMAD DAUD

YOUTH AND EDUCATION

After completing my primary education in Aceh, I left for Jakarta (then called Batavia) to pursue my secondary studies at a Dutch high school (Hogere Burgerschool, HBS). I had access to a Dutch education at this exclusive institution because my father was a hulubalang (a district chief in Aceh). I boarded with a Dutch family throughout my high school years in Jakarta. When the Pacific War broke out and the Japanese invaded British Malaya, I was called back to Aceh by my parents. At the time there was no air transport, and travelling by sea was becoming dangerous. So I took the train from Jakarta to Merak and crossed the Sunda Strait by ferry to reach Tanjung Karang on the southern tip of Lampung. My father had sent a car all the way from Aceh to collect us. My younger

Reprinted from Teuku Mohamad Daud, “Recollections of My Career”, Bulletin of Indonesian Economic Studies 35, no. 3 (December 1999): 41–50, with kind permission from the publisher.

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brother and I took four days and four nights to reach our home in Samalanga, about 100 km from Lhokseumawe. I stayed there throughout the Japanese occupation. THE STRUGGLE FOR INDEPENDENCE

During the Japanese occupation I received military training similar to that given to young Indonesians in Java when they joined PETA (Pembela Tanah Air, Defenders of the Fatherland), the Japanese-sponsored army, called ‘Gyogun’ in Aceh. This training lasted about 18 months. After Sukarno and Hatta had proclaimed Indonesia’s independence in August 1945, I decided to take part in the independence struggle, joining the newly established Army for the People’s Security (Tentara Keamanan Rakyat, TKR), later renamed the Indonesian National Army (Tentara Nasional Indonesia, TNI). At the time I had no other employment, and had been influenced by Japanese propaganda to the effect that Indonesia would one day become independent. We readily formed our own military force in my home district, and I became the commander of a regiment covering quite a vast area that included Lhokseumawe. From a military point of view we were quite strong, because a fully equipped Japanese regiment had surrendered all its weapons to us. In 1947 I was assigned to the Staff of the Military Command of the Fifth Division of the TNI in Aceh. I stayed there for six months, until I was transferred to the Sumatra military command based at Bukittinggi in West Sumatra. There I was put in charge of transport, equipment and armaments. We were very poorly equipped, so the challenge was to procure much needed military equipment and arms. To finance this, I and my uncle, Mr Teuku Abdul Hamid Azwar, began to smuggle agricultural commodities from Riau, the region closest to Singapore. This proved very difficult, because we lacked experience in what was essentially barter trade. We tried to collect exportable commodities of all kinds, including tea, coffee and rubber. In this way we became traders. THE ESTABLISHMENT OF CTC

One day Vice President Hatta visited us in Sumatra. In the presence of our commander, General Suhardjo, Hatta told us that, while he approved

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of what we were doing, from a political point of view it was awkward. In the Indonesian parliament (Komite Nasional Indonesia Pusat, KNIP) in Yogyakarta there had been much criticism of smuggling and, as soldiers in the revolutionary army, we were expected not to engage in it. He advised us to solve this problem by legalising our operations. This could be achieved by separating the military operations from the smuggling or trading operations. It could therefore be said that the Central Trading Company (CTC) was the brainchild of Hatta. Pak Azwar and I established CTC as a government-owned trading corporation in Bukittinggi in 1947. An English name was adopted to give prestige and make the company appear large and outward-looking. Soon we had set up branches all over Sumatra, including Jambi, West Sumatra, and especially Aceh. In this way our smuggling activities were legalised. Sometimes, by way of an injection of capital, we received chests of raw opium sent from Java in a small plane. We sold this and other commodities to Chinese merchants in Pakanbaru, who then smuggled them to Malaya. We also traded commodities ourselves. In Aceh, we had some shipping at our disposal, mostly prahu, but also the speedboat PT-58 commanded by the naval officer Admiral John Lie [an ethnic Chinese famous for his exploits in smuggling primary products out of Indonesia in exchange for arms needed for the independence struggle in the face of the naval blockade by the Dutch. Ed.]. Although the Dutch tried several times to blockade us, they could not locate us because there were so many inlets in Aceh from which we could carry out our operations. Products such as rubber from Langsa were smuggled to Penang, where CTC had a branch office. With the proceeds we purchased much needed uniforms, shoes, vehicles and weapons for our military. We needed goods, not money, so our smuggling was really barter trade. In December 1948 the Dutch launched their second attack (the second so-called ‘Police Action’) against the Republic. Just 19 days before, I had taken a plane from Bukittinggi to Kutaraja in Aceh. The ‘Seulawah’ had flown all the way from Yogyakarta carrying some senior naval officers. As it had to refuel in Bukittinggi, my wife and I and our two children obtained seats on the plane. I had intended going to Aceh on a routine tour of inspection, but when the Dutch occupied all Republican territory except Aceh, circumstances changed dramatically. Upon his arrest by the Dutch, President Sukarno had appointed Sjafruddin Prawiranegara as Acting Head of the Emergency Government of the Republic of Indonesia

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(Pemerintah Darurat Republik Indonesia, PDRI) to be based in Aceh. I was able to direct CTC’s operations from there, while Pak Azwar escaped via Singapore to Penang. There the British turned a blind eye to our carrying on business through local Chinese merchants, who also had ties with Chinese in Indonesia. Since Java was occupied by the Dutch, the imports we acquired from smuggling were now shipped to Aceh. Being well supplied with Japanese weaponry, our needs were mainly rice, clothing and special equipment. THE EARLY PERIOD OF INDEPENDENCE

When the Dutch recognised our independence in December 1949, Pak Azwar and I thought that our task had been accomplished. After all, we had only been amateur traders. Moreover, because of my experience with trade, I have never been a supporter of government business. CTC was 99% government owned, specifically by Bank Negara Indonesia (BNI) — 1946, a state-owned bank. According to corporate regulations, the company had to have two shareholders, and Pak Azwar held the remaining 1% share. At that time the Board of CTC consisted of three directors, Teuku Abdul Hamid Azwar, Haji Ahmad Thaher and me. The members of the Board of Commissioners were Teuku Mohamad Hasan, the Governor of Sumatra (then a single province), General Suhardjo, Mr Lukman Hakim (later a director of Bank Indonesia and ambassador to Germany), Mr Abdul Karim, and Mr Soeriaatmadja, who had been an official with the Cooperative Service during the Dutch colonial period. All the members of CTC’s Board of Commissioners were government people. The Board of Directors was given wide freedom in managing the company, reporting to the Board of Commissioners every three months. Not long after the Dutch recognition of our independence, we had a meeting with the full Board of Commissioners in Hotel des Indes, the most prominent hotel in Jakarta during the Dutch colonial period. This meeting was also attended by Vice President Hatta. Pak Azwar and I told him and the Board of Commissioners that we considered our task to be over, and suggested liquidating CTC. Hatta turned down our request, arguing that he now had another task for us — to challenge the monopoly of the ‘Big Five’, the five large Dutch trading companies. Under the terms

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of the independence agreement with the Dutch signed after the Round Table Conference, these and other Dutch firms enjoyed full rights to continue their operations in Indonesia. Pak Azwar and I realised how difficult this task would be, particularly as we were little more than inexperienced ‘orang kampung’ (village people) who knew nothing about international business. Our experience had been only in smuggling and barter trade. We discussed what to do. Lacking any business experience ourselves, we realised we must look for people who had the required experience and skills. At the time, the only such people were Indonesians of Chinese descent (Sino-Indonesians). We therefore began to approach ethnic Chinese managers employed in the few large companies owned by Sino-Indonesians, including the Liem Goan Seng and Kian Gwan companies. A senior manager with the Liem Goan Seng company, Drs Koo Liong Bing, was willing to help us. Through Mr Koo we were able to recruit other ethnic Chinese managers, Mr Liem King Gie (an expert on export products), Mr Tan Hong Tjay, and Mr Tan Soen Kie, whom we recruited from the Kian Gwan company. They were all highly experienced managers, and we were fortunate to be able to ‘hijack’ them. Drs Koo later became a director of CTC. In the beginning Pak Azwar and I had some difficulty in persuading the Board of Commissioners to recruit mainly Sino-Indonesian managers. We eventually succeeded because it was obvious that we were not playing politics and were only concerned with making CTC an efficient and viable corporation. We told the Board of Commissioners that the first task of CTC was to reduce the domination of the Dutch companies over the Indonesian economy. This we could not achieve with our bare hands. So we asked the Board to consider the Sino-Indonesian managers as tools of CTC in challenging the Dutch companies. I found the Sino-Indonesian managers to be loyal Indonesians. Relations between them and the pribumi (indigenous Indonesian) managers and staff at CTC were generally quite good. It helped, of course, that most of us were Dutch-educated and came from the same social background, so that we were communicating on the same wavelength. This would be more difficult with the present Sino-Indonesian tycoons, most of whom are totok Chinese,1 are not Dutch-educated and come from an entirely different cultural and social background, with the result that their way of thinking and ours are quite different.

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On the subject of pribumi and non-pribumi Indonesians, I myself am not really a 100% asli (autochthonous) or pribumi Acehnese. My forebears came from what is now Peninsular Malaysia. In the early part of the 17th century an ancestor of mine was the fourth datuk bendahara (prime minister) of Johor. The first and second datuk bendahara of Johor still had Indian names, so I assume they must have been Hindu, while the third one had a Muslim name. During the reign of Sultan Iskandar Muda of Aceh, a war broke out between Aceh and Johor. It ended with the defeat and conquest of Johor, and the sultan and the fourth datuk bendahara of Johor were captured and taken to Aceh. Around the same time, the hulubalang of Samalanga died, and a large delegation went to the Sultan of Aceh to request the appointment of a new hulubalang. The Sultan appointed the former datuk bendahara of Johor. Aceh has over time been home to a variety of races — Indians, Arabs, Chinese, even Portuguese. That is why we Acehnese are generally tolerant. But to return to CTC: besides recruiting these experienced managers, we also tried to find younger people who could eventually become skilled managers of the company. We organised training courses which over time resulted in a greater supply of qualified managers. From the directors to the lowest personnel, staff were paid well, not according to public service scales. This enabled them to live comfortably within their salaries without resorting to corruption. In the beginning we were not optimistic about taking on the big Dutch companies, because we knew how strong they were. But with patience, perseverance and hard work, we managed slowly to expand our operations, and to open branch offices overseas. The first branches we opened in the early 1950s were in Singapore and Penang; these were followed by offices in Tokyo, Osaka, Amsterdam, Hamburg, London and New York. Opening branch offices in London and New York was important, since these two cities were the main destinations of many of our export products, particularly rubber. Having a branch office in Tokyo was also crucial, as Japan had become the major supplier of various consumer goods we needed, including textiles and textile products. When business with Japan expanded, we found it necessary to open an office in Osaka. We also opened a shipping department to act as agent for lines to Europe, the United States and Japan. The domestic distribution of most products was in the hands of ethnic Chinese merchants. As we had inherited this distribution system from the

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Dutch colonial period, we had to work with it. In order to compete with the big Dutch trading companies, we had to sell our products at cheaper prices. This was not easy, faced as we were with the entrenched monopolistic power of these companies. For instance, the import of flour was totally controlled by the Dutch trading companies, who imported from the United States. To break this monopoly we decided to import flour from Australia, and then tried to compete with the Dutch trading companies by means of an active sales promotion program. We extolled the virtues of Australian flour, asserting that the quality of bread made from it was very high. To prove our assertion, we invited an Australian bread making expert to visit us. This was CTC’s first commercial contact with an Australian company. We subsequently received many invitations to visit Australia, but at the time we were focusing our efforts on the US and Western Europe. At first, most of the products we imported were consumer goods such as textiles. Over time we gradually moved into more technical fields, importing diesel engines and other machinery. We therefore had to develop a strong technical division. For this purpose we recruited a German engineer; most of the machinery we imported came from Germany, although some was from the United Kingdom. We developed good contacts with several German companies, including Henschel and Stulcken in Hamburg, who made CTC their official representative in Indonesia. Stulcken was the shipbuilding company that built the Dewarutji sail training ship for the Indonesian navy. We also became the official representative of a French company, Pont Mousson, which made water pipes, and of a Belgian shipyard in Brielle, near Antwerp. Through our contact with this shipyard, CTC was able to supply about 20 coastal vessels of 400–600 tons to Pelni, Indonesia’s new state-owned domestic shipping company, and to other Indonesian private shipping companies. CTC became the official representative of a German railway carriage company, Zimmering, Gratz, und Pauker, and also of Henschell locomotive manufacturers. Through these companies over the years we supplied hundreds of railway carriages to Perumka, the state-owned railway company. In contrast with the situation today [1996–97] all these purchases were made by tender. We also became the official representative of a Japanese shipyard, Ishikawajima. As its agent we took care of arrangements for the supply

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of several warships ordered by the Indonesian navy, and for this we received a commission. The Japanese general trading companies did not come onto the scene until the settlement of Japanese war reparations to Indonesia in 1957. Although we were faced with many regulations during the 1950s, it was generally not difficult to implement them because the objectives were quite clear. After 1961 the government began to meddle more and more in the economy and in the management of state-owned enterprises. Initially this interference was not so pervasive, but after one or two years the regulations became increasingly complicated, and I felt the situation was almost intolerable. When CTC was turned over to the Indonesian government in 1961, I tried to quit, as I saw no future in working in a state-owned company. Unfortunately the then Minister of Trade, Arifin Harahap, and his successor, Adam Malik, were friends of mine, and they persuaded me to stay. I hung on with the company (by then called PN Panca Niaga) until 1966, when I could no longer get along with the new Minister of Trade. After I had tendered my resignation, I had to wait three to four months before it was approved. When one day I happened to meet Mr Leimena, then Deputy First Minister, he said to me: ‘Daud, you are a deserter!’ I replied: ‘No, Pak, I am not a deserter, I just want to be free!’ THE POST-PANCA NIAGA PERIOD

After resigning from Panca Niaga, I was idle for a few months. As I felt I was not old enough to retire, some friends and I set up a new group of private companies, each of which was independent. We decided to keep this loose structure, as all the shareholders were friends who met regularly every three months. One new company we established was Otis Indonesia, which became and remained the sole agent and distributor of Otis Elevators in the US for more than 25 years. After several years of good business relations with the Otis company, they proposed setting up a joint venture with us. Another company we established was Takeda Indonesia, a joint venture with the Takeda Pharmaceuticals Company of Japan. In construction we formed Billfinger–Berger Indonesia, a joint venture with the German construction company, Billfinger and Berger, which

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engaged in civil construction work, primarily in real estate. In 1995 we expanded this joint venture by inviting a well known Australian construction company, Baulderstone Hornibrook, builders of the Sydney Opera House, to become a third partner. Another joint venture was with the Japanese company, Sumitomo Construction, which engaged mainly in the construction of buildings. THE OLD ORDER AND THE NEW ORDER COMP ARED

Drawing on my experience in business during the 1950s and early 1960s, I would say that in those days there was still fair competition. Now [October 1996] there is no fair competition at all. There must be fair competition in business, because through competition you are forced to work hard, to acquire more experience, and to be more efficient. Competition is becoming even more important: in a couple of years we will be faced with the requirements of AFTA, APEC and the WTO. I am afraid that our present [Soeharto] government is not fully aware of the coming challenges facing the Indonesian economy. Our East Asian neighbours, including Malaysia, are far ahead of us. We need to take concrete steps to prepare for these challenges, rather than just talk about them. In this context I would like to mention the Benteng (Fortress) policy of the early 1950s, which aimed at promoting pribumi businessmen.2 I was against this policy, but in one form or another it is still being pursued. In fact, the present policies are even worse. Of course, CTC also gained its share of profits from the Benteng policy. In the 1950s I could understand and support our government’s goal of trying to reduce Dutch economic dominance over the economy and to expand businesses owned and controlled by Indonesian nationals, both pribumi and non-pribumi. Unfortunately, non-pribumi business people, who are predominantly Sino-Indonesian, have been more successful than pribumi businessmen in taking advantage of the business opportunities opened to them and in accumulating capital. The Malaysian government has had greater success in promoting the development of bumiputera (indigenous Malaysian) businessmen. While the Indonesian government’s goal of achieving some balance between pribumi and non-pribumi Indonesian business was a good one, the implementation of the policy left much to be desired. In my view,

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the weakness of many pribumi entrepreneurs in seeking to become rich too quickly was one reason for the poor results of the Benteng policy. To achieve the goal of developing a strong indigenous Indonesian business class, the government must design concrete strategies to equip pribumi entrepreneurs to cope with domestic and international competition. At present our government does not have measures to raise the competitiveness of even the large conglomerates, whether owned by pribumi or non-pribumi entrepreneurs. The only policies evident at present are those such as the Timor ‘national car’ policy (Manning and Jayasuriya 1996: 18–21). These do not constitute a coherent industrial policy. I will give you a small example of the lack of success in raising the effectiveness of our own products. In 1950 I visited Europe for the first time. In those days a flight in a Constellation plane to Europe took four days. I left Jakarta in the morning and arrived late in the afternoon in Bangkok , where I stayed in a modest hotel not far from the airport. For dinner I had a steak, vegetables and fruit. The fruit was brought in a basket and consisted of citrus (jeruk), bananas and mangoes. I did not eat it, because it was really inferior. Now we import high quality Thai fruit in large quantities. We have to draw the right lessons from examples such as this. Obviously something is wrong with our present agricultural policy.

NOTES It is with deep regret that we report the passing of Mr Daud on 21 February 1999, and of Mrs Daud in August 1999. Mrs Daud had generously consented to publication of this interview, and their son Drs Sjahrial Daud, kindly read and corrected the manuscript. The Board of BIES extends its thanks and deepest sympathy to the Daud family [Ed.]. 1

2

A totok Chinese is an ethnic Chinese who was (or whose parents were) born in China, and who is therefore culturally Chinese, having as a first language either Chinese or one of the other dialects of China (Cantonese, Hokkien or Hakka). For further discussion of the Benteng policy, see the BIES interviews with Professor Sumitro Djojohadikusumo (Djojohadikusumo 1986: 35); with Sjafruddin Prawiranegara (Prawiranegara 1987: 105); and with Soedarpo Sastrosatomo (Sastrosatomo 1994: 50).

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REFERENCES Djojohadikusumo, Sumitro. “Recollections of My Career”. Bulletin of Indonesian Economic Studies 22, no. 3 (1986): 27–39. Manning, Chris, and Sisira Jayasuriya. “Survey of Recent Developments”. Bulletin of Indonesian Economic Studies 32, no. 2 (1996): 3–43. Prawiranegara, Sjafruddin. “Recollections of My Career”. Bulletin of Indonesian Economic Studies 23, no. 3 (1987): 100–8. Sastrosatomo, Soedarpo. “Recollections of My Career”. Bulletin of Indonesian Economic Studies 30, no. 1 (1994): 39–58.

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Reproduced from Recollections: The Indonesian Economy, 1950s-1990s, edited by Thee Kian Wie (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at < http://bookshop.iseas.edu.sg >

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Index

Aceh, 62, 82, 255, 256, 258 Africa assisting, 213–14 budgets, 213 corruption, 213 debt problems, 181 infrastructure, 213 Afro-Asian Students’ Conference First, 195 agriculture, 14–15, 16, 25, 82, 83, 177 development, 200 intensification, 235 aid, foreign, 23, 31, 32, 37 ODA, 129, 130 Aidit, 110 airline services, 204 Ali Moertopo, 37 Ali Sastroamidjojo, 62, 81 Ali Wardhana, 195, 197, 231 All Indonesia Labour Federation (SBSI), 132

aluminium, 95 Arab–Israeli war, 248 Armed Forces dual function, 126 Army, 125, 126 Second Seminar, 113, 126–27, 199–200 Staff and Command School (SESKOAD), 125, 126, 199 Asahan, 95–96 Asia economic crisis, 31, 34 regional economic cooperation, 178 Asia-Pacific Economic Cooperation (APEC), 177–80 Eminent Persons Group (EPG), 180 Leaders’ Meeting First, 179–80 preferential trading arrangements, 179 unilateral liberalisation, 179

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Assembly of Indonesian Students’ Councils, 195 Association of Indonesian Economists (ISEI), 110, 111 Association of Southeast Asian Nations (ASEAN), 176 Committee on Trade and Tourism (COTT), 176 food and energy security, 176 Free Trade Area (AFTA), 176, 178 joining APEC, 177–78 Preferential Trading Arrangement (PTA), 176 trade barriers, 176 Asuransi Bintang, 150, 153 capital, 153 Asuransi Tenaga Kerja (ASTEK), 237 autonomy, regional, 82, 214 Badan Usaha Tenaga Kerja Sukarela (BUTSI), 237, 238 Bandung, 225 Bank Indonesia, 11, 81, 231 Bank Negara Indonesia (BNI), 58, 60, 147, 256 Bank Niaga, 150, 153, 156–57 capital, 153 banks, 156 Bappenas, 32, 137, 201, 203, 207, 211 Benteng (Fortress) Programme, 12–13, 82, 153–55, 261, 262 “Berkeley Mafia”, 22, 57, 197 Bijeenkomst Federaal Overleg states, 6 Bintan Island, 95, 96 Brazil land settlement, 234

Index budget, 4–5, 249 1950, 4 1951, 4 balanced, 63 deficit, 4–5 financial discipline, 28 erosion, 28, 29 off-budget transactions, 28, 35 capital, 83 formation, 151–53 capitalism, 85 Central Bank, 58, 59 management, 81 Central Bureau of Statistics (BPS), 108–10, 111, 170 Academy of Statistics, 110 Central Statistical Office (CKS), 108 Central Trading Company (CTC), 11, 153–55, 254–60 China electric power, 99 Chinese, 30, 257, 262 anti-Chinese riots, 30 businessmen, 37, 154, 258, 261 Benteng Programme, 12 curtailing, 13–14 middlemen, 53 “whitewash policy”, 25 civil servants, 204, 205 Staff School for Civil Servants (Sespanas), 205 civil society, 209 Clean Rivers (Prokasih) programme, 206 coal, 239–40 Cold War, 195 colonial period, 108, 144 distribution, 154 economic growth, 171

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Index opium monopoly, 147 transmigration, 233 unemployment, 53 Communist Party of Indonesia (PKI), 19, 82, 106, 110, 111, 112, 229 community development, 192–93, 200 competition, 261 domestic barriers to, 29 Conference on Population, 210 Conference on Social Development, 209 Constituent Assembly 1956, 191 Constitution, 1945 Article 33, 9, 97 cooperatives, 83, 84, 85, 235–36 Coordinating Board for Capital Investment (BKPM), 100, 131 corruption, 21, 29, 30, 58, 213, 216 bureaucratic, 201, 202 control, 202 control, 204 “Crush Malaysia” campaign, 17 currency, 57, 58, 59, 78, 79, 80, 249 devaluation, 177, 216

Department of Internal Affairs, 30 Department of Manpower, 131–33 emphasis, 131 Department of the Interior Directorate General for Rural Community Development, 193 Department of Trade, 173, 176 Agency for Research and Development, 173 price checking, 183 development, 114 balanced, 211, 212 and democracy, 116–17 equitable, 91, 200 equity issues, 217 model, 217 people-centred, 210 rural, 200, 201, 235 Western model, 211 distribution system, 154 Djakarta Lloyd, 160 Djokosutono, 124 Djuanda, 9, 12, 110 Dutch enterprises, 6–7, 10, 53, 59, 257, 258, 259 nationalization of, 7 takeovers, 13, 81

Daud, Teuku Mohamad, 251–62 debt, foreign, 21, 24 rescheduling, 129 decentralisation, 214, 215, 216 Deklarasi Ekonomi (Dekon), 19, 111–12, 155 democracy and development, 116–17 democratisation, 215, 216 Department of Education and Culture Consortium for Economics, 181–82

Eastern Indonesia development, 203–4 Eco-labelling Institute, 211 economic development, 114, 125, 204 “Berdikari”, 171 structural disparities, 55 economy, 249 Benteng Programme, 12–13, 59, 82, 153–55, 261, 262 decline, 18–20 Dekon, 19

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deregulation, 27, 33, 34, 35, 214 Dutch dominance, 8 measures to counter, 8–14 early 1950s, 4–5 GDP growth, per capita, 25 growth, 54 Guided, 9, 17, 169 high-cost, 56 indigenous business, 8–14 liberalization, 33, 34 macroeconomic stability, 128 market, 115, 171, 197 New Order, 25–31 planned, 169, 229 pragmatism, 20–21, 22 private sector, 137–39 double-talk, 138–39 interaction with government, 137–38 problems, 127 Programme for Stabilization and Rehabilitation, 23, 25, 32, 199, 200 reforms, 34 regulations, 260 technocrats, 21–25, 28, 29, 31–38, 128–30 bond, 137 relations with students, 130 education, 83 primary, 26 quality, 217–18 Egypt, 196 electoral system, 214 employment unemployment, 53 energy conservation, 239 policy, 239 resources, 248–49

Index enterprises nationalized, 13 private, 9 state-owned, 9, 13 categories, 136 law on, 136 Perjan, 136 Persero, 136 Perum, 136 privatization, 96–97 role, 96–98 environment protection, 205, 206, 207–9 Environmental Impact Management Agency (Bapedal), 208 Europe, Eastern development, 116 European Commission (EC) garment imports, 174 exchange rate, 5, 93 management, 34 multiple system, 80 regime, 231 federation, 82 Federation of Indonesian Student Organisations (PPMI), 195 feudalism Javanese, 201, 202 financial crisis, 249 foreign exchange, 62, 93, 147, 152, 154, 158 controls, 64 abolition, 130, 156, 216 reserves, 5 Foreign Exchange Institute (LAAPLN), 152, 158 abolition, 62 Foundation for Sustainable Development (YPB), 210

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Index Fox, Matthew, 146, 147, 148, 149 freedom, 116, 117 Freeport Sulphur, 133 Friedrich Ebert Foundation, 132 fuel subsidy, 243 Garuda Indonesian Airways, 11 gas, natural, 240 General Agreement on Tariffs and Trade Uruguay Round, 166, 173, 177 Germany labour unions, 132 Gesuri Lloyd, 160 Global Coalition on Africa, 213 government strong central, 203 Green Revolution, 116 Gromyko, 58 Grossman, Gregory, 196 Gulf war, 247 Habibie, B.J., 28, 35, 212, 249 Hamengku Buwono IX, Sultan, 151, 169 Harun Zain, 197 Harvard University, 122 Hatta, Mohammad, 9, 11, 20, 50, 58, 78, 79, 80, 83, 148, 154, 190–91, 218, 254, 255, 256 cooperative society, 190 resignation, 191 on transmigration, 192 Higgins, Benjamin, 8, 10, 122 ideological development, 115–16 import controls, 5 licence, 152, 154, 155

licensing system, 61, 62 restrictions, 174 importers, 154 income distribution, 30 independence, 79, 106, 145 early, 4–21 war of, 168, 224–26, 254 Independent Petroleum Exporting Countries (IPEC), 247 India, 95 civil service, 204 oil, 246 indigenous business, 8–14, 101–2, 142 preferential treatment, 101, 102 subsidies, 102 Indonesia –Netherlands relations 1947 accord, 146 transfer of sovereignty, 5–8, 13 –United Kingdom relations textile trade row, 174 –United States relations, 146, 147, 148 Indonesian Association of Muslim Intellectuals (ICMI), 211, 212 Indonesian Chamber of Commerce and Industry (KADIN), 137– 39 issues, 139 Indonesian Republic, 5–6 Indonesian Shipping and Transport Agency (ISTA), 149, 150, 151, 157 Indonesian Society for the Promotion of Economics and the Social Sciences (Bineksos), 172 Indonesian Students Action Group (KAMI), 127

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Industri Pesawat Terbang Nusantara (IPTN), 28, 35 Industrial Census, 1964, 170 industrial estates, mini, 101 industrialization, 15–18, 26–27, 60, 82, 89, 115, 200 Economic Urgency Plan, 16, 59, 82 export promotion, 93–94 import substitution, 27, 90, 93–94 rural, 115–16 structuralist approach, 88 industries, 84 automotive, 92 basic, 90, 91–93 downstream, 91 engineering, 98 high-tech, 92 technology transfer, 98–100 upstream, 91, 92 inflation, 18, 25, 62, 93, 199, 201, 213, 249 hyperinflation, 18, 19, 21, 23, 25 infrastructure, 62, 90, 91, 93–94, 204 rehabilitation, 14–15, 25, 200 Inpres Desa Tertinggal (IDT), 193 Institute for Economic Research and Development (LP3E), 138 insurance, 237 insurrections, 4, 17 Inter-Governmental Group on Indonesia (IGGI), 24, 129, 130 interest, conflicts of, 201, 202 interest rates, 62, 63 International Conference on Economic Cooperation (ICEC), 174–75 International Energy Agency (IEA), 241, 245, 246

Index International Fund for Agricultural Development (IFAD), 175 International Labour Organisation (ILO), 133 labour rights, 238 International Monetary Fund (IMF), 129 International Tropical Timber Organisation (ITTO), 211 investment, 90 assessment, 99 domestic, 25, 26 Domestic Investment Law, 24, 128 foreign direct, 23, 24, 83, 130–31 doubts about benefits, 129 Foreign Investment Law, 24, 128, 156, 157 incentives, 131 Japanese, 131 liberalization, 27 Technical Team for Foreign Investment, 128, 129, 130– 31 private sector, 27 Iraq, 247, 248 Iskaq, 81 Islam, 84, 85, 211, 212 on gambling, 85 on riba, 85 Isthmian Lines, 147, 148, 149 Jakarta, 82 Japan, 100 industrial policy, 101 Ministry of International Trade and Industry (MITI), 101 regimentation, 116 responsibilities, 101 role, 100–1

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Index siege mentality, 101 war reparations, 260 Japanese occupation, 78, 121, 145, 146, 224, 254 Java farmers, 234 population growth, 234 overpopulation, 233 Java Bank, 60, 76 nationalization, 11, 60, 81 Javanese culture, 198 Jusuf Wibisono, 81 Keynes, 84 “pump-priming” theory, 194 Kissinger, Henry, 244 Koperasi Unit Desa (KUD), 235, 236 Korea, South, 95, 100 “Korea boom”, 4, 15 Kota business practice, 153 Kuwait, 248 labour force, 63 training, 91 labour market, 132–33 labour movement, 131–32 strikes, 132 labour rights, 238 labour union, 237 land ownership, 97 law, 81, 82 Leaders on Environment and Development (LEAD), 210 Lee Kuan Yew, 64 Leibenstein, Harvey, 196 Leimena, 155 Linggadjati agreement, 146 localization, 100

Makassar, 157 Malang, 168 Malaysia civil service, 204 Johor, 258 oil, 247 Maluku, 204 management, 99 manufacturing, 15, 21, 25, 156, 170 competitiveness, international, 34 development, 235 exports, 26, 27, 28 growth, 171 protection, 173 regulations, 156 Maramis, A.A., 79 markets, 53 distortion, 217 Maruli Silitonga, 194, 195 Masjumi, 62 Massachusetts Institute of Technology (MIT), 122, 170 McGill University, 226–27 McNamara, Robert, 213 Medina, 212 merchant marine, 158 middle class, 154 Minang family clan, 219 mining contracts, 133–34, 135 Ministry of Finance, 60, 211 Ministry of Labour, 170 Ministry of Shipping, 158 modernisation, 55 Mohammad, 212 Mohammad Yamin, 17 Monetary Board, 62 monetary policy, 62, 63

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Muhammadiyah Hisbulwathon, 223 Multi-Fibre Agreement (MFA), 177 Mulyatno, 111 Muslims, 84, 85 Nasution, 64 National Institute of Economic and Social Research (Leknas), 198 national motto, 215 National Planning Bureau, 61, 110 nationalism, 124 economic, 130 industrial, 36 nationalists, 9, 10 “administrators”, 10 “solidarity makers”, 10 nationalization, 11, 155 Natsir, 62 on Dutch, 84 natural resources, 90 Netherlands, 24, 57, 59, 60, 61, 78, 79, 81, 129, 147, 168, 189, 226, 255 –Indonesia relations 1947 accord, 146 expulsion, 155 Police Action, 146, 148, 255 transfer of sovereignty, 5–8, 13 Round Table Conference, 58 Netherlands Indies Civil Administration (NICA), 225 New International Economic Order (NIEO), 175 New Order, 20, 21–38 achievements, 25–28 downfall, 31 economic performance, 25–31 economic policies, 200–1 economic technocrats, 128–30

Index bond, 137 criticisms, 36–37 influence, erosion of, 34–36 relations with students, 130 role, 31–38 shortcomings, 38 failings, 28–31 industrial growth, 90–91 legacy, 31 public discontent, 29 repression, 30 newly industrialized country (NIC), 94–95 Nigeria, 214 Non-Aligned Movement (NAM), 179, 181, 213 non-governmental organizations (NGOs), 205, 210, 211 North American Free Trade Area (NAFTA), 178 North–South Dialogue, 174–75 Norway oil, 247 nuclear power, 249 oil boom, 34 end, 27, 28, 34 exploration, 15 market, 245 price, 241–42, 243, 244 fall, 33 production, 15 shock, 248 Old Order, 90 economy, 171 Ong Eng Die, 81 opium production and trade, 147 organisation-building, 160–62

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Index Organisation of Petroleum– Exporting Countries (OPEC), 174, 175, 240, 241, 242, 243–48 Secretary General, 243–44 supply management, 247 Pakistan, 214 Palapa satellite system, 203 Panca Niaga, 155 Pancasila, 30, 212, 218 Pancasila society, 212 Pantai Indah Kapuk project, 208 Papandreou, Andreas, 57 Partai Sosialis Indonesia (PSI), 111, 156 Pembela Tanah Air (PETA), 224, 254 People’s Consultative Assembly, Provisional Decree No. 23 of 1966, 200 Pertamina, 33, 98, 219, 238, 239, 240 autonomy, 136 category, 136 crisis, 134–36 financial problems, 32 foreign debt, 32 law for, 136 production-sharing contracts, 134, 135 Philippines democracy, 215 foreign direct investment, 130 Plan to Import Goods (RIB), 216 poor rural, 53 population, 210, 217 family planning, 33 Population Census, 1961, 109, 110, 117

populism, 115 poverty, 26, 82, 217 rural, 26 power development, 98–99 President, 81, 82 Presidential Instruction projects, 201 Presidential succession, 214 primary commodities Common Fund, 175 prices, 175 PRRI, 82, 83 Rachmat Saleh, 177, 182 Radius Prawiro, 173, 174 rebellions regional, 62 regimentation, 116, 117 Renville Agreement, 168 revenues, domestic non-oil, 28 rice self-sufficiency, 242 Rice for India campaign, 57 RIS, 82 Roem, 62 Round Table Conference, 58 debt issue, 7–8 Dutch business interests, 6–7 economic consequences, 5–8 Financial-Economic Agreement (Finec), 7, 11 rubber production, 15 rural areas, 63 development, 115, 200, 201 Sadikin, Ali, 158 Sadli, Mohammad, 21, 22, 106, 119–39, 213, 227, 228, 229, 231, 236, 237, 238 Sakirman, 110

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Salim, Emil, 23, 128, 129, 137, 185–218 Pancasila Economic System, 190 Samudera Indonesia, 157, 158–60, 161, 162 Samuelson, Paul, 123 Sarbini Sumawinata, 19, 22, 103– 17 Sarwono Kusumaatmadja, 210 Saudi Arabia, 248 oil production, 242, 248 savings, domestic, 26 Schacht, Hjalmar, 60, 61 “sectoral egoism”, 207 Serikat Pekerja Seluruh Indonesia (SPSI), 237 shipping, 155, 157–60 containers, 159 loading permit (SKU), 158, 160 project cargo, 159 stevedoring, 157, 159 Simatupang, 58, 59 Sjafruddin Prawiranegara, 9, 11, 13, 16, 20, 59, 60, 75–86, 255 on Dutch, 78, 80, 81 Sjahrir, Sutan, 57, 64, 76, 78, 80, 145, 146, 156 smuggling, 255, 256 social development, 26 social unrest, 29 socialism, 9, 85, 115 Soedarpo Corporation, 149, 155, 161 Soedarpo Sastrosatomo, 141–62 Soedjatmoko, 19, 111, 112, 113, 145, 146 Soeharto, 18, 21–38, 126, 127, 129, 135, 136, 180, 198, 199, 203, 205, 209, 210, 213, 214, 215, 216, 229, 231, 236, 242

Index children business activities, 36 commitment to APEC, 215 commonsense, 216 Dili Incident, 135 downfall, 31 environmental protection, 205, 206 fisherman, 207 Non-Aligned Movement, 181 Soehoed, Abdoel Raoef, 18, 27, 87– 102 Soewarto, 113, 125, 126 sovereignty, 85 terms of transfer, 5–8 stabilisation, 215, 216 students in politics, 194–95 Students’ Army (TRIP), 168, 189 Subandrio, 19, 111, 112 Subroto, 21, 124, 221–50 Sudjono Humardani, 37 Suhadi Mangkusuwondo, 19, 123, 165–82 Sukamdani, 138 Sukarno, 9, 17, 18, 20, 21, 23, 24, 32, 50, 76, 78, 79, 80, 82, 110, 111, 112, 168, 190, 191, 197, 214, 229, 255 exiled, 50 “Guided Democracy”, 17, 218 jailed, 50 late era, 4–21 legacy, 31 Manipol, 110 merchant marine, 158 national language, 50 presidency private business, 155–57 Sulawesi, South infrastructure, 204

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Index Sumarlin, 134, 135, 197 Sumatra, 83 community, 202 Lampung province, 191–92 cultural assimilation, 192 Sri Bawono, 192 rebellion, 191 transmigration, 191, 192 Sumitro Djojohadikusumo, 8, 9, 12, 16, 20, 47–65, 76, 83, 84, 122, 123, 124, 125, 130, 146, 149, 153, 154, 169, 172, 194, 199, 226, 227, 228, 231, 232 “Jakarta School of Economics”, 194 at United Nations, 58 Surabaya, 225 Tanjung Perak, 225 Suryo, 37 Sutowo, Ibnu, 33, 37, 134, 135, 136, 238, 240 Suwarto, 21, 22, 199 Taiwan, 95 Tan Goan Po, 227, 228 tax reforms, 28 Team of Advisers (Tim P-7), 212 Technical Training Centres (BLK), 238 “technologs”, 35 technology transfer, 64, 83, 98–100 Tentara Nasional Indonesia (TNI), 58, 168 textile exports, 177 Thailand foreign direct investment, 130 Thatcher, Margaret, 174

Third World, 175 problems, 114 trade, 62, 85, 94 barriers, 27 reforms, 27 regime, 34 retail Government Regulation no. 10 of 1959, 14 terms, 33 transmigration, 83, 232–35 land, 234 transport, 94 Trikora Lloyd, 160 United Kingdom –Indonesia relations textile trade row, 174 United Nations, 110 Commission for Indonesia (UNCI), 5 Conference on Trade and Development (UNCTAD) IV, 175 development programmes, 114 United States –Indonesia relations, 146, 147, 148 industrial relations, 132 and OPEC, 246 racial discrimination, 147 regional economic cooperation, 178 United States of Indonesia, 5–6, 79 abolition, 59 University of Indonesia Faculty of Economics (FEUI), 123–25, 127, 198, 226, 228, 229 Students’ Council, 195

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USSR development, 116 “warlords”, 203 West Irian, 6, 13, 17 West Kalimantan, 95 West New Guinea. See West Irian Widjojo, 22, 23, 35, 56, 123, 124, 125, 127, 128, 129, 130, 135, 136, 137, 168, 170, 175, 195, 197, 198, 199, 205, 209, 216, 229, 242 Wilopo, 107

Index Wiweko, 105 workers insurance, 237 World Bank, 34, 129, 214 World Commission on Environment and Development, 206 World University Service (WUS), 226, 227 Yamani, Sheikh Zaki, 248 Yayasan Kehati, 210 Yogyakarta, 79, 147, 148

© 2003 Institute of Southeast Asian Studies, Singapore

Reproduced from Recollections: The Indonesian Economy, 1950s-1990s, edited by Thee Kian Wie (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at < http://bookshop.iseas.edu.sg >

Thee Kian Wie, PhD, is senior economist at the Economic Research Centre, Indonesian Institute of Sciences (P2E-LIPI), Jakarta. His major research interests are Indonesia’s modern economic history and industrialization, foreign direct investment and technological development in the East Asian countries, particularly Indonesia. He is co-author of the book The Emergence of a National Economy — An Economic History of Indonesia, 1800–2000 together with Howard Dick, Vincent Houben, and J. Thomas Lindblad (Sydney, 2002).

© 2003 Institute of Southeast Asian Studies, Singapore