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The Indonesian Development Experience BBM434M434 HHALFALF TITLETITLE .ai.ai 1 19/09/1119/09/11 10:3510:35 AMAM C M Y CM MY CY CMY K The Institute of Southeast Asian Studies (ISEAS) was established as an autonomous organization in 1968. It is a regional research centre dedicated to the study of socio-political, security and economic trends and developments in Southeast Asia and its wider geostrategic and economic environment. 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). ISEAS Publishing, an established academic press, has issued more than 2,000 books and journals. It is the largest scholarly publisher of research about Southeast Asia from within the region. ISEAS Publishing works with many other academic and trade publishers and distributors to disseminate important research and analyses from and about Southeast Asia to the rest of the world. ii 00 IDE Prelims.indd 2 6/15/11 10:06:23 AM BBM434TITLEM434TITLE PAGE.aiPAGE.ai 1 19/09/1119/09/11 10:3610:36 AMAM The Indonesian development experience A COLLECTION C OF WRITINGS M Y AND SPEECHES CM of MY CY CMY WIDJOJO K NITISASTRO FOREWORD BY EMIL SALIM INSTITUTE OF SOUTHEAST ASIAN STUDIES SINGAPORE ÀÃÌÊ«ÕLà i`ÊÊ-}>«ÀiÊÊÓ䣣ÊLÞÊ- -Ê*ÕLà } ÃÌÌÕÌiÊvÊ-ÕÌ i>ÃÌÊÃ>Ê-ÌÕ`ià ÎäÊi}ÊÕÊi}Ê/iÀÀ>Vi *>ÃÀÊ*>>} -}>«ÀiÊ££È£{ >\Ê«ÕLà JÃi>ði`Õ°Ã} 7iLÃÌi\Ê ÌÌ«\ÉÉLà «°Ãi>ði`Õ°Ã} 7iÊ >VÜi`}iÊ *iiÀLÌÊ ÕÕÊ «>ÃÊ vÀÊ }À>Ì}Ê «iÀÃÃÊ ÌÊ «À`ÕViÊ >Ê ÃiiVÌÊvÊ>ÀÌViÃÊÀ}>ÞÊ«ÕLà i`ÊÊ > >Ã>Ê`iÃ>ÊÊÌ iÊLÊ*i}>>>Ê *iL>}Õ>Ê`iÃ>\ÊÕ«Õ>Ê/ÕÃ>Ê >Ê1À>>Ê7`Ê ÌÃ>ÃÌÀÊÜÌ ÊÀiÜÀ`Ê LÞÊ Ê->]ÊVi`Ìi`ÊLÞÊ/>Ê7`Ê ÌÃ>ÃÌÀÊ­>>ÀÌ>]ÊÓä£ä®° Ê À} ÌÃÊ ÀiÃiÀÛi`°Ê Ê «>ÀÌÊ vÊ Ì ÃÊ «ÕLV>ÌÊ >ÞÊ LiÊ Ài«À`ÕVi`]Ê ÃÌÀi`Ê Ê >Ê ÀiÌÀiÛ>ÊÃÞÃÌi]ÊÀÊÌÀ>ÃÌÌi`ÊÊ>ÞÊvÀÊÀÊLÞÊ>ÞÊi>Ã]ÊiiVÌÀV]ÊiV >V>]Ê « ÌV«Þ}]ÊÀiVÀ`}ÊÀÊÌ iÀÜÃi]ÊÜÌ ÕÌÊÌ iÊ«ÀÀÊ«iÀÃÃÊvÊÌ iÊÃÌÌÕÌiÊ vÊ-ÕÌ i>ÃÌÊÃ>Ê-ÌÕ`ið ^ÊÓ䣣ÊÃÌÌÕÌiÊvÊ-ÕÌ i>ÃÌÊÃ>Ê-ÌÕ`iÃ]Ê-}>«Ài / iÊÀiëÃLÌÞÊvÀÊv>VÌÃÊ>`Ê«ÃÊÊÌ ÃÊ«ÕLV>ÌÊÀiÃÌÃÊiÝVÕÃÛiÞÊÜÌ ÊÌ iÊ>ÕÌ ÀÊ >`Ê ÃÊ ÌiÀ«ÀiÌ>ÌÃÊ `Ê ÌÊ iViÃÃ>ÀÞÊ ÀiyiVÌÊ Ì iÊ ÛiÜÃÊ ÀÊ Ì iÊ «VÞÊ vÊ Ì iÊ «ÕLà iÀÊ ÀÊÌÃÊÃÕ««ÀÌiÀð - -ÊLÀ>ÀÞÊ >Ì>}Õ}*ÕLV>ÌÊ >Ì> ÌÃ>ÃÌÀ]Ê7`]Ê / iÊ`iÃ>Ê`iÛi«iÌÊiÝ«iÀiViÊ\Ê>ÊViVÌÊvÊÜÀÌ}ÃÊ>`Ê Ã«iiV ið £°Ê `iÃ>p VVÊV`ÌÃp£{xq£ÈÈ° Ó°Ê `iÃ>p VVÊV`ÌÃp£ÈÈq£Ç° Î°Ê `iÃ>p VVÊ«VÞ° °Ê /Ìi° {{ÇÊ ÇÎÊ Ó䣣 - ÊÇnn£{Σ£ÇxxÊ­ÃvÌÊVÛiÀ® - ÊÇnn£{Σ£nÎäÊ­i Ê* ® * Ì}À>« Ê vÊ 7`Ê ÌÃ>ÃÌÀÊ Ê Ì iÊ Ã«iÊ >`Ê «>}iÊ ÛÊ vÀÊ Ì iÊ /ÀLÕÌiÃÊ vÀÊ 7`Ê ÌÃ>ÃÌÀÊ LÞÊ Ài`ÃÊ vÀÊ ÓÇÊ Ài}Ê ÕÌÀiÃÊ «ÕLà i`Ê LÞÊ *iiÀLÌÊ ÕÕÊ «>ðÊ,i«ÀÌi`ÊÜÌ Ê«iÀÃð / iÊVÛiÀÊ`iÃ}ÊÃÊL>Ãi`ÊÊÌ iÊÀ}>Ê > >Ã>Ê`iÃ>ÊÛiÀÃÊvÊÌ iÊLÊ>ÃÊ VVi«ÌÕ>âi`ÊLÞÊ Ê,> >Ü>Ì>° /Þ«iÃiÌÊLÞÊÌiÀ>Ì>Ê/Þ«iÃiÌÌiÀÃÊ*ÌiÊÌ` *ÀÌi`ÊÊ-}>«ÀiÊLÞÊ* Ì«>ÌiÃÊ*ÌiÊÌ` )$%0RELIMSINDD !- To my grandchildren WITA (Sawitri Miriani) MIRA (Emiria Wijayanti) RAFI (Rafi Pradana Widjojo) May this concise economic history bring benefit to you and your peers 00 IDE Prelims.indd 5 6/15/11 10:06:23 AM WIDJOJO NITISASTRO 00 IDE Prelims.indd 6 6/15/11 10:06:23 AM Contents Foreword by Emil Salim xi Introduction xxv Part I PLANNING OF INDONESIA’S DEVELOPMENT 1. Economic Analysis and Development Planning (1963) 3 2. Imprudent Economic and Financial Policies (1966) 18 3. Restructuring Indonesian Economic Fundamentals with 25 Economic Principles (1966) 4. Contribution of Ideas of the Faculty of Economics, 30 University of Indonesia to the Session of the Provisional People’s Consultative Assembly (MPRS) (1966) 5. Comparison between Articles of the Contribution of Ideas 47 of the Faculty of Economics, University of Indonesia to the Decision of the Provisional Consultative Assembly No: XXIII/MPRS/1966 (1966) 6. The Essence and Consequences of MPRS Decree No. XXIII, 75 Year 1966, on Economic, Financial and Development Matters (1966) 7. Challenges in Increasing Food Production in Indonesia 98 (1968) 00 IDE Prelims.indd 7 6/15/11 10:06:23 AM viii Contents 8. The Basic Framework of the Five-Year Development Plan 104 (REPELITA) (1968) Part II IMPLEMENTATION OF INDONESIA’S DEVELOPMENT 9. Progress and Challenges of Indonesia’s Development 117 (1990) 10. Some Features of Indonesia’s Economic Development 124 During the Last Twenty-Five Years (1993) 11. Oil and the Indonesian Economy (1985) 135 12. Making Tough and Painful Decisions (1991) 139 13. Responding to Various Development Proposals (1997) 151 Part III FACING VARIOUS ECONOMIC CRISES 14. The International Monetary Crisis (1971) 159 15. Food Crisis (1972) 164 16. PERTAMINA Crisis (1975) 179 17. Devaluation of the Rupiah (1978) 194 18. Fuel Price Increase (1982) 206 19. World’s Oil-based Fuel Prices Dived (1986) 229 Part IV SETTLEMENT OF FOREIGN DEBT 20. Old and New Debts (1969) 235 21. A Once-And-For-All Settlement of Indonesia’s Foreign 252 Debt (1970) 00 IDE Prelims.indd 8 6/15/11 10:06:24 AM Contents ix Part V EQUITABLE DEVELOPMENT 22. Equitable Distribution Programme (1979) 263 23. Fostering Small Scale Enterprises (1977) 270 24. Food, Family Nutrition and Intersectoral Cooperation (1978) 276 25. Reduction of Poverty: The Indonesian Experience (1994) 287 Part VI INDONESIA AND THE WORLD 26. In the Mutual Interest of Rich and Poor Nations (1982) 297 27. Indonesia Chaired the OPEC Conference in Bali at a Time 304 When Iran and Iraq were at War (1980) 28. Fifteen World Economic Phenomena That Stood Out 310 During the Decade of the 1980s (1989) 29. Perception of Interdependence But Lack of Meaningful 319 Action (1984) 30. Advancing Mutual Understanding and Mutual Confidence 324 (1996) Index 329 About the Author 342 00 IDE Prelims.indd 9 6/15/11 10:06:24 AM 00 IDE Prelims.indd 10 6/15/11 10:06:24 AM Foreword As Indonesia entered the 1960s, its economy nosedived into an alarming exponential degradation. The cost of living index in Jakarta hit 100 per cent per year from 1962–64 before “shooting up” to 650 per cent from December 1964 to December 1965. The prices of daily necessities went up every day and Indonesia was trapped in spiral hyperinflation. Building the nation The main reason behind the hyperinflation was the uncontrollable increase of the volume of money driven by a deficit in the State Budget. There was a strong linkage between the increase in the deficit and the overflowing volume of money. Even if some 45 per cent of the total State Budget were to be channelled for military purposes, the impact on the economy in terms of increasing the flow of the volume of goods and services would not be that big. Its impact on boosting state revenue would be equally insignificant because most of the revenue would be spent on war preparation. The problem was the combination of the bulging revenue deficit, the allocation of revenue for unproductive purposes, and the rise of the volume of money. These things together had triggered the hyperinflation. The trade and service balance of payments in the 1960s also showed an alarming rise in deficit. As exports and imports dropped, there was a need to repay our foreign debts. All of these things had nibbled into our foreign reserves which tumbled from US$326.4 million (1960) to US$8.6 million (1965). Almost half of the total US$2.4 billion in foreign debts was spent by the Indonesian Armed Forces (ABRI), making it a power to be reckoned 00 IDE Prelims.indd 11 6/15/11 10:06:24 AM xii Foreword in terms of military equipment, weapons, fighter jets and warships, a leading edge for a developing country with a meager income. But this was unavoidable because the head of state had made a political decision to prepare for a war to win West Irian back into Indonesia’s fold. Later, the “crust” Malaysia policy, was adopted. The war drums were then beaten even harder to fight the “Capitalist and Imperialist Blocks” in the then Cold War era. In this “war economy” situation of the 1960s, emotions were fanned and patriotism whipped up. It was during this time that Sukarno embarked on nation and national character building, a process through which the minds of the people were infused with thoughts of nationhood and singular awareness of the motherland. His talent for boosting the spirit of the people with his fiery oration justified him a place in history when the nation was consolidating itself, but not without the relegating of economic development down in the priority scale. As the nation solidified itself, a new generation emerged with dreams of a prosperous and affluent Indonesia. The Indonesian revolution had brought forth a new generation with many of its members educated in universities. If the “war economy” condition were not addressed, the disillusionment among university communities would accumulate, not only among students but lecturers alike; all of whom were becoming more critical of the direction of the nation due to their dream of an accomplished and productive Indonesia. On the global political stage, the wars that had raged primarily in Vietnam, China and Korea had subsided and shifted into economic development. Indonesia was not spared by the spirit of the age that swept over Asia in the 1970s.
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