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Industrial and Foreign Investtnent Policy in Indonesia Since 1967 Southeast Asian Studies, Vol. 25. No.3. December 1987 Industrial and Foreign Investtnent Policy in Indonesia since 1967 THEE Kian Wie* [Sadli 1972: 203]. One ofthe outcomes of Introduction this more pragmatic approach to econo­ mic problems was the promulgation of a Indonesia's foreign investment policy new Foreign Investment Law in early since 1967 has changed directions several 1967 which provided various favourable times in response to fluctuations in econo­ incentives and guarantees to foreign in­ mic fortunes of the country and political vestors. pressure. The advent of the New Order The Foreign Investment Law of 1967 government in 1966 marked a sharp introduced a relatively brief period of an reversal in the approach to the economic 'open-door policy' with regard to foreign problems facing the country. Whereas the investment which lasted until early 1974. previous government under President Urban riots in January 1974 directed Sukarno adopted an increasingly hostile against the perceived 'over-presence' of attitude towards foreign investment re­ Japanese investment in Indonesia (the so­ suIting in the takeover of several foreign called 'Malari affair') led to a more enterprises during the early 1960s, the restrictive policy towards foreign invest­ New Order government put a much ment. This more restrictive foreign in­ higher priority on solving the serious vestment policy, however, turned out to economic problems of the country. While be in line with a general increase in the new government relied on foreign aid regulatory policies and government inter­ from the Western countries (including vention in the economy which became Japan) and multilateral aid agencies to more evident after the mid-1970s. provide the necessary funds for balance of The sharp deterioration in Indonesia's payments support and the rehabilitation balance of payments in 1982 and the of the obsolete infrastructure, it realised protracted slowdown of the Indonesian that the development of the country's economy as a result of the international vast natural resources and the embryonic recession and the attendant weakening of manufacturing sector would have to the world oil market forced the govern­ depend on foreign direct investment ment to introduce a series of policy reforms, including a reversal of its in­ * Economic and Development Studies Centre, Indonesian Institute of Sciences (PEP-LIPI), creasingly restrictive foreign investment Jakarta, Indonesia policy. In May 1986 the Indonesian - 83- 383 government introduced a set of policy decades ago. With a favourable turn­ measures (the 'Pakem' or 6 May package) around In economIc conditions, the to increase the international competi­ abiding and widespread national aspi­ tiveness of Indonesia's non-oil and gas ration of 'becoming master in one's own exports and improve Indonesia's invest­ house' would undoubtedly reassert itself ment climate by relaxing several restric­ once again. This would imply a return to tive measures to control foreign invest­ a more restrictive policy with regard to ment which had been in effect since the foreign investment. late 1970s. In the following pages we will have a Unlike the fundamental turnaround in closer look at the shifts in foreign In­ foreign investment policy in 1967, how­ vestment policy since 1967. Since the ever, shifts in foreign investment policy largest amount of foreign investment in after 1967 did not reflect a fundamental the non-oil and gas sectors has taken policy change, but rather a pragmatic place in the manufacturing sector, we will response to political pressures (1974) or also see to what extent industrial develop­ adverse economic conditions (1982). ment in Indonesia over the past two While recent policy measures and decaded has influenced foreign invest­ government efforts to promote more ment policy. To this end we will first foreign investment mark a partial return discuss Indonesia's industrial policy since to the 'open-door policy' of the late sixties the late 1960s. and early seventies, it seems unlikely that the Indonesian government (or any Industrial Policy since 1967 Indonesian government for that matter) would ever be prepared to pursue a com­ a. Official policy pletely liberal policy towards foreign I t is not easy to glean from official investment. To pursue such a course documents the actual thrust of industrial would mean a naive disregard of the policy in Indonesia. In fact, the actual potent force of economic nationalism pattern of industrial development since which no Indonesian government could the late sixties has not always been in afford to do. In hindsight, the 'open­ accordance with stated policies. More­ door policy' of 1967-1973 seems to have over, stated policies have sometimes also been an 'aberration' from a basic attitude been rather vague, thus giving rise to which can only be attributed to the different interpretations, for instance in desperate situation of the Indonesian regard to the ordering ofpriorities. economy after the fall of the Old Order The general direction of Indonesia's government. Though present economic long-term industrial policy is outlined in conditions are quite serious, the Indo­ the General Guidelines of State Policy nesian economy in the late 1980s is un­ (GBHN), which are set every five years doubtedly much stronger than it was two by the People's Consultative Assembly - 84- THEE K.W.: Industrial and Foreign Investment Policy in Indonesia since 1967 (MPR), the country's highest sovereign 4. Industries which employ more workers body. The GBHN stipulated that one of than capital; the objectives of long-term development 5. Industries which through the cumula­ was to achieve a 'balanced economic tive effects of their nature promote structure' in which a strong progressive regional development [Republik In­ manufacturing sector would be supported donesia 1969]. by a strong agricultural sector. To become Based on the above five guidelines, SIX the backbone of the Indonesian economy, specific industries were designated as the development of the manufacturing priority industries during the Repelita I sector would have to be carried out in period, namely: successive phases, covering the two dec­ 1. Fertilizer, cement, and chemical In- ades of the first four Five Year Develop­ dustries; ment Plans (1969/70-1988/89). During 2. Textile industry; the First Five-Year Development Plan 3. Paper, pulp, and printing industries; (Repelita I) priority would be given to 4. Pharmaceutical industry; the establishment of manufacturing in­ 5. Light and handicraft (cottage) indus dustries to support the agricultural sector, tries; while during Repelita II priority would 6. Metals, machinery, equipment, and be given to resource-processing industries infrastructure industries [Republik producing industrial raw materials. Dur­ Indonesia 1969]. ing Repelita III industries would be The guidelines for industrial develop­ established which would process the in­ ment during Repelita II (1974/75-1978/ dustrial raw nlaterials into manufactured 79) were almost the same as those for goods, and during Repelita IV engi­ Repelita 1. The main difference was that neering goods industries would be es­ the order in which the guidelines for tablished [Republik Indonesia 1978]. Repelita II was listed had been changed, The Repelita I (1969/70-1973/74) doc­ apparently reflecting a slight shift in the ument spelled out in great detail the order of priorities. Thus Repelita II listed types of industries which would be given the following industries as priority in­ priority, namely: dustries: 1. Industries which support the agricul­ 1. Industries which expand employment tural sector by making agricultural opportunities; equipment or by processing agricul­ 2. Industries which produce basic wage tural produce; goods, such as food, clothing, and 2. Industries which earn foreign exchange building materials for dwellings; or save foreign exchange by producing 3. Industries which earn or save foreign import-substituting products; exchange through manufactured ex­ 3. Industries which process more domes­ ports or make import-substituting tic than foreign raw materials; goods. Export-oriented industries - 85- 385 would include resource processing in­ still included those industries already. dustries producing industial raw listed in the previous Repelita namely: materials, as well as industries 1. Industries producing basic needs goods producing consumer goods and at prices accessible to the population intermediate goods. In promoting at large; resource processing industries which 2. Industries producing machinery and would utilise domestic resources, de­ equipment and industries producing velopment would be spurred in those industrial raw materials and ancillary regions where the resources were goods (machinery and basic metal located [Republik Indonesia 1974]. industries) ; Guidelines for industrial development 3. Industries utilizing natural and energy set for Repelita III (1979/80-1983/84) resources (basic chemical industries), indicated for the first time a clear shift in effectively employing Indonesia's com­ favour of an autarchic approach to indus­ parative advantage; trial development. This shift was reflected 4. Small and cottage industries, con­ in the emphasis given to industries which sidered to be important for a more would process (domestic) raw materials equitable distribution of business op­ into manufactured goods. It was hoped portunities and the expansion of op­ that in this way most of the country's portunities, as well
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