Economics and Finance in Indonesia Vol. 61 No. 1, 2015 : 41-52 p-ISSN 0126-155X; e-ISSN 2442-9260 41 The Indonesian Economy from the Colonial Extraction Period until the Post-New Order Period: A Review of Thee Kian Wie’s Major Works
Maria Monica Wihardjaa,∗, Siwage Dharma Negarab,∗∗
aWorld Bank Office Jakarta bIndonesian Institute of Sciences (LIPI)
Abstract
This paper reviews some major works of Thee Kian Wie, one of Indonesia’s most distinguished economic historians, that spans from the Colonial period until the post-New Order period. His works emphasize that economic history can guide future economic policy. Current problems in Indonesia were resulted from past policy failures. Indonesia needs to consistently embark on open economic policies, free itself from "colonial period mentality". Investment should be made in rebuilding crumbling infrastructure, improving the quality of health and education services, and addressing poor law enforcement. If current corruption persists, Indone- sia could not hope to become a dynamic and prosperous country. Keywords: Economic History; Colonial Period; Industrialization; Thee Kian Wie
Abstrak Tulisan ini menelaah beberapakarya besar Thee Kian Wie, salah satu sejarawan ekonomi paling terhormat di Indonesia, mulai dari periode penjajahan hingga periode pasca-Orde Baru. Karya Beliau menekankan bahwa sejarah ekonomi dapat memberikan arahan dalam perumusan kebijakan ekonomi mendatang. Permasalahan yang dihadapi Indonesia dewasa ini merupakan akibat kegagalan kebijakan masa lalu. In- donesia perlu secara konsisten menerapkan kebijakan ekonomi terbuka, membebaskan diri dari "mentalitas periode penjajahan". Investasi perlu ditingkatkan untuk pembangunan kembali infrastruktur, peningkatan kualitas layanan kesehatan dan pendidikan, serta pembenahan penegakan hukum. Jika korupsi saat ini berlanjut, Indonesia tidak dapat berharap untuk menjadi negara yang dinamis dan sejahtera. Kata kunci: Sejarah Ekonomi; Periode Kolonial; Industrialisasi; Thee Kian Wie
JEL classifications: N55, N65
1. Introduction palm oil, rubber, wood, coffee, and cacao made up around 55 percent of total main export products1 Indonesia’s current economic performance is a re- There are many factors constraining the Indone- semblance of its long economic tradition since the sian economy to industrialize and move up the colonial extraction period. Some similar character- value chain. Inconsistent, unclear and often over- istics can be found between the colonial economy lapping government policies contribute to sub- with the current economic situation. One of clear optimal economic performance. While at the same evidences is the fact that Indonesia is still highly time, infrastructure and skill gaps are also imped- dependent on its abundant natural resources for ing the industrial development, technological trans- its revenues. In 2012, commodity exports such as fer and thus economic growth. For the Indonesian economy to move forward and to avoid the middle income trap, it needs to learn from history of its ∗Corresponding Address: World Bank Office Jakarta, In- donesia Stock Exchange Building Tower 2, 12th Floor. Jl. Jen- past policy failures and successes. deral Sudirman Kav. 52-53 Jakarta, 12190. E-mail: mwihardja@ worldbank.org. ∗∗Jl. Jend. Gatot Subroto No. 10, Jakarta Selatan 12710 In- 1Ministry of Trade, Statistik Perdagangan Luar Negeri In- donesia. E-mail: [email protected]. donesia 2013.
Economics and Finance in Indonesia Vol. 61 No. 1, 2015 42 Wihardja, M.M. & Negara, S.D./The Indonesian Economy from the Colonial Extraction Period...
This paper reviews some major works of Thee Kian published in 2002 and "Indonesia’s Economy since Wie, one of Indonesia’s most distinguished eco- Independence" published in 2012. His works went nomic historians, that spans from the Colonial pe- as far back as the first appearance of the Dutch in riod until the post-New Order period. His works, 1596. Thee’s publications were voluminous, com- written in the 1980s until his passing in February mencing with the publication of his Ph.D. disserta- 2014, should remind us about the importance of tion from the University of Wisconsin. our economic history to give us guidance for fu- ture economic policy and strategy. His major works In 2002, he published a collaborative volume emphasize that the problems that Indonesia faces on The Emergence of a National Economy with today were the results of past policy failures. In Howard Dick, Vincent J.H. Houben and J. Thomas some of his works, for instance, Thee argued that Lindblad, in recognition of the lack of an up-to-date Indonesia’s relatively weak industrial development textbook on the Indonesian economic history. Four could partly be explained by its inconsistency in of his book chapters, making up a sequel of In- implementing the industrial policies during the oil donesia’s economic history starting from the arrival boom and oil shock periods. Thee always con- of the Dutch first voyages in the archipelago in the cerned about ’half-heartedness’ of the government late sixteenth century to the Soeharto era, deserve of Indonesia to fully embrace the pro-competition special attention. policies. The government easily switched policies Thee’s "Colonial extraction in the Indonesian to trade or industry restriction policies especially archipelago - A long historical view" (Thee 2013a) on sectors like mining, energy, and infrastructures, is a paper that goes back as far as the late six- signaling failures to stand tall on political pressures teenth century when the first voyages by the Dutch (Wihardja 2014). arrived in the archipelago. Correcting the percep- The paper is organized as follows. The analysis tion that Indonesia was colonized by the Dutch for section reviews on Thee’s major works on the In- 300 years, as most of Indonesia’s history textbooks donesian economic history since the colonial ex- would state, Thee made a point that unlike the Por- traction period until the new order period; Thee’s tuguese and Spanish, the Dutch were exclusively important works on industrialization policies, in- motivated by the wish to find trade opportunities, cluding his reflections on East Asian Development especially spices on the Moluccan islands, such strategy and technology transfer; and some of the as the highly-valued nutmeg. The paper continued lessons learned for Indonesia on past policy fail- with the evolution of the Dutch presence and poli- ures and successes on trade and industry. This cies in the Netherlands Indies. section also reviews Thee’s works on some so- First was the Dutch East India Company (VOC) cial aspects of development including on equity, that was established in 1602 to represent the com- poverty and disparities of income distribution. The bined interests of several Dutch trading compa- final section concludes and provides some policy nies. "The VOC enforced a bilateral monopoly on recommendations. the spice trade in the Moluccas: a monopsony on the purchase of the spices in the Moluccas com- bined with a monopoly on the sale of these spices in the Dutch Republic." (p. 41) Four years after 2. Analysis the French occupation of the Dutch Republic, the ’bleeding’ VOC, partly due to corruption of its of- 2.1. Indonesian Economic History ficials, was disbanded in 1799. During the French since the Colonial Extraction occupation in the Dutch Republic, Louis Napoleon sent Marshal Daendels as the new governor gen- Period eral who executed the construction of a major high- way of around 1000 km connecting the Western As one of Indonesia’s most renown economic his- and Eastern end of Java through corvée services torians, Thee Kian Wie has produced some influ- in which resulted in the death of thousands of un- ential works on the Indonesian economic history, paid peasant workers. When the British took over including "The Emergence of a National Economy: in 1811, Raffles continued with Daendels’ reforms An Economic History of Indonesia, 1800–2000", in transforming VOC. After Napaleonic wars ended
Economics and Finance in Indonesia Vol. 61 No. 1, 2015 Wihardja, M.M. & Negara, S.D./The Indonesian Economy from the Colonial Extraction Period... 43 in 1815, the Dutch resumed authority in Java. The Fourth was the Ethical policy that was introduced Java War - the last big war between the Javanese in the 1900 until the 1920s, primarily because the and the Dutch until the 1940s - then broke in 1825 Dutch felt the obligation to take responsibility for that lasted until 1930, when Prince Diponegoro the welfare of the Indonesian people for excessive was arrested. exploitation in previous periods. The Ethical pol- icy also resulted in the training programs for civil Second was the Cultivation System that was intro- servants before they came to the Netherlands In- duced in 1830. It was believed that forced cultiva- dies. The highly trained officials were also "gen- tion of export crops for the European market would uinely devoted to the cause of improving the wel- offer the most effective remedy against structural fare of the Indonesian people" (p. 53). However, deficits in both the Netherland Indies government the Ethical policy had failed to achieve anything and the Dutch Republic. The Cultivation System that it was referred to as the "Doctrine of the Little was proven to be "a stroke of fiscal genius" (p. Push" (p. 53). The welfare ideology of Ethical Pol- 45) whose proceeds were directly remitted to the icy simply contradicted the colonial ideology. The Dutch treasury. During the period 1851–60, prof- latter was mainly driven by economic and political its from the Netherland Indies accounted for as motivations of the colonial government. As a result, high as one-half of total national revenues. "In- no significant improvement on the welfare of the In- deed, the profits from the Netherlands Indies were donesian people, in education, by 1930s, only 7.4 indispensible for servicing the high Dutch national per cent of adults were literate. By the early 1920s, debt and for maintaining balance in the state bud- the Ethical Policy had been abandoned. get" (p. 48). However, famines broke in Demak and Fifth was the period of the Great Depression in Grobogan in 1848 and 1849–50 respectively as re- 1930s, the Japanese occupation in 1942 and fi- sources were being taken away from domestic food nally, Indonesia’s independence in 1945. production in lieu of export including in times of crop failures. Almost one-fifth of the pre-1848 pop- In the summary, Thee made an interesting point: ulation in these regions died because of famine- "Institutions and practices of extraction, leading related illnesses. Thee noted that even a conserva- to regressive distribution of assets, income and tive Dutch historian would call this period as "one wealth, have been sustained during the post- of the most shameful pages in the Dutch colonial colonial era. ... The abuse of public resources by history" (pp. 47–48). The Cultivation System was rent-seeking elites (including those during the Soe- abolished in 1870, not because of the cruelty and harto era), has been a constant factor in Indone- the many deaths it caused, but primarily because sian history and the Dutch colonial rule set the ex- private Dutch entrepreneurs wanted to invest in the ample in its most extreme form." (p. 57). colony themselves. It is clear from this paper, that Thee was never short of covering the welfare impacts of any pol- Third was the "liberal era" in 1870, when pri- icy or event in history in most of his writings. He vate capital was allowed to enter the colony freely. also usually provided a balance argument on his Not only did Dutch private entrepreneurs gain ac- analysis, for example, he noted the positive sides cess to private investment, but also indigenous of the Dutch and the Japanese occupation, includ- entrepreneurs. After 1880, private investment in- ing investments in public goods and services. creased rapidly. Thee strongly argued that the in- creased use of Chinese middleman in the tax In Anne Booth’s Festschrift (Thee 2013b), Thee farm system at that time, such as to collect taxes wrote a detailed account of Indonesia’s economy from local population, had a long-term conse- during the Japanese occupation, starting from De- quence that was "the strong anti-Chinese senti- cember 8, 1941, when the Dutch declared war on ment among the Javanese population which has the Japanese, to Indonesia’s independence on Au- persisted to the present day" (p. 52). The liberal gust 17, 1945. Unlike many of his writings, Thee reforms were perceived to be successful in sup- addressed open-ended questions that he himself porting the expansion of the colonial economy, al- could only speculate on answering. For exam- though there is little evidence that the liberal re- ple, he asked, why the Netherlands declared war forms led to a significant improvement in people’s against Japan before the U.S. did? In this book welfare in general. chapter, Thee also corrected some common pub-
Economics and Finance in Indonesia Vol. 61 No. 1, 2015 44 Wihardja, M.M. & Negara, S.D./The Indonesian Economy from the Colonial Extraction Period... lic perception that Indonesia was colonized by the relationship with the U.S. and its other Western Al- Dutch for 300 years, while in fact there were only lies and alignments with socialist countries as well four ships that arrived and stayed in the Indonesian as Indonesia’s withdrawal from the United Nations archipelago. "Indonesians even today say, that In- after Malaysia was admitted as a non-permanent donesia was colonized by the Dutch for three hun- member of the Security Council. During this pe- dred years, which historically is totally wrong. This riod, Soekarno closed itself from foreign aids, es- statement would have implied that when Cornelis pecially from the U.S., although it needed so much de Houtman landed in the port of Banten in 1596, of these foreign aids amidst deteriorating economic he and his four ships swept over the entire Indone- condition at home. However, Soekarno put politic sian archipelago like a tsunami!" (p. 4). above economic considerations. Thee argued that the U.S. economic aid in the 1950s was primar- In this paper, he acknowledged the role reversal of ily to improve the U.S. relationship with Indone- the U.S. relation with China and Japan, i.e. how sia, although Soekarno had little capacity and in- the U.S. was used to be an ally of China (and not terests for this economic aid. Putting politics above Japan), before China fell into the hand of Chairman economics, Soekarno’s leadership eventually led Mao Zedong in 1949, when the U.S. foreign policy to economic and political collapse in 1965. turned 180 degree. Thee also narrated how Japan, being desperate for imported oil embargoed by the Thee’s book chapter in The Emergence of A Na- U.S., Great Britain and the Dutch, decided to wage tional Economy (2004), "The Soeharto Era and Af- a war in South East Asia including Indonesia, in- ter: Stability, Development and Crisis, 1966–2000" stead of stopping the pyrrhic war against China. is one among his many other works to cover the Like in his other writings, he portrayed the cruelty Soeharto era. After the alleged coup of 30 Septem- of the Japanese occupation, although, providing ber 1965, Soekarno reluctantly signed a decree, a balanced analysis, he argued that without it, "it referred to as Supersemar, giving Army Comman- would have taken a much longer time for Indonesia der Lieutenant General Soeharto the authority to to become independent" (p. 12). Moreover, Thee restore order, which in effect giving him a transfer noted that during the Japanese occupation, many of executive power2. Soon after that, in 1968, Soe- Indonesians gained valuable experience and skills harto was appointed as Indonesia’s second Presi- by occupying high positions in the bureaucracy, dent. which were proven to be valuable when Indonesia Thee noted that the difference between the Old Or- became independent. der and the New Order was not only in terms of In Thomas Lindblad’s Festschrift (Thee 2014), political leadership but also their fundamental mis- Thee portrayed a struggling Indonesia for a real sions. While Soekarno developed "socialist econ- independence from the Dutch in the post-1945 omy a lá Indonesia" under a "guided democracy" independence period, including from issues on (Thee 2009a), for the New Order, the fundamen- the 15 puppet states, independence of West tal mission was to boost economic development. Papua and the huge debt Indonesia inherited Thee also wrote: "One of the proudest achieve- from the Dutch Indies government. Thee also ments of the New Order was its success in com- noted early economic advisors, such as Sumitro bining rapid growth with a sustained reduction in Djojohadikusumo, Sjafruddin Prawiranegara and the incidence of absolute poverty." (p. 225). The Djuanda Kartawidjaja, as "pragmatic and certainly major reason of this was because in the early pe- no less nationalistic than their detractors" (pp. 9– riod of the New Order under Soeharto was able 10). Thee described the resentment and unhappi- to maintain political stability and macroeconomic ness of the Indonesians over the continuing pres- stability. The stability could be achieved partly be- ence of the Dutch businesses, and soon the role of cause Soeharto was assisted with competent tech- the military and the Chinese Indonesians in state- nocratic economic advisers, such as Widjojo Niti- owned enterprises began when Dutch companies sastro, Ali Wardhana, Mohammad Sadli, Subroto were taken over by trade unions in 1957 that were finally nationalized by 1959. Thee argued that in 2 order to divert attention from domestic turbulences There are different stories about Soeharto’s accession to Presidency because the letter, Supersemar, was never found, at home, Soekarno launched "Ganyang Malaysia" raising suspicions that Soekarno never signed such as a de- (Crushed Malaysia) that soon led to the severing of cree.
Economics and Finance in Indonesia Vol. 61 No. 1, 2015 Wihardja, M.M. & Negara, S.D./The Indonesian Economy from the Colonial Extraction Period... 45 and Emil Salim, whom Soeharto trusted and lis- of the balanced budget law was crucially depen- tened to. The incidence of absolute poverty de- dent on continued annual inflows of foreign aid." (p. creased from 40 per cent in 1976 to 11 per cent 205) As a result of fiscal and monetary disciplines, in 1996. However, Thee was not short of noting the inflation declined from 636 per cent in 1966 to 9 New Order’s "corrupt" and "ruthless" (p. 241) polit- per cent in 1970. Soeharto and his technocrats re- ical power in its later period. alized that new foreign aid and foreign investments were crucial to the survival of the new government, During the early years of his Presidency, Soeharto putting behind nationalist rhetoric. Over the period appointed five economic advisors or professors, as of 1967–1973, economic growth recovered to an his economic confidants, whom he met at a mil- impressive record, averaging over 7 per cent an- itary school, Seskoad (the Army staff and Com- nually. mand School), where these five economists used to give lectures to Soeharto as a senior army of- In the second episode of Soeharto’s leadership, ficer. The five economists, often known as "the Indonesia experienced a windfall of oil revenues Berkeley mafia", were: Widjojo Nitisastro, Subroto, from two oil booms in 1973/1974 and in 1978/1979. Emil Salim, Ali Wardhana, and Muhammad Sadli. The oil boom in the 1970s drove Indonesia to pur- This was also the school where the military pre- sue one of the most inward-looking patterns of in- pared for their dual function (dwifungsi) and even- dustrialization among the Asian developing coun- tually built an alliance with the civilians, which in tries. In the first ’easy’ phase of import substitu- 1966 overthrew the Old Order. tion, Indonesia imposed tariff and non-tariff pro- tection including total import bans on some goods Thee divided Soeharto’s era into three phases (p. already assembled or manufactured in Indonesia, 203). The first phase (1966–1973) was a period enabling locally made light consumer goods and of "stabilization, rehabilitation, partial liberaliza- consumer durables to replace imported products. tion and economic recovery". The second phase In the late 1970s, Indonesia conducted the sec- (1973–1982) was a period of "oil booms, rapid eco- ond ’easy’ phase of import substitution, which in- nomic growth and increasing government interven- volved ’deepening the industrial structure’. Thee tion". The third phase (1983–1996) was a period noted that "the government’s ’industrial deepening’ of "post-oil boom, deregulation, renewed liberaliza- plan" was "’one massive exercise in import sub- tion and rapid export-led growth". For each phase, stitution’ without any reference to efficiency or ex- Thee’s analysis brings a wealth of lessons learned portability considerations." (p. 222). And moreover, from policy failures and successes. "this industrial strategy was strongly supported by One of the basic features that distinguished Soe- the government/ military bureaucracy, whose eco- harto’s economic policies from those of Soekarno nomic fortunes would be greatly advanced by the was an open economy. The hostile investment pol- establishment and operation of new, large state- icy of Soekarno was reversed by enacting a new owned industries." (p. 222). Indonesia also im- Foreign Direct Investment Law in 1967. Foreign di- posed mandatory "deletion programs" (p. 223), un- rect investment immediately skyrocketed from $83 der which intermediate goods were required to use million in 1967 to $271 million in 1972. In 1972, progressively more of locally made parts and com- capital account transactions were also liberalized ponents. This hurt export-oriented firms, who re- to move freely in and out of the country. Indonesia, quired high-quality parts and components. This through its ’balanced budget’ law in 1967, which deletion program has never been successful. In- prohibited domestic financing through domestic donesia still relies on imported parts and compo- debt and money creation, allowed foreign aids nents. There are several reasons for failure of the through Official Development Assistance (ODA) to deletion program, i.e. inadequate skills, lack of in- finance domestic budget deficit. By 1990, Indone- formation and lack of discipline on the part of the sia has become the largest aid-recipient country government and most problematic is the program receiving around $1.8 billion3. "These official aids was prone to rent-seeking activities and vested- flow turned out to be crucial, as the implementation interest groups. In 1974, anti-Japanese riots broke during a state 3http://data.worldbank.org/indicator/DT.ODA.ALLD. visit by Japanese prime minister Tanaka, in CD?page=4. Accessed on August 29th, 2014. protests of the perceived "sell-out" (p. 208) of the
Economics and Finance in Indonesia Vol. 61 No. 1, 2015 46 Wihardja, M.M. & Negara, S.D./The Indonesian Economy from the Colonial Extraction Period... economy to foreign capital and the perceived pref- 2008a). Corruption, collusion and nepotism were erential treatment to ethnic Chinese entrepreneurs. rife. When non-oil manufactured exports began Having succeeded in economic recovery, the gov- to slow down in the early 1990s, partly due to ernment reversed its liberal, free-market policies competition from low-labour-cost regional coun- in favour of more inward-looking and intervention- tries, putting pressures on the declining current ist policies, supported by increased government account balance, B.J. Habibie who was then the revenues from oil taxes. From 1974, foreign di- powerful Minister of State for Research and Tech- rect investment could only enter the country in the nology, pushed for costly high-technology indus- form of joint venture with Pribumi owning a majority tries, including his aircraft industry. But, without ownership. This resonated with the Benteng pro- prudent policy that properly considered resource gram (1950–1957) whose main goal was to build a constraints, this ambitious project became more of strong Pribumi economic class vis-à-vis the ethnic a parasite. Deregulations in the financial sector in Chinese entrepreneurs. the late 1980s, but without enough enforcements of prudential regulations, also allowed rapid expan- In mid-1970, Pertamina, the powerful state-owned sion of a weak banking system. People’s dissatis- company, defaulted on a short-term loan from faction with ’corrupt’ economic institutions was ex- a foreign bank. There was a big debate be- acerbated by people’s fear of repressive political tween the government under the supervision of regime. For many of the reasons above, the In- the technocrats and Pertamina on the change in donesian economy became vulnerable to rupiah the production-sharing contracts and subsequent extreme depreciation, aggravated by un-hedged financial autonomy of Pertamina. In a separate and maturity as well as currency mis-matched pri- book, Thee wrote that in times like the Pertamina vate sector debts. The speculative attacks in the crisis, Soeharto acted like "a responsible head of financial and banking sectors soon spiraled down government", supporting the technocrats who were into an unprecedented economic crisis and politi- trying to safeguard the country’s state revenues, cal crisis that witnessed the fall of the 30-year of instead of giving absolute protection to Pertamina Soeharto leadership. (Thee 2003, p. 135). Thee made three important points in the analy- After a decade of oil booms in the 1970s, Indonesia sis of the Soeharto era. First was the importance soon found itself running out of oil revenues with of ’good governance’. He wrote, "the only strong oil price dropped twice in 1982 and 1986. To move institution seemed to be President Soeharto him- the economy away from its dependence on oil ex- self, who was not a sustainable institution" (p. 241). ports, Indonesia shifted from import-substitution to Second was the two-edged sword of globalization. export-oriented industrial strategy. Not until 1986 "The Asian crisis also showed that globalization when oil price fell more steeply than in 1982, did may require institutions to change faster than they the government really push through trade reforms are able to" (Thee 2008a, p. 241). Last were "the towards export promotions. Beside trade reforms, growing disregards of economic analysis in policy the government also deregulated foreign direct in- formulation" with "the rise of interventionist poli- vestment, by removing restrictions that had been cies resulted from accumulation of corrupt political re-introduced in 1974. The most significant liber- power that eroded business competitiveness and alization of foreign direct investment was in 1994. rewarded rent-seeking policies" (Thee 2008a, p. As in many other writings, Thee often emphasized 241). Thee also made a note on the environmen- the interdependence between industrial, trade and tal degradation and depletion of energy because of investment policies. For example he noted that the high-growth economy and greed. whether or not foreign direct investment in Indone- sia is trade-oriented, referring to whether it pro- Furthermore, the perspective taken by Thee in his motes exports of finished products from the host analysis on the colonial policies on Indonesian country or promotes exports of parts and compo- economy, is well described by Hill, Negara, and Wi- nents from the home country (Thee 1984). hardja (2014): "Thee’s economic history work was generally positive rather than normative in tone. Despite the rapid growth in the late 1980s, Indone- That is, he did not set out to condemn the colo- sia slowly moved from what Thee called a "de- nial system beyond its obvious iniquities, nor did velopmental state" to a "predatory state" (Thee he engage with some of the grand debates, such
Economics and Finance in Indonesia Vol. 61 No. 1, 2015 Wihardja, M.M. & Negara, S.D./The Indonesian Economy from the Colonial Extraction Period... 47 as the ’colonial brain drain’, or theories of impe- Industrialized Countries (NIC) Investment into In- rialism. Rather, he sort to meticulously document donesia" (Thee 1991), Thee described the surge of and analyze the Dutch colonial economic system export-oriented NIC investment in the 1980-1990s. and its impacts on local commerce and living con- There were pull and push factors for the surge. ditions". Some of the pull factors include: the steep drop in oil revenues in 1982 and 1986 forcing the gov- ernment to shift from import-substitution strategy to 2.2. Industrialization Policy and East export-oriented strategy. This resulted in the condi- tion where exporters had been able to buy inputs Asian Development Strategy from foreign and domestic suppliers at interna- tional prices and government supported by adopt- Thee was a strong believer of the benefit of for- ing an active exchange rate policy (Thee 1991). eign direct investment. In several papers, he ar- The government ensured that the exchange rate gued that Indonesia badly need more foreign direct is competitive to support the growth of non-oil ex- investment in order to get the much needed capital, ports (Thee 1991). new technology and modern management meth- ods and access to export markets. He consistently The surge of investment in that period of 1980- reminded the government of Indonesia for not con- 1990s, is also influenced by the external factors. tinuing to rely on abundant natural resources and Stated in Thee (1991): "There were also the push cheap labour, instead to seriously develop and up- factors, including: the substantial appreciation of grade the technological capabilities of the country’s the NIC currencies and a rapid rise in wages of manufacturing sector (Thee 2008b). the NIC; the abolition of foreign exchange control by the Taiwanese government in 1986; the sup- In his paper, "Japanese Direct Investment in In- port from the Korean government to Korean private donesian Manufacturing" (Thee 1984), Thee ar- firms to invest in South East Asia; and the devel- gued that the Japanese investment in the early opment of Batam with Singapore as an industrial 1970s had been of the "import-substitution" rather estate to which Singapore’s labour-intensive indus- than "export-orientation" type. It had been "anti- tries can relocate their operations". trade oriented" (p. 95) in the sense that it did not promote exports from Japan of industrial raw mate- Asian NIC (Korea, Taiwan, Singapore and Hong rials, parts and components, nor did it promote ex- Kong) accounted for 58% of new investment ports of finished products from the host country. He projects approved and 84 per cent of Asian argued that of the Japanese components and parts NIC projects approved during 1990 were export- were "directly from explicit arrangements between oriented (compared to 59 per cent of Japanese the Japanese parent company and its Indonesian projects approved). Among Asian NIC investment subsidiary commonly as a package deal" (p. 101). projects mostly were Korean and Taiwanese that Not because of the Japanese comparative advan- were export-oriented, partly because they came tage in the supply of these inputs. Thee argued that later only to exploit a low-cost export base and long although Japanese investment has been in labour- relation they have developed with buyers from the intensive manufacturing in Indonesia, it may be developed countries. Other features of Asian NIC said to have been potentially export-oriented. But, investments, include: (1) large operations in terms a survey showed that Japanese investors’ decision of volume of outputs and number of workers, (2) to invest in Indonesia was the potential of the local labour-intensive nature – 64 per cent of Korean market and not to export, because they saw op- projects and 43 per cent of Taiwanese projects portunities to produce products that had been pro- were located in highly labour-intensive projects, (3) tected from imports. He argued that "Whether or mostly ’low-technology’ industries, but capital and not the Japanese direct investment in Indonesian technology-intensive path of industrialization in Ko- manufacturing is trade-oriented or not depends on rea and Taiwan resulted in a few projects in highly whether the country is pursuing a path of export- intensive technology industries in Indonesia. oriented industrialization or import-substituting in- "The orderly transfer of technology4 of NIC projects dustrialization." (p. 105).
In his other paper, "The Surge of Asian Newly 4Thee (2001) defined technology transfer as a process "that
Economics and Finance in Indonesia Vol. 61 No. 1, 2015 48 Wihardja, M.M. & Negara, S.D./The Indonesian Economy from the Colonial Extraction Period... to Indonesian owned and controlled operations from multinational companies in strategic indus- may be one of the major contributions of NIC in- tries and protecting the Chaebol - Korean conglom- vestment to Indonesia. Acquiring advanced tech- erates. Manufacturing industry was dominated by nologies through technical licensing agreements these Chaebol that were given incentives and le- would certainly avoid the politically sensitive prob- niencies. However, competition was encouraged lems of ’foreign domination’ over the economy among these Chaebol and the government im- which has often bedeviled the making of economic posed standard performance requirement, such as policy in Indonesia." (pp. 86–87) high export performance. Technological diffusion was encouraged by developing a network of sub- To achieve rapid and sustained economic growth, contractors who were mostly SME. The South Ko- Thee argued that Indonesia should not only focus rean government issued a law prohibiting compo- on agricultural development but also should seri- nents and sub-components to be in-house man- ously support its industrial development. Based on ufactured, but must be purchased from SME in- empirical findings, no developing country would be stead. During that period of time, SME contributed able to transform itself into a developed country if 35–40 per cent of total export in the country, al- it were to focus only on agricultural development, though 2 per cent of total firms namely the Chae- while neglecting or deferring industrial develop- bol produced 62 per cent of GDP. In fact, productiv- ment. To improve the competitiveness of Indone- ity growth of SME was higher than big companies sia’s manufacturing sector, Thee recommended since they used the same level of technology as big (many times) that the Indonesian government must companies, partly because they were more agile in stop providing the industry with preferential treat- adopting new technology. ment (such as the wood products, mining, palm oil). The government should also force the indus- In the case of Taiwan, Thee emphasized that phys- try to adhere to the country’s strict environmental ical infrastructure in small villages and access to obligations. ports support SME not only in agglomerated cities but also rural areas. This is par to the reason that A big player in Indonesia’s economic develop- growth has been more equitable (than say, South ment is the Micro, Small, Medium and Large en- Korea) and growths in agriculture and manufactur- terprises (MSME). Thee argues that Indonesia’s ing were more balanced. There were no barriers ’hollow middle’ resulted in assembling/ intermedi- to entry and the Chinese "self-entrepreneurial" as- ate industry in Indonesia to rely on expensive im- piration encouraged Taiwanese to open their own ported goods. In his book chapter, "SME Policies businesses. SME were export-oriented and had in Three East Asian Nations and Their Relevance high international competitiveness. SME were im- for Indonesia" (Thee 2004, p. 283), Thee drew ex- portant sources of exports by mid-1980s. During periences from SME in Japan, South Korea and that period, SME accounted for 70 per cent of total Taiwan. Thee argues that the Japanese experi- employment and 55 per cent of GDP and 62 per ences show that government loans are essential cent of export revenues. funding sources for newly established SME, most of whom are sub-contractors to big industries. Effi- ciency in SME in manufacturing industry in Japan is the main factor in highly competitive manufactur- 2.3. Lessons Learned For Indonesia on ing industry in Japan, such as machinery, electric- Industrial Policy ity, and cars. Indonesia recently passed Trade Law (Law No. In the case of South Korea, the government im- 7, 2014) and Industry Law (Law No. 3, 2014). plemented selective intervention by limiting FDI Amidst the end of commodity boom (2003–2012) and a widening current account deficit, Indone- involves the transfer of skills and technical know-how as well as the transfer of machinery and other capital equipment (em- sia has moved towards more inward-looking and bodied technology). Technology transfer can take place through protective trade and industrial policies in recent various channels such as foreign direct investment (FDI), tech- years. Supply-side constraints limit export com- nical licensing agreements, imports of capital goods, foreign petitiveness and import-substitution seems to be education and training, turnkey projects, technical consultan- cies, copying or ’reverse engineering’, and participation in world the only ’quick’ solution to narrow the widening trade. current account deficit. In fact, these new com-
Economics and Finance in Indonesia Vol. 61 No. 1, 2015 Wihardja, M.M. & Negara, S.D./The Indonesian Economy from the Colonial Extraction Period... 49 plementary ’twin sisters’ laws are just confirma- benefits analyses and understanding of the barri- tions of Indonesia’s more inward-looking trade pol- ers that inhibit efficient industrialization in the first icy and protective industrial policy for the past two place. Furthermore, these interventions are not years, as evident in the words of the government: conducted as they are supposed to be conducted "The Trade Law affirms our standpoint that Indone- and instead influenced heavily by pressures from sia does not fully embrace free trade,"5 and "with vested interest groups. Therefore, selective gov- the implementation of the newly approved Indus- ernment interventions in developing countries of- trial Law, Indonesia will have a strong legal base ten times adversely create rent-seeking activities, to promote import substitution as well as down- which from the perspective of citizens’ interests are stream industries in efforts to reduce the manufac- not productive. turing sector’s heavy reliance on imports of com- In other words, the success of selective govern- ponents and machinery."6 Although Indonesia is ment intervention is not without a condition. Draw- among the ASEAN6 countries (outside Cambodia, ing lessons learned for Indonesia on trade and in- Laos, Myanmar and Vietnam) with Common Effec- dustrial policies, as some of Thee’s writings sug- tive Preferential Tariffs virtually zero, Indonesia’s gest include the following conditions. Core Non-Tariff Measures Restrictiveness Index in 2009 is highest among ASEAN member states7. The first is reciprocal-based intervention, which Hence, we cannot argue that the Trade Law is a means that credits to some selected industries response to a trade policy that is too liberal. or firms are given only if accompanied by perfor- mance standards (Thee 2004, p. 299). For ex- Thee had warned that: "Import-substituting indus- ample, in the case of South Korea, government- trialization, if pushed ahead behind highly protec- supported Chaebols were imposed a high disci- tionist walls, is economically inefficient. It leads to pline to reach certain high export capacity in order serious distortions in the economy which are ex- to reach international competitiveness standard. tremely difficult to correct once they are built into Therefore, there must be some underlying implicit the economic structure of a country. For not only or explicit contracts between the government and are physical structures or complexes of production the private sector in terms of certainties of politi- established, but more importantly from the political cal imperatives (including regulatory certainties) by economy view point, vested interests favouring the the government on the one hand, and quality as- status quo which are supported by political power surances by the private sector on the other hand. holders become practically impossible to dislodge, Hill and Aswicahyono (2014) suggest that, in any even when the high economic costs of these ar- form of industrial intervention, there must be some rangements become evident." (Thee 1984, p.105) market test standards, performance requirement Experiences from South Korea, Hong Kong, Tai- and conditionality imposed on the ’winners’. wan and Singapore showed that some degrees of The second is "market-conforming intervention", "selective government intervention" to build indus- which means that government intervention does trial capacity at home had succeeded in putting not mean reducing firm competition, but on the these countries to become highly industrialized contrary, it must support firm competition to main- and high-income countries. However, Thee ar- tain competitiveness of the selected industries gues that what often happens in many developing (Thee 2004, pp. 268–269). Protecting inefficient countries, including Indonesia, with their import- firms from competition will put Indonesia in a high- substitution industries, is that, interventions often cost economy. In the case of South Korea, during times are not created to fix specific market fail- the era of planned and directed industrial policy in ures. They are not preceded by concrete costs and favor of the Chaebols, the South Korean govern- ment supported at least two big Chaebols in every 5Source: http://www.theaustralian.com.au/business/ sector or industry it developed (Thee 2004, p. 299). jakarta-freely-admits-it-is-shielding-local-stakeholders/Similar efforts to encourage domestic competition story-e6frg8zx-1226830971710#. 6Source: http://www.thejakartapost.com/news/2014/ happened in Japan. 02/07/ri-focus-import-substitution-industry.html . The third is institutionally-supported intervention. 7Source: http://www.eria.org/Mid-Term%20Review% 20of%20the%20Implementation%20of%20AEC%20Blue% Government intervention must be supported by 20Print-Executive%20Summary.pdf, p. 11 and 24. sound regulatory processes and sound institutions.
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Similarly important is what Hill and Aswicahyono lic support on its highly protected high-tech indus- (2014) call, "a convincing case that the Indone- tries. sian bureaucracy has the specialized knowledge The seventh is that trade and investment policies of markets and technology, superior to that of ma- cannot be too restrictive in order to allow some de- jor MNEs, to be able to make such a decision (of grees of external competition and foreign invest- the form of intervention)." (p. 24). ment in some key areas. Some degrees of exter- The fourth is that in order to reach an economy- nal competition is important for encouraging some wide competitiveness, building one or two produc- local manufacturers to improve their capacity and tive sectors is not enough. What is really needed to upgrade their product quality. And foreign di- is diffusion or structural change including techno- rect investment remains important to get the much logical diffusion from the most productive sectors needed capital, new technology and modern man- in the economy to the rest of the economy. If In- agement methods and access to export markets. donesia is to depend only on its comparative ad- The eighth, and perhaps most importantly, is that vantages, namely natural resources and resource- the decision to intervene in costly industrial policy based industries, it may never become a competi- is really to address some sort of market failures tive economy-wide without a substantial structural that impede Indonesia’s lack of competitiveness. change. In the case of South Korea, technological Hill and Aswicahyono (2014) correctly argue that if diffusion from the Chaebols to SME was done by Indonesia’s lack of competitiveness is not the re- issuing many regulations to support SME as sub- sult of some sort of market failure or technological contractors to the Chaebols, among which was by barriers, but due to high-cost domestic economy, issuing a law restricting Chaebols to have in-house inadequate education system, complex regulations manufacture for their parts and components (Thee and domestically-imposed barriers to international 2004, p. 299). technology transfer, then the solution should be The fifth is that selective intervention is not a sub- addressing the root causes and not embarking in stitute for more "neutral" or "functional" interven- some costly industrial policy. tion, such as infrastructure, education, research and technological development, and trade facili- tation to ensure skill development and productiv- 2.4. Social Aspect of the Development ity (Thee 2004, p. 264). Increasing innovation and Policy technological development are important to com- pete in the global market. Eventually, Indonesia’s Thee has also produced some important works on domestic value-added must not only come from poverty and inequality. In 1981, he produced his natural resources, which are not sustainable in the essays collection on equity, poverty and dispar- long run, but also from creativity and innovation. ity of income distribution published by Sinar Hara- In the case of South Korea, Singapore, Taiwan, pan. He believed that sustaining rapid economic and Hong Kong, the targeted upgrading of their in- growth is necessary to eliminate poverty in Indone- dustrial structure was consistent with changes in sia. And he added that the economic growth should the soft and hard infrastructures, which were the be complemented with economic empowerment results of deliberate investment in those sectors of the poor through the promotion of small-scale including skills, physical infrastructure and institu- and cottage industry in rural areas. He argued for tions. Their selective interventions also consisted cutting the bureaucratic procedures, red-tape, and of assisting firms to be capable of imitating and li- addressing the disproportionate economic power censing foreign technologies, and making sure that which certain groups enjoyed. Thee strongly be- they had accesses to the right skills and infrastruc- lieved that Indonesia should seriously address the ture. ever widening economic gap between the more prosperous ethnic Chinese Indonesians and the The sixth is that macroeconomic fundamental must pribumi (indigenous) Indonesian majority and the be sound. This is what we learned in the midst of wide development gap between Java and non- the Asian Financial Crisis in 1997–1998, in which Java. without a sound macroeconomic fundamental, the government quickly runs out its resources and pub- Thee’s more contemporary works in the Post-
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Soeharto era mostly focus on development chal- very prone to reduce the efficiency of policy and lenges and recent updates8. He often wrote about administration. corruption, poverty and inequality as well as en- vironmental degradation. In his 2013 short pa- per, Thee laid out four development challenges: 3. Conclusion combatting pervasive corruption; overcoming crit- ical constraints to reducing poverty, inequality and unemployment; the dilapidated physical infrastruc- Thee’s major works had taught us that Indone- ture; and the rapid decline of non-renewable natu- sia needs to consistently embark on open eco- ral resources at current rates of exploitation. nomic policies. It needs to free itself from "colo- nial period mentality". Indonesia in its present time Thee believed that competition is important for in- was hardly any different with Indonesia during the dustries to be competitive and efficient. However, colonial period with extractive institutions, relying he also acknowledged that some sort of govern- mostly on natural resources for much their rev- ment intervention is needed in the mid of market enues. For many years the country’s industrial de- failures (Thee 2009b). He gave an example that velopment plan has never been successful due to even the most liberal country like the US still con- the tendency to pursue ’protectionist’ policy with- ducts some sort of government interventions. He out any reference to efficiency or competitiveness warned that many developing countries wrongly considerations. Indonesia has been trying to adopt applied state intervention (statism) characterized selective interventions to support its local manu- by dominant state control to capital, production fac- facturing industries. However, these selective inter- tors, and distribution of resources. And as a result ventions are prone to capture by vested interests. created government failures due to an inefficient The root cause of the problem lies in the missing allocation of goods and resources than that would abovementioned conditions, including reciprocal- occur without government intervention. A case in based, market-conforming and institutional-based point was government’s support in costly high- interventions, as well as inadequate "neutral or technology industries, such as national car and functional" interventions to provide basic infras- aircraft. Often, government colludes with certain tructure and skills. groups in society so only some exclusive groups received special treatment/facilities and economic Thee’s works clearly show a poor record of In- resources were centered among these small num- donesia’s "industrial deepening" plan, which was ber of groups. "one massive exercise in import substitution" (Dick et al., p. 222). According to Thee, the Indonesian Thee argued that the government should play a government and its people should engage in an in- role as ’wasit yang adil dan netral’ (fair and neu- formed and healthy debate about the many eco- tral referee) to all groups. For example, although nomic challenges facing the country. He realized Thee was critical of the Soeharto’s later adminis- that Indonesia is somehow ’allergic’ to market com- tration, he praised Soeharto when he supported petition partly due to their historical experiences the technocrats instead of giving absolute protec- with the Old Order government. During Soekarno tion to Pertamina, during the Pertamina crisis in era, he campaigned against western influences. 1975. "Soeharto was both the head of the govern- Liberalism became political propaganda to fight ment and the Supreme Commander of the Armed western influence. Thee believed that it is impor- Forces. However, in times such as the Pertamina tant to educate people about market competition, crisis he acted like a responsible head of govern- to understand and to deal with its consequences. ment." (Thee 2003, p. 135). In other words, the The government interferes to correct market fail- government should not let their policies being hi- ures. Though empirical studies also often shows jacked by small group of people (elite captured) for interventions do not lead to its premises, and in- their own interests. In a resource rich country like stead resulted to "government failures". The work- Indonesia, Thee warned against ’predatory state’, ing of policies are important to understand of how in which corruption related to resource rents was tackling the failures in the first place9.
8Various East Asia Forum articles (www.eastasiaforum. org). 9http://asia.pacific.aw.edu
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Finally, Thee had reminded us that Indonesia Economic Development and Their Policy Implications for needs to invest much more in rebuilding its crum- Africa’, organized by JICA and JBIC, Tokyo, February 5– bling infrastructure and improve the quality of 6, 2008. [15] Thee, KW 2008b, ’Indonesia’s Industrial Policies and De- health and education services. At the same time, velopment since Independence’. Paper presented at Cen- he believed that Indonesia needs to improve law ter for Southeast Asian Studies, Kyoto University. enforcement, governance and institutions capacity, [16] Thee, KW 2009a, ’Indonesia’s Two Deep Economic Crises: The Mid-1960s and the Late 1990s’, The Journal particularly its bureaucracy, legal and judicial sys- of the Asia-Pacific Economy , vol. 14, no. 12, pp. 49–60. tem. With its current level of corruption, Thee had [17] Thee, KW 2009b, ’Neolib, Neoliberalisme, Apa Itu?’, Kom- warned that Indonesia could not hope to become a pas 26 May 2009. dynamic and prosperous country. [18] Thee, KW 2012, Indonesia’s Economy Since Indepen- dence, Institute of Southeast Asian Studies, Singapore. [19] Thee, KW 2013a, ’Colonial Extraction in the Indonesian Archipelago: A Long Historical View, Chapter 2’, in Colo- nial Exploitation and Economic Development: The Bel- References gian Congo and the Netherland Indies compared, eds E Frankema & F Buelens, Routledge. [1] Dick, H, Houben, VJH, Lindblad, JT & Thee, KW 2002, [20] Thee, KW 2013b, ’The Indonesian Economy During the Japanese Occupation’, , vol. The Emergence of a National Economy: An Economic His- Jurnal Masyarakat Indonesia 39, no. 2, pp. 327–340. tory of Indonesia, 1800–2000, Allen & Unwin, Sydney. [21] Thee, KW (forthcoming) 2014, [2] Hill, H & Aswicahyono, H 2014, Indonesia’s Medium Term The Indonesian Economy Development Plan: Background Study on Competitive- During the 1950s and Early 1960s and America’s Proposal . ness, draft report prepared for the Asian Development for Economic Aid Bank, Jakarta Office, March. [22] Wihardja, MM 2014, ’Looking at Thee Kian Wie’, The 23 June. [3] Hill, H & Thee, KW (eds) 1998, Indonesia’s Technologi- Jakarta Post cal Challenge, Institute of Southeast Asian Studies, Sin- gapore. [4] Hill, H, Negara, SD & Wihardja, MM 2014, ’In Memoriam: Thee Kian Wie: Dedicated Scholar and Public Intellectual’. Bulletin of Indonesian Economic Studies, vol. 50, no. 2, pp. 277–287. [5] Thee, KW 1981, Pemerataan, Kemiskinan, Ketimpangan: Beberapa Masalah Pertumbuhan Ekonomi – Kumpulan Esei (Equity, Poverty, and Disparities Some Problems of Economic Growth), Sinar Harapan, Jakarta. [6] Thee, KW 1984, ’Japanese Direct Investment in In- donesian Manufacturing’, Bulletin of Indonesian Economic Studies, vol. XX, no. 2, pp. 90–106. [7] Thee, KW 1988, Industrialisasi Indonesia: Analisis dan Catatan Kritis (Indonesian Industrialisation: Analysis and Critical Notes), Sinar Harapan, Jakarta. [8] Thee, KW 1991, ’The Surge of Asian NIC Investment into Indonesia’, Bulletin of Indonesian Economic Studies, vol. 27, no. 3, pp. 55–88. [9] Thee, KW 1994, Industrialisasi Indonesia: Beberapa Ka- jian (Studies on Indonesia’s Industrialisation), LP3ES, Jakarta. [10] Thee, KW 1994, Explorations in Indonesian Economic History, Lembaga Penerbit Fakultas Ekonomi Universitas Indonesia. [11] Thee, KW 2001, Channels of international technology transfer in Indonesia: A brief survey, ICSEAD Working Pa- per Series 2001–31. Available from:
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