Economics and Finance in Vol. 59 (3), Page 233 - 241

Widjojo's "Invisible Hand"

Emil Salim

Widjojo Nitisastro revealed for the first time his political economic view, when he unnoticeably reached his 28th birthday in September 23, 1955. He delivered a strong criticism to Wilopo's presentation on "the Interpretation of Article 33 of the Indonesian Constitution" in a debate between former Prime Minister (1952-1953) Wilopo and graduate student that took place in a Symposium of to celebrate the First Lustrum of the Economic Faculty of University of Indonesia, and was focused on the topic of Article 33 of the 1945 Constitution, stipulating that "the economy is arranged as a joint endeavor based on the principles of family-like mutual cooperation."

• 1. UNDERSTANDING WIDJOJO Wilopo has been an influential leader in the Indonesian Nationalist Party (PNI), who has won the 1955 general election. As one of the outstanding leaders of his party, he has been Minister of Labor (1949-1950), Minister of Economic Affairs (1950-1952) and Prime Minister (1952-1953). As a graduate from the Faculty of Law and Social Science during the Dutch colonial period, Wilopo was considered an "intellectual politician", who was open for rational criticism.

Widjojo on the other hand has joint the Indonesian 1945 revolution as member of the "Indonesian Student Army" in the battle of Surabaya (1946). When the physical revolution was over (1949), Widjojo became one of the first students of the newly established Economic Faculty at the University of Indonesia (1950) in Jakarta. He was already recognized as a brilliant student and as young graduate student was chosen by the Dean of the Economic Faculty, Professor , to become not only his teaching assistant but also his trusted "deputy" to assist him in "running" the Economic Faculty when he was occupied by his duty as Minister of Trade and Industry (1950- 1951), Minister of Finance (1952-1953 and 1955-1956).

The seeds of Widjojo's intellectual thinking were sown during encounter. Wilopo was interpreting "article 33 of the 1945 Constitution" as anti-liberalism, not emphasizing individualism but collectivism.

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Economic activities should not be based on the motive of obtaining individual private gain, but on the motive of serving the community for the betterment of all. "Joint endeavor" as stipulated in the constitution is different from "private endeavor". The goal is "to strive for the enhancement of cooperative joint endeavors" for the enhancement of the whole society and not for "private individual profits". The government must promote these kinds of economic activities, in particular those traditional practices that can be adjusted to these principles of joint endeavors. It is in this context that cooperatives must be promoted to live up to the spirit of article 33 of the 1945 Constitution.

Widjojo brought in his rebuttal the macro-economic perspective. The issue is not pro versus anti liberalism or state versus private enterprise per se. The main idea is to get the process of the economy moving to raise national income. All productive forces must be engaged and not limited to economic institutions and cooperatives. Furthermore, how does cooperatives organized by farmers, small producers, small traders and credit institutions lose their private features if "private enterprise" is rejected? Or are they being subordinated to states enterprises or state institutions? Widjojo detected confusion and mixing up of anti-liberalism with anti-private but pro cooperatives. Ernerging in this debate was Widjojo's concept to develop a coherent macro-economic structure that serves to raise GDP but by the same token device rational economic policies to interfere in the market to enable equitable distribution of income and to eradicate poverty. Whether through public or private enterprise becomes irrelevant, since the basic notion of article 33 is to strive for a growing economy with social justice, poverty eradication, and welfare for the people at large.

The development policy concept of Widjojo was not clear yet in 1955, but it started to grow together with his maturing intellectual ability affected by the economic and political challenges that he had to endure during the turbulent years of President Soekamo's guided democracy.

The first half of the fifties was full with political and economic turbulences. Indonesia was implementing parliamentary democracy with political parties forming the coalition cabinet and parliamentarians were chosen through free election. For a young nation like Indonesia however, the period of parliamentary democracy was combined with frequent changes of cabinets. Many cabinets lasted only 1 to 2 years. This squabbling between political parties makes economic development very difficult.

It was only during the Burhanuddin Harahap's Cabinet (August 1955 - March 1956) that effective rational economic policies were implemented, such as reducing budget deficits, dismantling the system of import certification and.stopping discrimination against businesses

234 Widjojo's "Invisible Hand" from Chinese Indonesian. Rational economic policies were drawn with the aim to get the price mechanism working right. The driving force behind all this was Professor Sumitro Djojohadikusumo, who was in charge as Minister of Finance. And as Sumitro's assistant at the Economic Faculty, Widjojo got his first encounter with the "reality of economics in action." However, this experience gives him also the feel of the grim reality behind economics. Widjojo was confronted not only with theories of economics as written in textbooks and taught in classes, but also with economics as it is guided and influenced by real social and political forces operating in real society. In such an environment, economic policy must be based on a clear notion of "what do you want to achieve not only IN economics, but also WITH economics." ' |

Widjojo was convinced that most import is to understand fully the theories of economics, to understand the inner logic in economics guided by the "invisible hand" in the market. This is why Widjojo urges all his young colleagues to reach for the Ph.D. degree. It is not the degree as such that is important, but the ability to develop the inner logic of economics, to obtain the methodology of deductive and inductive rational thinking. In brief the ability to use at its maximum our ability of critical and creative scientific thinking. But these features are also what Widjojo imposed upon himself. He obtained his graduate degree with top honors. And he completed his study and obtained his Ph.D. in economics from University of California (1961), Berkeley Campus, also with high distinction. Widjojo has proven to be a top graded scholar and intellectual. Meanwhile Widjojo was also aspiring for an ideal type of intellectual. Not the type of "intellectual worker that offers his intellectual ability to the highest bidder." But for a quality of intellectual with social conscious to perform the task of social critics, when means of criticism have been silenced, and to fight for the interests of the weak, the poor and the vulnerable group. This explains why Widjojo devoted his energy to lead the "Indonesian Institute for Economic and Social Research" or popularity known as LPFM. In his capacity as director of LPFM, several research projects were launched involving undergraduates and graduates students on subjects of transmigration in Lampung, urbanization into Jakarta with impacts on the informal sector in "becak-transport", informal trading in Pasar Benin, village commimity development nationally (that became the embryo for the creation of "Community Development Ministry or Kementerian Pembangunan Masyarakat Desa), family plarming and survey on 59 villages throughout Indonesia.

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Widjojo's has steered research into digging real data and facts in the fields where practically no reliable statistical data are available, not only in finance, banking, trade, production, but also in social statistics. Widjojo insisted that any responsible policies must be based on reliable data from the field.

In due course of Widjojo's intellectual development, he became fully aware that social factors affected by population become a crucial determinant in Indonesian development. And the only most reliable statistical data available at that time was the Population Census. This was than intensively analyzed in Widjojo's Ph.D. dissertation on "Population Trends in Indonesia (1961) published by Cornell University Press, Ithaca in 1970. In his thesis, Widjojo also draws an analysis of Indonesian Population trend 1961-1991.

2. WIDJOJO'S DEVELOPMENT POLICY PRINCIPLES By then Widjojo's has a realistic view on the Indonesian economic and social conditions, supported by statistical data. Through his role as Dean of Economic Faculty and his wide connections with intellectuals of all walks of life, Widjojo soon became the major brain-power of the National Plarming Bureau, which is attached to the Office of Prime Minister Juanda. Together with Secretary Ceneral of the National Planning Bureau, All Boediardjo, the office was assisted by graduate students and graduates from Economic Faculty under the leadership of Widjojo.

A rational 5 year National Development Plan (1965-1961) was drawn and agreed by the government. Unfortunately, the political development was not conducive and the Plan was not made operational. But the ability to draw a comprehensive Five Year Development Plan was the beginning of Widjojo's major say in Indonesian Five Year Plans when President Soekamo was replaced by President Soeharto in 1966.

In economic planning, Widjojo recognizes the crucial role of price as the invisible hand in the market. But this invisible hand needs to be working for "development with equity", taking care of the poor, the weak and the vulnerable group. It is in this context that Widjojo believes that the "invisible hand" must be actively steered by the government through development policies into the direction of serving social justice, striving for equity within and between nations. The market needs to function, but through appropriate government fiscal, monetary, trade, and production policies, the invisible hand must be guided towards the goal rising per capital income with social justice in a stable economy.

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Gradually the principles of Widjojo's economic policy emerged. For the intellectual Widjojo, "economics becomes a tool to serve the people." When for decades since independence, the majority of Indonesian people are still poor and suffering, the basic flaw is that the intellectuals have merely positioned themselves as "intellectual worker without social conscious", not knowing for themselves "how to reach for the goal of independent Indonesia." At least critical economists devote their energy for being an analyst sitting on the sideline. While this is better than just being an "intellectual worker" and passively operating in the system, Widjojo inspired his colleagues to become an active social change agent to create the opportunity to correct the criticized system.

In this context, while the function of the market is necessary to reach for economic efficiency, it is not sufficient for the purpose of change. The issues of "market failures" must be addressed, especially when it hit the poor. Government policies must make use of the market, through the interference in the market to correct market failure. The "invisible hand" must be guided by planning through the market to steer the economy into the predetermined objectives to reach for the development goals. And what are these development planning and economic policies objectives? j

First, stability in economic and political sense. It means that the rate of inflation must be under control through fiscal budgetary policies as well as monetary banking policies. It means controlling the flow of money not to run faster than the flow of goods, either produced domestically or imported. The budget must be balanced; government expenditure must be matched with government's revenues. This is also to discipline government agencies, including in the sub-national regions, to be efficient and to limit their expenditures to their revenues. Recognizing that government's earning capacities are lower than the need for developmental expenditure, this development gap must be closed with foreign assistance with low interests payment and long period of debt repayment. The net effect of all these policy measures is to reach for economic stability with low inflation rate.

Economic stability requires political stability. If in economics, economists are working with the concept of "stages of economic growth," moving from a rigid controlled to a more free and improved stage of economic growth, similarly there is a need to develop concept in "stages of political growth" moving from a tight controlled political system to an open and freely elected political system. The speed to move from one to the other stage, however, is more under control of politicians rather than economist. It is therefore the responsibility of economists "to advice and inform" political decision-makers on the pros and cons of the selected "stages of growth of political growth".

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Political stability must be exercised to support the goal of economic development. In the same breath, economic stability must enable political development to move from one stage to the following stage of political maturity. Widjojo recognized the inter-linkages and interdependencies between economic and political stability. And this raises the need to build political trust between economic and political policy makers.

Second is the principle of development. Widjojo was fully aware that Indonesia as developing economy must focus its energy on raising per capita income and move up on the ladder of economic strength. All government's funds, including state enterprises, especially those earnings large foreign exchange, like Pertamina, must be devoted to development in accordance to Indonesia's priority development plan.

The priorities are self sufficiency of basic needs, such as food (not rice only), energy, education (compulsory 9 years of school education), basic health services, sanitation, drinking water, simple housing. These priorities dictate where and what infrastructure should obtain high priority. Of all these priorities, self-sufficiency of food was the dominating focus. Learning from bitter experiences of severe draught, high food prices in the world's market in 1972 when the economy was still fragile, has taught Indonesia an important lesson to assure a minimum stable rice stock to ensure economic and political stability. This raises the importance to strengthen the rural society through intensive and extensive agricultural development, known as the BIMAS Program. It also raises the necessity to channel "windfall gains", such as the increase price of our oil exports, directly into rural development "by instruction of the President", known as Inpres Desa Project to finance projects that strengthen the rural economy.

Development in the 1970-1980's was also affected by severe global crises in 1980-1982 followed by an up and downswing in unpredictable economic cycles. A huge crash hit the global stock market (1987) followed by exchange rates sharp fluctuation of industrialized coimtries' currencies. The US $ ceased to become the anchor of world currencies. In the late eighties, crude oil prices crashed from US$ 25 per barrel (1985) to US$ 8 per barrel in 1986. Since oil exports formed an important portion of Government's earnings, this drop of oil price severely slashed the government budget's revenue.

Indonesia cannot isolate itself from the global economy. This give rise to the outward looking export oriented policies of Indonesian development. Exports and imports were conducted under the constrain that the net balance in the current account of the balance of payments must be able to finance at least six months of imports.

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Since inflation rate influences interest rate, which will affects production, exports and imports, "fine tuning" is required in policy making of these economic activities. It is here that Widjojo, as Coordinating Minister of Economic Affairs, played a crucial role as a conductor to "harmonize" the "economic orchestra". As a by-product of economic management during these turbulent years, Widjojo deemed it necessary to raise his voice and influence in the global arena. The economic crisis that had severely hit developing countries, were caused by industrialized developed economies. The World Bank (chaired by an US citizen chosen by the US government as the largest shareholder of the Bank) and the International Monetary Fund (chaired by a European from the European Union) were unable to prevent or solve satisfactorily the global crises. It is up to the developing countries to join forces and to create coimtervailing center to promote the developing countries interests and point of views. Indonesia as Chairman of the Non-Aligned Movement took the initiative to up a think-tank for and by the developing countries. The "South Center" was created in 1990, chaired by Mwalimu Jukius K. Nyerere, President of Tanzania, located in Geneva, Swiss, and moved by three outstanding economists, Gamani Corea, former Secretary General on the UN Comference on Trade and Development (974-1984), Dragoslav Avramovic, Governor of the Central Bank of Yugoslavia (1994-1996) and Widjojo Nitisastro, format Economic Coordinating Minister of Indonesia (1978-1983). This South Center was powerful in uniting the developing countries points of views on global economic development with more equity and social inclusion. The center was also instrumental in providing significant proposals on the issue of "fair as against free trade".

Indonesia was also leading developing countries in the fight for foreign debt reduction especially for the African developing countries. President Soeharto, as Chairman of the "Non Aligned Movement" assigned Widjojo and his colleagues to tackle the developing countries' debts based on Indonesian experiences. Supported also by Japan's Prime Minister Kuchi Miyazawa's who created and funded the "Tokyo International Conference on African Development" (TICAD) to incorporate Widjojo and his colleagues to reduce African debts to the industrialized countries. In this context, Widjojo"s personal experiences in settling Indonesian debt in 1968 became an inspiring model to be imitated by African coimtries. The third principle of Widjojo's development model is the emphasis on poverty eradication. For Widjojo development is not only raising Cross Domestic Products and concentrating on the "what and how to produce", but also to link it directly with the question of "development for whom".

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It is in this context that Widjojo emphasizes eight targets of development policies:

First, to meet the basic needs of food, clothing, and human settlements; Second) the provision of basic education and health care;

Third, equality in distribution of income, which differs from equal income distribution;

Fourth, equality in jobs distribution; Fifth, equality in pursuing business opportunities; Sixth, equal opportunity for all to participate in development, especially for the young generation and women; Seventh, dispersion of development into all places of the Indonesian archipelago; Eight, equal access for all to obtain justice.

Development must be pursued, with these eight policy targets. Social inclusion is mains treamed to raise GDP through inclusive growth with equity. These three major principles of development is shifting away from the single linear track of economic growth towards the double track of economic growth to raise income per capita but simultaneously also to raise the Human Development Index.

And the achievements thus far have shown that Indonesia has the capacity to act on policies to reach equitable inclusive growth. Indonesia has been able to pull itself up from a poverty stricken low income country in mid-sixties, to grow into a medium income country with reduced number of people below the poverty-line and higher level of Human Development Index in the mid-nineties.

Widjojo has proven that economists can contribute to the betterment of life for the Indonesians by pursuing its proper role as an intellectual with a strong commitment to raise welfare of the people. This has been achieved through policies in directing the "invisible hand" towards the goal of equitable growth with social inclusion.

On Friday, March 9, 2012 at the age of 84, Widjojo Nitisatro has passed away, to follow his teacher Sumitro Djoyohadikusumo who died on the same date but ten years earlier at the age of 83.

May both giant economists rest in peace.

Jakarta, March 2012

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REFERENCES Nitisastro, W., 2010. Pengalaman Pembangunan Indonesia: Kumpulan Tulisan dan Uraian Widjojo Nitisastro. PT Kompas Media Nuseintara, Jakarta. [

Nitisastro, W., 1955. Tanggapan terhadap Tulisan Wilopo. In: H. Soesastro, ed. 2005. Pemikiran dan Permasalahan Ekonomi di Indonesia dalam Setengah Abad Terakhir, vol. 1 period 1945-1959. Jakarta: ISEl. Ch. 5, pp. 66-73. 1

Wilopo, 1955. Tafsiran terhadap Ayat 1. pasal 38 UUD Sementara. In: H. Soesastro, ed. 2005. Pemikiran dan Permasalahan Ekonomi di Indonesia dalam Setengah Abad Terakhir, vol. 1 period 1945-1959. Jakarta: ISEl. Ch. 4, pp. 60-65.

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