The Role of Government Policy in Indonesian Small and Medium Enterprise Development, 1966 - 2006 Greta Christine Seibel Supervisors: Janet Hunter (LSE) & Anne Booth (SOAS) A thesis submitted to the Department of Economic History of the London School of Economics and Political Science for the degree of Doctor of Philosophy London, February 2020 i Declaration of Authorship I certify that the thesis I have presented for examination for the PhD degree of the London School of Economics and Political Science is solely my own work other than where I have clearly indicated that it is the work of others (in which case the extent of any work carried out jointly by me and any other person is clearly identified in it). I further declare: The copyright of this thesis rests with the author. Quotation from it is permitted, provided that full acknowledgement is made. In accordance with the Regulations, I have deposited an electronic copy of it in LSE Theses Online held by the British Library of Political and Economic Science and have granted permission for my thesis to be made available for public reference. Otherwise, this thesis may not be reproduced without my prior written consent. I warrant that this authorisation does not, to the best of my knowledge, infringe the rights of any third party. The thesis contains 78,855 words (excluding bibliography). Statement of inclusion of previous work Some of the comparative work with South Korea and Taiwan builds on the ideas developed in my Master thesis, submitted to the London School of Economics and Political Science in 2012. Signature: Greta Christine Seibel Date: London, 22 February 2020 ii Abstract This dissertation analyses how the policies of Suharto’s New Order government (1966- 98) and post-Asian Financial Crisis reforms shaped Indonesian SME development. Indonesia featured as one of the high-growth Tiger Economies in the World Bank’s (1993) East Asian Miracle report. One of the features of the East Asian model is the ‘principle of shared growth’, implemented through various reforms, including SME- targeted support policies. Suharto restructured the Indonesian economy along similar lines, yet it is commonly argued that Indonesia suffered from a ‘missing middle’ - a gap in firm-size distribution due to small firms staying small and large firms being born already relatively large. This perceived inability of indigenous firms to grow is subject to recurrent heated public debate. Chapter 2 places indigenous entrepreneurship in historical context, showing that attempts to foster it during the late colonial and early post-independence period largely failed. Chapter 3 explores the question of the missing middle in the manufacturing sector despite the New Order government’s objective to strengthen small enterprises. Using Economic Census data on number of firms, workers and value added by firm-size category reveals that as the Indonesian economy grew a missing middle emerged and persisted. A comparison with South Korea and Taiwan shows that this could not be explained by Indonesia’s stage of economic development and is indicative of a dual economy. Chapter 4 focuses on access to credit, a main constraint to SME development. Using Bank Indonesia data and statistical yearbooks, I analyse the various small business credit schemes introduced since the early 1970s. These generally showed – at best – mixed results. I identify a turning point when the approach shifted from subsidised targeted government credit programmes to market- led financial intermediation by commercial and local rural banks with market interest rates on savings and loans. However, the vast majority of SMEs remained self-financed and access to credit continued to be a pervasive issue for Indonesian SMEs during the New Order period and beyond. iii To Raoul and Lena, who taught me to find and follow my own path. To my father, whose legacy and love are my inspiration. iv Acknowledgements The initial idea for a PhD dissertation on Indonesian SME development first came when I worked on my Master thesis. Under the guidance and mentorship of my then- Master’s (now PhD) supervisor Janet Hunter I was working on a comparative study of the role of government policy in South Korean and Taiwanese SME development. When I started thinking about doing a PhD I knew I wanted to work on a country in which the story was less clear cut and the potential lessons learned of which would have wider applicability for developing countries today than the cases of South Korea and Taiwan. And, having been confined to English-speaking sources during my Master’s dissertation I wanted to pick a country for my PhD which would allow me to utilise my comparative advantage. The decision to work on Indonesia was therefore the only natural conclusion and with that my thereto rather shambolic CV came together as if mapped out with a red thread running through leading to this PhD project: having partially grown up in Indonesia and later returned to work and re-learn Bahasa, the choice to learn Dutch during my undergraduate degree in Maastricht, my wider interest in South East Asian and East Asian economic development and my research on the developmental state and its relationship with the private sector, all of which flowed into my PhD proposal. But I wasn’t ready just yet to move onto a PhD straight from my Master’s degree at the LSE. So I left London to work in India for two years. But the realisation soon came that while I found working in international development a life-changing experience, my passion was in research. While completing my two-year contract in New Delhi I took a course in SME Finance at the Frankfurt School of Finance & Management to prepare for my PhD project. I reached out to Janet, who helped me refine my ideas and develop a proper PhD proposal. I knew I definitely wanted to come back to the LSE and work with Janet – alma mater and my mentor who previously introduced me to new ideas and pushed and challenged me in a way that led me to produce research I had thought far beyond my abilities. It was Janet who introduced me to Anne Booth. The joint supervision was quickly agreed to. I knew that with these two powerhouses I was well set-up to embark on my PhD journey, which I have now just come out the other side of. Janet and Anne have been patient and supportive throughout this journey, pushed and challenged me exactly when I needed it; without their mentorship and guidance I could have not written this PhD dissertation. The English ‘PhD supervisors’ don’t do justice to either, the German ‘Doktormütter’ much more aptly captures what I owe to both Janet and Anne. I wish to warmly thank my examiners Tobias Axelsson and Thomas Lindblad for reading my work and their insightful comments. The viva was the perfect culmination of my PhD journey. I thoroughly enjoyed our conversation which gave me much food for thought for my future research trajectory. Their feedback has helped me sharpen the thesis and I am greatly indebted to both. Any errors that remain herein are mine alone. v The foundation of this PhD lies in the data and archival sources I collected during a four-month research visit in Jakarta in late 2015. Again, this would have been impossible to set up without Anne’s network and introductions, first to LIPI (the Indonesian Institute of Sciences) to set up an institutional affiliation and later to a long list of key contacts to interview and meet in Jakarta. The research visit to LIPI’s Centre for Economic Research (P2E-LIPI) would have not been possible without the help and introductions made by Siwage Dharma Negara. Wage was extraordinarily generous with his time and advice despite commuting back and forth between LIPI and Singapore, where Wage had just started as a Senior Fellow at the ISEAS Yusof Ishak Institute. Thanks to the generous welcome of Pak Maxensius Sambodo to P2E-LIPI I benefitted greatly from the exchanges with my fellow researchers and from being able to present my research at the weekly seminar at P2E-LIPI. The comments, suggestions and feedback I received in personal meetings and during my presentation have played an important role in refining my research questions and sharpening my hypotheses. I have also greatly benefited from my meeting with Prof. Tulus Tambunan at the University of Trisakti. Professor Tambunan is one of the leading experts on Indonesian SME development and Director of the University’s Center for Industry and Small and Medium Enterprise Studies. I would have not been able to collect all my data at all these different archives without the generous support of my colleagues at P2E-LIPI. Too many of the junior researchers at P2E-LIPI to name took time away from their own work to take me to ANRI (National Archives of the Republic of Indonesia), BAPPENAS (the Indonesian National Development Planning Agency), Bank Indonesia (the Indonesian Central Bank) and BPS (the Indonesian Central Board of Statistics). I would like to thank Ibu Untari, Pak Ari and Pak Bintang in particular, without their guidance I would have been hopelessly lost in Jakarta and the depth of the archives. I also recommend David Henley’s Economic History Archival Guide for Jakarta for anybody contemplating archival research in Jakarta; it shaved weeks off my research time at the Indonesian National Archives. Apart from LIPI I spent the vast majority of my time in Jakarta at BPS, where I collected the Indonesian Economic and Industrial Census data. Ibu Stefanie Intan Christienova at BPS was always approachable and helped me navigate the many volumes there are to the Economic Census data and allowed me to see and photograph the more fragile Industrial Censuses.