Maintaining the New Order

The Indonesian Economy Since 1966
May 23, 1997

On coming to power in the mid-1960s, President Suharto of Indonesia inherited a bankrupt economy with inflation running at 600 per cent. One of his shrewdest moves was to appoint as economic advisers a group of western-trained technocrats, who set in train the market-oriented economic revival of Indonesia. Dubbed the "Berkeley mafia", they conceived a three-stage blueprint for Indonesia: economic and political stabilisation, followed by infrastructure revival, and finally industrialisation.

They avoided making the mistake of concentrating on immediate industrial development in the hope of achieving a trickle-down effect. For they had understood the fact that the bulk of the population was concentrated in the rural areas, and so an industrial strategy would have been counterproductive and have had little effect in alleviating the predicament of the rural poor. Instead, a pragmatic economic policy based on a strategy of industrialisation in phases with a strong agricultural base as the capstone was adopted. It soon bore fruit. Inflation fell sharply and within two years production climbed as the New Order government abandoned Sukarno's ramshackle regulatory controls. Over the past three decades, Indonesia's annual economic growth rate has averaged close to 6 per cent. Similarly the New Order's record on poverty alleviation, when viewed in tandem with its impressive growth record, is unique for a country of the size and diversity of Indonesia.

This is clearly a challenging subject for an economist to analyse. Yet despite the plethora of research on the subject both within and outside Indonesia since the early 1970s, there has existed no substantial volume providing a full account of the New Order economy, until the appearance of this volume by Hal Hill. Not only does it fill this gap and take its place as the standard reference on the Suharto government's economic record, it also makes an immense contribution to the field of modern development economics.

Staying within the confines of neoclassical economics, Hill's study carefully assesses the approach adopted by the New Order technocrats in achieving macroeconomic stability and how natural resource advantages were translated effectively into economic policy. Similarly, his analysis of the Government's change in policy, after two decades, from rural-oriented agriculture-based policies to an emphasis on boosting the non-oil sector by making manufactured exports the new engine of growth, is an adroit piece of work. So too will his careful assessment of the debate over industrial policy be useful for readers interested in the policy process underlying the management of the economy.

Hill's ability both to grapple with the complexities inherent in such a big subject and sensitively to weave in controversial aspects prevalent in the Indonesian economy, such as cronyism, corruption, nepotism and regional imbalances, is extremely impressive. These problems remain a blight on Indonesia's economic success story, some of which are responsible for creating the much-criticised phenomenon of a "high-cost" economy. No study would be complete if it ignored them. But by providing the reader with a sympathetic assessment of Indonesia's economic progress since 1966, Hill manages successfully to integrate some of these issues without detracting from the big picture, the immense achievement of the New Order government in reversing the economic trends of the 1960s when economists had written the country off.

Perhaps the author should have delved a little into the field of political economy. Economic development would not have been possible without stability. If there has been a keynote concept in the ideology of the Suharto administration, it has been the concept of order or ketertiban. Suharto has consistently stressed the symbiotic link between stability and development. Stability here has a larger connotation than mere macroeconomic stability. For example, the role of governance in economic development is crucial in explaining the Indonesian success story, and will influence whether the country takes its place among the newly developed economies of East Asia. The great challenge for the future is the need for Indonesia to create credible public institutions so that capital-intensive development will follow the resource-intensive development of the last 30 years.

Leonard C. Sebastian is a fellow, Institute of Southeast Asian Studies, Singapore.

The Indonesian Economy Since 1966: Southeast Asia's Emerging Giant

Author - Hal Hill
ISBN - 0 521 49512 1 and 49862 7
Publisher - Cambridge University Press
Price - £50.00 and £17.95
Pages - 328

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