Policies for Private Sector Development in Indonesia

This paper surveys the historical evolution of private sector development in Indonesia in the post independence period, with a particular focus on policy towards foreign investment and small enterprises.

During the early years of independence in the 1950s policies were mainly aimed at countering the economic dominance of Dutch business and ethnic Chinese economic interests. Affirmative programs were used to advance the interests of indigenous (pribumi) entrepreneurs. However, with the introduction of President Sukarno’s "Guided Democracy and Guided Economy" policy, state-owned enterprises were promoted as the pillars of an Indonesian-style socialist economy.

During the Soeharto era these policies were reversed and the role of private entrepreneurs, including ethnic Chinese, was again promoted. However, instead of fostering a healthy development of the private sector, the New Order nurtured the growth of a dependent capitalist class of client entrepreneurs through patronage, and preferential treatment was not given based on good economic performance.

The New Order government did not have a clear and consistent view of the expected role of foreign direct investment (FDI). Hence, unlike Singapore, Indonesia has not been able to reap the full benefits of FDI, including effective technology transfer and technological upgrading. Since the early 1970s there have been several nation-wide small- and medium-scale enterprise (SME) promotion programs to advance the welfare of economically weak social groups. These programs were largely unsuccessful in nurturing healthy development of viable SMEs. Vigorous private sector development requires the establishment of a favorable investment climate that does not discriminate on the basis of ethnic origin (pribumi versus non-pribumi), size (small versus large firms), or source (domestic investment versus FDI). This should be supported by effective competition policies, including proper enforcement of the New Competition Law of 1999.

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Comment(s)

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1. Thee Kian Wee
   (posted 09 May 2006 / 01:39:20 PM)
   
   Dear Mr. Cabalza,
   
   You are absolutely right that the ethnic Chinese, both totoks and peranakans have played and are still playing an important rule in the Indonesian economy. I did not mention this in my paper, as my focus was on how the perception on the part of several Indonesian policy-makers of Chinese economic dominance have shaped various policies to curtail Chinese economic activities in order to promote indigenous Indonesian entrepreneurship. Most of these policies have not succeeded in substantially reducing the economic role of the Chinese, although over time a growing class of indigenous Indonesian entrepreneurs emerged during the New Order era without, however, substantially reducing the economic role of the Chinese.
   
   While during the late Soeharto era much resentment arose in response to the growth of Chinese-owned and -controlled conglomerates, it is often forgotten that the large majority of Chinese business consists of the large number of small- and medium-scale enterprises (SMEs) operating in manufacturing, trade, transportation, restaurants, and other services, such as the many shops all over Indonesia selling auto parts, electronic products, auto repair shops, and various other economic activities which keep the Indonesian economy running. The surge of manufactured exports after the deregulation measures and trade reforms after the end of the oil boom was to a large extent due to foreign-invested, export-oriented plants from Korea and Taiwan and to the Chinese run garment firms and other firms producing labor-intensive products.
   
   Thank you for your good comment.
   
   THEE Kian Wie
   Senior Economist
   Economic Research Centre
   Indonesian Institute of Sciences
   (P2E-LIPI), Jakarta
2. Chester Cabalza
   (posted 27 March 2006 / 08:14:46 AM)
   
   It would have been ok if you also highlighted the significant roles of the totoks and peranakans (of Chinese descent) in the economic progress of Indonesia. Despite, some persecutions experienced by this minority group, they have at least contributed a lot to the escalation of the largest economy in Southeast Asia.