Conclusions

5. Conclusions.

The above account of private sector development in Indonesia has indicated that government policies towards the private sector have often been ambivalent and inconsistent. 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. During the early 1950s these efforts were accompanied by measures to advance the interests of indigenous (pribumi) Indonesian entrepreneurs through affirmative programs. However, with the introduction of President Sukarno’s Guided Democracy and Guided Economy, advancing the interests of private businessmen was discontinued, while state-owned enterprises (SOEs) were promoted as the pillars of an Indonesian-style socialist economy.

During the Soeharto era the role of private businessmen, including ethnic Chinese, was again promoted in view of the New Order regime’s emphasis on economic growth. However, instead of fostering a healthy development of the private sector, through patronage the New Order nurtured the growth of a dependent capitalist class of client businessmen. Preferential treatment given to favoured businessmen, including the children of the President, their cronies and a number of favoured ethnic Chinese businessmen, over time led to the rapid growth of large conglomerates. In the Republic of Korea preferential treatment was based on the ‘reciprocity principle’, that is preferential treatment was tied to the export performance of the favoured enterprises.This was not the case in Indonesia where preferential treatment to favoured enterprises was not based on a similar ‘reciprocity principle’. Not surprisingly, this led to the development of large, domestic market-oriented enterprises which were not internationally competitive.

To emphasize the government’s continuing commitment to promote the development of SMEs to advance the welfare of the economically weak groups in society, since the early 1970s the government launched several nation-wide SME promotion programs. These programs were, as we have seen, largely unsuccessful in nurturing a healthy development of viable SMEs.

During the New Order era SOEs operating in various economic activities were given an important role in the economy, particularly in the ‘commanding heights of the economy’. These SOEs were seen as a strong counterweight to the economic dominance of the 39 ethnic Chinese, but because of political intervention and corruption in general were inefficient and uncompetitive. Although after the Asian economic crisis privatization of these SOEs was promoted, in practice this was hampered by economic nationalism and the opposition of vested interests with a stake in these SOEs.

Unlike the Sukarno government, the New Order government in the beginning pursued an open door policy towards foreign direct investment (FDI). Over time, however, increasingly restrictive policies towards FDI were introduced, particularly after the oil booms of the 1970s when the government was awash in oil revenues. These restrictive measures were again reversed after the end of the oil boom in 1982. These shifts in FDI policy indicated that the government did not have a clear and consistent view of the expected role of FDI. Hence, unlike Singapore, Indonesia has not been able to reap the full benefits of the FDI presence, including effective technology transfer and the industrial and technological upgrading of the economy.

Given sound economic policies, vigorous private sector development will promote rapid and sustained economic growth. The lack of success in promoting healthy private sector development requires a decisive shift away from past failed policies in favour of new policies. These new policies should not be driven by primordial or xenophobic considerations, but by rational economic considerations. This involves the establishment of a favourable and non-discriminatory 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 can be supported by effective competition policies, including the proper enforcement of the New Competition Law of 1999. Basically, however, a healthy development of the private sector depends on the development of good governance which is likely to take a long time.

Download this Discussion Paper [ PDF 330KB| 46 pages ].

Comment(s)

There are [2] comment(s) for this entry. Post a comment.

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.