Government Policies Towards Indonesian Private Sector: A Historical Overview

To a large extent the economic policies pursued by successive Indonesian governments since the early years of independence up to the present have been shaped by the interplay of the major economic challenges faced by Indonesia at the time and the economic ideas of the major policy-makers. Because of Indonesia’s colonial past and the perceived economic dominance of the ethnic Chinese minority in the economy, government policies have also been influenced by economic nationalism. Paraphrasing the late Harry Johnson, professor of economics at the University of Chicago, economic nationalism in newly independent nations emerging from colonial rule is defined as ‘the national aspiration to having property owned and controlled by nationals and having economic functions performed by nationals (Johnson, 1972: 26). For this reason since the early years of independence until the end of President Soeharto’s ‘New Order’ regime in May 1998, the development of the private sector, including the large private enterprises, small- and medium-scale enterprises (SMEs) and foreign-invested enterprises, has been greatly affected, more often than not adversely, by misguided and extensive state intervention.

2.1 The early independence period, 1950 - 1965

In the early years of independence in the 1950s Indonesia’s political leaders, including the major economic policy-makers were, on account of their bitter experience during the Dutch colonial period, quite averse to capitalism, including a market economy and private enterprise. Instead, many of these leaders were attracted to socialism in its various forms, including Fabian socialism, although in general not to Marxism-Leninism or other radical leftist ideologies, save for the communists, who in the 1950s were still relatively small in number.

Besides an aversion to capitalism and to quote, President Sukarno, ‘free fight liberalism’, economic policies in Indonesia since independence up to the present have also been 5 strongly influenced by the force of economic nationalism. During the early postrevolutionary years in the 1950s economic nationalism was particularly strong, even aggressive, because of the continuing dominance and control of Dutch business and to a lesser extent of Chinese business, over the Indonesian economy. In fact, it was estimated that the modern sector of the economy, generating about 25 per cent of Indonesia’s GDP at the time, was still dominated by Dutch firms and a few American and British transnational corporations. Moreover, many senior positions in the fledgling public service were occupied by Dutch officials, whose loyalty to newly-independent Indonesia could not readily be taken for granted (Higgins, 1990: 40). No wonder that during this period many Indonesian nationalists called for a ‘transformation of the colonial economy into a national economy’.

In the 1950s the force of economic nationalism in Indonesia could be easily understood. Under the terms of the the Financial-Economic Agreement (Finec), reached at the Round Table Conference in The Hague in late 1949, the Netherlands’ agreement to transfer sovereignty speedily to Indonesia was accompanied by a commitment by the Indonesian government that the legal rights and interests of Dutch enterprises operating in independent Indonesia would be protected. In other words, they could continue to operate without any hindrance, just like during the colonial period, although as foreign companies they were now operating in a less conducive, even hostile political environment.

Even though most Indonesian nationalists disliked this agreement, during the first half of the 1950s strong economic nationalism was tempered by a pragmatic recognition of economic realities. In particular, it was recognised that the continued operations of Dutch business was essential to rebuilding the war-ravaged economy, in particular the large estates and mines which were to yield much needed foreign exchange.

Despite the constraints imposed by the Finec, the pragmatic economic policy-makers were nevertheless determined to match Indonesia’s hard-won political independence with meaningful economic independence. As under the provisions of Finec nationalisation of a number of vitally important economic institutions and enterprises was allowed, albeit with certain conditions attached. For instance, nationalisation required the consent of both the Indonesian and Dutch governments, as well as the enterprise to be nationalised.

To counter Dutch economic dominance, the Indonesian government took several measures, notably the nationalisation of the Java Bank in 1951. The Java Bank had been the bank of circulation during the Dutch colonial period and because of its strategic economic position was the obvious first target of nationalisation. In 1953 the Java Bank was made the central bank of Indonesia under its new name, Bank Indonesia. Subsequently, other Dutch companies operating in important fields were also nationalised, including the public utilities and railways.

After the mid-1950s relations between Indonesia and the Netherlands, never cordial since Indonesia’s independence, rapidly deteriorated because of the dispute over the status of West Irian (currently named Papua province). Viewing Indonesia as the natural inheritor of the Netherlands Indies, of which West Irian had been a part, the Indonesian government demanded that sovereignty over this territory also be handed over to Indonesia. The Dutch government refused, arguing that racially, culturally, and linguistically the Papua population inhabiting West Irian was not part of the Indonesian nation. When an Indonesian motion to the United Nations Assembly in November 1957 urging the Dutch government to reach a settlement with Indonesia on the West Irian dispute, was defeated, anti–Dutch demonstrations broke out in Jakarta. Militant labour unions affiliated with the Indonesian Communist Party and the Indonesian Nationalist Party took over the head offices of Dutch companies in Jakarta and other big cities. In the following two weeks similar take-overs of Dutch companies took place all over the country.

Although the Indonesian government had not initiated these take-overs, it did not resist them either. To forestall economic and political chaos, the army put these taken-over enterprises under its control. In early 1959 the Indonesian government officially nationalised all Dutch enterprises, and turned them into state-owned enterprises (SOEs). The management of most of these new SOEs were entrusted to senior military officers. The nationalisation of all Dutch enterprises went a long way towards satisfying Indonesia’s economic nationalism, that is its aspiration ‘to own and control the productive assets formerly owned and controlled by foreigners’, and ‘to fill those economic functions formerly played by foreigners’.

The nationalisation of all Dutch enterprises, however, did not fully satisfy Indonesia’s economic nationalism because various important economic activities affecting the livelihood of the Indonesian population were still controlled by ethnic Chinese. These included the important intermediate trade, rice mills and money lending. In fact, as a result of the nationalisation of all Dutch; enterprises in 1959, the ethnic Chinese community emerged as the strongest element in the economy, aside from the government itself. Particularly in the rural areas the Chinese had since the Dutch colonial period built a position of dominance in retail trade, in rice milling and in rural finance (Mackie, 1971: 9).

In dealing with the ethnic Chinese business community, however, the problem was complicated by the fact that the ethnic Chinese community consisted of both Indonesian citizens and foreign nationals, most of them citizens of the People’s Republic of China and a much smaller group loyal to the government in Taipei,China. In the case of the ethnic Chinese, economic nationalism was also tempered by the aversion of many Indonesian political leaders to practice overt ethnic or racial discrimination because of their long struggle against Dutch colonial rule and its implied racial discrimination (Sadli, 1988: 359).

Dealing radically with Chinese economic activities was also complicated by the fact that the economic activities of the ethnic Chinese, particularly in the rural areas, was intertwined with the economic activities of the indigenous Indonesian rural population. There was concern that trying to eliminate the Chinese economic activities too hastily might hurt the indigenous Indonesians. On the other hand, precisely because of the close contact of the rural population with the Chinese intermediate traders, who bought up their farm produce to be sold to the Dutch trading companies and who sold them various consumer goods which had been imported by these companies, resentment of the Chinese was much more intense than with the Dutch, as they often felt cheated by the Chinese traders. Moreover, these Chinese intermediate traders also often functioned as money lenders, who were disliked because of what the rural population considered usurious interest rates charged by these money lenders.

Despite some concern about the possible adverse economic effects of dealing too harshly with the Chinese traders, successive Indonesian cabinets felt compelled to take measures to reduce Chinese economic dominance and foster the growth of an indigenous Indonesian business class. To this end, Djuanda, Minister of Welfare, in April 1950 issued a regulation which gave priority to indigenous businessmen to import goods from abroad. To facilitate this import trade, indigenous businessmen were given easy access to cheap credit. This program was called the ‘Benteng’ (Fortress) program (Siahaan, 1996: 168). Actually, the major purpose of the Benteng program was to try and set up a counter-force to Dutch business interests, particularly the monopolies of the ‘Big Five’ Dutch trading companies (Sumitro, 2003: 59).

Choosing the import trade as the first major economic activity, on which policies to promote indigenous entrepreneurship would be focused, was understandable because at the time almost all the export and import trade were in the hands of the Dutch and the Chinese (Suhadi, 1967: 218). Focusing on the import trade to secure indigenous Indonesian dominance appeared to be the most feasible, because this trade seemed to be most responsive to state direction through controls over the allocation of import licenses (Robison, 1986: 44). The import trade also appeared the most accessible to indigenous businessmen, because they could easily set up their business with a minimum of overhead investment, could concentrate on products sufficiently standardized, which only required a minimum of business experience, and could deal in goods that enjoyed a seller’s market because of import restrictions (Anspach, 1969: 168).

The Benteng program attracted a lot of interest. While in 1951 some 250 businessmen had registered with this program, in 1952 this number had increased to 741, and to 1,500 in 1953 and to over 2,200 in 1954 (Siahaan, 1996: 168). As a result, the percentage of total government foreign exchange credit allocated to the Benteng importers increased from 37 per cent in 1952-53 to over 76 per cent in late 1954 (Robison, 1986: 45).

From the time that the new indigenous importers had started receiving preferential treatment under the Benteng program, with several of them lacking capital or business experience or both, they engaged in business practices which, although not in violation of the letter of the law, did offend ethical standards. There were of course other new indigenous importers who had established a bona fide cooperation between their indigenous companies and non-indigenous or foreign companies. However, there were many more cases which could hardly be named bona fide enterprises, in which indigenous importers and ethnic Chinese businessmen (whether Indonesian citizens or foreign nationals) had set up so-called ‘Ali-Baba’ concerns. In fact, ‘shotgun weddings between the new indigenous importing companies and the older import companies of ethnic Chinese businessmen proliferated under various forms, such as fronts and straw men and the selling of import licenses to genuine, mostly ethnic Chinese, importers (Sutter, 1959: 1027). Hence, the Benteng program did not foster a strong, self-reliant indigenous merchant class, but a group of licensed, but unproductive rent-seekers. Not surprisingly, these importers were often referred to as ‘briefcase importers’ (importir aktentas), whose only ‘qualification’ as an importer was that they carried a briefcase (Siahaan, 1998: 168).

To eliminate bogus importers, the government in 1953 started screening officially registered indigenous importers. As a result the number of registered importers was reduced by more than half from about 4,300 to about 2,000 (Burger, 1975: 171). This measure, however, turned out to be ineffective. In August 1954 the Central Office of Imports estimated that about 90 per cent of the registered national importers were not bonafide. This estimate was confirmed by another screening in 1955 ordered by Roosseno, the new Minister of Economic Affairs, who had replaced Iskaq, the former Minister of Economic Affairs. However, even Iskaq, who had been a strong supporter of the Benteng program, acknowledged that import licenses were being sold at 200 to 250 per cent of their nominal value (Anspach, 1969: 174).

Thus Indonesia’s experience with its first affirmative program to promote a strong and selfreliant indigenous business class proved to be a failure, and in the second half of the 1950s came to an inglorious end, even though this program was never officially abolished.

Other measures directed at reducing the economic dominance of the Chinese in other fields included a government regulation in 1954 which decreed that the ownership of existing rice mills owned by Chinese had to be transferred to indigenous Indonesians. The regulation also stipulated no new licensing for running rice mills would be issued to foreigners (Suryadinata, 1992: 132). As at the time many ethnic Chinese were still Chinese citizens, this decree could be applied to these rice mill owners. However, like the Benteng Program, the implementation of this regulation also proved difficult because of the shortage of experienced indigenous rice mill operators. Hence, the deadline for implementing this regulation had to be continuously extended (Anspach, 1969: 184).

Another important measure in the 1950s to break Chinese control of the intermediate and retail trade in the rural areas was the Government Decree no. 10 of 1959 issued in November 1959. This decree stipulated that as from 1 January 1960 foreign nationals would be banned from rural trade and would have to transfer their business to Indonesian nationals (Suryadinata, 1992: 135). Although on paper Indonesian nationals benefiting from this Decree could also include Indonesian citizens of Chinese descent, the government hoped that much of the rural trade run by the ‘foreign’ Chinese would be taken over by cooperatives and businesses owned and run by indigenous Indonesians.

Since neither cooperatives nor indigenous businessmen were fully equipped to replace the Chinese traders, or to engage in rural trade with equal efficiency, the ban caused considerable economic disruption. At least in the short run, the ban caused more hardship to the villagers it was supposed to help (Somers, 1964: 28). Realising the danger to both the country’s economy and his own power by continuing the anti-Chinese campaign, President Sukarno succeeded in curbing anti-Chinese measures. Although Government Decree no. 10 was never lifted, its further implementation was temporarily suspended. (Suryadinata, 1992: 137).

As economic conditions continued to deteriorate since the late 1950s and Sukarno’s and the army’s attention were increasingly focused on reclaiming West Irian from the Dutch, further implementation of Government Decree no. 10 was discontinued. Moreover, with the emphasis on Indonesian-style socialism with the introduction of President Sukarno’s Guided Democracy and Guided Economy in 1959, new affirmative programs to promote indigenous private businessmen were not considered anymore. Henceforth, government policy gave priority to state enterprises, which would own and control the important branches of production. Private enterprises would henceforth only be allowed to operate in those economic activities which did not control the supply of the basic wage goods of the people (Rice, 1983: 60).

The Guided Democracy and Guided Economy period (1959 – 1966) ushered in a period of rising hostility towards both domestic private capital and what remained of foreign direct investment, which included mostly American and British investment. With foreign loans, including from the US and Japan, a number of state-owned basic industries were built, including fertiliser, cement, paper, chemicals, spinning and shipbuilding, while private enterprise was regulated and supervised through designated industry associations (Dick, 2002: 186-7). New foreign direct investment, never popular during the 1950s, was given a clear sign that it was not welcome, when the new Foreign Investment Law, just enacted in 1957, was repealed in 1958 when anti-foreign feelings were running high after the takeover of all Dutch enterprises.

However, food crop and cash crop smallholder agriculture as well as cottage and smallscale enterprises remained privately owned (Dick, 2002: 187). Obviously, Indonesian-style socialism never envisaged collectivisation of agriculture as carried out in the communist countries nor nationalisation of cottage and small enterprises, which were mostly owned by rural, indigenous, petty entrepreneurs.

2.2 The New Order period, 1966 - 1998

Shifting government policies towards the private sector

The advent of Soeharto’s New Order regime in 1966 heralded a new turn in governmentbusiness relations. Inheriting a bankrupt economy which was in shambles because of the utter neglect of economic considerations by the Sukarno government, the Soeharto government gave top priority to economic recovery. This was achieved by quickly restoring macroeconomic stability to control hyperinflation which was reaching more than 600 per cent in 1966, and by rehabilitating the dilapidated physical infrastructure.

The New Order government also reversed the socialist policies of the Sukarno government. Etatist policies, under which the state had to play the dominant role in the economy, were abandoned. To this end, the new government removed most controls on private investment and curtailed the activities of the state-owned enterprises (SOEs) and the various industry associations. By ending government subsidies and preferential access to credit by state-owned banks and foreign exchange allocations to the SOEs, a more level playing field for private enterprises was created, while the import monopolies of the SOEs were abolished. Facing the requirement to operate more efficiently, the SOEs were relieved of the burden of having to sell their products at below market prices (McCawley, 1981: 64; Robison, 1986: 137).

To encourage the private sector, including foreign private enterprise, to play a bigger role in the economy, the stigma of private enterprise of the late Sukarno period was removed (Sadli, 1988: 358). To this end the hostile foreign investment policy of the Sukarno government was overturned by enacting a new Foreign Investment Law in 1967, which opened the country to new foreign direct investment (FDI). This Law contained various attractive incentives, including generous tax concessions (e.g. tax holidays, duty free imports of capital goods) and guarantees, including the free transfer of dividends and profits and a guarantee against arbitrary nationalisation of foreign enterprises (Sadli, 1972: 204). To administer the new inflows of foreign investment, a Technical Team for Foreign Investment (which later became the Capital Investment Coordinating Agency, BKPM) was established, which was also put in charge of foreign investment promotion (Sadli, 2003: 128). This new law signaled an open-door policy to foreign direct investment which, however, lasted only for a few years because restrictive regulations were imposed on new foreign investment in the mid-1970s.

In 1968 the New Order government also reversed the restrictive policies of the Sukarno government to private domestic businessmen by enacting a Domestic Investment Law, which not only provided the same incentives and guarantees to private domestic investors, but a few additional incentives. For instance, no questions were asked about the legitimacy of the origin of the funds to be invested in Indonesia. This meant that back taxes would not be imposed on these funds (Sadli, 1997: 244-45). Since this Domestic Investment Law did not only apply to indigenous Indonesian businessmen, but also to the Sino-Indonesian businessmen, this whitewash policy was successful as new domestic investment, along with foreign direct investment, increased rapidly during the first years after these liberal investment policies were enacted.

Although in principle the Domestic Investment Law provided the domestic investors with the same incentives and guarantees as the Foreign Investment Law, initially the domestic investors were in some important ways still at a disadvantage. For instance, the Capital Investment Coordinating Board (BKPM) required that both foreign and domestic companies applying for incentives under the Foreign or Domestic Investment Laws were required to deposit 25 per cent of their planned investment as collateral in state-owned banks. For non-priority sectors, mostly those outside agriculture, forestry or importsubstituting industries, the required collateral was even higher, namely 50 per cent (Robison, 1986: 139). During the late 1960s and early 1970s few domestic firms, particularly the indigenous-owned firms, possessed many liquid assets after the hyperinflation and economic chaos of the late Sukarno era.

However, as a result of the favourable investment climate for private investment, domestic investment, along with foreign investment, gradually increased and over time rose rapidly, including in medium- and large scale industries. Investment in the manufacturing sector became attractive because of the protectionist import-substitution policies pursued during the early New Order era. During this period several domestic business groups began to emerge under the political patronage of senior government officials and senior military officers. They operated in various sectors, including textiles, electronics, transport equipment and pharmaceuticals, often as joint ventures with foreign investors (Robison, 1986: 144). However, most of private domestic enterprise and employment in manufacturing operated in cottage and small-scale industries, including food products, textiles, garments, rubber milling, weaving, brick making, roof tiles, clove cigarettes, and furniture.

The liberal trade and investment policies, however, did not last long. By the mid-1970s the pendulum swung back towards more interventionist policies. The immediate cause for the re-emergence of interventionist policies was the steep rise in international oil prices in late 1973 and again in late 1978. This oil boom vastly increased the financial resources of the Indonesian government, which allowed the Indonesian government, particularly Mr. Soehoed, the dynamic Minister of Industry, to embark on an ambitious state-led, second stage import-substituting industrialization effort, involving the establishment of large-scale, state-owned, basic industries.

The government also reversed its liberal foreign investment policy in response to rising economic nationalism. This economic nationalism was reflected by violent anti-Japanese riots in January 1974 directed at the so-called ‘over-presence’ of Japanese investment projects. Henceforth, the New Order government pursued a more restrictive policy towards foreign investment. This was, amongst others, reflected by the requirement that new foreign investment projects would only be allowed in the form of joint ventures with Indonesian businessmen or companies, in which the majority equity share was owned by indigenous Indonesian businessmen and/or where the majority of the executive board members of the company were indigenous nationals. Foreign partners in joint ventures were also required to divest their majority equity holdings to their Indonesian partners or to the Indonesian public by floating their shares in the Jakarta Stock Exchange within a specified period of time (initially 10 years after the start of commercial production). The trend towards more restrictive regulations on foreign investment intensified following the second oil boom in 1978 (MacIntyre, 1994b: 250).

Another important influence on industrial policy in Indonesia emerged when in 1978 a new Minister of State for Research and Technology, Dr. B.J. Habibie, a German-trained aeronautical engineer, was appointed. Under his leadership Indonesia initiated the development of a range of state-owned, ‘strategic industries’, including a ‘hi-tech’ aircraft assembling company, a shipbuilding company, and eight other SOEs, deemed crucial for Indonesia in view of their strategic importance.

The end of the oil boom in 1982 as a result of the weakening world oil market once again forced the government to shift back to a liberal trade and foreign investment regime. Because of the government’s much reduced fiscal capacity to fund new investment projects and the need to generate new non-oil export revenues and non-oil tax revenues, the government introduced a series of deregulation measures designed to improve the investment climate for private, including foreign, investors. The government also introduced a series of trade reforms aimed at reducing the ‘anti-export bias’ of its highly protectionist regime. As a result, domestic and foreign investment since the mid-1980s increased rapidly, particularly in export-oriented projects. Most of the new export-oriented foreign investment projects, particularly in labour-intensive manufacturing industries, were carried out by Korean and Taiwanese investors (Thee, 1991: 55). The boom in foreign as well as domestic investment lasted until Indonesia was hit by the Asian economic crisis in 1997.

It is important to recognize that while government policies towards the private sector were often motivated by economic nationalism, considerations of national interest and sustaining economic growth were also paramount during the first two decades of New Order rule. However, since the late 1980s economic policies were often undermined by the political elite’s interests, particularly the business interests of the President’s family and their cronies. This was reflected in blatant corruption among the government bureaucracy, particularly at the top levels of the bureaucracy, collusive relationships between the political elite and their business cronies, mostly ethnic Chinese tycoons, and nepotistic policies of President Soeharto to benefit his childrens’ business interests. These policies distorted market incentives and rewarded unproductive rent-seeking activities, which only rewarded corrupt officials and their business cronies and, instead greatly hurt the interests of poor farmers.

A case in point was the monopsony/monopoly rights given to Soeharto’s second son to purchase the citrus grown by citrus farmers in West Kalimantan and then sell these citruses at monopoly prices. Another blatant example was the creation of a similar monopsony/monopoly consortium headed by Soeharto’s youngest son to purchase and sell cloves grown by clove farmers. Like with the citrus farmers, clove farmers were greatly hurt by these extortionary policies. In addition, several projects were initiated, the economic viability of which were very doubtful, such as the so-called ‘national car’ project of Soeharto’s youngest son. Without prudent policies that took proper account of Indonesia’s resource constraints, these projects would become devouring’ tapeworms’, as one critical economist put it (Nasution, 1995: 3-4). These practices undermined the economic resilience of the country and contributed to the erosion of the legitimacy of the New Order regime.

Policies towards the ethnic Chinese

Despite the strong anti-Chinese sentiments among wide sections of the public, which erupted in anti-Chinese riots after the fall of the Sukarno government, pragmatic considerations again gained the upper hand. Because of the New Order regime’s key policy objective of pushing economic growth (Booth, 1998: 325), it was realised that the ethnic Chinese were an essential element to achieve this goal. It was therefore necessary to abolish various restrictions on the economic activities of the Chinese which had been introduced during the Sukarno era.

While the Chinese were given wide opportunity in the economic field, in other fields, such as politics and culture, their activities were severely restricted, in some cases even banned. Celebrating Chinese New Year in public was prohibited, while Chinese schools and Chinese language newspapers were banned. To minimise the ethnic identity of the ethnic Chinese, the New Order regime issued a decree urging Sino-Indonesians to change their Chinese names into indigenous Indonesian names. This policy reflected the need to minimise social differences, which in the past had often erupted in anti-Chinese riots, and strive for social harmony (Elson, 2001: 161), an important policy objective for the new New Order government.

Despite the gloomy outlook for the ethnic Chinese, including the Sino-Indonesians, at the beginning of the New Order era, the regime’s emphasis on economic development opened new economic opportunities to the Chinese. With their long commercial experience, better access to capital, managerial and technical skills, and their contacts with the Chinese business networks in Southeast and East Asia and, in some instances, their mutually profitable contacts with the indigenous (pribumi) power holders, the Chinese were able to move into various economic activities on a large scale. The result was that the ethnic Chinese community prospered to a much greater degree than during the Dutch colonial period, the Japanese occupation, and the early period of Indonesian independence. This was not only the case with the relatively few Chinese business tycoons who, patronised by pribumi senior government officials and military officers, were able to establish large conglomerates. Many medium and small entrepreneurs too were able to prosper because of rapid economic growth. However, they were only able to survive and prosper through their persistence and hard work.

The New Order government was determined to boost economic growth by encouraging direct investment by ‘domestic foreign capital’, that is domestic capital which had been ‘parked’ abroad by many ethnic Chinese during the final tumultuous years of the Sukarno government. Nevertheless, explicit and implicit discrimination in various forms against the ethnic Chinese continued. As a result, many ethnic Chinese businessmen were forced to collaborate with pribumi businessmen, who held the required business licenses (Suryadinata, 1999: 140-41). In this sense not much had changed from the Sukarno era. In fact, over time the ‘Ali Baba’ system of the Sukarno era was ‘improved’ and grew into the hated, well-connected conglomerates, which gave rise to renewed anti-Chinese sentiments and riots in the late New Order era.

The New Order government also took several measures to help the pribumi businessmen advance faster in response to the anti-Japanese student riots of January 1974. These riots were actually also directed at the government, which was held responsible for the perceived rising inequities arising from the government’s liberal and open-door policies. Besides the earlier-mentioned measure to require new foreign investment projects to be joint ventures with Indonesian partners, since 1974 state banks were required to provide only investment credits to domestic companies. The favoured companies were those in which the majority share ownership (at least 51 per cent) was held by pribumi businessmen, and where the majority of the board of directors and the supervisory board would also be pribumi Indonesians (Sadli, 1988: 359).

However, just like with the affirmative Benteng program in the 1950s, this measure was again undermined by the same ‘Ali-Baba partnerships’. In these partnerships the pribumi businessmen (the ‘Alis’) fulfilled the majority requirements, while the ethnic Chinese ‘Babas’ controlled the operations. While the state banks were of course aware of these practices, they were resigned to these practices as otherwise too few companies would be able to meet the minimum own capital requirements to qualify for these bank loans (Sadli, 1988: 360).

Increased government revenues from the second oil boom of 1978/79 gave the government another opportunity to promote pribumi businessmen by introducing a new affirmative program. To this end President Soeharto issued two consecutive Presidential Decrees in 1979 respectively 1980. These Decrees stipulated that government contracts of up to Rp. 20 million (US$ 31,898 at the prevailing exchange rate) were only reserved for businessmen from the ‘economically weak groups in society’1. While contracts up to Rp. 100 million had to be awarded by tender, preferential treatment would still be given to businessmen from the ‘economically weak groups in society’, if their tenders were up to 10 per cent higher than the others (Daroesman, 1981: 15).

To qualify as a businessman from the economically weak groups, at least 50 per cent of his/her company would have to be owned by pribumi businessmen, while more than half of the board of management would have to be pribumi. Moreover, the amount of capital and net assets of the company would have to be less than Rp. 25 million in the case of a trading company or related activities, or Rp. 100 million in the case of a manufacturing or construction company. Local cooperatives would also qualify as an economic entity owned by members of the economically weak groups (Daroesman, 1981: 15). Despite some similarities with the ill-fated Benteng program, these Presidential Decrees were more successful, as over time a relatively large group of successful pribumi entrepreneurs emerged, such as the entrepreneurs of the Kodel group.

In the late 1980s, discontent rose about the perceived widening gap between the privileged rich and the large group of poor people, specifically between the visibly rich ethnic Chinese business tycoons and the pribumi majority. Aware of this resentment, President Soeharto in March 1990 convened a meeting at his large ranch near Bogor with the heads of the leading conglomerates, many of them ethnic Chinese tycoons. These conglomerates, including the conglomerates owned and controlled by his own children, had grown very rapidly during the New Order. Their rapid growth was possible because of the patronage of the powerful political elite, particularly President Soeharto. Under this patronage, the conglomerates enjoyed preferential treatment, including large subsidized credits from the state banks, protection, and monopoly positions, and assured government procurement. The actual size of these conglomerates only became evident after some of their subsidiaries had gone public after the stock exchange boom in 1989.

Suharto used this meeting not only to deflect rising criticism of the blatant preferential treatment given to the businesses of his children, but also to reduce rising public anger about the visible role of the ethnic Chinese conglomerates. To this end he portrayed himself as one of the ‘little people’ (wong cilik) (Elson, 2001: 268). On national television Soeharto used this meeting to urge the assembled tycoons to assist cooperatives (mostly, if not all, owned by members of the economically weak groups) by transferring a quarter of their vast assets to the cooperatives and to give an opportunity to the cooperatives to buy shares in the private companies as a suitable means of narrowing the gap between rich and poor. This equal sharing of the nation’s wealth would emerge as a constant theme in Soeharto’s speeches throughout the 1990s (Elson, 2001: 268).

Suharto used this meeting not only to deflect rising criticism of the blatant preferential treatment given to the businesses of his children, but also to reduce rising public anger about the visible role of the ethnic Chinese conglomerates. To this end he portrayed himself as one of the ‘little people’ (wong cilik) (Elson, 2001: 268). On national television Soeharto used this meeting to urge the assembled tycoons to assist cooperatives (mostly, if not all, owned by members of the economically weak groups) by transferring a quarter of their vast assets to the cooperatives and to give an opportunity to the cooperatives to buy shares in the private companies as a suitable means of narrowing the gap between rich and poor. This equal sharing of the nation’s wealth would emerge as a constant theme in Soeharto’s speeches throughout the 1990s (Elson, 2001: 268).

As was to be expected, Soeharto’s appeal was an empty gesture. Beyond some minor token steps, none of the conglomerates was prepared to transfer their assets to cooperatives or allow the latter to buy shares in their business holdings, even if the cooperatives were financially able to do so. They only made token gestures in participating in the government’s ‘Foster Father scheme’. Under this scheme, large enterprises (referred to as ‘Foster Fathers’), were urged to establish partnerships with cooperatives and small enterprises, largely owned by members of the economically weak groups in society. Naturally these schemes were unworkable and ineffective in raising the economic viability of these cooperatives and small enterprises, as they were not motivated by market considerations, but in effect amounted to forced marriages.

2.3 The post-Soeharto period

The Asian financial and economic crisis of 1997/98 led to a sharp contraction of Indonesia’s GDP of almost -14 per cent in 1998. Unlike the two other worst-affected countries in East Asia, South Korea and Thailand, which were better able to deal with the crisis, the Indonesian government was unable to respond speedily and effectively to the crisis. As a result, the economic crisis worsened and spiraled into a serious political crisis, which led to the fall of President Soeharto who had ruled the country for 32 years.

The unsettled conditions and political unrest led to severe anti-Chinese riots, which erupted in Indonesia just before Soeharto’s fall, and led to substantial capital flight, particularly to Singapore. Because of the serious economic crisis, many companies suffered great losses. Major companies, many owned by ethnic Chinese tycoons, as well the banks owned by the ethnic Chinese and pribumi conglomerates, went bankrupt and were either taken over by the government’s Indonesian Banking Restructuring Agency (IBRA) or sold to foreign investors.

At present anti-Chinese sentiments have abated, perhaps because of the collapse of the debt-ridden Chinese conglomerates and the fall of their powerful patron, President Soeharto. In spite of their collapse, there was concern that these conglomerates, after undergoing restructuring, would be able to regain control through their proxies over their former companies. These companies were taken over by IBRA as collateral in return for Bank Indonesia’s liquidity credits to bail out the banks they owned.

After the crisis the highly indebted ethnic Chinese conglomerates were forced to restructure their businesses through a series of divestments (both forced and voluntary) or by attempts to establish strategic alliances with the new political elite, as the Salim group, the biggest ethnic Chinese conglomerate during the Soeharto era, has done (Sato, 2004: 40). Considering the public resentment over the collusive relationships between the Chinese conglomerates and their political patrons, both the leaner conglomerates and their new political patrons, need to tread very carefully lest new anti-Chinese riots erupt.

Many conglomerates, including the Salim business group, have also shifted from a high degree of diversification during the Soeharto era to a sharp focus on their core business. On the other hand, smaller conglomerates, which had mainly grown on the basis of capable management rather than relying on political patrons, and which had not accumulated huge debts, have emerged as buyers of the assets sold by the indebted large conglomerates. In fact, a few of them have tied up with new pribumi and foreign investors to expand their business (Sato, 2004: 41-42).

Because of the sensitivity about the perceived economic dominance of the ethnic Chinese, any Indonesian government, including the present government of President Susilo Bambang Yudhoyono, has to take account of the difficult trade-off between the important need to satisfy the legitimate aspirations of the pribumi majority for greater equity and the equally important need to reassure the ethnic Chinese business community lest the mass flight of Chinese capital adversely affects economic growth.

Despite controversial statements by Jusuf Kalla, the current Vice-President, that affirmative policies to promote pribumi businessmen are imperative in order to prevent further anti-Chinese riots, thus far the government has refrained from pursuing discriminatory policies against the Chinese. Hence, like during the Sukarno as well as Soeharto eras, pragmatic considerations have again prevailed over economic nationalism. However, like the previous governments steps are taken to promote pribumi business, particularly small- and medium-scale enterprises (SMEs), which are mostly owned by pribumi businessmen.

For their part, the more prosperous ethnic Chinese economic community, particularly the businessmen, need to realise that the long-term security in their country of birth can only be achieved if the economic gap between them and the pribumi majority is steadily narrowed. This goal cannot be achieved by the government alone, but need to be achieved by the efforts of the ethnic Chinese community itself, particularly by faster social and economic integration with the pribumi majority. For instance, a serious effort need to be made to establish real partnerships with pribumi businessmen which do not amount to the infamous ‘Ali-Baba’ partnerships of yore. More philanthropic foundations could also be established to fund the establishment and operations of good schools at all levels to meet the needs of private business for skilled personnel.

Looking to the future, two important issues need to be addressed to promote the development of an efficient and competitive private sector. The first is the need to attract more foreign direct investment. The second concerns the steps to be taken to develop a viable and competitive SME sub-sector Viable and efficient SMEs would promote pribumi entrepreneurship and strengthen Indonesia’s industrial structure by opening opportunities for supplier firms to the large downstream assembling industries. The next two sections will discuss these two issues in greater detail.

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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.