The colonial state moves from direct participation to providing economic and administrative environment for private firms. Western firms control banks, shipping, mining, trade, and plantations. Ethnic Chinese dominate the domestic economy, with few opportunities for local merchants. Trade and plantations expand the money economy and wage labor, though a village subsistence economy persists.
The Depression causes a decline in plantation agriculture, especially the massive sugar industry. Foreign investment in large-scale industrial production, such as rubber, oil, and cement, continues to grow. Manufacturing increasingly moves from home to factory but remains a minor sector. The economy remains based on the export of primary goods and import of manufactures.
After the Indies government joins an international oil embargo against Japan, which imports 25 percent of its oil from the islands, the Japanese invade. Stressing the idea of a Greater East Asia Co-Prosperity Sphere, the Japanese exploit the outer islands for its resources and Java for its labor force. Many businesses fail because of disruptions from the Pacific war.
The 1945 constitution states that "Branches of production which affect the life of most people shall be controlled by the State." Lingering disruptions abroad from World War II and at home from the fight for independence hurt production of the exports the islands' economy depend on. The Dutch carry out several "police actions" against independence forces in an effort to retake key plantation areas.
Indonesia inherits an agricultural export economy based on Dutch investment. Linking capitalism with colonialism, nominally socialist parties move to dismantle the colonial economy slowly. With little private capital, state capitalism drives efforts to reduce foreign control. The state controls some banking, utilities, industry, and trading firms, but with the goal of boosting a private sector.
State capitalism accelerates as state-owned firms take over foreign plantations and private companies. By 1960 a Guided Economy seeks to industrialize through centralized planning and control, which Sukarno calls "socialism a la Indonesia." Failed policies and mismanagement causes inflation, a fall in per capita GDP, and an inability to import goods or service debts.
With Suharto in power, new policies reduce the state role by encouraging foreign investment and the private sector. But the regime maintains huge state firms, limits foreign ownership, and protects key industries. A National Development Planning Council that produces a series of Five-Year Plans is marked by a battle between Western-educated economists ("the Berkeley Mafia") and economic nationalists.
Oil price hikes fund a return to a state-led economy, including steel, oil-processing, and cement projects. The state oil firm grows into a huge conglomerate and source of funds for army and political factions before collapsing. Suharto cronies and connected ethnic Chinese build banking, trade, manufacturing, and timber empires. Riots spur foreign investment restrictions to boost local ownership.
Falling oil prices spur reforms urged by the World Bank and domestic businesses: boost exports, cut the budget, and replace state investment. Policy shifts from heavy industry to export goods; the mechanism is increasingly private investment. Banking and trade are deregulated, investment relaxed, and some state and private monopolies ended. State firms still account for 30 percent of GDP by 1990.
Liberalization is accompanied by a boom in foreign investment. Dismantling of the state sector continues, with shares sold in telecom, banking, and mining, and state monopolies opened. But in 1995, 180 state firms still account for 15 percent of GDP. The Five-Year Plans continue but emphasize private-sector development.
The financial crisis sweeps the region, causing the rupiah to crash. Investors panic, debts soar, and the banking sector collapses. The crash reveals weak banks, bankrupt conglomerates, and a corrupt judiciary. A massive bailout of the conglomerates leaves the state temporarily owning major parts of the economy. Despite IMF pressure to sell assets and privatize state firms, progress is slow.
IMF-influenced policies aim to encourage foreign investment and strengthen the banking and corporate sectors. But ongoing violence, corruption, the problem of reforming the political role of the military, and battles with Parliament distract Wahid from economic reforms. Indonesia is under pressure to privatize state firms and in particular its telecom sector.
The recovery is fragile. Megawati faces corruption and opposition to reform on one side and pressure from creditors on the other. Privatization gets a boost with the sale of a major bank, but investors are still slow to return. The global slowdown of 2001-02 and the 2002 Bali bomb fallout hold growth below 4 percent and force the government to spend on a stimulus package, widening the deficit.
back to top