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Indonesia: Role of Government
Country Study > Chapter 3 > The Economy > Role of Government

ROLE OF GOVERNMENT


In the early years of nation building, from 1950 to 1957, a variety of moderate policies were pursued to support the pribumi through subsidized credit from the state-owned Bank Rakyat, or People's Bank, and through limiting certain markets to pribumi business. The nation's first five-year development plan (1956-60) proposed a realistic level of government investment in public infrastructure, but offered little regulation or overall guidance to the private sector. This plan was superseded by dramatic developments in the political and economic sphere, including the 1957 takeover of Dutch enterprises initiated by workers, which led ultimately to state control of this important segment of the economy. About 300 Dutch plantations and 300 firms in other areas such as mining, trade, finance, and utilities ultimately came under the control of the Indonesian government. Dutch management was replaced by Indonesian civil servants or military officers, most of whom had little managerial experience.

The de facto expansion of the state was sustained by a general policy shift to justify greater state intervention in the economy. Sukarno's Guided Economy was initiated in a new eight-year development plan begun in 1959, which entailed a twelvefold increase in government project expenditure from the previous plan, without clear sources of finance. By the mid-1960s, central bank credit to the government accounted for half of government expenditures. This deficit spending led in turn to mounting inflation, which peaked at 1,500 percent between June 1965 and June 1966. At the same time, foreign debt mounted, both from the West and increasingly from the Soviet Union. In spite of a highly visible public building campaign, the economy stagnated and by 1966 per capita production was below the 1958 level.

Following the downfall of Sukarno, the New Order regime under Suharto pursued, with financial assistance from the International Monetary Fund, a variety of emergency stabilization measures to put the economy back on course. During the 1960s, a team of economists from the Faculty of Economics at the University of Indonesia became influential presidential advisers. Because three of the five-member team had received doctorates from the University of California at Berkeley, the group was sometimes referred to as the "Berkeley Mafia." Chief among the Berkeley group's recommended reforms was a balanced budget, although foreign assistance and foreign borrowing were included as sources of revenue. Furthermore, in a break from the socialist tenor of Sukarno's Guided Economy, Suharto's New Order heralded a return to private market development.

The New Order remained committed to a stable economic environment encouraged by responsible fiscal and monetary policy, but concerns over foreign economic dominance, the limited national industrial base, and the need for pribumi economic development mandated increased government regulation during the 1970s. In spite of these increasing government controls, the economy continued to prosper throughout the 1970s, with GDP growing an average 8 percent annually.

By the early 1980s, a precipitous drop in growth pointed to limits in the industrialization strategy, and a new generation of reformers advocated a more limited role for the government. Entrenched beneficiaries of protected markets and enlarged bureaucracies resisted these reforms, but when the oil market collapsed in 1986, the balance was tipped in favor of the "freefight " advocates.

Data as of November 1992




Last Updated: November 1992


Editor's Note: Country Studies included here were published between 1988 and 1998. The Country study for Indonesia was first published in 1993. Where available, the data has been updated through 2008. The date at the bottom of each section will indicate the time period of the data. Information on some countries may no longer be up to date. See the "Research Completed" date at the beginning of each study on the Title Page or the "Data as of" date at the end of each section of text. This information is included due to its comprehensiveness and for historical purposes.

Note that current information from the CIA World Factbook, U.S. Department of State Background Notes, Australia's Department of Foreign Affairs and Trade Country Briefs, the UK's Foreign and Commonwealth Office's Country Profiles, and the World Bank can be found on Factba.se.

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