Managing Indonesia

The Modern Political Economy

John Bresnan

New York

Columbia University Press

1993

3. The Rise of the Technocrats

Indonesia's economic and social crises were significant factors in bringing about Sukarno's fall. The extraordinary rise in prices, which doubled every few months during 1965, and the financial panic created by the government's mishandling of the currency in December added greatly to the president's vulnerability; moreover, the impact of inflation on the population of the capital city contributed to the turn in the student demonstrations against the government. When the Communist party was banned in March 1966, Soeharto came under considerable pressure to take action to improve the economy. With the arrest of a number of cabinet officers, including the head of the central bank, he had the means to reshape the government and to give its policies a new direction.

Following the arrest of cabinet ministers, officials in many departments of the government, as well as in some provinces and towns, were dismissed or suspended. Several hundred air force officers were arrested, as were lesser numbers of naval officers and police. But Soeharto was in no position to alienate the many Sukarnoists within the army and other branches of the armed forces; the possibility of another coup attempt could not be ruled out. As a result the purge was limited, and the new cabinet included many members from the previous one. The principal change was in the cabinet "presidium"or "super-cabinet." For some months the main policy lines were to be shared by members of a triumvirate: Soeharto was chairman and also responsible for security; Adam Malik, the nimble Sumatran who had survived the rough and tumble of party politics ever since the 1930s, who had served as ambassador in Moscow, and who was the foremost anticommunist in the previous Sukarno cabinet, was now responsible for international affairs; and the Sultan of Yogyakarta, bringing the aura of long-term legitimacy, was in charge of economic affairs.

Economic deprivation was now widespread in the society, and for many had reached a severity unknown since the years of wartime occupation. The situation called for action across a wide front. Yet Gunnar Myrdal's dictum, written at about this very time, seemed unassailable. Indonesia and the other states of South and Southeast Asia were, he said, "soft states." Hard economic decisions could not be taken or, if taken, could not be implemented. The fundamental problem was the lack of effective governments. Myrdal acknowledged that, reluctantly, he had reached the conclusion that political democracy no longer seemed a fundamental requirement of modernization. The situation had reached a point, he believed, when some measure of "compulsion" had become "strategic." ₁

Herbert Feith, a close student of the Indonesian case, had described policy-making under Guided Democracy in similar terms:

This is not a government which can easily exert much weight of power. Many of its decrees are effectively ignored by those who are charged with their implementation. This is sometimes attributed to the ineffectiveness of its administrative machinery. But it is more accurately described in terms of the weakness of the political elite's cohesion, the heavy dependence of this elite on the bureaucracy as a social class, and the great importance of intra-bureaucratic politics as a force for immobilization of the government. ₂

Soeharto and the Sultan were thus in great need of new and large ideas. They also faced a substantial task in building a consensus behind any economic program that would be responsive to the circumstances. Indeed, if much was going to change, the entire national elite had to be reeducated.

That substantial changes actually occurred, and within the space of several months, was owing principally to a series of catalytic events that placed a handful of young economists of the University of Indonesia at the center of the discussion of what the government should do, and led to their rapid rise to power as the key members of Soeharto's "economic team."

Perceptions of the Economy

Much romanticism had surrounded the economic wealth of Indonesia. This was not wholly a matter of invention, nor entirely a native perspective; the islands were indeed rich in a wide range of natural resources, and many Dutch politicians and colonial officials had built their careers on the promise of this wealth. But after independence the romance took on a characteristically Indonesian element. A number of Indonesians, and particularly many Javanese, believed that because the country was rich in natural resources the government could make people rich simply by making wise decisions or, as it was frequently put, by issuing the right commands. Sukarno had reflected this view--as well as his impatience with the entire subject of economics--in his Independence Day address of August 17, 1963:

The economic question demands our full attention. Is not food and clothing one of the points of the Government's Three Point Program? And is not the economy one of the "points" of our Revolution?

As the Great Leader of the Revolution, I devote very great attention to this economic "point." But let me be frank: I am not an economist. I am not an expert in economic techniques. I am not an expert in the techniques of trade. I am a revolutionary, and I am just a revolutionary in economic matters.

My feelings and ideas about the economic question are simple, very simple indeed. They can be formulated as follows: If nations who live in a dry and barren desert can solve the problems of their economy, why can't we? . . .

What more can I say other than to ask you to be patient for a while longer? I have already issued the Economic Declaration known as Dekon, and fourteen Government Regulations are also out. Now I say only: be patient a while longer, be patient, wait and see! ₃

Sukarno's view of what needed to be done was in striking contrast to the views expressed that same month in two lectures delivered at the Faculty of Economics of the University of Indonesia. Widjojo Nitisastro, in his inaugural lecture as professor of economics at the university on August 10, 1963, defended the role of economic analysis in development planning, and argued that if the country was to break out of its stagnant economic situation a process of planning and policy-making was required in which efficiency, rationality, consistency, clear choices among alternatives, and attention to prices and material incentives all played a central role. Mohammad Sadli, in a lecture later the same month, made a theoretical defense of the stabilization program and a major assault on the causes and costs of inflation. These were political events in the life of the capital city, attended by cabinet ministers and other prominent figures, and it seems fair to say that many of those present shared the views expressed on these two occasions. ₄

Sukarno showed no deeper understanding of the situation as it worsened. In his speech of August 17, 1965, he was still acknowledging shortages of food and clothing and asking for patience, for more time, although he now blamed the shortages on others rather than himself. It seems inescapable that whatever the other problems that stood in the way of the government's getting a grip on the economy--and they were considerable—a central problem was that Sukarno simply did not understand the roots of the economic deterioration that was eroding the people's welfare, the government's credibility, and his own hold on the presidency.

Even so, the psychological and political obstacles to breaking with the president were enormous. The process began within weeks of the currency fiasco when, on January 10, 1966, the students of the Faculty of Economics opened a conference at the University of Indonesia on the state of the economy. The event was notable chiefly for an address by Mohammad Sadli. Sadli used the occasion to make a wide-ranging attack on the problems of inflation, on imbalances in price relationships ("Where else in the world can a person ride a train for 500 or 1,000 kilometers with a ticket that costs the same as a few dozen eggs?"), on the size of the government bureaucracy, and on the decline in exports. But the basic problem, he said, was "the state of mind." It was no longer enough for the country to rely on "tension management." A "day of reckoning" had arrived. The economy no longer had any savings. The "only way out" was to restore the good will of the international community and seek new credits abroad. ₅

It was still something of a leap from the language of this pronouncement on the university campus to the unvarnished terms the Sultan used in his first formal statement as triumvir on April 12, 1966. One had to go back to the annual reports of Sjarifuddin Prawiranegara, head of the central bank in the early 1950s, to encounter in an official Indonesian document anything like the frank tenor and realistic detail of the Sultan's statement. The statement was drafted by Selo Soemardjan, secretary to the Sultan and professor of sociology at the University of Indonesia; the university economists, all close associates of Soemardjan, were deeply involved in its preparation. The statement said in part:

In 1965 prices in general rose by more than 500 percent; in fact the price of rice soared by more than 900 percent. Unless swift and correct steps are taken, it may sky-rocket by more than 1,000 percent in 1966.

In the 1950s the State budget sustained deficits of 10 to 30 percent of receipts and in the 1960s . . . soared to more than 100 percent. In 1965 (the deficit) reached 300 percent. The most serious (increase) of all took place in January, February and March of 1966. Within the first quarter of this year (the deficit) amounted to almost the whole government expenditure in 1965.

For years to come Indonesia's economy is saddled with foreign debts totalling $2.4 billion. This year we have to begin to pay our long-term debts. If we fulfill all our obligations, we (will) have no foreign exchange left to spend for our routine needs . . . . For years we have been importing our daily necessities through short-term loans on conditions detrimental to us.

There must be an austerity programme, a programme of retrenchment covering all facets of government.

All State enterprises, whether commercial or otherwise, have to operate on truly economic norms.

In the agricultural sector, food yield and farmers' income must be improved appreciably . . . . Irrigation, fertilizer, pesticides and implements to boost output are essential.

Rehabilitation of highways, maintenance and expansion of the network of roads in economically important areas are a necessary condition for our economic recovery and stability.

We need port facilities, particularly dock facilities to render fast service to ocean-going vessels . . .

What are the prerequisites . . . to economic rehabilitation? Every official, whether in the government or the private sector . . . should render the greatest contribution within his ability in the interest of the State and nation, not merely for personal gain . . . . The Government deliberately restricts its programme within the limit of its capacity and the prevailing atmosphere in the conviction that it will not reach its goal without public support and aid.

We decline to make promises which may arouse unrealistic hopes among the people. They may become disappointed if improvements fail to come up to their expectations. The only promise we give is that we will do our best honestly to meet the challenge. ₆

The picture this statement revealed, Heinz Arndt noted, had "few parallels in a great nation in modern times except in the immediate aftermath of war or revolution." ₇

The Great Inflation and Its Causes

The inflation that marked the decline of the Indonesian economy to this sad state, and that played a central role in mobilizing opinion against the Sukarno government, had been a feature of economic life since 1961, doubling every year from 1961 to 1964, increasing sevenfold in 1965, and continuing at the same rate in the early part of 1966. An inflation of such magnitude was by this time reflected in every aspect of economic and social life. ₈

One of the causes of the inflation was the persistent and growing deficit in the government budget. The deficit was related, in part, to the impact of important political events. The deficit jumped in 1958, reflecting the "outer island" rebellion; again in 1961, reflecting the West Irian campaign; and again in 1964, reflecting "confrontation." On each of these occasions, the increase in the deficit was greater than it had been the time before.

It was believed at the time that expenditures also grew because of increasing government bureaucracy. By early 1966 it was estimated that employees of the government, members of the armed forces, and employees of state enterprises numbered 4 million; when their family members were taken into account, it was estimated that at least 10 million people, or 10 percent of the population, were directly dependent on the government for their incomes. Data that became available later put these estimates in doubt, however.

In any case, the deficit was caused by declines in revenue, as well as by increases in expenditures. From 1960 on, total government revenues were less each year than the budget for even routine expenditures, such as salaries, and the gap grew larger annually. A principal reason was that government revenues were raised mainly by direct or indirect taxes on international trade, and trade was falling steadily from the late 1950s.

Credit expansion also was a factor. From 1950 on, the money supply often increased more rapidly than the government budget did. During 1965 alone the money supply increased almost fivefold, and not much more than half of this could be attributed to the budget deficit. Credit expanded mainly through the state banks, going to state enterprises, private enterprises, and for various extrabudgetary projects. The governor of the central bank later testified at his trial that he had extended numerous unsecured loans to official agencies and to private individuals on either his own or the president's approval.

While the money supply was thus growing rapidly, the supply of goods was declining, and an important reason was the decline in export earnings. Indonesia was historically an exporter of tropical agricultural products and of minerals, principally tin and oil. As a percentage of all domestic production, exports between 1958 and 1962 averaged each year only about a third of prewar levels, and in the period from 1963 to 1965 were even lower still. Factors behind this downward trend included the takeover of Dutch-owned plantations and tin and oil companies during the West Irian campaign, the loss of Singapore as a processing center because of "confrontation," the mounting cost of doing business as a result of inflation, and the continuing deterioration of roads, ports, trucks, ships, and power supply. Still another factor was the lack of control over state enterprises; agencies responsible for significant percentages of rubber and oil exports, for example, retained substantial portions of their earnings, ostensibly to pay for imported spare parts and materials for their own operations, rather than pay them over to the Ministry of Finance.

The decline in exports threatened the country's ability to import, and imports were essential; the country was not self-sufficient in food or in textiles, let alone in machinery and other capital goods. Through 1957 the government drew heavily on its foreign exchange reserves, virtually liquidating its gold reserves in the process, in order to sustain imports, the largest portion of which consisted of consumer goods. During 1962 to 1964 a third of the country's total imports was paid with foreign loans and credits, including Japanese reparations. Most of the loans were theoretically tied to specific projects, but in fact an average of 26 percent was used for raw materials and another 18 percent for consumer goods. As early as 1961 Indonesia was unable to meet all the payments due on its foreign debt, and the arrearages grew annually. In 1965 the accumulated payments due amounted to 75 percent of the total value of exports during the year.

How the deteriorating trade situation fed the domestic inflation can be seen in the case of rice. Between 1954 and 1961 rice production increased annually at a rate about equal to population growth. By importing supplemental supplies from abroad, the government was able to increase the availability of rice on a per capita basis. In 1962, which was a good year in terms of domestic production, imported rice amounted to about 10 percent of the total rice available. The imported rice was used to supplement the cash wages of civil servants and soldiers, and to "inject" supplies into urban markets to stabilize prices and prevent unrest. After 1962, however, the volume of rice produced domestically ceased to grow, and the government was at this point less able to finance imports. The amount of rice available in the country steadily declined on a per capita basis. Hence Sukarno's appeals from August 1963 on for patience in regard to food supplies. Moreover, because rice was the principal item of expense in urban household budgets, the price of rice tended to pull the prices of other goods along with it. Hence, the uncontrollable rise in prices.

The great inflation, then, resulted from declines in productivity of all the country's key producers—its rice farms, rubber plantations, tin mines, and oil wells; it reflected the withering decline of foreign trade and, with it, a massive decline in government revenues; it reflected a pattern of expenditure of public funds that showed a disregard of economic cost; and, finally, it was accompanied by a decline of discipline in the banking system, eventually leading to that system's virtual collapse.

Consequences of the Great Inflation

The social and political consequences of inflation were equally wide-ranging. Perhaps most significant was the decline in the government's ability to command the resources it once had at its disposal. Government expenditure in real terms declined by more than two-thirds over the brief three-year period from 1962 to 1964. Thus, even before 1965 began, the government had already lost much of its ability to take any significant action whatsoever—except perhaps for the symbolic action that the president still commanded, or, one might say, to which he was reduced.

Another result of inflation was ever-widening economic control in the hands of the government bureaucracy. The multiple exchange rates made available to exporters and importers were continually changing. When importers nevertheless experienced windfall profits, price controls were established for imported materials. When importers evaded the price controls, the government took over the importing of key industrial materials—yarn, some textiles, wheat, and cloves (for the spiced cigarettes widely popular in Java)—and sold them to domestic industrial enterprises at official prices. When consumers also demanded protection from the inflation, the government went a step further and regulated the prices of finished goods produced by domestic industry. When a black market continued to flourish despite this last step, the government went even further and, by 1965, took to distributing food and clothing through state-owned retail shops.

A further result of the inflation was abandonment of the commitment to social justice. Again rice was a prime example. The government did not control enough of the total rice supply to be able to ration the rice at fixed prices for all. Those protected by the government's distribution system comprised only a small portion of the total consuming public—government employees, members of the armed forces, employees of state enterprises, and some inhabitants of the larger cities. In addition, government subsidies to lower public utilities rates also benefited only a fraction of the population; even electricity and piped water were enjoyed only by the upper classes in the cities. Possibly most serious was the gap that inflation created in rural communities between those who had access to land and those who did not, although an absence of data made it impossible to assess how far this extended.

Because of inflation, the traditional respect people had for bureaucratic office declined. One analyst observed that a middle-grade civil servant would have seen his cash salary increase twelve times from 1957 to 1964, while prices were increasing thirty times. Another noted that a senior civil servant with a salary of 200,000 rupiah a month would have needed 750,000 a month for household expenses at the end of December 1965, and 2.5 million by May 1966. Most government employees by this time were working for the perquisites of office, including housing, transport, and rations of rice and textiles, compared to which their cash salaries were negligible.

Civil servants turned to various devices in order to survive. Wives went to work in the private sector and earned more than the "head of the family," straining family relations. Many civil servants appeared in their government offices for only a few hours a day, and often for only a few days a week. The pervasive government involvement in the economy also encouraged rampant bribery, both because the opportunities were presented to bureaucrats who had the power to distribute scarce goods, and because little moral authority or practical sense was attributed to many of the controls in the first place. The arrests of ministers and dismissals of other senior officials that began in March 1966 left government employees thoroughly demoralized. The bureaucracy was ripe for attack.

Educating the Elite

Within a few weeks of the Sultan's statement on the economy, from May 6 to May 9, 1966, a second symposium was held at the University of Indonesia. The sponsors this time were the University's rector and deans, the national Indonesian Students Action Front, and the more recently formed Indonesian University Graduates Action Front, a federation of anticommunist university alumni. Ali Wardhana of the economics faculty was chairman of the event, and Emil Salim of the same faculty was rapporteur. The entire cabinet was invited. The agenda was the full range of economic, political, social, and cultural problems confronting the country.

The high point of the conference was an address by Subroto, an economics lecturer at the University, who made a slashing attack on the policies of Guided Democracy. The country's economic interests had fallen victim to the government's political ambitions, he said. Almost half the country's foreign debt had been entered into for military purposes, and a large part of the government's spending since 1960 had gone into its pursuit of West Irian and then into the anti-Malaysia campaign. Although the government planned that a large part of its income would come from state enterprises, the fact was that the government depended on import taxes, and these were declining. Maintaining the government apparatus, which was already too large, was using up so much government income that little was left for development. Even the share of foreign credits available for nonmilitary purposes did not go to projects that would directly benefit the people or rehabilitate production, but went to projects selected for political purposes, like the Asian Games. It was time, Subroto said, for Parliament to approve the government budget before the fiscal year began; to use government funds to rehabilitate the economy instead of spending funds on helicopters, airplanes, and other "luxuries"; and to expend every effort to bring into balance the entire array of monetary and fiscal policy, foreign trade, prices, the salaries of civil servants, and production. ₉

Another speaker, Sumiskum, a leading figure in national legal circles, and later a speaker of parliament, said that "confrontation" as a strategy had failed to take into account the balance of power between Indonesia and its opponents. The opinion was now encountered on all sides, he said, no matter with whom one spoke, that the "strategy of struggle" that Indonesia was pursuing had been calculated inadvisably. But people were afraid to say so, for fear of being branded "agents of imperialism, subversion, or the CIA." ₁₀

In June the Provisional People's Consultative Assembly met for the first time since the political crisis began nine months earlier. The Assembly was now lacking its former members from the Communist party, as well as some other Sukarno supporters; nevertheless, the majority had been members several years before when the body had unanimously elected Sukarno to the presidency for life. So it was not at all a foregone conclusion that Soeharto would gain the Assembly's complete support. Sukarno might even have agreed to the session somewhat hopeful that he would recover lost ground. In the event, the Assembly elected Nasution as its chairman and produced a series of decisions that represented a considerable victory for Soeharto. The Assembly confirmed Soeharto's position as chief executive, and made this irrevocable by the president; it confirmed Soeharto's outlawing of the Communist party; and it instructed Sukarno to submit a full explanation of his role in the events of the previous October 1, and forbade him to issue any further decrees. The Assembly further instructed Sukarno and Soeharto jointly to form a new government, the main objectives of which were to be political stabilization, economic rehabilitation, preservation of an independent foreign policy, and preparations for general elections.

The Assembly failed to resolve the question of the future of the political parties, but it did approve a lengthy statement on the economy, finance, and development. The statement was drafted not by the government, but by five members of the economics faculty—Sadli, Salim, Subroto, Wardhana, and Widjojo. They were careful to provide early copies to Soeharto and his personal staff; they also lobbied every Assembly member they knew. According to several of the drafters, the statement was virtually unchanged as it was discussed and approved, first by the Economic Commission chaired by General Jusuf, and then by the full Assembly. The statement rejected both "free fight liberalism," which it said led only to exploitation, and "etatism," which killed all initiative outside the state sector. In the short term, the statement said, the priorities were to bring inflation under control, revitalize production, meet the people's needs for food and clothing, and increase exports. In the longer term the economy needed to be developed, with agriculture given the first priority. The government was to play the central role in guiding the course of development, but private businessmen were to be encouraged to play an active role. The government was to adopt a drastic austerity program at once, which would affect both civil and military expenditures. Foreign borrowing was approved, provided the funds were used for the essential purposes of the government's stabilization and rehabilitation plan. Because of the country's limited capital resources, legislation was to be prepared promptly to provide for foreign private investment as well. ₁₁

But the chief member of the elite whom the university economists had to win over to their way of thinking was Soeharto, and up to this point they had not even met him. That occurred only in August when a second army seminar was held at the Staff and Command School in Bandung in order to establish a consensus among the army's commanders, now shorn of the leftists among them, on their future course of action. The seminar is best remembered because it reaffirmed and extended earlier doctrine about the army's nonmilitary role. Now, it was claimed, the people were looking to the army above all to provide the nation with leadership and stability. But Colonel Suwarto, who was the organizer, arranged for several of the University of Indonesia economists to meet with the army commanders and argue in person for their ideas. Soeharto evidently was impressed. He was soon calling the economists in for discussions, and before long he appointed them his official "expert advisers."

One of the economists recalled that initial experience:

The whole purpose was to give Soeharto a concept and the beginning of a program. After all, he had just come from nothing. The need was to give him some ideas and some rudimentary programs. After Super Semar, Soeharto had to have a program. There was really nothing else available, and the seminar was sponsored by the army, so he took it over "skin and hair," as the Dutch say—the program and the people who proposed it. ₁₂

To another of the economists, it was not that simple: "It was a step by step process. The Assembly statement was clear, but it needed to be worked out, to be made more operational. It had to be accepted by the army leadership as a whole, not just Soeharto. And he, of course, was not a vacuum into which we could just put our ideas." ₁₃

Indeed, the task was even larger. The entire national elite had to understand what was proposed. A man who had served in Sukarno's cabinet and later became a prominent critic of Soeharto's leadership explained:

The great achievement of this government has been to teach us to think economically . . . . Even I saw the banks as alien to me. Money was just for buying things, and if you didn't have any, you bartered for what you wanted. We were still basically agrarian in our thinking in 1965. Water? Oil? Why pay for them? Weren't they God's gift out of our own ground? So the government had to move slowly. There had to be a period of education, of forming a public mentality, where the costs of things, and choices, were taken into account." ₁₄

The New Economic Policies of 1966

The new economic policies were first outlined at a conference of representatives of the Indonesian government and its major noncommunist creditors in Tokyo on September 19. Seven creditor nations were represented: the United States, Japan, Britain, France, West Germany, Italy, and the Netherlands. The International Monetary Fund (IMF) and Australia also were represented, while Canada, New Zealand, and Switzerland sent observers. The largest single creditor, the Soviet Union, was not invited. The Sultan led the Indonesian delegation, and the principal Indonesian statement was presented over the name of General Soeharto as chairman of the Cabinet Presidium. The statement said in part:

For some months now a reshaping of our political structure has taken place. A new order has emerged with a pragmatic rather than doctrinaire approach in solving our nation's problems.

Specifically, the (Consultative Assembly) ordered the Indonesian Government to formulate and to carry out an economic stabilization programme, to be preceded by an immediate rescue programme. In this respect the control of inflation receives first priority, while the rehabilitation programme is primarily concerned with the following sectors: food, infrastructure, exports and clothing.

The creation of the right social and monetary condition being uppermost in our mind, the Government has planned to introduce to this end measures which in broad outline are as follows:

(a) by rendering a more proper role to market forces, create a wider and equal opportunity for participation in the development of our economy by all creative efforts, state and private, domestic and foreign alike;

(b) the achievement of a balanced State Budget;

(c) pursuance of a rigid yet well-directed credit policy of the banking system;

(d) establishment of a proper link between the domestic and the international economy through a realistic exchange rate, and thus creating stimuli to reverse the downward trend of the balance of payments. ₁₅

The major significance of the Tokyo meeting was in the fact that Soeharto had put his own name behind these general objectives. The donors did not react positively as a group until a later meeting in Paris in December—and not until the general objectives laid out in the September statement had been translated into policies and programs within the domestic system of rules and regulations that had grown up during the Guided Democracy years. This was accomplished quickly, however, as the process was already well advanced. On October 3, Soeharto announced a sweeping program of economic policy reforms. The aim was to decontrol the economy, balance the budget, begin to get inflation under control, and pave the way for foreign aid. Taken together, the measures constituted the single most significant statement of economic policy of what was to become the long Soeharto presidency. The form and language of the reforms were as notable as their substance. In place of "commands," the office of the president now issued detailed decrees. In place of revolutionary rhetoric, the language of government was now, if anything, given to understatement. The measures of October 3 reflected a change in the whole way of thinking about the government's role in the economy.

Decontrolling the Economy

With the October 3 decrees the government took a series of steps to decontrol the economy: it eliminated the existing system of multiple exchange rates and import-export licensing controls from a large portion of the country's international trade. The central bank announced it would sell foreign exchange at a rate to be fixed from week to week. On the same day, import licensing restrictions were greatly liberalized. In practice, importers were free to import what they wished, with the exception of certain specified luxury goods. Government departments and enterprises lost the privilege of importing at special exchange rates, with the exception of certain key commodities. At the same time export procedures were simplified, and most central and regional government authorities were expressly precluded from interfering in the export trade. The effect of these actions was to remove numerous distortions from the domestic price structure and to eliminate a major source of bureaucratic and political corruption.

The exceptions were significant. Selected government departments and enterprises were permitted to continue to import directly from foreign suppliers a number of "essential" commodities: in fact, they were assigned as sole importers of rice, fertilizer, newsprint, and diesel oil needed for electric power generation. The government faced a dilemma with regard to these "essential" commodities imported on its own account. If the import of these commodities were opened to the market and prices were set by market forces, the government would have had to increase substantially either their prices to the public or their subsidies in the state budget. If it exercised the first of these options, a further inflation of urban prices, and no doubt of student protests, would have followed. The government also would have faced a major problem in keeping the armed forces and the bureaucracy under control. In addition, it would have lost its leverage over the publishing industry, the only aspect of the mass media not under direct government management. On the other hand, if the government were to show the real cost of these subsidies in its budget, its pledge to the international community to balance its budget could not have been met. The decision was therefore made to avoid this dilemma by applying an artificial exchange rate to these selected imports, thus "hiding" their real cost in the public accounts. The decision reflected the government's continuing weakness at the time, as well as its caution. The panic of the previous December, when the government had taken radical action in regard to the currency, was not to be repeated.

Balancing the Budget

The Soeharto statement to the Tokyo meeting reported that between 1960 and 1965 the share of the net national product accruing to the government as revenue fell from 13 percent to 1.5 percent. This was an even more dramatic illustration of the collapse of the government's financial capacity than the decline through 1964, noted earlier. The extremity of the situation encouraged some government advisers to propose radical action. Even moderates among them believed that the government's only remaining choice was to withdraw, to get out of the economy as far as it could, at least for a time, and let market forces work their way. The government did not control enough of the economy to enable it to make much difference. As J. A. C. Mackie observed, the Indonesian economy by this time was, in reality, a thoroughly laissez-faire system anyway, despite all the talk to the contrary. ₁₆

On the revenue side, hopes frankly had to rest on a considerable increase from import duties. In the first quarter of 1966, 65 percent of tax revenue came from indirect taxes, mainly on imports. Some consideration was given to reforming tax administration, to collecting the substantial arrears that had accumulated, and to collecting more of the taxes that were falling due, mainly income and sales taxes from individuals and corporations. It was also believed that the rural sector had substantial unused taxable capacity, because inflation had reduced the land tax to nominal amounts. The political and administrative obstacles in the way of all such schemes were, however, formidable. The prospect for increased revenues from import duties rested on the hope of a larger volume of imports, and from much higher landed values at the new exchange rate. But an increase in the volume of imports depended on an increase of exports or of foreign aid, and both of these depended on ending the confrontation with Malaysia.

The Sultan had made clear in his April 12 statement that the government intended to inaugurate a program of austerity with regard to expenditures. Proposals had been made at seminars at the University of Indonesia for massive retrenchment of the civil service. In January the suggestion was that one out of every four government employees could be dismissed with no loss in efficiency; in May it was proposed that half of all government employees should be dismissed and all nonessential agencies abolished. Some agencies found that when all employees did show up for work, as they were now obliged to do, not enough chairs were available for all of them to sit on. But no alternate employment was available either; government employment, both civil and military, constituted a vast system of unemployment relief. Most secondary school graduates assumed, with some reason, that they would be employed by the government. Putting a cap on hiring would be difficult enough. Some agencies did reduce some costs by ordering excess employees not to report for work, thus saving at least on transport, and urging them to try to turn their secondary jobs into primary ones. All in all, however, given the political obstacles, large savings were not likely to be found in this direction. ₁₇

Work on the president's Special Projects was brought to a halt, and work was also suspended on most other development projects pending the formulation of a program of priority public works. Budget control was restored to the Ministry of Finance, and the Cabinet Presidium issued a decree restricting expenditures on the purchase of official vehicles and the like. But without cuts in subsidies or in government employment, the prospect of balancing the budget was nil—in the absence of foreign aid.

The government did rein in credit expansion sharply, which was politically easier to do as the business community was relatively small and unorganized for political action. The October policies included highly restrictive controls on bank credit: no credit was to be extended for imports except in special cases, credit for exports was placed under stricter control, no long-term loans were to be made, no overdrafts were permitted, no credit could be advanced to finance debts to the government, and no preference was to be given to state enterprises. These strictures were reinforced by high interest rates (6-9 percent per month) and requirements that banks maintain larger reserves. ₁₈

Foreign Debt and Foreign Aid

Balancing the state budget was clearly essential to bringing inflation under control. But most economists in Jakarta at the time did not believe this could be accomplished in less than several years. In fact, the inflation of 1966 was actually worse than that of 1965 and, although several budgets were formulated, each was rapidly overtaken by the continuing advance of prices. Meanwhile, the real economic situation, that is, the supply of food and clothing, had become critical.

Indonesia's foreign debt as of December 31, 1965, totaled $2.3 billion. Sixty percent of the total was owed to communist countries, and 70 percent of this, in turn, was owed to the Soviet Union. Most of this portion of the debt was for material that had been sought, principally for use by the air force and navy, for the West Irian campaign and, subsequently, for the campaign against Malaysia.

Much has been made of the role the International Monetary Fund played during the months that followed, and of the roles played by the U.S. and Japanese governments. Some Western academics, politicized by the American prosecution of the Vietnam War, were not prepared to think kindly of these institutions. One early study accused them of leading Indonesia into "debt slavery" by their actions in the latter part of 1966. ₁₉ Another contended that the events of this period resulted from a long-term American plot. ₂₀ But such explanations gave too much credit to foreign agencies, failed to give adequate attention to the development of thinking within Indonesia itself, and ignored the Indonesians' capacity for autonomous decision making.

Most Indonesian economists saw no alternative to seeking foreign assistance. Mohammed Sadli had argued as early as January 1966 that Indonesia was obliged to seek foreign help. Export earnings in 1966 were not expected to equal even the payments due that year on Sukarno's debts, he said, and inflation, as he had been arguing since 1963, had destroyed the whole fabric of domestic savings. Nor did anyone see an alternative to the country's looking to the West for the needed assistance. Neither Russia nor China was a potential source of emergency food supplies, and even in 1965 the communist states had provided only 25 percent of Indonesia's economic aid. In addition, relations with the Chinese were at this point all but broken, and the Russians, having been allied with the Indonesian air force and navy, were deeply distressed by the army's accession to power.

Still another consideration was that the United States, Japan, and the noncommunist nations of Western Europe were the principal markets for Indonesia's exports. If the Indonesian economy were ever to pay its way again, it would have to expand its trade ties with these markets. Even a major effort to direct exports to the communist countries in the early 1960s had met with little success, except for sales of rubber to China and the Soviet Union, and most of what the Chinese bought was resold on the world market. These sales were dwarfed not only by the sale of rubber but of other commodities as well to the United States, the Netherlands, West Germany, and Japan, and by exports of crude oil to Japan, Australia, and the United States.

The banning of the Communist party in March 1966 set the seal on a course of action from which Indonesia could not turn back; it had no place else to go but to the industrial democracies. The United States and Japan, for their part, were expected to rally to the assistance of an anticommunist Indonesian regime. In addition, the IMF was a natural ally. It had participated in working out the aborted stabilization plan of 1963. Many of the same officials were still in place in both the Indonesian government and the Fund, and quick action was anticipated. Things did not work out as quickly as the Indonesians expected.

The U.S. government was, by all accounts, pleased with the turn of events in Indonesia, but several factors inhibited a quick response. The upper echelons of the U.S. government were at the time heavily preoccupied with the course of events in Vietnam. Moreover, with the cost of American support to Vietnam rising sharply, Washington was of a strong disposition to avoid acquiring a large financial commitment to yet another Southeast Asian state. In addition, Indonesia was by now in default on its debts, and until this obstacle was removed U.S. law barred the country from receiving most forms of official American assistance.

The Japanese government found it equally difficult to take action. The Japanese had developed a close working relationship with Sukarno, involving Japanese veterans of the occupation of Indonesia, and Japanese business interests that had played a role in introducing Sukarno to his most recent wife, Ratna Dewi Sari, a former Japanese cabaret hostess. For some months after October 1, 1965, Dewi played an active role in trying to heal the breach between Sukarno and the army generals, and the Japanese ambassador in Jakarta continued to report that Sukarno was likely to survive the crisis. In addition, the Japanese government suffered the further limitation that it had had relatively few dealings with the Indonesian military. Yet Japan, more than any other external power, depended on Indonesia's natural resources. Japan was therefore among the first countries to recognize the Soeharto government, and the first to propose a consortium of Indonesia's international creditors. At the same time the Japanese were concerned to see the new government act on its promises, and might also have been reluctant to accept the American proposal to provide a third of the aid Indonesia needed. According to the testimony of Indonesian participants, they found the Japanese the most difficult to deal with of all their foreign creditors, and were uncertain right up to the last minute whether the Japanese would fall into line with the rest in Paris in December. ₂₁

The IMF, meanwhile, was not ideally suited to the task of providing a rapid or broad response to developments in Indonesia. Many outside the Fund saw it as rigid and slow-moving at the time. Also, while it could play a role in the rescheduling of Indonesia's debt, it was not in the business of providing economic aid. That was the domain of the World Bank, and Indonesia had lost its membership in the Bank when it pulled out of the United Nations. On the other hand, the IMF had helped work out the monetary stabilization program with the Indonesians as recently as 1963. The head of the Asia department of the IMF, the highly regarded Burmese economist Tun Tin, had become acquainted with Sumitro at the Asia-Africa Conference in Bandung in 1955, and he was disposed to think well of Sumitro's former students who populated the economic agencies of the government, as well as the economics faculty at the university. The individual he chose to represent the IMF in Jakarta was Kemal Sieber, a Turkish economist who was one of the Fund's ablest men in the field, and a man who was to champion the Indonesian case within his own organization and among officials of the creditor governments through the next several years.

It was this constellation of forces, then, that led to the ensuing events. In April Adam Malik went to New York to announce that Indonesia would resume its seat in the United Nations General Assembly. Shortly thereafter, the United States offered an emergency credit of $8.2 million for the purchase of rice, one of the few actions it was in a legal position to take. In May the Sultan went to Tokyo and obtained an emergency credit of $30 million from the Japanese. That same month Adam Malik met in Bangkok with Tun Abdul Razak of Malaysia and announced that Indonesia's "confrontation" would be brought to an end. In September the creditor nations, meeting in Tokyo, gave Indonesia an eighteen-month moratorium on debt payments. And in early October the Indonesian government announced a sweeping set of new economic policies and regulations designed to give force to its earlier general pronouncements.

In December the Western creditors met again with Indonesian representatives, this time in Paris, and now they were prepared to act more positively. The creditors agreed to a moratorium until 1971 on payments of interest and principal on long-term Indonesian debts incurred before June 1966. They also set a target of $200 million in new assistance for 1967. Their assistance to Indonesia was to rise steadily from this point on; in the three years from 1967 through 1969 foreign aid accounted for 28 percent of the Indonesian government's total spending, including all its development spending and, at first, even a portion of its routine expenditures. In the same period, although domestic tax efforts almost doubled the share of taxes in gross domestic product (GDP), the level remained well below the share in 1960. Inflation was brought under control by the end of 1968, and over the subsequent three years was never greater than 10 percent. ₂₂

It was hardly surprising that any of the principal actors in these events behaved as they did. Even in Jakarta there was a lack of effective opposition. The 1963 stabilization program had been extremely unpopular, and given the alignment of political forces in the Indonesian capital at the time, it is unlikely that the program would have endured for long even without the confrontation campaign and the resulting loss of Western support. Most Indonesian political leaders in 1963 were not willing to give up the patronage that growing government budgets made possible. Nor did they believe that monetary austerity would lead to economic recovery; many feared it would lead the country into deeper recession, and continued to hope that government spending would promote a return to increased productivity. But their confidence was greatly shaken by mid-1966, and their voices were muted.

Many members of the elite, interviewed in the late 1960s, expressed unhappiness with the country's position of international dependency. Many felt the independence of Indonesia's foreign policy was unduly circumscribed by the need to maintain the good will of the United States, Japan, and the West European states. A small number took issue with specific policy positions, especially with the depth and duration of the austerity program. But there was no widespread rejection of the government economic program as a whole. A large majority supported it. ₂₃

The reservations were, however, a harbinger of the storm to come. Soedjatmoko explained the problem:

There is in Indonesia . . . a continuing and deep suspicion towards outside interference, infiltration, and subversion directed both towards East and West, reinforcing a xenophobic tendency already inherent in it, with the result that political change—even desired change—is rejected if the process of bringing about such change involves overt or covert foreign participation.

There is also another set of attitudes, not generally shared but sufficiently widespread to warrant our attention, namely the feeling that, "even now after the communists have been removed as an effective political force, the imperialists are not really willing to help us to develop our economy because of their fear of eventual competition from the new nations." Linked with this is the feeling that "we will remain poor as long as imperialism exists. We will therefore have to fight imperialism before we can properly tackle our problem of poverty."

The prevalence of these attitudes suggests profound fears and suspicions, as well as the deep-seated need for self-assurance and self-assertion. . . . It would be denying some essential characteristics of Indonesian nationalism to say that Sukarno's foreign policy until its last few years was not widely supported in the country. ₂₄

The University Economists

The university economists' involvement in national policy was not unique to Indonesia. To some extent it was a global phenomenon, encouraged in part by the demands of dealing with foreign assistance agencies, including those of the United States, Japan, and the West European states, and such intergovernmental institutions as the IMF, the World Bank, and the Asian Development Bank. But this deference to technical expertise in the governments of the new states also reflected a change in leadership within them: the solidarity-makers of the independence period had given way to a successor generation of leaders who sought legitimacy in their ability to promote economic development.

The change was particularly marked among the noncommunist states of Southeast Asia. Gunnar Myrdal, in decrying the political incapacity of the governments of the region in the mid-1960s, had witnessed the last years of an era. By the late 1960s or early 1970s, every government of Southeast Asia was authoritarian to some degree, and economic planning agencies were playing significant roles in most of them. Individuals with technical expertise also were found in increasing numbers in agencies of these same governments before the decade was out. The number of Western doctorates even among cabinet officers became striking, often far surpassing their presence in the cabinets of the Western countries themselves. The new breed spawned a new word, technocrat, and the word entered several of the national languages of the region. ₂₅

The Indonesian case was remarkable, nevertheless, for two elements that tended to set it apart from the rest. First, the highly trained elite of Indonesia represented a much smaller proportion of the population than did its counterparts in the other countries of the region in 1966. This meant that their skills could not be distributed as widely in the political system, but could be made available only in a few select locations—inevitably at the very top. This circumstance reinforced the centralizing tendencies already inherent in the political culture, and was even more significant in a still largely illiterate society in which men of knowledge were shown great deference. (That Soeharto was able to surround himself with men of modern science not only increased his ability to control the surrounding environment from a technical point of view, but also added symbols of power to his person that carried considerable weight in the society.) Their small number also set the technocrats apart from the bulk of the bureaucracy, which continued to adhere to the same values it had held before the technocrats moved into the top of the system—"parachuted" in, as the phrase went. Thus, while the Indonesian technocrats could have a significant impact on broad policies—in the economic case, on monetary policies and on major allocations of resources—they could have little influence on the processes responsible for policy implementation—on contracts, licenses, promotions, profits, payoffs, and all those other events of microeconomy that are the stuff of daily economic life. ₂₆

The Indonesian economists also remained in public office far longer than their counterparts elsewhere in the region. This was partly a function of Soeharto's own long tenure. Yet, the stability of his relations with his initial five economic advisers—Sadli, Salim, Subroto, Wardhana, and Widjojo—was exceptional. All were to remain his personal advisers or members of his cabinet for many years. Widjojo was Minister of Planning and later Coordinating Minister for all economic affairs until 1983. Wardhana was Minister of Finance and replaced Widjojo as Coordinating Minister until 1988. Both were still full-time advisers to the government into the 1990s. Salim was still in the cabinet as Minister of State for Population and the Environment. Subroto filled several cabinet posts, including that of Minister of Mining until he became secretary general of OPEC in 1988. Sadli was head of foreign investment and then Minister of Mining until, in the wake of the Pertamina crisis in 1975, he took a post at the Chamber of Commerce and Industry. In addition, numerous other economists from the University of Indonesia followed the initial five into government over time, and while factions developed as their numbers grew, the cohesion of the group was, on the whole, remarkable.

If Soeharto and his army associates initially found common cause with the university economists in their shared sense of the need to break with the recent past, the relationship in fact went deeper. They also shared the view that the principal threat to the nation lay in its delayed economic and social development. And if foreign aid were to help make development possible, Soeharto needed the help of men such as these. He was quite innocent of international economic affairs at the time; according to one U.S. embassy official in 1966, it was doubtful that Soeharto even knew what the IMF was. ₂₇ Given the disparity in their backgrounds, it took considerable self-confidence on Soeharto's part to put himself in the hands of the university men as he did.

Over the longer term, the stability of the relationship between Soeharto and the economists appears to have been founded chiefly on the fact that they worked well together. Soeharto immersed himself in the details of economic management, seemed to have a good head for the work, and learned quickly. Over the years he seldom met with his cabinet as a whole, but many years, when resources were tight and choices were difficult, he met as often as weekly with his economic ministers, chairing the sessions himself, hearing the alternatives, taking copious notes, and summarizing the consensus at the end. From the economists' point of view, Soeharto exhibited those very qualities of rationality and consistency that Widjojo had described in 1963 as essential to the task of economic policy-making.

Relations between Soeharto and his economic advisers over time also owed something to the traditional political culture of Java. One of the economists, pressed to describe the working environment with Soeharto, recommended a reading of Benedict Anderson's essay on kingship in precolonial Java. ₂₈ Here the central government of Java is seen as an extension of the ruler's personal household; officials are granted their positions and the perquisites that go with them as personal favors; and tension invariably exists between the ruler's family and his officials of common origin who have risen to power on the basis of their ability and loyalty. At the same time, the traditional ethics applying to officials require them to work hard for the good of the state, to refrain from indulging personal motives, and to behave in a refined manner, meaning, among other things, to use polite and indirect language. Thus, one of the economists attributes Widjojo's long influence with Soeharto to his policy of avoiding public exposure; Widjojo's public statements since 1965 could probably be counted on the fingers of one hand. ₂₉ Thus, too, the publisher of one of the nation's leading news media suggested that Widjojo enjoyed elite support not so much for the rationality of his policies as for the "purity" of his language. ₃₀

By such means did the Indonesian economists, Widjojo and his associates, as much as any comparable group in the contemporary world, place the stamp of their ideas on a large national economy. The origins of the Indonesian economists, and their ideological orientations, are thus of unusual interest.

Professional Origins

The University of Indonesia was founded only in 1950 after independence was achieved. At the time, although Indonesia was then a nation of some 77 million people, only a relative handful of Indonesians had completed any study beyond secondary school. J. S. Furnivall, reviewing the educational situation in Southeast Asia in the last years before World War II, found there were 1,101 individuals in institutions of higher education in the Netherlands Indies in 1938 out of a population of 68.4 million. By comparison, there were 759 in Malaya out of a population of 3.4 million; 872 in Thailand out of a population of 14.9 million; and 10,340 in the Philippines out of a population of 16.2 million. ₃₁ The poverty of the Indonesians in terms of formal education stood in stark contrast to the relative wealth of their neighbors.

The Dutch colonial system had not reckoned with the needs of independence in the postcolonial era; indeed, independence was not foreseen at all. ₃₂ The tiny educated Indonesian elite provided much of the leadership, however, of the national independence movement and of the national government of Indonesia in its early years. Their small numbers assured influence to the individuals among them, but also contributed to their separation as a group from the bulk of the population. ₃₃

The few trained economists in this small elite were at odds with Sukarno almost from the beginning. Mohammad Hatta, who had studied economics at Rotterdam in the late 1920s, and who was the first vice president of Indonesia, resigned in 1956 because of his unbridgeable differences with the president. Sumitro Djojohadikusumo, who studied at Rotterdam in the 1930s, and was minister of trade and of finance in some of the first postindependence cabinets, joined the "outer island" rebellion in 1958. More than any others, these two—they were not alone, all the major parties had prominent intellectuals in their leadership—but they were among the few trained economists to serve in an Indonesian cabinet prior to 1966—represented the clash of the rationalist-administrative minds in the elite with the solidarity-makers of whom Sukarno was the unquestioned leader.

Hatta and Sumitro also were of major consequence in shaping the economic thought of Indonesia. ₃₄ Hatta is credited with being the author of Article 33 of the 1945 Constitution, which reads:

The economy shall be organized as a common endeavour based on the principle of the family.

Branches of production which are important for the state and which control the lives of large numbers of the people shall be controlled by the state.

The land and water and the natural resources contained therein shall be controlled by the state and utilized for the maximum prosperity of the people. ₃₅

Hatta saw socialism as being rooted in Islamic thought, he told George Kahim in 1949. He believed that a mixed economy was best suited to Indonesia, and for him that meant a large state-run sector, a substantial cooperative sector, primarily operating among the farming population, and a limited capitalist sector comprised of small business. ₃₆ He did not believe that more than a few hundred Indonesians had the education and experience to set up a firm, a limited liability company, or a trade association the way Europeans and Chinese did. The only way the people could become economically strong was through the cooperative movement. ₃₇ The background to this view of cooperatives was the picture he had formed of Indonesia's economy when he was a student in Europe: "At the top the economy was entirely in the hands of the whites. The economy in the middle was 90% in the hands of the Chinese. What was in the hands of the Indonesians was the small part. Everything that was small! It was obvious that all those small concerns could not possibly become strong by their own powers." ₃₈

Hatta was much influenced by the growth of the cooperative movement in Britain and Scandinavia. But he also reflected the values of the Islamic trading community of West Sumatra from which he came. He had no time for communism. And while he favored a strong government role in the economy, he also favored efforts to promote small-scale enterprises owned and operated by Indonesians—specifically, as he made clear, by non-Chinese Indonesians.

Sumitro was the son of a senior official in the rural administration of Java, and he wrote his own doctoral dissertation on problems of rural credit in Java. Politically he was a Social Democrat, and when he published an economics text in 1955 he argued that the underdeveloped nations were obliged to plan and manage their economic development. Entrepreneurs with capital and skills were too few within the societies themselves. Unless development was to be left to foreign economic interests altogether, the state had to take the lead in creating the necessary capital and skills. This did not mean, however, that the government had to be involved directly in the ownership and management of enterprises, although that might be desirable in some cases, such as public utilities. A government could stimulate the economy in many other ways for it to develop as the government desired. ₃₉

Indeed, as early as 1951, Sumitro had sponsored plans for extensive government intervention to strengthen indigenous industries. The aim was to make it possible for small Indonesian firms to produce substitutes for manufactured goods that were being imported, by giving them capital assistance and by restricting certain markets from foreign competition. (The program was undertaken after Sumitro was out of the cabinet, and the import-licensing element of the program was a disastrous failure. A later minister issued import licenses primarily as a means of financing the National Party, and the indigenous business community—rather than being helped—was seriously discredited.) ₄₀

If Hatta was a man of ideas, grounded in the socialist thinking of Europe in the 1920s, and somewhat romantic for the circumstances of postindependence Indonesia, Sumitro was a man of policy, well attuned to the prevailing sentiments of his profession in the wider world of the 1950s and 1960s, and with a sharp eye to the needs and possibilities of the moment. And Sumitro was to become the dominant ideological force for a later generation of Indonesian economists. He was not only more "modern," more pragmatic, than Hatta. He also was Javanese, and in a position to speak from the dominant center of Indonesian politics. In addition, he had an electric personality that attracted a large following of younger men.

The Faculty of Economics

Sumitro was early named to the leadership of a faculty, or school, of economics in Jakarta, and this was to be a powerful instrument for the development of Indonesian economic thought and policy. Sumitro's own ambition was to create an Asian version of the London School of Economics. It would conduct research, train students, and advise government and business; in short, it was to be a major influence in national affairs. Sumitro quickly attracted a number of unusually able students, and put together a makeshift teaching staff that included two visiting UN experts from the United States, Benjamin Higgins and Nathan Keyfitz, and a number of Dutch lecturers. Almost from the outset, however, he began to look for means to replace the Dutch in order to build the school on Anglo-American lines. ₄₁

Most of Sumitro's first students came from the families of officials in the former colonial administration. Most had attended Dutch-language secondary schools before the Japanese occupation. Many served in student military detachments during the anti-Dutch actions following the Japanese surrender. They joined the new Faculty of Economics with every expectation of playing significant national roles in the new era of independence. Indeed, many of them, while still pursuing their studies, were soon working in the national planning agency, under the leadership of Djuanda and Ali Boediardjo, two of the most prominent members of the country's central administration. ₄₂

Sumitro found support for the Faculty in 1955 with the arrival in Jakarta of Michael Harris as the resident representative of the Ford Foundation. Harris had had no formal education beyond high school. He began work as a CIO organizer, rose quickly in union ranks, acquired a wide circle of acquaintances among figures in the New Deal, and served in wartime economic posts in Washington. At the end of the war he was appointed director of the U.S. aid program in Sweden, and later was a senior member of the economic staff of John McCloy, U.S. high commissioner in Germany. In between these latter two appointments, he had been sent on a brief assignment to Indonesia. Harris and Sumitro apparently were already acquainted, either as a result of Sumitro's assignment in 1949 to Indonesia's unofficial republican "embassy" in Washington, or as a result of Harris's later brief assignment to Jakarta. In any case, they were kindred spirits. In a matter of months the University of California was drawn into the discussions, in part because students at Berkeley, since as early as 1950, had been raising funds to help the new universities of Indonesia, and in part because some members of the Berkeley faculty, such as Thomas Blaisdell, were well known to Harris from the war years in Washington. The Dutch contingent in the teaching staff of the Faculty of Economics was supplemented by the first visiting professors from the University of California in the middle of 1956. It was none too soon. In April of the following year, fleeing arrest, Sumitro joined the dissidents gathering in Sumatra. In December communist-affiliated labor unions "took over" all Dutch banks, plantations, and other enterprises, and in a matter of months most Dutch nationals left the country.

In 1958 the long-simmering discontent in the "outer islands" erupted in a full-fledged rebellion, and Sumitro accepted the position of Minister of Finance in the rebel government. When the rebellion collapsed, as it quickly did, Sumitro became a hunted man, not only as he fled through the jungles of Sumatra, but in the ensuing years across half a dozen countries. His former students in Jakarta were left vulnerable to attack from several quarters in the increasingly radical environment of Jakarta after 1958.

Yet, the young economists, most of whom at the time were in their late twenties and early thirties, were not without protection. Some of the most prestigious professors of the university, notably Djokosutono and Djuned Pusponegoro, who led the law and medical faculties, and who enjoyed the personal confidence of Sukarno, were resolute in their defense of their younger colleagues. Had it not been for these elder academic statesmen, the economics faculty may well have been disbanded before it even began to function as a corporate body. As it was, the dangers in the external environment caused the group to develop intense internal loyalties. One foreign visitor, writing in late 1964, described the young leadership group in the Faculty of Economics as "proud, resourceful, and self-reliant." ₄₃

The Heir Apparent

The heir apparent to Sumitro on his sudden departure from the scene was Widjojo Nitisastro, who was thirty years of age at the time and about to start his doctoral studies at the University of California. Widjojo came from a family of teachers, on both his father's and his mother's sides, and grew up in several district capitals in East Java. At the age of twenty he was commanding a student army unit in the fighting against the British in Surabaya. In the eyes of his commander of the time, he was a brave young man who was mindless of risk to himself. ₄₄ The leader of the student army, Mas Isman, later founded and led a politically powerful organization of student army veterans, Kosgoro, and appointed Widjojo its economic adviser.

In 1955, the year he graduated from the University of Indonesia, Widjojo engaged in a notable debate with a former prime minister, Wilopo, on the structure of the Indonesian economy. Wilopo was an intellectual among the leaders of the National Party; someone interested in the cooperative movement conceived the event, and Wilopo, as expected, argued the case for cooperatives. Widjojo, asked to respond, found this approach unduly concerned with the redistribution of income. If economic development was to be successful, he said, redistributing income could not be separated from increasing it. These were complementary aims; they were integrally related, and they had to be pursued concurrently. He also argued that the constitution did not have to be interpreted to mean that any particular form of ownership was to be preferred. The point of the constitution, he said, was that it established a clear role for the state in the economy. Thus, as Widjojo saw it, the constitution called for "an economic system based on the joint efforts of the entire community, with the objective of achieving a higher level of per capita income and an equitable distribution of income, with the state playing an active role in guiding and implementing economic development." In such a system, private enterprise was not at all incompatible. ₄₅

Widjojo and the other university economists also acquired a circle of acquaintances among the officer corps of the Indonesian army as a result of two training programs in which they were engaged as part-time teaching staff. Djokosutono, who doubled as dean of the economics faculty when Sumitro fled, had persuaded the army leadership of the desirability of training some of its younger officers in law and economics; he was the first director of the Academy of Military Law when it was established, and, in turn, named several economists of the university among its first faculty members. Graduates of the academy quickly found their way into senior staff positions; among them was Sudharmono, who later served as secretary to Soeharto's early cabinets, by the mid-1980s was head of the government's political party, and in 1988 was elected vice president.

Meanwhile, the economists also were engaged as part-time lecturers at the Army Staff and Command School in Bandung. The principal figure in the school from the late 1950s on was an officer by the name of Suwarto, who came from a middle-class family of officials, had been educated in a Dutch secondary school in Central Java, and had pronounced intellectual leanings. In 1958 Suwarto was charged with organizing the first year-long course at the school; he envisioned the "long course" as a vehicle for providing a wide-ranging education to the general officers of the future. Half the curriculum was to be concerned with nonmilitary subjects, and to teach them he arranged for the school to enter into formal agreements with the leading universities. Suwarto had gone to secondary school with Sadli, and so the tie with the Faculty of Economics was quickly established. Because transportation was poor, the Jakarta economists usually went to the school for several days at a time, staying over with the young colonels who were their students, and spending the evenings in long talks about the state of the country and its future.

As the early 1960s wore on the university economists were placed increasingly on the defensive by initiatives from the political Left. An effort was made by leftists to take over the national economic association. The Faculty leadership was pressured to add known leftists to the teaching staff. Students of the Faculty were recruited by the communist student organization to serve as campus provocateurs. By early 1965 junior members of the Faculty staff were scanning the communist press every day to alert Widjojo and the other senior members to any change in tactics that might affect them. By this same time the campus also had become a battleground of competing demonstrators as the principal student organizations, the Islamic Student Association, which was affiliated with the Islamic social organization Muhammadiyah, and the Indonesian Student Movement Center, an offshoot of the Communist party, organized shows of strength and disrupted each other's rallies.

Widjojo traveled to China and Eastern Europe in 1964 and 1965. He was not favorably impressed. A colleague later recalled:

What was going on in China was extremely important. China was in the midst of the "great leap forward," and authoritarianism was very strong. As far as we could see, development had come to a complete halt there. But remember that the whole orientation here at the time was toward Peking. There was a constant flow of delegations going there; it was a "must." Widjojo went to China with Djuned Poesponegoro in 1964, and he returned full of concern about the nature of the Chinese regime and the implications that had for us. This was the source of the references in our 1966 documents to "etatism." ₄₆

But if the university economists were not impressed with the regimes of China and Eastern Europe, neither were they adherents of a liberal ideology. Indeed, capitalism had no defenders whatsoever among the Indonesian political elite. One of the economists later reflected on this predisposition of his countrymen: "Nineteenth century images are strong. The United States is thought to be a libertarian economy in the nineteenth century sense, when of course it is highly regulated. People don't understand that competition is a means of promoting efficiency." ₄₇

Further Intellectual Orientations

What mattered principally in almost any discussion of the economy was the recent experience of Indonesia itself. Social solidarity was a major element in the national independence movement, and Sukarno had added the power of his personality to the ideal of equality. The economic policy statement drafted by Widjojo and his colleagues, and passed by the Provisional Consultative Assembly in July 1966, reflected these influences in rejecting "free-fight liberalism" on the grounds that it would lead inevitably to "the exploitation of man by man." What many Indonesians mainly had in mind, however, was not abstract theory but that Dutch capital had dominated the heights of their economy until only eight years earlier; and that much of the private sector that remained, other than agriculture, was still dominated by the Chinese.

One of the leading economists later recalled that ideology had had little to do with his and his colleagues' thinking in 1966: "The problem was: how to start the damn thing moving? . . . Ideological calculations just weren't there. The numbers were on the table." ₄₈

Indeed, the economists' political ideas were poorly developed. Like many other members of the Indonesian elite, they were deeply concerned about the growing strength of the Communist party. Moreover, the army contained men whom they knew and with whom they could talk. As choices narrowed, they worked more and more with the army. They were concerned about authoritarian government, but they seem to have given little thought about how it could be avoided. Political issues, properly speaking, seemed not to have a place in their thinking at all.

The economists also did not share the Indonesian nationalists' discomfort with foreign aid or foreign investment. Of course, they had more experience in living in Western countries than all but a handful of their fellow countrymen. In addition, their dealings with the West were conducted through the good offices of men trained in economics and finance like themselves, men who talked the same language they did. When Harvard University was recruited to provide economic advisers, the Indonesians invited the Harvard economists to share their government offices. When the World Bank appointed an unprecedented resident mission, and named Bernard Bell, a former Djuanda adviser, to head it, Bell and his group also were housed in the offices of the Planning Agency. Further, Bell followed Sieber in becoming an advocate for Indonesian interests and policies, and was all the more powerful because of his direct line of communication to Robert MacNamara, the Bank president.

The young Indonesian economists had, as this suggests, considerable confidence that mainstream Western economic thinking could be applied to Indonesia. Their years at Berkeley and other (largely) American universities also gave them great confidence in their professional ability to set the nation on the path to economic growth; this alone tended to set them apart from others, to bind them closely together as a kind of secular brotherhood, earning them the sobriquet "Berkeley mafia." They fully shared Sumitro's view of government as the source of plans, guidance, and direction for economic growth. They were much influenced by India's experience with community development, had done village studies themselves for the Indonesian planning agency in the 1950s, were in agreement that the government had to see agriculture as the base for growth in other sectors, and believed that greater incentives had to be given to agricultural producers. They were committed to population control; Widjojo's dissertation, in fact, was a demographic study that is now a classic in the field. ₄₉ The economists also were confident that other sectors of the population and economy could be more productive. This certainly included the export-producing populations of the "outer islands." It also included the Java-based community of manufacturers.

This last element set the Indonesian economists apart from some theorists. An influential element in Western thinking had been the "Orientalist" cast of mind of such scholars as J. H. Boeke, who had begun his own economic study of the Netherlands Indies in the late 1930s and completed the bulk of it in a German concentration camp in the early 1940s. Boeke adopted, with some modification, the view that the Indonesian economy was doomed to be indefinitely a "dual" economy, one in which a relatively small number of producers were "modern" or "Western" in their values, capitalist and entrepreneurial in their behavior, and part of a larger international system, while the great majority were trapped in a domestic system that was "traditional" or "oriental" in its values, precapitalist or "stagnant" in behavior, and operating within a domestic system that had no significant contact with the wider world. ₅₀ J. S. Furnivall, at work at the same time, argued that Western economic theory was of limited application in a tropical dependency such as the Netherlands Indies precisely because it did not address political and social aspects of the colonial situation. The basic problem, he argued, was that, in a colonial society, there was "no community as a whole." The purpose of policy thus should be "to integrate society and to organize social demand." ₅₁ Sadli, in a long critique published in 1957, rejected the Boeke view as one that seemed designed to justify the perpetuation of the colonial relationship. It might take more than one generation, Sadli said, but there was no reason why Indonesia could not develop an industrial sector in its economy, a larger middle class in its cities, and, along the lines suggested by Furnivall, provide greater linkages between the social elite and the mass of rural society. ₅₂

One aspect of this debate often went unstated, that the bulk of the larger urban traders and the small-scale private manufacturers were of Chinese or of mixed Chinese-Indonesian descent. All along Indonesian economic nationalism had had a strong element of racism, and in 1966 anti-Chinese sentiment was widespread. The university economists appear not to have shared this sentiment. The University of Indonesia was one of the few institutions of the postindependence establishment that provided an honored place for Chinese-Indonesians; the economics faculty, like the medical and law faculties, numbered Chinese-Indonesians among its leading figures, and in the conditions of the time these were not only professional colleagues, but also personal friends and political allies. One should not overstate the case, however. Few Chinese-Indonesian economists would follow their colleagues into government; even the economic agencies were largely the preserve of indigenous Indonesians. It was assumed, however, that Chinese-Indonesians would play a significant role in the private sector, in the new industrial sector that was to come, and in the middle class that was to grow in the cities. Exactly how this was to lead to greater social cohesion, however, was not clear.

These, then, were the strengths and weaknesses with which the economists entered the government. When the need for their economic expertise was great, as it was in the late 1960s and in other periods to come, they would be relatively immune from criticism. But when criticism did come, it would focus on those views that set them apart from others in the elite—views about foreigners, about the Chinese, and about the place of both in the economy.

---

Note 1: Myrdal, Asian Drama , pp. 65-67. Back.

Note 2: Feith, "Indonesia's Political Symbols," p. 92. For an extended assessment of the Guided Democracy period, see Feith, "Dynamics of Guided Democracy." Back.

Note 3: Feith and Castles, eds., Indonesian Political Thinking , pp. 392-94. Back.

Note 4: Nitisastro, "Analisa Ekonomi dan Perencanaan Pembangunan"; and Mohammad Sadli, "Economic Stabilization as an Essential Condition for Effective Economic Development," August 31, 1963, reproduced in part in Feith and Castles, eds., Indonesian Political Thinking , pp. 396-400. Back.

Note 5: Sadli, "Masalah Ekonomi-Moneter Kita Jang Strukturil." Back.

Note 6: 6. The extracts are from the English edition of Business News  (Jakarta, April 15, I966), and are reproduced in Arndt and Panglaykim, "Survey of Recent Developments." Back.

Note 7: Arndt, The Indonesian Economy , p. 3. Back.

Note 8: This section and the one following draw principally on the following sources: proceedings of a seminar held at the University of Indonesia from January 10-20, I966, The Leader, the Man and the Gun ; proceedings of a seminar held at the University of Indonesia from May 6-9, 1966, Kebangkitan Semangat '66: Mendjeladjah Tracee Baru(Jakarta: Jajasan Badan Penerbit, Fakultas Ekonomi Universitas Indonesia, 1966); Arndt, "Survey of Recent Developments"; Mackie, Indonesian Inflation ; Newman, Inflation in Indonesia ; and Mangkusuwondo, "Indonesia." Back.

Note 9: Subroto, "Menjusun Sendi-Sendi Ekonomi Berdasarkan Prinsip Ekonomi. Back.

Note 10: Sumiskum, "Konfrontasi dan Politik Luar Negeri Untuk Kepentingan Nasional." Back.

Note 11: Republic of Indonesia, Madjelis Permusjawaratan Rakjat Sementara, "Pembaharuan Kebidjaksanaan Landasan Ekonomi Keuangan dan Pembangunan. Back.

Note 12: Personal interview, May 26, 1983. Back.

Note 13: Personal interview, June 1988. Back.

Note 14: Personal interview, May 28, 1983. Back.

Note 15: Financial Times , September 22, 1966, cited in Arndt, "Survey of Recent Developments," pp. 3-4. Back.

Note 16: Mackie, Konfrontasi . Back.

Note 17: Hawkins, "Job Inflation in Indonesia." Back.

Note 18: Arndt, "Survey of Recent Developments." Back.

Note 19: Payer, "The International Monetary Fund." Back.

Note 20: Ransom, "Ford Country." Back.

Note 21: Nishihara, The Japanese and Sukarno's Indonesia , passim. On the last point, personal interviews, 1983 and 1989. Back.

Note 22: Gillis, "Episodes in Indonesian Economic Growth," p. 245. Back.

Note 23: Weinstein, Indonesian Foreign Policy . Back.

Note 24: Soedjatmoko, Indonesia: Problems and Opportunities and Indonesia and the World , p. 291. Back.

Note 25: On the comparative situation, see Milne, "Technocrats and Politics." Back.

Note 26: Gillis, "Episodes in Indonesian Economic Growth," pp. 242-43. Back.

Note 27: Personal interview, July 28, 1990. Back.

Note 28: Anderson, "The Idea of Power in Javanese Culture," pp. 33-43. Back.

Note 29: Personal interview, August 19, 1989. Back.

Note 30: Personal interview,August 14, 1989. Back.

Note 31: Furnivall, Educational Progress , p. 111. Back.

Note 32: See, for example, Harry Benda, "The Pattern of Administrative Reforms," Journal of Asian Studies , pp. 589-605. Back.

Note 33: Kahin, Nationalism and Revolution in Indonesia , pp. 37-63. Back.

Note 34: For a general introduction, see Rice, "Origins of Economic Ideas," pp. 141—53. Back.

Note 35: Translation by the author. Back.

Note 36: Kahin, "In Memoriam: Mohammad Hatta," pp. 113-19. Back.

Note 37: Hatta, The Co-operative Movement , pp. 8, 31. Back.

Note 38: Hatta, Bung Hatta 's Answers , p . 84. Back.

Note 39: Djojohadikusumo, Ekonomi Pembangunan , pp. 117ff. Back.

Note 40: For a history of economic policy to 1957, and a review of other analyses of economic policy during the period, see Glassburner, "Economic Policy Making in Indonesia." A telling fictional account of the political corruption that destroyed Sumitro's import-licensing scheme appears in Lubis, Twilight in Djakarta . Back.

Note 41: A history of the Faculty of Economics of the University of Indonesia has yet to be written. A valuable contribution can be found in Dye, "The Jakarta Faculty of Economics." Back.

Note 42: The origins and views of the younger economists are treated in considerable detail in MacDougall, "Technocrats as Modernizers," and in the same author's "The Technocrat's Ideology of Modernity." Back.

Note 43: Dye, "The Jakarta Faculty of Economics," p. 19. Back.

Note 44: Apa & Siapa: sejumlah orang Indonesia , 1983-84 (Jakarta: Grafiti Pers, 1984), p. 577. Back.

Note 45: Nitisastro, Population Trends , pp. 383-84. Back.

Note 46: Personal interview, June 8, 1983. Back.

Note 47: Personal interview, June 4, 1983. Back.

Note 48: Personal interview, June 8, 1983. Back.

Note 49: Nitisastro, Population Trends , pp. 383-84. Back.

Note 50: Boeke, Structure of Netherlands Indian Economy , and Evolution of the Netherlands Indies Economy . Back.

Note 51: Furnivall, Netherlands India, pp. 462-63. Back.

Note 52: Sadli, "Reflections on Boeke's Theory of Dualistic Economies," pp. 99-123. Back.