Questioning Suharto’s Economic Achievements

Following Suharto’s death, the public opinion is divided between those who praise Suharto as a ‘hero’ and others who see him as a ‘villain’. Nevertheless, generally both sides agree that Indonesian economy during Suharto’s reign was a success story.

Is it true that the ‘smiling general’ was successful in developing Indonesia’s economy? A mere observation on economic growth during the first-half of his time in power might give ‘yes’ as an answer. Yet, if we honestly observe the country’s history of economic development, we can get a different answer.


The Beginning of the “New Order” Regime

The power shift from Sukarno to Suharto is a change of Indonesia’s economic direction from an independent position towards global capitalism (“Berdikari”, Berdiri di Atas Kaki Sendiri [stand on our own feet]) to fully enter and support western capitalism.

Soon after he gained power, Suharto, supported by American trained economists, declared a new direction for Indonesia’s political-economy that is based on economic growth through foreign investments.

Winters (1996) notes how Indonesia’s economy was carved up, sector by sector, through closed negotiations between the foreign investors and the Indonesian government officials. The result was spectacular. The Freeport Company gained a mountain of copper in West Papua, an American and European consortium got West Papua’s nickel, the giant Alcoa company obtained the biggest proportion of Indonesia’s bauxite, and a group of American, Japanese and French companies acquired the tropical forests of Sumatra, West Papua and Kalimantan.

The meeting also marked the beginning of Indonesia’s economic development, which was subsequently followed by foreign control on Indonesia’s national natural resources that were protected during the Sukarno’s administration.

Industrialisation

The next phase of Indonesia’s economic development is industrialisation. Protectionism, which was the dominant school of thought at the time, was implemented in the beginning of the country’s industrialisation. Facilities were given to various sectors to defend them from unequal global competition. This is, of course, not a wrong strategy.

However, the implementation was not fully based on profitability and comparative advantage to build a strong industrial foundation for the country. Protection and facilities were granted to benefit Suharto’s cronies and later his family and children (for example, remember the ‘Mobnas [national car] project’ granted to Tommy Suharto).

As a result, protections were given to unprofitable sectors as long as they can serve the interests of the family. People without true entrepreneurship were given facilities and Indonesia’s industry became inefficient and the aims of protectionist policies to develop the country’s industrial foundation were consequently not fulfilled.

The industrialisation phase also instigated an economic system that nowadays is dubbed as ‘crony-capitalism’. The table below shows that almost all major industries; cement, automotive, agri-business, wood, property, banking, etc., were owned by Suharto’s cronies and families.



Liberalisation and Crisis

The table above also illustrates the inter-linkages between banks and industrial sectors in each group. Instead of functioning as financial intermediary, the banks practically were the cronies’ cash-cow. Public funds were used for financial support of businesses which belonged in the same group.

The unhealthy financial practices, along with financial liberalisation undertaken at the time, subsequently led to a demise of Indonesian economy, and also the Suharto regime, during the 1997 monetary crisis.

The break down of the banking sector subsequently initiated public distrust when 16 banks were closed down altogether on November 1, 1997. Later, the banking collapse also led to bankruptcy of the industrial sectors that the banks previously supported. At this point, the ‘monetary crisis’ has been transformed to an economic crisis and later developed to be multi-dimensional socio-political crises.

Impacts

It is the multi-dimensional crises that we are still suffering up to date. Therefore, the view which says that “Suharto’s time is better than now” is not consistent with the history of Indonesian economic development.

The current sunset of Indonesia’s industry is the result of the flimsy foundation that was built during Suharto’s reign. The ‘colonialism’ of Indonesia’s natural resources is also the impact of Suharto’s economic policy. The current problems in the banking sector are still the continuing effect of the sector’s collapse during the monetary crisis. We can still find many today’s problems that are rooted in flawed policies in Suharto’s time.

Having said this, it does not mean that the current administration can be released from its responsibility. The biggest mistake of post-Suharto governments is the inability to make a clear cut from Suharto’s policies and political-economic system, which have caused problems for the people until this moment. It is the responsibility that the current government must answer.

This article is a shorter version of my op-ed published in Bahasa Indonesia in a newspaper.

economy