The political economy of industrialization in the Indonesian new order (1966 - 1993)

Abstract

Indonesia's political system has restricted power and participation to a small portion of the population who are high-ranking officers in the army and the bureaucracy. The ideology which is embraced by the military caused them to curtail societal countervailing power in order to create an effective instrument for dirigisrne economic policy. The establishment of an autonomous state has been achieved through developing fiscal autonomy through external resources (foreign loans, aid ) and natural resource exploitation (especially oil and gas). Social control in Indonesia relies heavily on coercion. Coercion is frequently the starting point for control exercised through the bureaucracy. This thesis is an effort to understand the nature of the business-state relationship as well as the role of the state in the industrialization process using an approach which was developed by Neo-Marxists such as Fred Block.

Strategic industrial policy forms a central component of the state. Economic nationalism in Indonesia took the form of state support for industrialization programs and intolerance for foreign ownership of capital. This was possible due to the oil booms in the 1970s. The economic nationalism was translated into high trade barriers to induce the development of a manufacturing sector, and foreign investment laws which required the participation of indigenous businessmen. State intervention involved the creation of price distortions so that economic activity was directed towards greater investment in particular industries. Import-substituting industrialization in Indonesia has served both economic nationalism as well as ensuring the development of strong political supporters in the bureaucracy (both civilian and military). This policy has resulted in the formation of a capitalist class.

Therefore, in almost three decades in power, the New Order has been instrumental in both capital accumulation and class formation.

The nature of the business-state relationship is characterized by the extremely dependent business class upon the state. The influence of business on policy formation was minimal. Businessmen only react defensively to public policy in a covert and specific manners. As a result, the effect was felt in the implementation stage rather than in the formulation stage of policy. The prevailing forms of the instrumental influence of business were the outright giving bribes, and more importantly for big business enterprises, the creation of clientelistic ties with military-bureaucratic leaders. The drop in oil prices in the 1980s forced the state to take corrective measures towards the high-cost economy. The structural adjustment was carried out slowly and reluctantly in order to avoid damaging the existing power structure too dramatically. There has been a tendency towards loosening state control over the economy in recent years. Indonesia has already shifted its industrialization strategy which was inward-oriented in nature towards an outward-oriented industrialization.

However, economic reforms have not yet changed the nature of the business-state relationship. The fact that capitalism in Indonesia has not yet fully developed explains this partially. At least in the near future, the state will still dominate the economy.