From Inward Looking to Outward Looking: Dynamics of

Indonesian Economic Policy during the New Order Era

Femmy Roeslan1, Susanto Zuhdi2

Department of Economics, Faculty of Economics and Business, History Department,

Faculty of Humanities, Universitas Indonesia, Depok, 16424, Indonesia1,
History Department, Faculty of Humanities, Universitas Indonesia,
Depok, 16424, Indonesia2
[email protected] 1, [email protected]

Abstract
The period of the New Order, which held power for more than 32 years, was the longest
government regime in the history of post-independence Indonesia. Rapid economic progress
in this era allowed Indonesia to shift from a group of low-income countries in the mid-1960s
to middle-income groups in the early 1990s. During the New Order, there were two oil
booms, namely in 1974 and in the 1979/80 periods. Blessing of this oil had accelerated
Indonesia's economic growth. Previous studies showed that the New Order had brought
about changes in fundamental economic thought, from relatively closed and nationalist to
more open. This study aims to examine the dynamics of changes in industrialization
strategies during the New Order. Furthermore, it will be discussed why there is a change in
strategy from inward-looking to outward-looking and how these changes can arise. This
study will exercise a multi-disciplinary approach, namely, economic development and
history.

Keywords: economic development, government intervention, inward-looking, outward-

looking, oil boom, new order.

INTRODUCTION

Within 30 years of the New Order government has succeeded carry out an extremely
rapid economic recovery, which was manifested by the ability to reduce the inflation rate
significantly and was followed by a high rate of economic growth. Hill (1996) and Booth
(2016) mentioned Indonesia in the period 1966-1968 as one of the success stories in Asia in
controlling inflation throughout the 20th century [1,2]. This brilliant economic achievement
is inseparable from fundamental economic policy changes, from a guided and nationalist
economic climate switched into a more open economic environment in which the private
sector is given more extensive opportunities. The achievements of the New Order
government cannot be separated from the industrialization process that has been pursued,
which is full of dynamics. At the beginning of the new order period, the government took an
inward-looking oriented towards the import substitution industry. The fall of various
commodity prices, including oil and gas, in the early 1980s, made the government had to turn
to an outward-looking oriented to the export promotion industry.
A team of economic advisers strengthened the New Order government with the main
task of developing a realistic and comprehensive economic stabilization program. The rise of
the Indonesian economy at the beginning of the new order was inseparable from the role of

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the technocrats known as the Berkeley Mafia. Indonesia is an example of a developing
country where the relationship between market-oriented technocrats and international
institutions (such as the IMF and the WB) has been very close in the policy-making process.
For many western economists, the new government represented a victory of economics over
politics [3].
This paper discusses why there is a change in strategy inward-looking to outward-
looking and how these changes can occur. In detail, this paper tries to discuss economic
thinking that was applied from the beginning of the new order to the period before pre-
deregulation, namely in the first half of the New Order government (1966-1982). The choice
of the period is based on the consideration that research on the New Order in Indonesia is a
fascinating field of study to work. The New Order was a period in which Indonesia's
economic growth was recognized as one of the miracles and led Indonesia to become one of
the candidates for the "Asian tiger" [4]. The rapid economic progress in this era allowed
Indonesia to shift from a group of low-income countries in the mid-1960s to the middle-
income groups in the early 1990s. This research will use a multi-disciplinary approach,
namely economic development, and history.

DISCUSSION

Indonesia's economic transformation: the implementation of inward-looking policies

Deteriorating economic conditions marked the New Order government. This situation
has encouraged young activists and economists to contribute ideas to improve chronic
economic conditions. This activity began with a Seminar at the Faculty of Economics,
University of Indonesia in January 1966. It then continued with a Symposium Exploring New
Tracee at the University of Indonesia on May 6-9, 1966 [5]. The symposium concluded that
the previous government's main failure was not being able to solve economic problems using
principles rational and realistic economy, but rather refers to political jargon. The results of
the symposium were then carried out to the Second Seminar of the Army, held in Bandung on
August 25, 1966. At this seminar, a team of economists from the University of Indonesia1
Gave various formulas as well as the methods to Army leaders to deal with a severe
Indonesia's economic problems [6].
The New Order government has created changes in fundamental economic thinking,
from the relatively guided and nationalist2 to be more open, which was marked by a change
in the foreign exchange rate system to encourage international trade activities and the
enactment of the 1967 Foreign Investment Law (UU PMA), Domestic Investment Law (UU
PMDN) in 1968. Previously the development of the industrial sector was the focus and
limited to state-owned companies [7]. With the issuance of the PMA and PMDN Laws, this
was one of the efforts of the New Order government to attract private funds to participate
more broadly in development activities. With these two laws, foreign and domestic investors
are allowed to invest in various production activities. With the enactment of the PMA Law, it
has succeeded in attracting foreign capital to Indonesia.
The commitment of the New Order government to improve the economic conditions
that were in ruins was realized by giving interest to the development of the industrial sector

1
General Soeharto then appointed them to become his economic advisers. The Economic Expert Team of the President of
the Republic of Indonesia consists of Widjojo Nitisastro, Subroto, Ali Wardhana, Emil Salim, and Mohammad Sadli.
2
. However, history has shown that the Indonesian economy has been open naturally since centuries ago. Because of its
geographical location with abundant natural resources. Long before the arrival of Europeans, the Indonesian population had
been involved in international trade with traders from India, Arabia, China, and mainland Southeast Asia. Indonesia only
developed as a modern-open economy in 1830 together with the commencement of cultuurestelsel (cultivation system).

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(manufacturing). Modern industrialization in Indonesia had begun since the New Order
period, especially Repelita I. During the 1970s and 1980s, Indonesia's modern industrial
sector had shown rapid development, even faster than Japan and Hong Kong and the three
ASEAN countries, Thailand, Philippines, and Malaysia [4]. The rapid growth of the modern
industrial sector since 1967 was closely related to the paradigm changes described above,
among others, trade liberalization and the enactment of the PMA Law and Domestic Direct
Investment Law. Another critical factor is the increase in the utilization of the production
capacity of the previous government. During the guided economy, the utilization of industrial
capacity was still underutilized due to the absence of capital, lack of raw materials, and spare
parts. This situation was exacerbated by political uncertainty. However, the growth rate of the
modern industrial sector experienced a slight slowdown after 1975. This deterioration was
indirectly related to the debt crisis experienced by Pertamina and domestic inflationary
pressures that have occurred since 1973.
The New Order's economic policies were formulated realistically with the criteria of
rationality. The economic policy was compiled by a technocrat group (chaired by Widjojo
Nitisastro), which dominated by Bappenas. This group became known as economists who
were pro-Western economists. A research conducted by Mari Pangestu showed that during
the period 1966-1982, in fact, the industrialization strategy adopted was import substitution
policy, with an exceptionally protective by exercising tariff as the main instrument [7]. Table
1 summarized the chronology of the direction of economic policy in Indonesia during the
period 1966-1982.

Table 1. Changes in Policy Direction and Economic Condition in Indonesia Economic setting 1967-1972
Economic setting 1967-1972 1973-1981
Rehabilitation and Stabilization Oil Boom
GDP (economic growth) High (10%) Moderate (7-8%)
Industry Policies Import substitution –SI Policy Continuing SI Policy (for intermediate
(for final goods group) and capital goods)
Trade Policies Protection Policy Begins Improvement of Protection Policy (bill as
the main instrument)
Source: Pangestu in Basri, 1994 (Tabel 3), p. 248. [8]

Although the technocrats were accused as supporters of the free market, however, these
findings rejected the notion that during the early period of the New Order was the most
liberal period during Suharto regime. As shown in Table 1, at the beginning of the New Order
government technocrats preferred import substitution policies, to provide wide protection for
industrial sectors, as well as a protective trade policy. Both of these policies showed that
technocrats decided to apply inward-looking industrial strategies. The choice of policy aims
to protect domestic industries that are considered unable to compete in the international
market. These various economic policies implemented at the beginning of the New Order
period required the importance of state intervention.
At the end of the 1960s, technocrats based in Bappenas compiled a development plan
(strategy), which was then devoted to GBHN (Outlines of State Policy).3 This GBHN was
described into the Five-Year Development Plan, and every development policy must be based
on the development trilogy.4 According to Kunio (1990), the main problem was not the issue

3
GBHN was determined through Tap No. IV / MPR / 1973.
4
According to Sumitro Djojohadikusumo [9], the development trilogy contains three elements which include three
interrelated dimensions, namely economic growth, equity and national stability. If in Repelita I and II the emphasis of
development is more on the dimension of growth, then since Repelita III development has focused more on the equity
dimension by the Development Trilogy. The plan compiled by technocrats was an indicative long-term plan.

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of intervention versus non-intervention [10]. In many cases in Southeast Asia, responses had
indeed been creating inefficiencies and renters. The low quality of government intervention
and its poor implementation would undoubtedly lead to inefficiencies and intensify rent-
seeking. Despite the period of rehabilitation and stabilization, 1967-72, the Indonesian
economy showed remarkable progress, with growth in the gross domestic product (GDP)
averaging 10.2% per year and growth in per capita income, on average 6.5% per year. This
remarkable economic achievement continued during the oil boom period (1972-80) [11].
From inward-looking to outward-looking: a blessing from the oil boom
During the 1970s, Indonesia obtained a "blessing" that had never been predicted before,
namely oil boom. The increase in petroleum prices had a significant impact on the revenue
post in the APBN (national budget), and this provided opportunities and hopes for the
government at that time to encourage investment in various sectors. During the New Order
government, there were two oil booms, namely in 1974 and in the 1979/80 periods. It was
undeniable that the blessing of oil has accelerated Indonesia's economic growth. During the
oil boom period, Indonesia's development was marked by the implementation of import
substitution industrialization strategies, modernization of the agricultural food sector, and
exploitation of natural resources. This condition, then, caused the emergence to
conglomerates, which in turn became cronies of the New Order government.
Countries that are given abundant natural resource gifts are often trapped in extractive,
distortive, and short-term natural resource management models. During the oil boom period,
the growth rate of GDP and GDP per capita, in fact, experienced a slight slowdown. This
decline in growth rates was recorded almost in all sectors, except for the transportation sector
[11]. Some parties stated that the symptoms of the dutch disease were indeed experienced by
Indonesia if they observed a shift in the composition of GDP and exports during the 1970s.
However, the authors argue that Indonesia was able to manage the blessings of oil wisely.
The government has allocated state revenues for the construction of agriculture and
infrastructure sectors.
The oil boom has triggered changes in industrial policy. Before the oil boom, industrial
policy was always associated with technocrats, while after the oil boom, industrial policy was
associated with technologists. Actually, there is nothing wrong with this change. As
explained by Kunio [10], the industrialization strategies did require capital as well as
technological support, considering that technology is one of the main factors in the process of
industrialization and economic development. In some cases in Asia and Southeast Asia,
increasing technological capabilities was an effort to reduce dependence on foreign capital.5
At the end of the second5 oil, boom forced the government to shift import substitution
strategies to export promotion strategies. After almost two decades of implementing an
import substitution-oriented industrialization strategy, it was realized that this strategy had
not succeeded in building an industrial structure that had international competitiveness. The
oil boom is not entirely a "blessing", but is a unique challenge that must be addressed
carefully and thoroughly.
The strategies of industrialization (import substitution and export promotion) adopted
by the New Order government was very closely related to the issue of capitalism. Britain and
Western European countries are examples of countries that provide support for the
application of science and technological development. In fact, in Indonesia, excessive
government interference had made capitalism became less dynamic, thus disrupting the
5
In Indonesia, the struggle of B.J. Habibie to improve science and technology in Indonesia could be claimed quite
successful. B.J. Habibie was appointed as State Minister for Research and Technology at the third Development Cabinet
cum as Head of Agency for Assessment and Application of Technology (BPPT) since March 1978. Thanks to his proximity
to President Soeharto, B.J. Habibie had access to obtain more funds than his predecessor, Sumitro Djojohadikusumo.

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principle of free competition and intensifying the emergence of rent-seekers among
government bureaucrats. This condition stimulated the economic power of Chinese
businessmen by using bureaucrat connections to seek special facilities. This excessive
interference interferes with the principle of free competition and the deadly dynamics of
capitalism itself. Robison (1986) explained further that the phenomenon of capitalism in
Indonesia was only a reconstruction of the existing capitalist class and consolidated the
existing class structure [12]. On the one hand, Chinese capitalists were needed to run some
businesses which failed managed efficiently by the government. At the same time, President
Suharto also provided opportunities for retired military officers to do business [10].6 In
carrying out its business, some of these bureaucratic capitalists also collaborated with
Chinese capitalists. He [10] concluded that capitalism that took place in Southeast Asian
countries, including Indonesia, was quasi (ersatz).7 First, capital development in Southeast
Asia is only limited to the tertiary sector, namely in the field of banking and financial
services. With the level of technology still low, capitalism in the industrial sector is only
comprador capitalism. Second, capitalism in Southeast Asia is dominated by rent-seekers
(which can be divided into family members of the President, bureaucrat capitalists, crony
capitalists and other capitalists who connect with the government) and speculators. Third,
capitalism in Southeast Asian countries is dominated by Chinese (and foreign) capitalists.

CONCLUSION

It is very difficult to conclude that the New Order adopted a free market economy
system, because the transformation of Indonesia into a liberal market economy, was
ambiguous and uncertain. Several things are taken into consideration. First, government
intervention recorded was still robust in the development process since the beginning of the
New Order. Government intervention was carried out through State-Owned Enterprises
(BUMN), using direct funds from the state budget and credit from state banks to participate
in building the industrial sector.
Furthermore, the assumption that technocrats as free-market-oriented and open-minded
to western economists do not seem to fit reality, at least during the period of this study (1966-
1982). Although there was good cooperation between technocrats and IBRD and the IMF at
the beginning of the New Order, in reality, economic policies at that time could not be
categorized as fully liberal. The various explanations illustrated that different government
policies in the first half of the New Order tend to be more protective. The rise of rent-seeking
practices and the emergence of speculators is also an indication that government intervention
is excessive. Excessive government interference has made capitalism not dynamic, thus
disrupting the principle of free competition and the contaminated dynamics of capitalism
itself. Thus, the authors conclude that the free market economic system was indeed still not
fully applied at that time. Conditions after the end of the oil boom will certainly provide
another story in the New Order regime.

6
Yoshihara Kunio called this group a bureaucrat capitalist. Some of them are Ibnu Sutowo, General Soemitro, Andi Sose.
Meanwhile the list of big Chinese capitalists can be read in [9], Appendix 3.
7
Ersatz comes from German, which means substitution or substitute. In English it is interpreted as a substitute for the
inferior (Ibid., p. Xiii)

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