Economic policies of the Habibie presidency: a retrospective

Abstract

B.J. Habibie ascended to the presidency in the midst of a severe economic crisis, and with a reputation as an economic nationalist rather than reformer. Nevertheless, Habibie had the mantle of reformer thrust upon him, and important steps toward economic reform were taken during his 1998–99 presidency. Among these were reforms of domestic and foreign trade policies, the development of anti-monopoly and consumer protection laws, and the decentralisation of fiscal and regulatory authority. Through strict adherence to monetary discipline, moreover, Habibie accomplished a macroeconomic stabilisation that had eluded Soeharto in his last months as president. Other changes in economic policies and practices under Habibie, notably a populist program to distribute government largesse to cooperatives and small business and the extraction of election campaign funds from banks dependent on state authority, were steps in the wrong direction, if economic efficiency and good governance were among the goals.

Notes

¹Ali Wardhana, ‘Structural adjustment in Indonesia: export and the “high-cost” economy’, speech to the 24th Conference of Southeast Asian Central Bank Governors, Bangkok, 25 January 1989, quoted by Borsuk (1999: 165) and originally by Bresnan (1993: 260).

²Schwarz draws the Soeharto quote from Waldman, Pura and Bruachli (1998).

³Aware of his own credibility problems, Habibie privately insisted that his first speech to the nation as president be checked by Indonesia's most respected economic technocrat, Widjojo Nitisastro (Habibie 2006: 72).

⁴President Soeharto had asked for IMF assistance in the last months of 1997, and a comprehensive IMF program had been put in place, but the economy had not stabilised by the time Habibie ascended to the presidency.

⁵From 1997 to 1999 I was an economic adviser to the Ministry of Industry and Trade in Jakarta, sponsored by the US Agency for International Development (USAID), and worked in all of these policy areas.

⁶Golkar is a contraction of ‘golongan karya’ or ‘functional groups’. The Golkar Party was the successor to the Golkar organisation that Soeharto had used for years as his political machine. The Bank Bali scandal is discussed later in this paper.

⁷Hill (2000) offers a more complete and nuanced analysis of the causes of the economic crisis.

⁸The governor of Bank Indonesia at the time has revealed that, at a cabinet meeting in September 1997, Soeharto directed that banks that were healthy but had liquidity problems were to be assisted (Djiwandono 2000).

⁹Boediono was State Minister for National Development Planning under Habibie and Minister of Finance under Megawati Soekarnoputri; he became Coordinating Minister for the Economy under Susilo Bambang Yudhoyono in September 2006, and was appointed governor of Bank Indonesia in May 2008.

¹⁰Law 25/1999 on the Financial Balance between Central and Local Governments stipulated that the regions were to receive 80% of forestry and mineral revenues, but only 15% of oil and 30% of gas revenues.

¹¹District and city governments are not in a hierarchical relationship with each other, but rather are separate entities on the same hierarchical level.

¹²See, for example, the two-part series in the Jakarta Post (hereafter ‘JP’) on the ‘Transformation of corruption’ by Teten Masduki, coordinator of Indonesia Corruption Watch (Masduki 2001).

¹³The figure given for the number of provinces before decentralisation excludes East Timor, over which Indonesia relinquished control in 1999. Data are based on calculations by the author using online information from the Department of Home Affairs (Departemen Dalam Negeri) and <http://id.wikipedia.org/wiki/Pemekaran_daerah_di_Indonesia> [Proliferation of regions in Indonesia].

¹⁴The comprehensive ban on exports of all palm oil products was actually intended to make smuggling more difficult. Previously, only the exports of crude palm oil and palm cooking oil (palm olein) had been banned, but olein had been smuggled out of the country by being classified for customs as stearine, which resembles it when hot. On a trip with relatively senior staff of the government's Tim Tarif (Tariff Team) in early 1998, I saw 180-kilogram drums being filled, supposedly with stearine, at a refinery at a port in Riau province. The drums were identical to those in which a brand of olein had previously been exported, and it would have been impractical to remove congealed stearine from them at the destination. A supervisor at the refinery made the implausible claim that putting the alleged stearine in the drums under pressure would keep it liquid!

¹⁵‘End to fertilizer subsidies is pure folly’ (interview with H.S. Dillon), JP, 21/12/1998.

¹⁶Farmers in Lampung province on Sumatra reported in 2006 that they could not obtain fertiliser, and had suffered crop failures because some of the subsidised fertiliser sold to them was fake (Saroso 2006). Adulteration is an expected consequence of sales of a product at artificially low prices, particularly if the price is held down only for a group of relatively unsophisticated buyers. In a similar way, subsidised gasoline has often been diluted with lower-priced kerosene, leading to engine damage for many.

¹⁷Thee (2006) argues that this problem also existed for the 1999 anti-monopoly law considered below; it too was mandated by the IMF, though certainly it had supporters within Indonesia.

¹⁸Many of the mills are antiquated, dating from the Dutch era, and have capacity well below the minimum efficient scale in the modern industry. There are also serious coordination problems between the mills and the small land-holder farmers who supply much of their cane. For example, the mills typically have an inefficiently long milling season, so that the sugar cane stands too long in the fields; this leads to reduced sugar content and prevents some farmers from getting other crops planted on time. Moreover, irrigated rice fields are generally poor locations to grow sugar cane. Thailand and Australia are the most competitive sugar producers in the region; their plantations and mills are integrated, and harvests are mechanised. Private mills on dry land outside Java also have lower costs than mills on Java.

¹⁹This was the conclusion of a study by the Business Competition Supervisory Commission (KPPU 2005). See also the discussion below of the competition law.

²⁰Similar charges were made about the infamous Benteng (Fortress) program of 1950–57, for example. It provided subsidised credit and import licences to indigenous Indonesian entrepreneurs to counter the economic clout of Dutch and Chinese traders. Some of these favoured parties sold their licences to Chinese importers, while others defaulted on their loans. Few of the indigenous businesses survived the end of the program.

²¹The land-swap scandal is estimated to have cost Rp 95.4 billion in state funds (JP, 2/3/2001) and the 1999 scandal Rp 62.9 billion (Saraswati 2004).

²²President Habibie, in his October 1999 accountability speech, noted simply that Bank Indonesia could no longer administer subsidised loans because of its independent status under the new law (see the section on banking below).

²³My translation of his ‘Ekonomi kerakyatan dalam dinamika perubahan [The people's economy in the dynamics of change]’ speech to Konferensi Internasional Ekonomi Jaringan: Menuju Demokratisasi Ekonomi di Indonesia [International Conference on the Networked Economy: Towards Economic Democratisation in Indonesia], 6–7 December 1999, Jakarta, available at <http://pustaka-ekonomika.blogspot.com/2007/10/ekonomi-kerakyatan-dalam-dinamika.html>.

²⁴Only cooperative activities aimed at serving their members were exempt, but in practice this could have encompassed almost any activity of the cooperatives.

²⁵In the Indonesian cultural context, competition between large and small firms has been seen as inherently unfair without reference to any anti-competitive conduct on the part of the large firm (Marks 2007).

²⁶The term ‘unfair’ posed some problems for the drafters of the anti-monopoly law. The text of the law commonly uses the term ‘tidak sehat’ (‘unhealthy’) to mean ‘unfair’, but this can lead to ambiguities if it implies that too much competition is problematic. The law also uses the term ‘tidak jujur,’ which usually means ‘dishonest’ but in this context can also mean ‘unfair.’

²⁷The secretary general of the Ministry of Industry and Trade had been assigned the lead in development of the law (see also footnote 5 above).

²⁸Thee (2002, 2006) offers an overview and critique of the anti-monopoly law and its initial implementation under the KPPU.

²⁹In the same determination, the largest Indonesian cellular telephone service provider, Telkomsel, was found to have over-charged its customers. It was required to reduce its tariffs by at least 15%, and was fined a similar amount.

³⁰ Antara News (21/11/2007) reported that Temasek owned a 54.15% share in the SingTel Group, which held a 35% stake in Telko msel, while Temasek fully owned Singapore Technologies Telemedia, which owned 75% of Asia Mobile Holdings, which in turn owned 41.9% of Indosat. Telkomsel and Indosat together account for about 90% of the cellular telephone service market in Indonesia (Kong and Ramayandi 2008: 27).

³¹Pardede (1999) and other surveys of the Indonesian economy in this journal around the time of the economic crisis of 1997–98 provide useful perspectives on bank restructuring.

³²Bank International Indonesia reportedly was similarly squeezed (JP, 3/8/1999); see also Landler (1999).

³³He will also be remembered for granting independence to East Timor. All of these topics were examined by participants in the 2007 workshop on ‘Indonesia's Reformasi: Reflections on the Habibie Era’, mentioned in the initial footnote to this paper.

³⁴McKendrick (1992) provides a useful assessment of the fundamental problems that the company faced.

³⁵Privatisation was advocated not only by the IMF but also by economists like Faisal Basri (2002: 103).

³⁶Marks (2007) offers historical and cultural perspectives on how the economy and economic policy are viewed in Indonesia.

Additional information

Notes on contributors

Stephen V. Marks∗

An earlier version of this paper was prepared for ‘Indonesia's Reformasi: Reflections on the Habibie Era’, Workshop and Public Forum Program, School of Advanced International Studies, Johns Hopkins University, Washington DC, 26–27 March 2007. The author thanks Ross McLeod, Thomas Willett, Jeffrey Fortner, Dewi Fortuna Anwar, other workshop participants and a host of attentive referees for their helpful comments