Hal Hill Talking About Indonesia Indonesia's Economy

I find the article written by Hal Hill. Mr. Hill is the H.W. Arndt professor of Southeast Asian economies at the Australian National University, Canberra. From 1986-98 he headed the university's Indonesia Project.

The article was published in the November 2004 edition of the Far Eastern Economic Review

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Four Men Who Changed Indonesia
November 2005

by Hal Hill

The past eight years have arguably been the most challenging in Indonesia's 60 years as an independent nation state. After the economy contracted by almost 14% after the 1998 financial crisis, recovery has been slow, shaky and unpredictable. At times, the country could have degenerated into a "failed state," with dreadful implications for its people and the neighboring region.

But it appears that the worst is over. In three nationwide elections last year, almost 150 million people cast their votes without verified allegations of malpractice on any scale. The economy is now recovering strongly, though it remains vulnerable. The new rules of the game in business and politics are gradually becoming clearer.

Why and how this recovery has been achieved will be the subject of some budding author's yet-to-be-written opus. But critically important have been the role of informal coalitions of broadly like-minded individuals engaged in major public-policy battles in a newly-emerging and volatile political arena. These individuals have had particularly important impacts in four key areas: the importance of "economic orthodoxy" in cleaning up the mess left by the crisis and in restarting economic growth; quickly regaining macroeconomic stability in the wake of the crisis; keeping open the intellectual and policy connections to the global community; and reminding a younger generation of academics of the importance of analytical rigor and public-policy responsibilities in their research.

In the grand scheme of things, academics typically resort to their favorite theory to explain how countries respond to major crises. Individuals are accorded a minor role in these explanations, since theory has always had difficulty accommodating them. And when they do enter the story, they are typically durable center-stage actors: the Maos, Hitlers, Thatchers, together with presidents, leaders of major corporations and members of dominant wealthy families. While understandable, this tends to understate the key role of opinion leaders with an opportunity to shape policy decisively.

To understand Indonesia's recent economic history, one has to look beyond the presidential palace and the major boardrooms to a broader set of actors who have been influential in shaping social and political currents. For Indonesia lurched suddenly from a carefully managed to a chaotic polity where anybody and everybody could have their say. Development policy is now no longer about "low politics" or lobbying the president and senior cabinet members behind closed doors. Rather it has become an open, transparent process featuring sometimes raucous and even vindictive public debates.

In this rapidly evolving and highly dispersed marketplace of ideas, ranging from the sophisticated to the wacky, the ability to argue and persuade has become critically important. To understand the transition process, one therefore needs to view it both at the macro level and up close. A helpful entrée to the latter is to examine the role of key individuals over this period, and how they operated during this period.

Inevitably the choice is arbitrary, but at least four "opinion peddlers" stand out. Perhaps inevitably also, all four are highly unusual. Two are past cabinet members. All four received doctorates and advanced training in the U.S. The first language for two of them is Dutch. Two also belong to Indonesia's tiny ethnic Chinese community, which accounts for about 2% of the population and has often been excluded from government.

But the common elements are just as important. They are all people of impeccable personal integrity. They are passionate about social justice and poverty alleviation. Philosophically, they are all what may be termed "liberal internationalists" in their belief in open societies and economies. But they are also deeply nationalist in the sense of caring about their country and its progress. During the crisis, all four could easily have left the country for greener pastures. But they remained at home, to fight on, either in government or as active proselytizers in the public domain.

Moh Sadli is emeritus professor at the University of Indonesia. Now well into his 80s, he was a cabinet minister under Suharto for 10 years and a core member of the so-called "Berkeley Mafia," led by the redoubtable Widjojo Nitisastro the grand old man of the Indonesian economics profession. Mr. Sadli has been the tireless public campaigner for sensible economic policy. His biweekly (and bilingual) opinion pieces in his Internet newsletter, in the quality Jakarta press and in his Business News outlet have arguably been the single most widely-read and influential economic commentary throughout this period.

Three key elements have always been present in these commentaries. First, the importance of sound "first principles" in economic policy, whether it be macroeconomics, trade and industry policy or social issues. The second has been keeping a watchful eye on the public-policy debates, the complex, fluid political economy equations, and how they are likely to impinge on outcomes. And third, in debates which have often been parochial and sometimes conspiratorial, Mr. Sadli has always been quick to remind his readership of the international dimensions, ranging from the lessons of other countries in transition from crises to the latest writings in development economics. Mr. Sadli has also straddled business and academe with ease, more effectively than anybody else in Indonesia. As the architect of Indonesia's liberal foreign-investment policies in 1967 and from his tenure as minister for mining in the 1970s, he retains close connections with the international business community, and has played a major role in educating them about Indonesian political economy.

Boediono, a professor of economics at Gadjah Mada University who has held several senior government positions, was minister of finance for three years, mainly during the Megawati administration. Probably more than any other person, he was responsible for the restoration of macroeconomic stability. Public debt began to rise alarmingly following the economic crisis, mainly owing to the liquidity credits issued to stave off bank failures. When he stepped down from the Finance Ministry, the budget deficit was just 1.5% of GDP, an achievement which would have appeared impossibly ambitious in the late 1990s.

The record is all the more noteworthy for it was achieved in difficult circumstances. The cabinet possessed limited economics expertise and sympathy for orthodox economic policies. Foreign investors were deserting the country. The president rarely went public to argue the case for economic reform. A newly assertive parliament was eager to spend on favorite projects, while the political environment was quite hostile to "IMF" notions of fiscal prudence. Mr. Boediono's contribution to the restoration of macroeconomic stability has sometimes been compared to the early years of President Suharto, when the technocrats quickly brought the Sukarno-era hyperinflation under control.

Yet in some respects his task was perhaps more difficult. The "Berkeley Mafia" were cohesive and more numerous in the cabinet, they had direct access to and strong support from President Suharto, and they enjoyed a close working relationship with foreign donors and multilateral organizations. By contrast, Mr. Boediono not only had to bring the cabinet on-side but he also had to persuade parliament of the merits of his package. Indeed, it was not uncommon for him to spend half his time educating, persuading and cajoling representatives.

Hadi Soesastro has for many years been executive director of Indonesia's most influential internationally-oriented think tank, the Jakarta-based Center for Strategic and International Studies. Established in the early 1970s, CSIS has arguably functioned as the most important prism through which foreign intellectuals view Indonesia. The Center has had a sometimes controversial past, owing especially to the identities and histories of its early founders and leaders. It periodically comes under attack for its political and business ties, with an undercurrent of hostility toward its alleged "Catholic Chinese" identity. At the peak of the economic crisis in late 1997 it was the object of nasty, politically inspired demonstrations, and occasionally such sentiments reappear.

But this is a side show compared to its remarkable achievements in projecting Indonesia to the world. The center runs more quality international conferences in Indonesia than anybody else. Foreign scholars and graduate students gravitate to its hospitality, and to its lively, cosmopolitan, intellectual atmosphere. It has an unparalleled network of international contacts, especially but not only in the Asia-Pacific region, where it is arguably the best institution of its kind. For over a quarter of a century, it has also published Indonesia's best English-language current affairs journal, the Indonesia Quarterly. CSIS is a team effort, with a number of stars (a former director, Mari Pangestu, is now Indonesia's trade minister) and extremely able management. But over these eight years, it is difficult to think of a more inspiring and able leader of a think tank than Mr. Soesastro.

Thee Kian Wie is widely regarded as Indonesia's most eminent and prominent academic in the social sciences, for which he was recognized with the nation's highest award in 2002. From his tiny office in the Indonesian Institute of Sciences, over the past 35 years he has authored or edited almost 20 books and 70 papers on an amazing variety of subjects: economic history, his primary research field, together with industrialization, foreign investment, small-scale industry and poverty, to name just a few.

He too has been a prolific and passionate public commentator on a wide range of issues. In "retirement," he edits Indonesia's premier economics journal, Economics and Finance in Indonesia. The country's research community and its leading universities remain sadly neglected, and are in danger of falling behind their East Asian counterparts, owing to chronic under-funding and an environment which places little value on sustained scholarship.

Mr. Thee is the role model to whom the serious younger generation of academics looks for inspiration on how to maintain academic integrity in a challenging environment, and how to preserve life-long enthusiasm for intellectual enquiry. With his unparalleled international scholarly network, he has shown the next generation how to build bridges connecting to the global research community.

The past few years have been a volatile chapter in Indonesia's history. There has not been an "Olsonian" sweeping away of corrupted structures and vested interests. Rather, Indonesia is a work in progress, with impressive incremental achievements. Inevitably, this is a very partial picture of the transition. Since observers view the country through different prisms, it is therefore easy enough to quibble with this selection of individuals, which after all includes no politicians, no business people, and no women. But it does captures a key dimension of the forces at work in constructing a new, democratic Indonesia, and of how four individuals have worked effectively, in an unconnected fashion but with a broadly similar and coherent reform agenda.