The Indonesian Economy in the Nineteenth and Twentieth Centuries: A History of Missed Opportunities

EH-NET BOOK REVIEW

Published by EH.NET (October 1998)

Anne Booth, The Indonesian Economy in the Nineteenth and Twentieth

Centuries: A History of Missed Opportunities. Basingstoke: Macmillan

and New York: St. Martin’s Press, 1998. xvi + 377 pp. Includes

bibliographical references and index. $19.95 (paperback), ISBN

0-333-55310-1 (Macmillan). $79.95 (hardcover), ISBN 0-333-55309-8

(Macmillan) and 0-312-17749-6 (St. Martin’s Press)

Reviewed for EH-NET by Jeroen Touwen, Historical Institute, Leiden

University, The Netherlands.

BAD LUCK IN A VERY RESOURCEFUL ECONOMY

Which Lessons Can Indonesia Learn from its Past?

This is a volume in a new and ambitious series named A Modern Economic

History of Southeast Asia, edited by Anthony Reid, Anne Booth, Malcom

Falkus and Graeme Snooks, initiated by the Australian National University

in Canberra, and published by Macmillan. Of the eighteen volumes

planned (dealing either with themes or with countries), three have be

en published so far, of which this is one.

Professor Anne Booth of the School of Oriental and Asian Studies (SOAS) in

London has a long experience in the scholarship of the Indonesian economy.

She is known for her monograph Agricultural Development in Indonesia

(Sydney: Allen and Unwin, 1988) and for two influential edited volumes: A.

Booth, W.J. O’Malley and A. Weidemann (eds), Indonesian Economic History

in the Dutch Colonial Era, (New Haven: Yale Center for International Area

Studies, 1990), which is generally regarded as the first survey of modern

economic history of Indonesia), and A. Booth (ed.) The Oil Boom and After;

Indonesian Economic Policy and Performance in the Suharto Era

(Singapore: Oxford University Press, 1992). In addition, she ha

s published a long list of contributions in journals and edited volumes. In her

work,

she has consistently applied systematic quantitative macroeconomic

analysis in combination with a more qualitative evaluation of government

policy and growth theory. But what is also quite significant in her work

(including the present book under review) is her attention for a

combination of the colonial and the independent eras of Indonesian

history. Booth is one of the few historians who easily jumps back and

forth between these two periods, drawing parallels and making comparisons.

Thus, she is able to conceive a long-term view on economic development,

an approach which has often been ignored by economists and historians.

At first sight, the reader of The Indonesian Economy in the Nineteenth and

Twentieth Centuries is confronted with a provocative subtitle: A

History

of Missed Opportunities . To this subtitle a streak of irony is added by

the picture on the cover of the book: a photograph of the Indonesian

government aeroplane factory in Bandung. The Indonesian airplane industry

IPTN (Industri Pesawat Terbang Nasional), in which present-day president

Habibie played a leading role, has often been viewed as a symbol of

irresponsibly large expenditure on prestigious high-tech projects,

significant for the 1980s and 1990s Suharto-era. Does Booth criticize such

projects and imply that the Indonesian economy would have been better off

with investments in different sectors, or a different (more balanced)

economic policy? And which other opportunities have been missed by

Indonesia? Indonesia is one of the poorest countries of Southeast Asia and

has been lagging behind several of its neighbors for many decades. Only

during the recent period of export-oriented growth (ca. 1980-1997) did it

began receiving international praise for its economic performance – praise

that has melted away since the monetary crisis (and subsequent political

unrest) brought the Indonesian economy to a virtual stand-still and scared

off most foreign investors.

In the following, I will first review the contents of the book and outline

some of its characteristics. In conclusion, I will return to the question

of which opportunities were missed and how this affected Indonesian economic

development.

An extensive introduction (Chapter 1) describes the formation of an

‘Indonesian’ economy, highlights the current debates in the historiography,

and states the aims of the book, which consists of six chapters (excluding

the introduction and conclusion) dealing with thematic aspects of the

Indonesian economy.

Chapter 2 is called ‘Output Growth and Structural Change between

1820-1990′, and places the important political events in a chronological

survey of economic performance. This chapter has an essential function

in providing a chronological framework and evaluating the different

indicators and measurements of long-term economic development. Within

each sub-period, the trends in output growth are linked to changes in

domestic economic policies (reflecting changes in political priorities) and

to world market trends (p. 16). Particularly the phases of growth (p. 15,

85-87) should be mentioned here. In combining political events and

economic situation, Booth identifies the following 10 phases:

• 1) 1830-1870 rapid export growth, slowing down after 1840
• 2) 1870-1900 policy reforms but sluggish growth
• 3) 1900-1930 ethical policy and export expansion
• 4) 1930-1942 world depression leading to contraction of export volume
• 5) 1942-1950 Japanese occupation and independence struggle (harming

  economic performance)

• 6) 1950-1958 rehabilitation of the economy, output growth
• 7) 1958-1966 declining per capita GDP, structural retrogression
• 8) 1966-1973 economic recovery
• 9) 1973-1981 the oil boom period
• 10) 1981-1990 non-oil exports production leading to output growth

economic performance)

Chapter 3 is called ‘Living Standards and Distribution of Income’ and sets

out to investigate why the relative rapid growth of GDP, almost certainly

faster than population for much of the last two centuries, did not result

in broadly based improvement in living standards. Booth argues that,

in fact, we should examine the growth of the part of GDP that is devoted

to household consumption, after subtracting government expenditures

and expenditures on capital formation, of which the returns are not

shared by all classes of society. Of course, also foreign remittances

should be disregarded in this context. The chapter argues that ‘the

growing expenditure on both government consumption and capital

formation, together with the high level of remittances abroad, meant

that, for much of the colonial era, private consumption expenditures

grew less rapidly on average than GDP’. Booth continues: ‘But, in

addition, there is evidence that such growth as occurred in average

consumption expenditures did not benefit all classes of society

equally. There were gainers and losers, and the gainers were often

concentrated in particular ethnic groups and regional locations’ (p. 89).

This development is typical for both the colonial and the independent

period, and also forms an essential element of today’s problems in

Indonesia. To quote Booth again: ‘As in other colonial societies, economic

stratification along ethnic lines was pronounced in Indonesia in the early

twentieth century, and in spite of the egalitarian rhetoric of the

independence struggle, this stratification persisted in the post-1950

period. The growth which has occurred since the 1950s has in turn produced

new patterns of differentiation by ethnic group, social class and region’

(p. 89).

In Chapter 4, ‘Government and the Economy in Indonesia in the Nineteenth

and Twentieth Centuries’, the economic role of the government in Indonesia

is studied. Conforming to the central argument of the book (which can be

rephrased as: to develop a long-term view on economic development and

economic policy in Indonesia), it is argued that for a deeper understanding

of Indonesian economic performance, we must also develop a better

understanding of the domestic factors which promoted or inhibited economic

growth. The actions of the successive governments, in both the colonial

and the post-colonial periods, are crucial in such an understanding (p. 135).

Strangely, a different set of phases is applied in this chapter (p. 137),

distinguishing six phases in the role of government which almost, but not

completely, cover (combinations of) the ten phases of growth distinguished

in Chapter 2 (p. 85-87). Although the six phases make sense and clearly

order the main policy tendencies, some more explicit comment could have

been made on their coinciding or not coinciding with phases of economic

growth (linking the effects of government intervention to the world

economic situation). I must add that in the further elaboration on the

individual phases, the context of economic performance is of course

often included, since government policy is usually designed in reaction to

economic conditions.

It is emphasized that ‘colonial Indonesia, at least in the twentieth

century, was far more than just a nightwatchman state, concerned purely

with law and order and the collection of taxes’ (p. 155). There was a

lot of reform and general enthusiasm for modernization, as

characterized by the Ethical Policy but also by the large number of

projects that were constructed in the physical infrastructure. This is

reflected in the large share of government in GDP. It is remarkable that

in the early independent period, from 1950 to 1965, real growth in public

expenditure was much lower than in the first three decades of the twentieth

century. Increase of the share of public expenditure relative to GDP

occurred not earlier than the latter part of the 1970s (p. 201).

Chapter 5 is entitled ‘The Impact of International Trade’, and deals with

the (important) role of trade in the Indonesian economy, the terms of

trade, the changes in the trade regime (“Rise and decline of free trade

liberalism in the colonial era”), the regulated trade regime since 1950,

and the post-colonial experience in trade. On the whole, Booth’s view

on the “colonial drain” seems to be pessimistic. This is obvious from

her evaluation of the oil boom period (1973-1981), where Booth writes:

‘Certainly, there is plenty of evidence that government investment over the

oil boom years was far from optimal. But at least the rents were retained

in the domestic economy. Had budgetary policy been used for investment

in human and physical capital at earlier periods in Indonesia’s economic

history, per capita output and living standards could have gr

own faster than in fact was the case’ (p. 243).

Further elaborating on the record of investment in the colonial economy,

Chapter 6 treats ‘Investment and Technological Change’, while Chapter 7

focuses on ‘Markets and Entrepreneurs’. The latter chapter

deals with the indigenous sector of the colonial economy, the development of

the labor

market, and the economic role of the Chinese, but also evaluates the role

of socialism and government planning in the period 1950-1965, and the

role of the state and the market during the New Order. This chapter

particularly should attract the attention of economists who will plan the

economic course of Indonesia after 2000. These themes clearly connect with

the problems of present-day Indonesia, concerning the powerful

conglomerates and the ethnic division of affluence. Booth explicitly states

that the rise of powerful conglomerates who were able to exploit political

connections preceded the deregulation and liberalization if the economy

over the 1980s. The rise of these conglomerates was a symptom of the

limitations of the deregulation process and not, as is sometimes argued,

a consequence of this process (p. 322).

A text book for advanced learners and a challenging monograph

As a textbook, this study has an interpretative character. In each chapter,

individual data and events are treated in the context of the theme of the

chapter. For example, if I want to know something about the Sugar Law of

1870, the index refers to pages 30 and 253. On page 30, the S

ugar Law is mentioned in the context of structural change in the economy.

Together with

the so-called Agrarian Law, the Sugar Law signaled the demise of the

Cultivation System in Java, but some scholars have argued that this

legislation did not produce a dramatic change in Java’s economy (it did

not form a watershed), even though it had an impact on export growth over

the longer term. On page 253 the Sugar Law is mentioned in the context of

investment and technological change, since it allowed for private

investment in the sugar sector, permitting free contracts between sugar

refineries and peasant cultivators, which allowed the government to

withdraw from the sugar cultivation (because the high failure rate of sugar

companies had caused the government substantial losses). The Agrarian

Law, closely connected with the Sugar Law, is also mentioned on page

298 in the context of land shortage in Java. There is no introductory

explanation in a chronological context of what the Sugar Law and the

Agrarian Law actually stated or implied.

This example shows that the book is not so much a beginners’ textbook, but

rather an interpretative study based on an exhaustive survey of the recent

literature and extensive analysis of quantitative data. In an elegant andc

ompact style, Booth manages to inform the reader continuously of the

debates on issues mentioned, on the various views held in the

historiography, or the need for further exploration on some themes. Of

course, as a macro-economist, she relies heavily on the (rich) Dutch

colonial source data for the colonial period (since there are no other

quantitative data for the colonial period). But by studying the long-term

development of a first colonized, then independent country, she avoids

placing too much emphasis on the colonizer’s presence and manages to

analyze the economy as such, integrating the domestic or indigenous

economy and the internationally oriented ‘predatory’ economy, and

developing a fairly ‘autonomous’ (non-eurocentric) view.

One criticism that could be made is that the thematic, non-chronological

structure of the contents of this book may not be very helpful in a survey

that covers two centuries. The various chapters, in their dealing with

structural change, distribution of income, government policy, the role of

international trade, investment, and entrepreneurship, each attempt to

cover the entire period 1800-1990. An introductory scholar will

continuously feel the need to browse back and forth, in order to piece

together a complete picture of each historical sub-period. On the other

hand, one may argue, this organisational structure allows for reading

one chapter at a time and puts an explicit emphasis on the long-term

continuity within each aspect of Indonesian history. This is indeed one of the

aims of the book. For example, Booth states that she wants to

‘highlight the underlying continuities in policy-making and the

implications of these continuities for Indonesian economic

development in the longer term’ (p. 12). She also argues that ‘

there were, and continue to be, more similarities in the economic goals of the

Dutch colonialists and the Indonesian nationalists than has yet been

acknowledged. These similarities are due to the persistence of many

underlying problems’ (p. 12). Thus, a thematic organization of the

contents of the book forces the reader to observe chronological

continuities within each theme. This is indeed one of the strong

arguments of the book.

Applying a long-term perspective, Booth distinguishes clearly between thep

eriods of expansion and stagnation. It is very instructive that these are

placed in the context of government economic policy and the world economic

situation. In an accessible style, she provides a balanced picture of

growth and decline, giving thoughtfully phrased judgements in matters

which have raised a lot of discussion. On the whole she meticulously

reviews and quotes the recent historiography, including many Indonesian

scholars.

Missed chances?

Now, which are the missed opportunities referred to in the title? Such

counterfactual meditation is, of course, a hazardous exercise, but it may

be able to throw light on the long-term lessons that can be drawn from

the past two centuries. As Booth says, it is ‘useful to ask if a different

type of colonialism could have produced better economic results’

(p. 329-330).

First, one can think of the effects of the Cultivation System, which

thwarted the development of market institutions in rural Java (p. 334), and

on the whole was merely oriented towards remitting a large annual sum to

the Dutch budget (p. 327).

Secondly, the late colonial Dutch regime was busy ‘developing’ the colony

in the material sense, but it largely ignored the need for higher education

or developing a skilled Indonesian work force. The colonizers constructed

a lot of infrastructure and social overhead capital. But the economic gains

from these efforts were largely lost after independence, mainly because

the educational system had failed to train a higher or middle class of

officials who could take over the economy after independence. Booth even

states that the ‘failure to accelerate access to education was probably the

greatest of sins of omission of Dutch colonialism’ (p. 328).

To perceive this as a missed chance for the Indonesian economy is feasible

from the point of view of the Indonesian society itself, which was hindered

by this imbalance. But it makes little sense when analyzing colonial

policy: the Dutch simply did not plan to leave very soon, and therefore did not

integrate the formation of an indigenous elite into their official

policies. Of course, the colonizer can always be blamed for colonizing

the country, but should it also be blamed for consistency within its own

system? I think it is more important that there was a system of ethnic

inequality or racial prejudice at the core of this Dutch colonial

consistency. It is this legacy of colonial rule which certainly can be

viewed as a “missed chance,” because it shows us, amongst others,

the roots of the strong economic position of Chinese entrepreneurs,

and the relatively weak indigenous entrepreneurial class. It also, in

part, explains the discontinuity in economic development after

independence. Booth draws attention to these matters and points at

the crucial fact that the Indonesian nationalist leaders were essentially

isolated from the economy or from specific economic ideas of how

to rule the country: ‘the weakness of the indigenous business

class in the late colonial era, together with the very small numbers of

indigenous Indonesians in the upper echelons of the administrative

service, or in the professions, meant that these groups had far less

influence on the leaders of the independence struggle than in, for

example, British India.’ (p. 330).

These reflections show that the historiography has progressed from making

simple-minded or emotional accusations to the colonial regime, and now

attempts to adopt a more objective perspective which allows for lessons to

be drawn. There have been many crossroads at which another direction could

have been taken, leading to different outcomes of economic development.

Needless to say that there were also favourable effects of certain

important events of Indonesia’s past.

Do the parallels drawn between Suharto’s new order and the late colonial

government policies also imply the suggestion that other roads could and

should have been taken by post-independence governments, or in other words

opportunities were missed? In Chapter 4, we find a positive evaluation oft

he progress made by the Suharto government during 1983-1990, making the

non-oil sectors (agriculture, manufacturing, tourism) more internationally

competitive and the economy less reliant on the exports of oil and gas

(p. 199). At the same time, it is stressed that the role of the government

in the economy was not in any way significantly reduced in the 1980s,

and that very little attempt was made to privatise the state-owned

enterprises, which had a very low rate of return. ‘Regulatory control over

parts of the state-owned enterprise sector remains weak: the so-called

“strategic enterprises,” controlled by the influential Minister of

Research, Dr. Habibie, enjoy access to extra-budgetory sources of

finance which are outside the control of the Ministry of

Finance, or any other government regulatory agency …. This recurrence of the

“Pertamina syndrome” indicates that the problem of controlling the state

enterprise sector is far from resolved in New Order Indonesia’

(pp. 200-201). Recalling the airplane factory on the cover, probably

Booth does view the Suharto/Habibie emphasis on prestigious,

high-tech state enterprises such as an airplane industry as a missed

chance. . .

As already mentioned, Booth is fairly positive about the investments of the

government using the oil boom rents, at the same time warning that the

economic reforms of the 1980s did not recreate the type of open trading

regime that prevailed in the colonial economy from the 1870s to the early

1930s (p. 242). She also states that investment in education and human

capital has, as it was in colonial times, in fact been neglected by the

Indonesian government since 1950.

In the last pages of Chapter 8, ‘Conclusions’, Booth describes the role and

the shape of the type of “market capitalism” that is encountered in

Indonesia (p. 334-336). Without referring to slogan type phrases such as

‘Asian values,’ she explains why free market capitalism is looked at with

ambivalence in Indonesia. This deep ambivalence about liberal market

capitalism persists in contemporary Indonesia at many different levels of

society and this ambivalence has not exactly strengthened Indonesia’s

economic performance. In part, the hesitation to accept free market

capitalism is rooted in nationalist, anti-imperialist views of the

pernicious colonial past. (This might have been different had the Dutch not

been in Indonesia, but without the colonial state formation process there

probably would not have been an Indonesian state as we know it today at

all.) Senior policy-makers, including Suharto himself, saw free market

capitalism as a good opportunity to favor their immediate families and

close business associates. But more broadly, economic growth was viewed as

necessary because the neighbouring countries around Indones

ia realized rapid economic growth. Should Indonesia fall behind, then this

would

make it vulnerable to external threats and internal insurrections.

Recent events in the spring and summer of 1998, after this book had been

published, confirm these suspicions. But Anne Booth goes one step further

and compares the authoritarian growth-oriented state with other

autoritarian developmental states such as Meiji Japan, Franco’s Spain,

and South Korea under Park Chung Hee. The history of these three

countries ‘would suggest that the forces of economic growth, once

unleashed, will inevitably lead to demands for a stronger legal and

constitutional framework which guarantees a broad range of civil liberties,

including a stronger regime of property rights. In Indonesia, too, it is

inevitable that economic growth will create such demands, which the

political system will then have to accomodate.’ … How the government

responds to these challenges will determine not just Indonesia’s

economic future in the new millenium, but its very survival as a

nation’ (p. 336).

These ominous words aptly describe a process that has been underway,

gaining speed after the KRISMON (monetary crisis in its Indonesian

acronym) and Suharto’s stepping down, and which will draw the world’s

attention to Indonesia for the next few years. It seems that a new

‘decolonization’ has just begun, and anyone who wants to put it in

perspective is recommended to read this book.

Jeroen Touwen

L. Jeroen Touwen is post-doc research fellow at the Historical Institute of

Leiden University. He is the author of Extremes in the Archipelago. Trade

and Economic Development in the Outer Islands of Indonesia, 1900-1942

(Leiden: KITLV Press, forthcoming in 1999).