Economic Proclamation
The proclamation of 17 August 1945 has equipped the nation with the foundation of the state (Pancasila) and the Constitution (UUD 1945) as guides to manage all affairs of Republic, including the economy.
Mural paintings to enliven the 75th Anniversary of Indonesian Independence decorate the walls in the Old City area, Jalan Pintu Besar Selatan, Pinangsia Village, Taman Sari District, West Jakarta, on Thursday (20/8/2020).
The proclamation of 17 August 1945 has equipped the nation with the foundation of the state (Pancasila) and the Constitution (UUD 1945) as guides to manage all affairs of Republic, including the economy.
The ups and downs of economic development were pursued in order to ensure that the mandate of the proclamation is fulfilled. In the Old Order era (1945-1965) under Soekarno\'s rule, it could not be fully said that economic development had taken place as it has now.
Development plans and concepts are not non-existent, but due to limited resources and political problems all thoughts do not turn into actions.Also
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Many government programs intended to advance the economy, such as the plan for the "Economic Development Strategy Committee" formed by the Sjahrir Cabinet in 1947, the 1951 "Economic Urgency Plan", the 1955 "Djuanda Plan", and the 1961 "National Development Plan" (Sjahrir, 1986); but most of them did not leave any trace due to the unfavorable political situation.
Revisionist socialism
One of the things worth noting during the Old Order period was the nationalization policy of foreign (Dutch) companies, particularly in the plantation sector. Hundreds of Dutch-owned companies were controlled by the state. Apart from plantations, another sector that was taken over was banking. This step was a strategic guideline to support the role of the state in the economy, which was then held by state-owned enterprises (SOEs). This is also the pillar of the Constitution if it is linked to Article 33 of the 1945 Constitution.
Other programs have less of a footprint due to the turbulence of the political situation. The ideals of an independent economy were hampered by many obstacles. The country at the beginning of independence was preoccupied with matters of recognition of sovereignty for independence and regional issues (West Irian/Papua). The age of the government (cabinet) was not long, so each plan did not have enough time to be driven. The dynamics of conceptual ideals and shortages of political support became the background at that time.
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Example of the Republic of Indonesia banknote with a design depicting the president and vice president in Jakarta, on Saturday (11/7/2020). There are four presidential and vice presidential figures who have appeared, namely Soekarno, Mohammad Hatta, Soeharto, and Sultan Hamengku Buwono IX.
In a straightforward manner, one of the New Order technocrats, M Sadli (1987), described four characters of development during the Old Order. First, there was no adequate political stability. Second, the orientation and priorities of government policies were too political and idealistic. Third, relations with Western countries were not very good. More foreign economic assistance was from the Eastern Bloc. Fourth, the ideological tendency of the government was to regulate the economy with broad direct intervention (guided economy), for example determining prices, regulating production (licensing systems), etc.
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This last characteristic also showed the standing position of the Old Order regime, which many economists called "socialism". This opinion was certainly not wrong, but not entirely correct because the founders of the nation (as constitutional formers) were more accurately described as "revisionist socialism" (providing room for the people through cooperatives and private business in trade).
Development Trilogy
In the early period of the New Order, the situation was tough for whoever was in power. At that time, there was no hope for Indonesia to achieve progress, especially if change was desired quickly.
This grim description, of course, did not negate the development achievements that had been accumulated over the past 20 years, though the results were less than impressive.
According to Anne Booth and Peter Mc-Cawley (1990), the level of production and investment in various sectors had shown a decline since 1950. The 1966 real per capita income was very likely to be lower than 1938. Industry contributed only about 10 percent of GDP and was faced with serious capacity unemployment. At the beginning of the decade the budget deficit reached 50 percent of total state expenditure, export revenues declined considerably, and during 1964-1966 hyperinflation resulted in a paralyzed economy. This grim description, of course, did not negate the development achievements that had been accumulated over the past 20 years, though the results were less than impressive.
The direction of policy of the New Order government could be largely sniffed from statements at the creditors conference in Paris (December 1966). The most important points [Muhaimin, 1991]: (i) market forces would play a vital role in economic stabilization; (ii) state enterprises would operate on a competitive basis with the private sector. The provision of credit and allocation of foreign exchange based on preference would be terminated and on the other hand these companies would be exempted from having to sell their products at a low price, which was determined at will; (iii) the private sector had been given a boost by removing import license restrictions on raw materials for inputs; and (iv) foreign private investment will be stimulated by a new investment law, which provides tax breaks and other incentives.
During the New Order era, the flag of economic development was hoisted with the stitching of the "Development Trilogy": stability, growth and equity. Long-term (GBHN) and medium (Repelita) development guidelines were produced. During the three decades of the New Order, three groups of government elites competed to "trade" the concept of economic development (Zaidi, 1991). First, the technocrats (dominant in 1966-1973 and 1986-1996), namely the economists Soeharto trusted. They promoted pragmatic development strategies (economic growth) and the application of a market economy system. Second, the mercantilist-nationalist group (influential 1974-1983) that pushed the idea of more dynamic industrial development, large industrial protection policies (high technology), and the excessive role of SOEs. Third, the patrimonist carriage (existed every time), namely politicians around the President who wanted to preserve the protection of various business opportunities for supporters of the New Order.
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Not long after the New Order came to power, in 1974 the Malari Incident (15 January 1974) [which was echoed very loudly by students and intellectuals], contained a rejection of foreign investment and proposed new policy formulations that favored the interests of the common people. Investment from Japan was seen to be so dominant. The policies introduced after this incident included: (i) foreign investment policies became more restrictive. All foreign investment was required to be in the form of a joint venture and national participation had to be increased within a certain period; (ii) the government launched a number of credit programs for indigenous entrepreneurs that were funded by the State Budget (APBN). In 1974 the Mini Credit, the Candak Kulak Credit (KCK), as well as the Market Inpres (Presidential Instruction) were rolled out in 1978; and (iii) the government implemented protective measures against the small industry sector, through the Small Industry Guidance and Development Project (BPIK) which began in 1975 (Zaidi, 1998).
The students of the University of Indonesia were applauding their determination before the 1974 Malari Incident.
Arifin Siregar (1987), another technocrat, reported that in 1982 the world oil price suddenly fell (oil shock) which affected the receipt of development funds. At that time, nearly 70 percent of the government\'s development budget revenue came from oil sales. As a result, domestic demand weakened and economic growth fell to 2.3 percent (1982). In 1982/1983 the current account deficit was US$7 billion. In response to this, the government adopted the following policies: (a) devaluation of the rupiah by 28 percent; (b) reduction of government subsidies and rescheduling of development projects; (c) tax reform, concerning the simplification and rationalization of income tax, the replacement of current sales tax and import duties with value added tax; (d) banking deregulation, which eliminated the credit ceiling system and exempted the determination of deposit rates and bank loan interest rates.
In general, the legacy of economic development was felt in this era. The framework and stages of development were managed in a fairly structured manner, including the main priority sectors. Basic needs (clothing, food, shelter) were fought for, as were education and health (Puskesmas and Posyandu). The agricultural and industrial sectors were growing according to plan, at least until Repelita (Five-year development plan) III. However, in the end, there were strong criticisms of the economic achievements of the New Order: (i) inequality of income and control of assets (capital and land) was widening; (ii) monopolistic practices and rent hunting were getting bigger; (iii) neglect of the agricultural sector (entering Repelita IV); (iv) foreign debt and PMA (foreign investment) were accompanied by burdensome policy concessions; (v) politics had increasingly centralized development; (vi) liberalization has been carried out since the 1980s, especially in the financial sector (banking); (vii) extraction of natural resources.
Economic stability
The 1997/1998 monetary crisis triggered economic and political reforms that revived the "Reform Order". The crisis devastated the economy, the rupiah depreciated 83 percent, the stock index fell by 35 percent, market capitalization fell by 88 percent, interest rates skyrocketed 65 percent, economic growth was minus 13 percent (1998), inflation reached 77 percent (1998), and unemployment soared.
After that, the new government designed economic reforms at three levels. First, at the macro level, economic and political decentralization was designed through the Regional Autonomy Law. Second, at the meso level there was a trap of economic liberalization triggered by a letter of intent with the IMF. Several steps to stop this trap were actually being taken. However, due to heavy economic and political constraints, negotiation space was narrow. Third, at the micro level, the prohibition of monopolistic practices in the economy was urged [Law No. 5/1999 which created the Business Competition Supervisory Commission (KPPU)].
An economic recovery plan was designed in 1999-2004. This effort did not come easy because of "political destabilization", with changes in the leadership of the state/government in a short time (three times). Even so, its work did not disappoint. Habibie succeeded in strengthening the rupiah exchange rate to around Rp 6,000 per US dollar. Abdurrahman Wahid era (1999-2001) economic growth became positive, debt was lowered, inequality had shrunk, and the welfare of civil servants (PNS)/Indonesian Military (TNI) was raised. Relations in foreign affairs were carried out intensively, both with the "West Block" and the "East Block".
Next, Megawati issued a policy of postponing debt repayments, increasing per capita income, strengthening the exchange rate to Rp 8,500, increasing exports, and during this time also pursued privatization (Indosat).
International Monetary Fund (IMF) managing director Michel Camdessus (left) observes President Soeharto sign the IMF Memorandum of Economic and Financial Policies on 15 Jan. 1998. Soeharto finally agreed to carry out economic reforms for a total loan of US$4 billion, following the plummeting value of the rupiah to Rp 11,700 on 7 January 1998, or three days after the announcement of the State Budget (RAPBN) based on an exchange rate of Rp 4000 per US dollar.
In the second half of the Reform Era, a demonstration of "economic stabilization" (2004-2014) was presented, which was carried out in a more coherent manner and according to a textbook format. Several policies initiated in the SBY era included: designing and making the RPJP (National Long-Term Development Plan) and the RPJMN (National Mid-Term Development Plan) in 2005, fiscal discipline was carefully guarded, foreign investment was well facilitated (especially through the Investment Law No. 25/2007), privatization of SOEs was quite excessive (especially 2009 and 2013), changes in debt sources from foreign countries/multilateral institutions to domestic debt, the non-tradeable sector began to crawl away from the tradeable sector (the beginning of the de-industrialization period), economic growth increased but inequality also continued to creep. Investment was increasing as a source of gradual reduction in poverty and unemployment. This legacy became the capital for the government after that.
Development proposal
The third part of the reformation period was Nawacita (2014-2019), part of which was intended to establish Indonesia from the periphery. The Joko “Jokowi” Widodo administration made fundamental changes to development policies and priorities to make this happen.
Note on this regime: nominal debt is increasing fast (but still within the corridor of fiscal discipline) and FDI from China is bursting.
During the last five years the role of SOEs has increased in the economy (especially in infrastructure development and management of natural resources). There has also been massive infrastructure development, with inflation always below 4 percent, the spending budget for social assistance and protection has increased, the health budget allocation has increased according to the mandate of the Health Law, village development is carried out spartanly (via the Village Fund), and the main economic pathology trident (poverty, unemployment, inequality) has occurred. Note on this regime: nominal debt is increasing fast (but still within the corridor of fiscal discipline) and FDI from China is bursting.
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At this point, the main minutes of the 75-year journey of economic development can be formulated. First, a mature concept cannot be executed effectively without the support of political stability.
Second, economic development requires a long-term vision framework that is derived in medium and short term planning. Third, the organization and stages of development must be guarded with high discipline so that the development movement progresses from period to period. Fourth, economic crises always demolish previously constructed structures (in addition to causing political disasters). The strength of the domestic economy, which relies on domestic natural resources, is a gamble that must be won quickly.
Fifth, the desire for progress must be managed under the umbrella of adherence to the consensus of the nation (the basis of the state and the Constitution) so that the image of the future can easily be imagined since development is designed and implemented.
Ahmad Yustika Erani
The last sketch means absorbing the basic guidelines of the state and the Constitution as a development proposal. The economy must be "organized" as stipulated in the Constitution through effective planning, and it must not be dictated by an oligarchy under the guise of a market mechanism. Building a business is an economic movement that advances cooperation beyond competition. That is where the meaning of cooperatives overcomes the corporation. The state exercises control over the economy only in the strategic sector (important production branches for the state) and natural resources as an instrument to support the interests of basic life fulfillment, welfare distribution, and environmental conservation civility. This understanding is the one that forms a development identity with active state character, collective economy, and participatory action (equal ownership of factors of production, a fair economic arena, and citizens also take part to decide). This development proposal as well as the economic proclamation has built the steps of the century-old Republic.
Ahmad Erani Yustika, Professor of the School of Economics and Business, University of Brawijaya and Senior Economist of Indef
