Using Economic Methodology to Assess Competing Models of Economic Policy-Making in Indonesia Author(s): Wing Thye Woo Reviewed

work(s): Source: ASEAN Economic Bulletin, Vol. 7, No. 3 (MARCH 1991), pp. 307-321 Published by: Institute of Southeast Asian Studies (ISEAS) Stable URL: . Accessed: 27/04/2012 22:31
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Since devaluations are traumatic affairs3 and directly reduce thewelfare of the urban elite because of their greater consumption of im ported goods. 7. In light of Robert Bates' Indonesian research which documented how elite-oriented rent-seeking states inAfrica have systematically exploited their agricultural sectors. When the distributional impact of four other systemic The dominant views of the Indonesian state can be summarized as follows: the highest echelon of themilitary and bureaucratic structure and the biggest capitalists have captured the instru ments of the state and are using them for their benefit. credit and agricultural policies) are considered.ASEAN Economic Bulletin Vol. rural and regional interests are found to be important determinants of policy choices. The dominant models in the literature can be encompassed by the characterization that effectivepolitical participation is limited to the highest echelon of the military and bureaucratic structure. it was deduced from an incomplete application of the revealed preference principle.1 The purpose of this article* is to chal lenge this elite-oriented rent-seeking view of the state. The second flaw of conventional wisdom is that its predictions of the course of state-society interaction have been falsified. in order to effect an income transfer to the rural areas. follow that Indonesia must have been doing the same if the dominant views were true. Two principles from economic methodology (revealed preference and prediction) are used to test competing models of the Indonesian state. expenditure. and to thebiggest capitalists. Outcomes are more in line with the predictions from a corporatist model. when therewas no balance of payments reason todo so. 3 Economic Using Methodology Assess Models Competing Economic Policy-Making Indonesia Wing ThyeWoo to of in policies (exchange rate. First. No. March 307 1991 ASEAN Economic Bulletin . This view is flawed in two ways. there is something missing in the conventional view of the state-society relation ship in Indonesia. Its empirical basis lies in thedistributional consequences of only one systemic policy ? trade policy. Indonesia even de valued its currency by 50 per cent in 1978.2 it would Part 1 Politics andPolicy But this corollary of urban-bias has not been trueof Indonesia. Indonesia has in fact been very active in promoting rural development since the establishment of theNew Order government of President Soeharto in 1966.

and been more correct in their predictions. Part 4 draws out the predictions of the models in Parts 2 and 3. All of its political expressions. and to help in predicting the evolution of the relationship. the bureaucracy. The term "cultural deter minism" captures well the flavour of the works which portray Indonesia as a "mystical. and Part 3 presents an alternative hypoth structure is essentially determined by the posture of trade policy. an observer should be able to infer from the policies which are repeatedly chosen both the objective function of the state rents to state and private enterprises. If the proponents of the narrow models had considered a larger set of systemic policies. and capital is too nar row: we must also include the peasantry and regional interests in order to be able to explain the distributional thrust of Indonesia's macro economic policies. motivation and dynamics represent the subliminal impulses of the complex Javanese culture. government hence giving us a long time span to search for patterns in policy-making.6 Part 7 ends with some general observations. provided policy-makers say".5 The dominant models with their focus on political repression and on the generation of rent for the elite predict theNew Order preference methodology has been in power for over 15 years.) These narrower models had been deduced from the observation that Indone sia's protectionist trade policy was channelling enormous esis of Indonesia being an implicit corporatist state. The reason why the narrower models have omitted these two groups is because the only systemic economic policy their propo nents examined was trade (industrial) policy. This knowledge would allow the observer to charac terize the nature of the interaction beween the state and civil society. sense of mindlessly playing out the Naipaul's ASEAN Economic Bulletin 1991 March 308 . Dual istic society". The prediction principle can be translated as Part 2 Existing Models of the Indonesian State Cultural Determinism In the firstcategory are those studies which as sert that the Indonesian state isunique. "the predictions of an incorrect model are un likely to stand up well to the test of time". Some have even ventured the opinion that the history of Indonesia is a constant rerun of a timeless script set to an elaborate Javanese rhythm. The revealed preference principle can be roughly translated as "paying more attention towhat people actually do than towhat they may This means that. Indonesia provides a good case to apply the revealed because are competent and that the period of observation is long enough.7 Proponents of this tarian nature of the byproduct of a feudal ized by an extensive view regard the authori regime as the inevitable state which is character form of a patron-client a secular worsening of state-society relations. Part 2 discusses the dominant models of the Indonesian state. Most economists have long held this prediction prin ciple to be the only unbiased way of choosing among competing paradigms.4 and the political constraints that it faces. The extreme version claims in fact that the relationship between state and society today is not much different from that in pre-colonial Indonesia. The characteri zation of the ruling coalition as consisting of the army. Parts 5 and 6 present some evidence from the conduct of exchange rate and public expenditure policies to support the proposed model of an implicit corporatist state. Our conclusion from the application of the revealed preference and prediction principles is that the Indonesian state ismuch more corpo ratist than the dominant views.The veracity of the competing models of the state will be tested by using two Indonesian principles common in economic analysis: the revealed preference principle and the prediction principle.8 The decision makers are merely mimic men in V. (In an open economy like Indonesia. This article shall show that events have so far falsified this prediction. This article is organized as follows.S. the industrial network unique to Indonesia (bapakism). they might have seen the state-society relationship in Indonesia as less exploitative.

May and Sievers conclusion that the persistence of cultural values is so over whelming that the state under Soeharto is es sentially indistinguishable from a pre-Dutch Javanese state. changing indigeneous writers despaired over in Indonesia. of a traditional ruler."11 Since cultural values do affect one's perception of costs and benefits. There are too many aspects in today's Indonesia showing that the two centuries rule has radically transformed the of Dutch political culture and intellectual environment.10 along Given this perceived entrenchment of un these cultural values. The state-society relationship is straightforward: the state is an instrument of the propertied classes to exploit the other classes. To be specific. A typical assertion from the dependent state strand is that under "the post-1966 regime a complete open-door policy was adopted vis-a-vis comparative advantage doctrine is certainly not an indigeneous Javanese concept.What state theorist neglects is that the dependent Indonesia is stillmore hostile to foreign capital than its Southeast Asian neighbours. the Indonesian Govern ment has consistently promoted national capital at the expense of international capital. There are two strands to the capital determin ism literature: the international capitalists' (or. Capital determinism differs from cultural deter minism in that it sees nothing unique about the Indonesian state has been itshistorical mission of facilitat merely fulfilling ing capital accumulation.13 First. The de pendent state model is untenable for Indonesia because two of its key predictions have been ASEAN Economic Bulletin 1991 March 309 . more plausible to attribute the For example. to accept In this case. dependent) state. and the domestic capitalists' state. contradicted. The rela nomic development between state and society is seen as a tionship stagnant one with servitude demanded of. the standard of living in the periphery (rural areas) has actually gone up and not down. Second. it is restrictive foreign investment laws in Indonesia to economic nationalism aroused by the bitter war for independence than to an atavistic sense If Soeharto were indeed the of xenophobia. have theirhearts less than theirheads inwhat theyare doing. The theAnderson. Capital determinism is thus like cultural determinism in that it also as mimic regards Indonesian policy-makers Indonesian men. and willingly borne by."12 This allegation is more hospitable accurate only in that Soeharto is than Soekarno toward foreign investment. ancestry much older than Indonesia's. Given the progress in political institutionalization and economic restructuring since 1949. particularistic and paternalistic. however. he would not have clone felt the need to legitimize his god-king status the through popular elections. state. few scholars would dare to allege that cultural factors do not influence policy making. It is difficult. Furthermore. the inflow of foreign capital. in a sense they are only going motions of conducting an economy through the Western lines.but are perfectly rational from the point of view of a state with an Capital Determinism "Capital determinism" is an apt description of the works in the second category because they analyse Indonesia from theMarxist perspective. themimic men are unknow ingly working to further the cause of capital accumulation. though not without technical skill. one cannot The "rationalization" conclude that Indonesia is hopelessly mired in a pre-capitalist mentality and is hence doomed to remain a patrimonial state in theWeberian sense of being personalistic. but may appear primitive by the state bureaucracy is now more institutional ized than at any earlier point in history.9 Brian May describes the economic advisers to President Soeharto as follows: historic One frequentlyhas the opinion that the tech nocrats.role expected of them. the possibility of eco of the state apparatus Western standard. the masses. Soeharto's "policies are incomprehensible from the point of view of any articulation of popular representative national interest. but yet it is very strongly held by the "mimic men" whom these cultural determinists belittle.

attempting to salvage the basic Marxist tenet that the role of the state is to facilitate the process of capital Given model. the bourgeoisie. traders. But they are in the last analysis conditioned by the social order in which the state is located. role for the "politico-bureaucrats" pendent because the growth policies were initiated in the early 1970s when few of them had substantial ties to business. in September. The Praetorian State state He admits that the Indonesian role in its rela "a relatively autonomous plays tions in capital"16. there is no "capital determinism" in his work. are the urban middle classes. neverthe with theirgeneral acquiescene and in their less. Indeed. arguably. the ruling coalition. the national rural Since Soeharto is a former army general and the army is themost important group inGOLKAR.17 How ever.writes: capital."18 It is clear that Soeharto is now less depen dent on the military than ever. in the first few years of the Soeharto but it is certainly not now. been a praetorian state administration. in controlling capital to the task of economic growth.14 But since Robison does not present a model of how state actions are pri the implausibility of applying the inter national capitalists' state model for Indonesia and in general Richard Robison.marily on behalf of domestic undertaken. according to Robison.. he appointed the firstcivilian to head . an astute observer of the military had noted that it does not contain "important centers of power independent of the central authority" and the president does not engage in "a continuous process of bargaining with other officers. To be fair. the ex and included civilians on the executive board of the internal security apparatus. it is extremely sensitive to discontent amongst those classes [which. Robison.. Indo nesia may have. The army supports the Soeharto government and receives in return important (and lucrative) administrative posts but it does not set the national agenda.It provides the conditions for economic growth and the stability of the existing social order . State he establishment 1966). general interests. several writers have called Indonesia a praetorian (or army) state. Why Robison continues to push his model given these admissions is a contradic tion waiting to be resolved. in August.. and he attributes this failure of his Marxist framework to intra-capital con flicts. Robison's hypothesis is observationally indistin guishable from the sycophantic proposition that state is devoted to economic the Indonesian development for the benefit of all segments of society and not primarily for the benefit of in fact. While (Soeharto's government) may politically exclude the dominant social forces fromdirect access to political power. Robison also recognizes the im state plausibility of his domestic capitalists' The Bureaucratic Other observers have concluded that Indonesia cannot be termed an army state in the sense that the state serves primarily the needs of the ASEAN Economic Bulletin 1991 March 310 . Policies are a matter of both judgement and response to specific pressures. and.. argues that the actions of the state are to promote the interests of Indonesian national capital and not the interests of inter national capital. In the absence of a class-based analysis. back in 1978. Robison has to assign a strongly inde that he could document how state capital and private domestic capital have expanded under the Soeharto regime. capital. He takes as proof of this thesis the fact accumulation. Events in 1988 in March. Soeharto support this conclusion: appointed a military lawyer as his Vice-President over the protests of the army.15 Robison's an answer analysis just does not provide to whether it is capital which is the state or the state harnessing landowning classes.the state pe troleum company (an army preserve since its tensive lower ranks of statebureaucracy] which constitute itsbase of social support. it rules.

Even though communism has not been a serious threat for the last 20 years.. Several thousand employees at the state petroleum com the of PKI is by improving livesof the rural weredismissedin 1986 old because of their pany of explaining why Indonesia.22 These two groups have won themselves a place within the "corporate board" through having had a history of past belligerence which threat ened the existence of the state.military. The political lesson is clear: one effective way of preventing the resurgence population. If the bureaucratic polity were indeed so politically insulated from themasses.. the president's inclinations determine broad outlines. Like islands cut off from the social seas sur rounding them. therewould not have been the need to embark on the ambitious ex pansion of rural schools and on the improve ment of the irrigation systems. Jackson's hypothesis is incapable emanating from the international arena . successful governance of Indonesia needs to accommodate agrarian radicalism.24 There is belief that a the widespread millenarianistic Javanese messiah would eventually emerge and to the creation of an ideal lead the peasants after a violent confrontation with the society ASEAN Economic Bulletin 1991 March 311 . Specifically.bureaucratic polities are largely own societies and impervious to currents in their may be more responsive to external pressures [The] president is the final arbiter . ethnicity and religious diversity. It is Soeharto who decides who gets what shares in return for supporting the president and his programs. It explains the pol icies of the state either in terms of rent seek ing activities or ideological conflicts within the bureaucratic elite. As long as resources are supplied to meet the nonservicegoals of the active politi cal elite.William Liddle notes that "the New Order appears to have shifted from a system of personal rule to an institutionalized presidential army-bureaucratic complex.. unlike Nigeria and Mexico."19 Karl Jackson has advanced a version of this model which he calls a bureaucratic polity because "political power and participation [are] monopolized by the highest levels of the civil and military bureaucracies. or PKI). This official fear of communism may actually reflect the official awareness that agrarian radi calism has a long tradition in Java. and ignores the effects of societal demands on the actions of the bureau cratic polity. communist connections. Until PKFs sup in 1965. the fear of it goes beyond official rhetoric."20 Part 3 An Alternative Characterization of State-Society Relations: The Implicit Corporatist State It is clear from the preceding review that it is necessary to broaden the existingmodels beyond the domestic capitalists. even though he may yield on specificpoints. it and its affiliated organiza pression tions had over 23 million members.21 The chief problem of the bureaucratic polity paradigm is its narrowness. Our contention is that we must accord great importance to the rural sector and to re [Bureaucratic polity is characterized] by the degree to which national decision-making is insulated from social and political forces out side thehighest elite echelons in thecapital city. gional interests in explaining policy formation. Agrarian Radicalism One of the New Order's chief concerns is to avoid conditions favourable to the resuscitation of the Communist Party of Indonesia (Partai Komunis Indonesia. and over 700 employees at the Ministry of Public Works were undergoing background checks in 1988. regionalism. has devoted so much resources to the development of the agricultural sector.. the army and the bu reaucracy to include other major social coali tions.23 and most of themembers were landless peasants in Cen tral and East Java. There is little dispute that the civilian elite has both influenced and bureaucratic benefited from the economic policies enacted since 1966.

survives in the implicit coalition Hence. This diversity resulted in numerous secession attempts in the 1950s. and embodied the political rivalry between the abangan Javanese and the santri non-Javanese. he must be considered an independent force rather than 1991 March312 . The sense of alienation in the Outer Islands has not been helped by the fact that the inner circle of theNew Order gov ernment is dominated by Javanese. but a strong chairman who brokers reasonably fairly among these inter ests. It is noteworthy that the "Toward Salvation" manifesto drafted by themystic was the signed by the first former Vice-President. to a close approximation.forces of oppression. Sumatra. are consistently catered to in the economic poli cies undertaken.000 islands. and there are substantial differences in interests and ideology among the major social coalitions. themilitary. The seriousness with which the government regards peasant movements can be seen in the eight-year jail sentence meted out in 1978 to a Javanese mystic who had declared himself themessiah and had asked Soeharto to step down. The abangan Muslims of order in line" analogy: the maintenance over the world. one is uneasy because the fabled "smoke filled" backroom where deals are struck cannot be identified. A social coalition is deemed to be on the corporate board if its political demands the coalition's ASEAN Economic Bulletin corporate board does not mean that the social coalition has explicit representation in a par ticular individual who argues exclusively for Indonesians. ethnic* cleavage of Javanese-Outer The Javanese live in central and east Java and account for nearly half of the 165 million interestwithin the decision mak ing process. The Council. The main religious tension is and the santri between the abangan Muslims are nominal Muslims. and the santriMuslims are the orthodox Muslims. Since the authoritarian nature of the state renders themedium run accountability of Soeharto's actions to be very low. To take a "bottom survive. home to 300 ethnic groups which speak more than 250 dis tinct languages and whose religious practices vary widely. any degree of decision-making concentrated in. and the broad executive powers granted to. The queues to public toilets all peaceful state of affairs invariably endure even though no prior explicit agreement has been reached and even though there are no enforcers of the implicit social contract. the bureaucracy. the leader of the Indonesian Protestant Church Islamic generals. Since his enhanced power came from popular cognizance of his penchant for a fair distribution across the coalition. It is for this reason that we see the unusual merely the compromise byproduct of competi tion amongst the elite groups. the president. the domestic capitalists. Islanders. It must be pointed out that being on the experience the interests and reactions of each is needed to keep the implicit other.25 What coalition together is not an explicit forum where every member is reminded at every meeting of their competing interests. The Darul Islam rebellion to establish a fundamentalist Muslim state lasted from 1949 to 1965. The reason why Soeharto has not acted more autocratically with his independent status is that he recognizes the self-limiting perhaps nature of such acts. The interesting question iswhether an explicit to forum is always required for a coalition answer is no. Ethnicity and Religion Indonesia comprises 13. Scholars' the head Council. of the National and two retired Regionalism. the rural sector and the regional interests as members of the corporate board because there is no formal bargaining mechanism to reconcile competing demands. The reason the system works is because everyone knows that self-enforced queuing is the only way to get the job done expeditiously. The latest violent incident arising from regionalism occurred inmid-1990 in Acheh. Itmay appear awkward to label the president. In short. Indonesia because themembers know from long Muslims who subscribe to ancient Javanese be liefs (kebatinan). head of the Roman Catholic Church in Indo nesia. The abangan-santri distinc follows the tion.

disturbing the social The author went on to point out that a devalua tion appeared to double the probability that a ruling group would be removed from power.prolonged deviation from this practice would increase the power of the board of directors. They support favourable treatment of the agricultural sector because it supplied 82 per cent of nonoil exports in 1970.. with its numerous implicit compromises ? and officials are understand is finally undertaken . Unless compensating policies are simultaneously implemented."28 Furthermore. Our proposed model hence pre dicts that there would not be an upward trend either in the intensityof state-society antagonism or in the number of trade restrictions. they tend to predict that the jackboot of military rule would Since ASEAN Economic Bulletin equilibrium..64 per cent in 1982 won 62 per cent of the votes cast in process with substantial checks and balances. it predicts a policy-making GOLKAR and 73 per cent in 1987.62 per cent in 1977. and the President adopts those which are either compatible with his innate preferences. of does not regard "uninhibited acceptance power as an inherent personal right. and the army and bureaucratic elite who have business investments. the army and bureaucratic elite as the senior partners. The econ omic policy-making process can be described thus: the different lobbies and advisory groups propose policy initiatives. and 75 per cent in 1980. unlike his predecessor.. particularly agri and labour-intensive commodities cultural manufactured goods. is one of ? the most of traumatic measures acceptance of the comparative advantage prin ciple leads them to emphasize the development of the nonoil export industries. [Currency] devaluation has come to be regarded as a measure of last resort. Soekarno. At the policy-making level. the dominant models would also predict that large-scale deregulation of trade is not possible... or vital to maintaining 1971. 1991 March 313 .with countless partial substitutes adopted before devaluation luctance of officials arises in large measure from the [fact that a] devaluation will disturb an implicit social contract among different ? or at leastwill jar some segmentsof society out of theiracquiescence in the existing groups state of affairs."26 to as The fact that Soeharto has managed the various sectoral con tutely accommodate cerns quite well can be seen in his winning of an increasing proportion of the popular vote. This may account for Lucian Pye's observation that Soeharto. inevitably cause "large scale outbreaks of mass opposition. Given the wider membership of our implicit corporatist model. and indigenous capital. the economic inter ests of the rural sector and theOuter Islands are economists bolstered by the arguments of the professional economists (popularly referred to as technocrats) who work at theMinistry of Finance and the Their National Planning Body. The re ably anxious about The Predictions of the Competing Models Part 4 the dominant models are based on the are geared perception that economic policies toward the enrichment of a few. BAPPENAS. since trade restric tions directly benefit the domestic capitalists.27 To sum up.29 .. rural sector and re gional interests as junior partners. there is a limit to how far any given group can force the passage of policies directly favourable only to itself and deleterious (even if indirectly) to thewelfare of the other members of the coalition. economic policy thata government may under take. and to triple the odds that theMinister of Finance would be relieved. our im plicit corporatist state model can be quite ac as curately described by President Soeharto the strong chairman of the board. Part 5 Exchange Rate Management: The Inscrutable Oriental? It is folklore among political scientists and policy that: Currency devaluation dramatic ? even his position as the overarching patron.

and not the indirect revenue increases which of basketscontaining mix of goods typically the consumed by Indonesians. is open to smuggling. This meant that Indonesian producers of tradeables were experiencing a profit squeeze.34 It is important to stress thatArndt was referring to the direct revenue increase coming from the revaluation of the oil taxes at the new exchange rate. The 1978 devaluation was not an aberration.its strange enough. by 50 per cent in November currency. to devalue in order to boost nonoil exports. Indonesia devalued the rupiah. It is important to stress that the overvalued exchange rate harmed the entire agriculture sector and not just the export component be cause all agricultural products are tradeables devaluation given that Indonesia. The ASEAN Economic Bulletin March314 1991 .32 The overvalua tion of the rupiah was the result of maintaining the exchange rate at 415 rupiahs to the dollar despite the large domestic inflation from 1974 to 1977. The overall picture for Indonesia's balance of payments in the current fiscal year is thus still reasonably reassuring. by the number local purchasing Islands. tion operates in effectas a tax.e. We attribute this willingness to both the political strength of the peasants and the erable part of the country's export earnings directly to the government. had grown steadily throughout the 1972-78 period. 58 per cent of the labour force in Java were directly engaged in agricultural activities and 65 per cent of the labour force in the Outer Islands were doing so. Indonesian watchers were not aware Many of the deleterious effects of the overvalued sector. bureaucracy they would latch on to a primary motivation for devalua tions suggested by Heinz Arndt when he dis cussed the 1983 devaluation. measured units or in dollar earnings. by its geography. officialand unofficialalike. The prices of their output were fixed by inter national competition but the prices of their domestic inputs were being driven up by the double-digit inflation. The distress of the nonoil export industries is clearly seen only when their export earnings are expressed in terms of local purchasing power. He pointed out that: In Indonesia's accrue where a consid a devalua to devalue This Indonesian willingness the exchange rate in a healthy balance of payments situation stands in stark contrast to the reluc tance of most developing countries to devalue even when the balance of payments situation is desperate. But inOctober 1978 therewas certainly little expec tation of an immediate devaluation. An authori tative commentary on the economic situation in Indonesia written on the very eve of the concluded: Yet power of export revenue declined by 33 per cent between 1973 and 1975. The New Order government showed no subsequent ? 38 per cent in 1983 and reluctance to devalue 45 per cent in 1986. i. when Indonesia's oil reserves were closer to depletion. Could the narrow models of the Indonesian state explain the 1978 devaluation in terms of rent-seeking activities by a capitalist-army Outer cabal? Presumably. The harm was widespread because in 1977. circumstances. the easiest and in the short run themost effectivetax instru ment at the government's disposal.On a longer view. There were in fact per sistent newspaper reports from April to July that a rupiah appreciation was imminent. it is difficult to resist the traditional balance of payments pessimism of economists everywhere.31 The primary reason for this unexpected de valuation lies in the economic difficulties and political tensions associated with the reallocation of resources being forced upon the economy by an overvalued exchange rate. and the fact that exchange rate policy was in the hands of the technocrats. and the subsequent recovery was so slow that the 1978 value was the same as in 1973.30 It is true that most economists were in agreement that there would be a need in the future. 1978 when therewere no signs of the balance of payments deteriorating.33 exchange rate on the agricultural Nonoil nonLNG in physical exports.

36 The 1986 devalua tion differed from the earlier two devaluations in thatmany commentators not only expressed the usual pessirhism about the ability of de valuations to boost exports but also outrage over this back-handed way of raising taxes. The obvious pro-rural items are "fertilizer subsidy" and most of the INPRES i. What is really noteworthy about this is that the peasants were encouraged to grow more Fertilizer subsidies benefited the agricultural sector directly. Fiscal policy is singled out for attention because it is under the jurisdic tion of the technocrat-controlled Ministry of Finance. It is amiss. while total which rency. In this section. The claim that a devaluation would ease budget ary pressures is correct only if the oil tax exceeds the debt service. two of the three non-official observers interviewed by theJakarta Post on the day of the event "considered the devaluation as a drastic action to save the budget". Arndt's point that the rupiah value of the oil is certainly taxes increases with a devaluation of otheroptions short [had]studiedthoroughly "whether the government It is not possible to conclude from the ex 1whether a penditure structure given in Table rural bias exists because only a few of the items in it can be easily classified either as pro-rural or pro-urban. In brief. notably external debt service payments. and the second viewed the government as tending "to come up with surprises without considering their impact on the business world". however.37 correct. The 1986/87 fertilizer subsidy allocation pro vides a striking example of rural-income main tenance.38 out technocratic incompetence.40 the state rice agency rice at a timewhen BULOG. and the first sectoral INPRES programme by focusing on primary schools in particular benefited the rural sector dispro portionately. in not mentioning that Indonesia also has substantial routine ex in foreign cur penditure that is denominated The fact is that the budget deficit was directly reduced by the 1978 and 1983 devaluations but If we rule widened by the 1986 devaluation.usually appear in themedium run as the results of the higher income and exports induced by the devaluation. the narrow models' view of deval uations being due to an avaricious state con resources by whatever stantly appropriating "non-visible" means cannot be sustained. fertilizer subsidy actually rose by 20 per cent in an attempt to check the fall in rural Javanese income. omists reacted negatively to the 1986 devalua tion. The first observer questioned the drastic monetary measure". the 1986 deval uation could not have been motivated by reve nue enhancement consideration at all. The commitment to rural development can Presidential decrees for specific purposes.e. the implicit corporatist state hypothesis is verified by examining the expen diture pattern of the Indonesian Government ASEAN Economic Bulletin 1991 March315 . otherwise the reverse is true. 2 focuses on a number of welfare Table measures to provide an alternative way of also be deduced from the fact that the first two programmes started after the 1973 oil price increase were targeted toward the rural sector. In the 1986/87 recession. Presidential Instruc (Instruksi Presiden.35 This belief in the primary of the revenue en hancement factor may explain why many econ and their consequences. The programmes are funds chan general INPRES to finance public nelled to local authorities works projects chosen at their own discretion. the floor price. was on the guarantees verge of bankruptcy because of the runaway costs of storing the excess rice from the bumper harvests of yesteryears!39 The INPRES programmes were started by nominal spending of the government fellby 7 per cent in response to lower domestic revenue. Part 6 Preferences as Revealed Expenditure Pattern by the While efficiency is clearly an important reason for the decentralized decision-making feature of INPRES public works projects. tions) programme. For example. what may have been equally important is the dispensation of political patronage to the village-level elite.

2 1164.1 195.2 0.5 108.0 Sectoral Inpres programmes 25.0 49.0 166.9 development expenditure 298.5 291.0 0.4 253.0 20.8 67.5 1075.5 78.7 2054.8771.3 125.2 Total11951.6 1746.5 931.0 10.2 5.0 227.1 1215.8 1001.0 114.2 5.8 11.2 21421.3 20.4 12.4 715.8 9428.7 Distribution 6.0 130.0 23.0 2.0 98.7 217.8 283.0 215.0 962.9 336.1 13.8 1.5 19.3 78.1 70.4 4223.2 281.3 10. 110.0 526.3 General 92.5 34.0 98.9 42.8 47.7 4061.5 54.9 .9 50.7 5.4 1.6 893.2 5.3 253.9 1209.7 604.0 243.3 0.0 Health 4.5 50.7 4212.0 377.5 267.5 599.0 Others 75.6 737.1 42.2 450.8 5800.6 987.5 2156.3 207.6 22824.0 65.4 26.0 928.6 25.1 713.0 534.9 851.719.1 119.1 1419.7 511.3 19380. capital Total expenditure .7 374.8 1397.4 54.5 routine expenditure 438.0 6977.3 1316.8 188.3 Government 7.1 143.9 2743.0 5299.4 villages to0.0 784. 2649.7 2055.7 2489.6824.0 384.5 246. 109.4 82.6 2730.6 39 124.2 249.3 100.8 91.5 549.9444.0 31.6 200.4 48.8 13.0 33.6 11716.4 417.3 2757.9 8076.2 2555.0 287.2 63.2 5.0 253.8 15.0 0.7 483.4 Personnel 593.3 30.1 8296.0 East 4.7 565.8 15.3 18311.3 1077.471. 10.6 5916.2 10873.4 976.4 61.0 Roads 101.7 2023.6 by of Programmes Total9951.6 87.4 40.0 19.6 474.0 65.0 0.6 87.5 684.8 534.9 5.7 3503.0 Fertilizer Subsidy 0.9 961.5 228.9 11.1 324.4 420.8 535.5 57.9 162.8 Subsidies 75.1 64.3 1429.583.9 326.0 0.9 574.5 476.2 226.0 0.3 8411.9 Food 0 43.0 70.5 538.8 13917.0 0.8 6.7 100.6 15.3 1546.9 669.4 17.6 1480.7 6.3 2418.6(PMP) 371.0 9.5 105.1 83.0 14355.9 107.3 385.4 5.1 42.8 128.6 6.9 4.1 108.9 1.2 584.8 12.8 62.5 480.3 25.7 451.0 736.6 194.8 2148.5 0. 744.5 Service Debt 70.5 87.0 137.4 Project aid1663.5 19.0 572.1 4305.0 141.6 167.0 5.4 59.2 71.2 1019.4 94.1 109.9 3867.7 73.0 7359.6 28.3 53.8 4014.5 150.3 kabupatens 194.4 325.1 280.2 19.2 Subsidies 23.33507.6 326.3 1977.4 265.0 6805.9 4466.4 0.8 26.5 3.7 1924.8 79.7 3684.8 712.4 189.1 179.6 Subsidies 478.9 6.0 to provinces 224.7 167.6 1629.2 448.6 participation 22.6 76.9 13125.7 91.7 3323.6 4316.252.3 155.4 201.4 336.1 1224.3 1016.3 590.9 4018.8 39.1 197.2 448.1 1332.8 6.9 773.3 2087.6 to Other routine expenditures 100.1 94.0 1315.8 218.9 252.6 15826.6 85.0 284.4 5425.9 3.7 129. subsidy 0.7 9.6 88.1 176.9 1907.0 220.1 6940.5 3408.1 268.3 INPRES 98.2 2programmes 540.4 7.9 166.0 134.0 506.5Subsidies 193.1 444.23583.5 101.2 636.1 69.0 1972/73 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 1980/81 1979/80 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 3260.2 132.2 2102.4 IPEDA 157.7 114.6 9899.6 6996.3 70.0 Departments 221.2 52.5 2724.9 1022.4 1883.2 255.1 412.5 3474.1 2639.6 Rupiahs) TABLE 1 of (Billions Expenditure 50.1 0.0 2277.2 3219.6 591 7 336.2 142.0 0.7 86.7 752.0 3.2 7 & Timor Jaya Irian 5.9 regions to0.9 628.7 31.2 167.9 62.0.0 Primary 111.0 subsidy 1.4 2533.1 2776.6 80.5 0.9 420.5753.2 4.9 1316.1 Markets 374.3 313.9 3046.0 64.3 4.7 schools 8.9 522.0 7756.0 64.7 181.

334 Indonesia 0. Instituteof Southeast Asian Studies. Islam.327 0.298 Indonesia 0. Part C data are fromTables 2. This particularly apply is because the provision of services to meet the ASEAN Economic Bulletin 1991 March317 "basic needs" of the poor is heavily dependent on government expenditure.328 0.341 0. Bulletin of Indonesian Economic Studies.329 0.389 0. Hughes and I.346 0.344 0.only 58 .337 0.Indicators of Impact of Government Expenditures on Rural and Urban Areas Rural Part A Basic Needs Outcomes: Consumption.330 Indonesia 0.364 0.11 and 2.306 0.298 0. Health and Education School enrollment ratio for 7-12 year olds Urban Indonesia TABLE 2 197158 198081 1984 100 Infant Mortality Rate (per 1.000 livebirths) 100 114 114 87 73 90 100 140 60 84 1971 150 1980 Daily calorie intake in 1976 a) national average 1954 b) bottom 40 per cent of sector 1471 Part B 105 1933 NA 1852 1434 1964-65 survey Java (excluding Jakarta) Outer Islands 0. per cent of rural children in the 7 to 12 age group attended school compared with 73 per cent of PartA ofTable 2 shows thatin 1971. determining the thrust of Indonesian econo mic policy. Basic Needs in Indonesia: Economics.311 0.304 Part C Income Distribution Outcome as Measured byGini Coefficients (inequality increaseswith size of coefficient) 0.304 0. July 1981.348 1970 survey Java Outer Islands 0.357 0.321 0.339 1976 survey Java Outer Islands 0. 1986. We have to those which limited the welfare measures to the poorest segment.368 0. Sources: Part A are from the 1979 and 1984 Part B data are fromTable 2 of G.397 0. "Inequality in Indonesia: A Decomposition Analysis". Politics and Public Policy.346 0. especially its fiscal policy.332 0.300 0.296 Population Below DifferentPoverty Lines 1970 1976 47 27 14 63 37 18 41 23 1980 Proportion Number (Millions) (Percentages) Poor Very Poor Destitute Proportion Number (Millions) (Percentages) 56 37 20 65 43 23 Proportion Number (Millions) (Percentages) 60 34 9 13 World Bank country reportson Indonesia.14 in Sjahrir.

The outstanding feature is that the in come distribution in the rural areas has become rural population. state and private capital were able to sharply escalate 1987. attitudinal and economic changes in tracking two East Javanese villages. works would have to attribute the big resource transfer to the agricultural sector either as the economic triumph of neoclassical logic over rent-seeking demands or as the result of the peasant background of the President. Our interpretations of Parts A and B is sup ported by the research of Sjahrir on themeeting of basic needs in Indonesia. We ascribe this improvement in rural income distri bution to the development projects designed to raise the income level of the poorer and more may be decreasing at lower levels in rural areas."42 Material progress was evidently widespread43 and "corruption two geographers who have been Edmundson. The im portance of the peasant background variable should not be exaggerated. Without these two variables. Evidence of reduced state-society tensions is also found in micro studies of Indonesian villages. 1. The Gini coefficient for the overall rural sector fell from 0. The surprising finding here is that the rural poor may actually eat better than the urban poor.30 in 1976. Part 7 The Conclusion disenfranchised peasants.34 in 1970 and then to 0.35 in 1964-65 to 0. In 1980. the higher proportion of votes cap against 1. Part B of Table more equal over time. It is true that under the guise of off The of trust toward the central government than there had been in 1971.In the 1971-80 period." second prediction of the elite-oriented rent-seeking model that there would be a steady proliferation of trade restrictions has also been falsified.471 calories per day in the rural sector as urban children. presidents of peasant origin who did not pursue agriculture-oriented policies. the infantmortality rate in both areas showed an equal drop of 36 points. The liberalization of the trade regime con inued in 1988. however. In 1980. The pro portion of manufacturing production protected by quantitative restrictions fell from 49 per cent inmid-1986 to below 35 per cent at the end of setting the negative effects of the 1982 oil price decline on the balance of payments. conclude that in both villages in 1981 "there was a greater expression an attenuation rather than an accentuation of hostility in the relationship. Wade and Stella tured GOLKAR by in the lastelectionindicates the proportion and number of people in the destitute category were half of those in 1970. There are too many examples of authoritarian African evidence in Parts 5 and 6 support the presence of the agrarian radicalism and regional ism variables in the Indonesian policy-making equation. see Part C of Table 2. The three basic needs indicators in Part A paint a picture of improvement in social services being pro vided in the countryside and imply that the does not neglect the Indonesian Government 2 shows how the distribu tion of income has evolved under the Soeharto regime. this increase in rents was not permanent as predicted by conventional wisdom. If anything. However. This is be cause most of the import-competing industries are in urban Java and the higher prices of manufactured goods represent an implicit tax on the residents in the rural sector and in the Outer Islands." The Edmundsons attribute the now greater ad ministrative efficiency to the "increasing aware ness on the part of politicians that support of the peasants is necessary for long term stability. previous quantitative restrictions on imports. The "victims" (represented by the technocrats) were able to force consider able rollbacks in import restrictions. the figures were 81 per cent and 90 per cent respectively. and in 1984 the enrolment rate was 100 per cent in both areas. with the most prominent case being the withdrawal of a monopoly import licence on plastics issued to a state firmwhich ASEAN Economic Bulletin March 318 1991 .433 in the urban sector.41 He found a con siderable decline in the number of people below the poverty line. The prediction of worsening state-society re lations in Indonesia by the narrow capitalist army-bureaucracy models has not occurred.

The importance of whether an elite-oriented rent-seeking model or this implicit corporatist state model is true is obvious. 6-9 September 1990. there are two reasons why state is superior to the narrower models. The notable works in this traditionare Benedict O'Gorman Anderson. CA: University of California Press. Brian May. Antagonism between the state and civil society has not been increasing steadily."44 Agrarian radicalism causing the state to in corporate the welfare of the agricultural sector into policy formulation is not without prece dent. different predictions about what would happen when the present presidential term ends in 1993. public expendi ture policy.Markets and States inTropical Africa: The Political Basis of Agricultural Policies (Berkeley. and there limit on the appears to be a politically-imposed of trade restrictions to benefit state and growth private capital.Aust: Fontana. 5. See Wing Thye Woo. ASEAN Economic Bulletin . Economica.and am grateful to theparticipants of the International anonymous refereefor insightful Conference on Economic Policy Making Process. Siegel (ed. MA: Belknap Press of Harvard 1991 March319 Behavior".) Culture and Politics in Indonesia (Ithaca. Indonesia. 1. agricultural. for example. Milton Friedman. Power and Politics: The Cultural Dimensions of Authority (Cambridge. Another paper supplies evidence from the financial sector and agricultural policies. xiii inPreface. Idea of Power in Javanese Culture" inC. 1972). Holt. 1988. 13. February 1938) to describe the deduction of the structure of a consumer's preference See. Indonesia. How they differ is a topic for another article with a different focus. inEssays inPositive Economics (Chicago: University of Chicago Press. The Indonesian Tragedy (Boston: Routledge and Kegan Lucien Pye. The cultural determinism label ismine and this characterization of Indonesia is fromAllen Sievers. 1981). He sug exclusively with "a Hong Kong-based company which lists two of the president's sons as directors.45 here is that the systemic policies (exchange rate. NY: Cornell. Asian Paul. and fromcross-country comparisons to support our position. Suharto's Indonesia (Blackburn. Robert Bates. The term 'revealedpreference'was coined by Paul Samuelson ("A Note on thePure Theory of Consumer's fromhis buying behaviour. forhelpful comments.46 The second reason for preferring the thismodel is theoretically more satisfactory be cause it represents a wider application of the revealed preference principle. Bali. This characterization of conventional wisdom as an army-bureaucracy-capital coalition covers as special cases the fourdominant models of the Indonesian state to be discussed inPart 1. David Denoon. It was deduced from observing the distributional impact of a gests that the greater proneness of the English is respon peasants to be politically mobilized The point sible for the difference in outcome. financial and expenditure policies) which have raised rural income and moderated regional inequity over the last 15 years in Indo nesia are less the outcome of a compassionate state than the upshot of a state savvy of its past history of rural radicalism and secessions. and Ghana (Cambridge.ventional labour shortage explanation for why rural income inEngland went up after the Black Death cannot be adequate because serfdom was reimposed in Poland after the calamity. 1978). B. 3. 4. NOTES AND REFERENCES * I thank an criticisms. 1974) p.Hamish McDonald. Robert Brenner points out that the con deals larger set of systemic policies than the narrower models (exchange rate policy. agricultural policy. credit allocation policy and trade policy versus trade policy alone). Devaluation under Pressure: India. 1986). Indonesia". They offer vastly model of the Indonesian corporatist (implicit) First. The JohnsHopkins Mystical World of Indonesia: Culture and Economic Development inConflict (Baltimore: "The Press. "The Economic Policy-Making Equation in University of California at Davis. Pacific Rim Studies ProgramWorking Paper No. 1953. Anderson and J. 2. 6. To sum up. the is because conventional corporatist model wisdom has done poorly in the prediction test. 1980). MA: MIT. "The Methodology of Positive Economics". 7.

cit. 1967. 19.: Allen and Unwin. inMyron Weiner and Samuel Huntington (eds. (Sydney: Angus and Robertson. Robison. 1988. 1988. Pye. Robison..Other analyses of Indonesia being a dependent stateareRex Mortimer (ed. Procedure and Effects on Indonesian Society" in Jackson and Pye (eds. NY: Macmillan. 117. 20. 1973). 395. 22. Peter Evans. p. "The Prospects forBureaucratic Polity in Indonesia" in Jackson and Pye (1975) op. 113. Indonesia: The Rise of Capital (Sydney. Robison. 1978). 373. p.. 1-2. Ulf Sundhaussen. op. 23. 11. Netherlands. [and that] thecentral state apparatus does notmonopolize thepolicy process. World Politics. 1974).. V. cit. Sartono Kartodirdjo. 26. cit." Liddle however did not elaborate what groups ought to be included in thebroader coalition. Pacific Viewpoint. TheMystical World of Indonesia: Culture and Economic Devel opment inConflict (Baltimore. CA: Ramparts Press. R.emphasis added. By the classification scheme inEric Nordlinger. NY: Cornell. 17.Pye notes that Soeharto does not pretend "that he can do anything and everything.) Showcase State: The Illusion of Indonesia's Accelerated Modernization. 10. and David Ransom.MD: JohnHopkins Press.. "Soeharto's Indonesia: Personal Rule and Political Institutions" inPacific Affairs. 587. p. Comparative Politics. cit. META. 21. 1967)." p.S. Figures from William Liddle. and Allen Sievers. 17. The Army and Politics in Indonesia (Ithaca. This iswhy proponents of this view have referred disparagingly to the Soeharto government as the new Mataram. S. much more January 1987). cit. Brian May. p. Kuala Lumpur. mimeo. 1975-1983 (Ithaca. 1984). The best statement of the domestic model for Indonesia isRichard Robison. tions in Indonesia" inJackson and Pye (1978) op. The general failureof thedependencymodel isadmitted by one of itsforemostproponents. and predictions of. The co-ordination of actionswithout regular explicit consultations should not be regarded as unusual. 1969. "Patrimonialism and Military Rule in Indonesia". Malaysia. op. 70-71. Mouton. The same predictionwas made 10years earlier by W. July 1979.). op. 13. Harold Crouch. p. capitalists' state 15. 1985. Harold Crouch." mimeo." in Claire Holt. 12. op. A more detailed statementof our implicitcorporatistmodel is in Wing ThyeWoo. "The Economic Policy Making Equation in Indonesia". Suharto and His Generals: IndonesianMilitary Politics. Andre Gunder Frank. which face antitrust laws.University of California at Davis. The classic statementon. Height of its 28.University Press.) The Trojan Horse: A Radical Look at Foreign Aid (San Francisco. thedependency hypothesis is and Underdevelopment inLatin America. This is standard operating procedure foroligopolistic industries in theU. Naipaul. cit. 16. "Agrarian Radicalism In Java: ItsSetting and Development. See Woo (1988. p. p. 1975). F. Benedict Anderson and James Siegel (eds. 10. 1986). "Nationalism and the State inModern Indonesia". "From Aliran Towards Class Struggle in the Countryside of Java". 120-22. 25. cit. See his "Foreign Capital and the Third World State". Pacific Rim Studies Program Working Paper No. cit. TheMimic Men (New York. Understanding Political Development (Little and Brown. From B. In a laterarticle ("The Politics of Shared Growth: Some Indonesian Cases". Antonie Dake. Indonesia: Dependency and Underdevelopment.p. 1981. Anderson. 1978). p. "The Military: Structure. "Indonesia in 1987:The New Order at the Power.. In theSpirit of theRed Banteng: Indonesian Communists between Moscow and Peking. 8. 18.) Political Power and Communications in Indonesia (Berkeley. ASEAN Economic Bulletin 1991 March 320 .NY: Prentice-Hall. p. Capitalism 13. 119. op. Karl Jackson. quoted in R. op. 1959-1965. and David Jenkins. 4 and p. Indonesia is a praetorian state of the ruler-type.Vol.) Culture and Politics in Indonesia. p. Monthly Review Press.Aust. 374.. cit. control. Soldiers inPolitics: Military Coups and Governments (Englewood Cliffs. 1988). 14. 1982. In p. Liddle broadened the scope of effective political participation further:"there is beneath-the-surfacepolitical activity in the New Order than the standardmodel ofmilitary and bureaucratic authoritarianism leads us to expect.CA: University of California. op. "Bureaucratic Polity: A Theoretical Framework for the Analysis of Power and Communica 27. "Ford Country: Building An Elite for Indonesia" in SteveWeissman (ed. Karl Jackson. Mataram was the last dominant kingdom on Java. 1973. 1985). William Liddle. 70. emphasis added. NY: Cornell. Wertheim. and Soeharto's home village was under its 9.) fora discussion of this second Liddle article. Sritua Arief and Ado Sasono.. 24. 78.. 1977).

6 April. Politics and Public Policy (Singapore: Instituteof Southeast Asian Studies. 30. Bruce Glassburner and Anwar Nasution. p. 46.A devaluation would reduce the incentive to smuggle and thus raise legal export volume (and export taxes) immediately. 37. 62. "Indonesian Sachs Economic Policies and Their Relation toExternal Debt Management". 13 September 1986. because the village started partly to handle projects which affected administratorswere not able to absorb more funds. and most taxes are collected from the urban dwellers.4. Bruce Glassburner and Anwar Nasution. 1December 1988. Richard Cooper. Frans Seda inKorhpas. 1978.PrincetonUniversity.10 in Wing Thye Woo. Evsey Domar ("The Causes of Slavery or Serfdom: A Hypothesis". and "Weak US Dollar Upsets Indonesia's Balancing Act". published as Book I inJeffrey (ed. 41. "Macroeconomic Crisis and Long-Term Growth: The Case of Indonesia. 32. Warta Berita. 1986).g. 13April. Sinar Harapan. 39.Motorbikes andGarbage". and Anne Booth inBulletin of Indonesian Economic Studies. Heinz Arndt. Far Eastern Economic Review. July 21. E. November 1979) called it "perverse" behaviour. however. February 1976. The indirect revenues can appear immediately if the overvalued official rate had prompted substantial smuggling. Wade Edmundson and Stella Edmundson. No. Bulletin of Indonesian Economic Studies. Philpin (eds. 31. Basic Needs inIndonesia: Economics. 42. of the Pacific Rim Studies Program at the ASEAN Economic Bulletin 321 March 1991 . December 1986. Arndt. Merdeka. op. 10. Far Eastern Economic Review. 24May. "Would a Revaluation be More Beneficial?" Merdeka. This explanation is not without controversy. Essays in InternationalFinance.See theanalysis of the 1966devaluation in Wing ThyeWoo. This was also noted of a different village by James Sterba ("Progress Comes to a Tiny Village in Measured inBanks. August 1983. Suara Karya. "Reform without favour: Indonesia eases curbs on imports and trade". "Survey of Current Developments".) The BrennerDebate (Cambridge University Press. Central Java. 33. H. partly. 1965-1985". and extolled "the value of stable and credible exchange rate arrangements". e. This is why Ross Garnaut ina hard-hittingassessment of thedevaluation written one year later ("Survey of Current Developments". June 1971. Jakarta Post. A detailed analysis of the 1978 devaluation is in Wing Thye Woo and Anwar Nasution. H. Bulletin of Indonesian Economic Studies. Mohammed Sadli inKompas. Aston and C. W. 34. 5May. H. 43. Additional rice is available only with additional subsidies. village programme was started at the very beginning of the Soeharto era to alleviate rural which was allowed to deteriorate under Soekarno. 1985). "CurrencyDevaluation inDeveloping Countries". August 1983. Sjahrir. Wing Thye Woo isAssistant Professor of Economics and Head University of California at Davis. 1989). 35. "Revaluation as an April's Joke". cit. Past and Present. and. Bulletin of Indonesian Economic Studies. 24 June. The fact thatmore rice is produced does not mean that the rice policy benefits the urban classes too. 5October 1987)who had predicted a pessimisticoutcome for the village in a 1971New York Times Magazine article. November.29. Robert Brenner. "A Decade of Village Development inEast Java". This point was not lost on all non-official economists. "Survey of Recent Developments". 36. cit. "Agrarian Class Structure and Economic Development inPre-Industrial Europe". 45. For example "Revaluation is not the Solution". 38. (1988. p. See Table II. unemployment and to rebuild the rural infrastructure With the growth of theoil sector in the early 1970s. 40. 13September 1986. The INPRES 44. explanation. 86.) Developing CountryDebt and Performance. the INPRES districtand province programmes were more than one village.). Journal of Economic History. 30 September 1986. it isnot necessary todevalue or revalue". "Again. Volume 2 (Chicago: University of Chicago Press. The Asian Wall Street JournalWeekly. Bulletin of Indonesian Economic Studies. the distributional effectsof agricultural and credit policy are discussed in op. March 1970) also offersa political Woo As noted earlier. See T. "A Suggestion that theRupiah Should be Revalued".

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