Indonesia's Economic Development

in comparison to South Korea and Taiwan

Gary Dean, September 1999
Reference: http://okusi.net/garydean/works/IndEcDev.html

The rapid pace of economic development in East Asia over the past few decades has
awed the world. This is particularly so for the so-called Newly Industrialising Countries
(NICs) which include South Korea and Taiwan, together with the city-states of Singapore
and Hongkong. Since the 1980's, these states have experienced very rapid growth rates,
especially South Korea and Taiwan, which have recorded annual GDP growth of 9.7%
and 8.3% respectively during the period 1980 to 1990. By comparison, Indonesia during
this same period recorded 5.4% annual GDP growth, which whilst still a fast rate of
economic growth, comes nowhere near that of South Korea and Taiwan.[1]

This paper shall focus on the recent economic development in Indonesia, and attempt to
contrast it with that of Korea and Taiwan. It shall attempt to explain why such relatively
large differences in economic growth occurred between these countries, despite a
significant number of shared historical experiences and a certain amount of cultural
similarity. Why is it that South Korea and Taiwan have surged ahead economically
during this time, whilst by comparison Indonesia has lagged in relative terms? What
makes Indonesia so different?

My perspective is shamelessly culturalist. I shall start by giving an overview of the

Indonesian economy and the social cultural framework within which it operates,
including the influence of patrimonialism, the bureaucracy, and the educational and legal
system. I shall then contrast this with the state of affairs in South Korea and Taiwan,
discussing some of the similarities, and then highlighting the many differences.

Until very recently Indonesia's economy was dominated by state actors. There exists a
long tradition of economic nationalism in Indonesia with the state attempting to have a
hand in all aspects of economic activity, rather than relying on the uncertainties of the
market.[2] Business has never enjoyed a privileged place in Indonesian society, and private
capitalism is viewed by most Indonesians with suspicion, a view accurately reflected in
the quasi-socialist Indonesian constitution. Article 33 of the constitution in particular,
interpreted literally, would seem to rule out most private capitalist activity, especially
foreign capital investment. The fact that the systematic abrogation of this article for the
last three decades has been quietly ignored by almost all sections of Indonesian society is
more a symptom of pragmatism rather than covert agreement. Capitalism was, and
probably still is to a large degree, equated with colonialism and exploitation, and
collectivist ideas about economic organisation still enjoy widespread support.[3]

In the 1970's and early 1980's, oil exports became fundamental to Indonesia's political
economy, and for a time at least, helped to shield Indonesia from market realities.
Indeed, by 1981 oil and gas accounted for 82% if all exports, and 73% of government tax
revenue.[4] Pertamina, the state-owned oil and gas monopoly, also formed a critical
financial base for the New Order generals, and to this day continues to be ruthlessly
milked by the military and by the top echelons of the New Order elite. Pertamina, like
many other 'state-owned enterprises', is in fact a cash machine for particular interests,
groups and individuals.

The pervasive patrimonial system of government in Indonesia owes much to the cultural
and political legacy of the sultans. Like the Indonesian military today, their interests
were first and foremost the maintenance of their own power. Economic development,
where it was actually undertaken, was a mere means to maintain power, not an end in
itself, and certainly not undertaken with any thought for the 'common people'. Sultanism
concentrates all power to the top, and all the resources within the reach of sultan's
mandala are the personal property of the sultan. Contemporary Indonesian 'Bapak-ism' is
a mere continuation of this tradition under another name.

The implications of this outlook are enormous, and much understated in academic
discourses about the Indonesian economy. Marxian class perspectives such as those
advanced by Robison[5] and MacIntyre[6] often seem to do more to obscure the reality and
dynamics of Indonesian society and economy than they do to illuminate it. Perspectives
such as this attempt to force the square pegs of European-oriented Marxian class analysis
into the round holes of non-European culture. Despite pockets of industrialisation and
paper-thin modernist veneers, the Indonesian state and the populations it currently
encompasses remain predominantly traditional in their outlook and attitudes.[7]

Like the sultans of the past, contemporary Indonesian political leaders dispense largesse
to their immediate underlings in the form of 'fiefs'. A government ministry, to start at the
top of the social-political hierarchy, constitutes a kind of fiefdom given by the President
to his trusted allies, giving the owner of the fief enormous power over a bureaucratic
domain. Resources within the realm of the department are distributed according to the
political power priorities of the particular minister, which means keeping his immediate
underlings under control and subservient. And so this pattern is replicated down to the
very lowest levels of the organisation.

Even within departments, different sections and regional branches often behave almost as
autonomous units, in the services they provide (or do not provide), in the fees they charge
for services, and in the way they interpret departmental and legislative regulations. In
return for these fiefdoms, homage must be paid by the owner to his immediate superior,
which is to say, that person responsible for granting the fief. These chains can stretch
from the lowliest clerk in the lowliest department through to the highest levels of
command, including of course, presidents and generals.

The financial accountability of Indonesian government instrumentalities, including

departments and 'SOEs', is virtually absent, and when not completely absent, frequently
fraudulent. The distinction between 'personal' and 'public' interest is rarely if ever made,
and it has only been these past few years that such distinctions have begun to be
emphasised at a formal symbolic level. The personal bank accounts of ministers,
departmental and organisational heads are often used to 'look after' money belonging to
the ministry, department, or organisation. Alternatively, a practice common under the
New Order was for the minister to establish a series of 'charitable foundations' to handle
various aspects of a ministry's finances, with the minister naturally as their head.

Within this bureaucratically paralysed system of administration, it should be no surprise

that in the vast majority of cases the only way to get anything done by a bureaucrat at any
level is to offer an inducement. Many of these inducements are in the form of semi-
official 'fees'. A branch of a department will, for example, set a fee for a certain service
and a portion of this will be redistributed to all members of the particular branch, much
like a workers' cooperative; high officials naturally get the lion's share. The appallingly
low official wages paid to bureaucrats probably necessitates such practises.

The patrimonial system of interpersonal relations is an all-pervasive characteristic of

virtually all Indonesian cultures. Its extension into the field of education has especially
important implications. Although Indonesia has long had an apparently well-organised
education system, with a minimum nine years schooling recently made compulsory, the
quality of the education provided is very poor. Teachers' wages are atrocious even by
Indonesian standards, with most compelled to seek outside employment in order to
survive.[8] Even Indonesian university lecturers are not much better off. Whilst it could
be argued that Indonesian universities do indeed provide education of sorts to their
students, their primary function seems to be the provision of a high-status literate class
who can take up their place within the state bureaucracies. What is taught, presuming
lecturers even show up, is frequently hopelessly out of date, and gea red to an extent to
selling the particular lecturers equally out-of-date textbook. Economic disciplines, such
as business, accountancy and management, are taught using rote methods, which would
not be so bad if what was being memorised was remotely useful in the world of modern
capitalism. [NB: The author undertook two very long full semesters of undergraduate study at
Indonesia's most prestigious university, Universitas Gadjah Mada, firstly in the Faculty of Economics, and
then in the Faculty of Social and Political Science.]

The internal organisation of large educational institutions reflects that of the government
bureaucracy, with sub-departments or faculties being worlds unto themselves, with their
own separate administrative systems and much subsequent bureaucratic duplication.
There is extremely little cross-communication between faculties. A typical arts student,
for example, would not ever have undertaken any classes in, say, the economics or social
science faculties, throughout his or her four years at university. The same student will
have followed his/her classmates in doing nearly exactly the same subjects for the entire
length of the course, with little opportunity to undertake study in side areas in which
he/she may have an interest. Further to this, about a year of their four-year program will
have been consumed undertaking compulsory first semester subjects on Pancasila (the
state ideology) and 'religion' and 'culture', and a less than useful final semester consumed
with 'field experience' (Kuliah Kerja Nyata) and the writing of a mini-thesis (skripsi),
more often than not of questionable standard.

The absence of a coherent legal system within Indonesia also serves as an impediment to
the development of a modern capitalist socio-economic system. At the legislative level,
the legal system has been paralysed by years of presidential decrees whose legal status is
dubious. The legislative role of the DPR (House of Representatives) over the years from
independence until perhaps a year ago has been increasingly sidelined. The body of law
that does exist comprises an incoherent amalgam of colonial, national, religious, and
traditional law.

As important as law itself is law enforcement. The courts, like all other Indonesian state
bureaucracies, works along patrimonial lines. A judge's first duty is to the people who
put them in their position, not to notions of principle or justice. In the area of business
contract law in particular, judicial decisions can often be bought. Further to this,
decisions can often be highly influenced by factors of race, religion and citizenship
status. The entire court system lacks integrity, frequently leading to solutions to legal
problems being sought outside of that system, with sometimes-deadly results.[9] Foreign
investors seeking redress from the legal system to enforce contracts are systematically
discriminated against should their case ever be actually heard. Overall, Indonesia is not a
good country in which to have a contract dispute, which puts a serious question mark
over the safety of foreign investment.

Like South Korea and Taiwan before the 1960's, Indonesia was still a predominantly
agricultural society in 1980. Oil and gas contributed much to Indonesian national income
starting in the early '70's, with up to 50% budget revenues deriving from this source.[10]
Indonesian society itself had only just started the journey on the road to industrialisation.
The vast majority of the population remained engaged in agricultural pursuits, principally
rice, but also plantation crops such as cloves, rubber, sugar, etc.

Like South Korea and Taiwan, Indonesia was and remains a highly militarised society
with a state strongly influenced by the military. All these countries have more-or-less
capitalist economies, and all are oriented towards the United States.[11] In addition, and
most importantly, the contemporary history of all three nations starts during the few years
after the end of the Second World War. South Korea and Taiwan together experienced
decades of Japanese colonial occupation, which had a profound effect upon those
societies and upon their cultures and social structures. Japanese colonialism is not only
'credited' with strengthening the two countries physical and human infrastructure, but also
the basis of its modern manufacturing.[12]

Japan's impact upon Indonesia was of a different nature, but nonetheless had dramatic
implications. Occupied by Japanese forces for a mere three years, there was little time
for Japanese cultural outlooks to deeply penetrate Indonesian society. The most
important legacy left behind by the departed Japanese was an embryonic state and
military structure. Sukarno proclaimed Indonesia's independence a mere few days after
Japan formally surrendered, marking the beginning of the bloody four-year independence
war, using those rudimentary military and political structures lacking before the Japanese
occupation.

All three countries, South Korea, Taiwan, and Indonesia, were clearly born out of serious
warfare and severe civil disturbance in the five or so years after the Second World War.
However, despite these important historical commonalities, Indonesia clearly did not take
the same route economically in the years following. In fact, apart from some shared
historical elements, Indonesia is quite radically different from South Korea and Taiwan.
Unlike Indonesia, South Korea and Taiwan are characterised by a very high level of
cultural and linguistic homogeneity; both countries have no significant 'ethnic'
minorities.[13] This is in stark contrast to the nations of Southeast Asia, and in particular,
Indonesia, where literally scores of different and competing ethnic groups have been
corralled into arbitrary nation-states delineated by European colonialism. Because
Indonesia is a multi-ethnic society with ethnic minorities very active in the economy,
public sector-private sector relations have often been conflictual.[14]

South Korea and Taiwan are culturally Confucianist, forming the base of norms of social
morality, influencing personal, familial, and institutional relationships, and the system of
governance. Confucianism provides the overall terms of reference for social morality
and order. Confucian influences include reverence for the education and social harmony,
respect for authority, ancestor worship, and emphasis on the importance of personal
relationships and the family.[15] Whilst some superficial similarity with Confucian values
can be found in Indonesian societies, contemporary Indonesian cultures are in the main
predominantly influenced by Islamic values and codes of behaviour.

Confucianism gives a revered place to public officials within the state. Partly as a
consequence of the strong bureaucratic traditions provided by Confucianism, the
governments of South Korea and Taiwan have relatively effective, coherent, competent,
centralised, and high calibre bureaucracy capable of implementing policy. Indonesia,
quite simply, has never had such a bureaucracy. Although some Indonesian state officials
may know enough to formulate economic policy, they often lack the capacity to
implement such plans.[16] Most importantly, the bureaucracies of Indonesia, like most
Southeast Asia states, are highly subject to penetration by societal forces. Under
Confucianist systems the business community is subservient to the rulers of the state, and
the non-elite classes are expected to respect the guidance of the ruling elites.[17] The
negative effects of patrialism upon the bureaucracy are thus not as profound in Confucian
societies, and a degree of state autonomy can thus be achieved.

Confucian cultures, of course, give much weight to the value of education, and parents
will often sacrifice much in order to provide their children with as good an education as
possible. Both within the family and without, there is enormous pressure to 'achieve' in
the realm of education. Comparatively little such pressure exists in Indonesian societies.
This is partly due to the collectivist, almost tribal, ethos that pervades Indonesia, and the
social pressure not to achieve or to stand out from the rest of the group. Individual
achievement, which is to say, the conscious striving for excellence or status by any
person, is seen as a form of egoism, in contrast to the status obtained by an individual
through fortuitous circumstance (fate) in which there is no conscious (or at least, socially
visible) striving.

There is a perception that the economic transformations currently underway in Southeast

Asia may be replicating this Northeast Asian developmental model.[18] Very high growth
rates in Southeast Asian countries over the past few decades, including Indonesia,
especially in the area of manufactured exports, has led to comparisons being made with
the so-called 'tiger economies', with South Korea often cited as a model for Indonesia.
There is a presumption that the economic 'formulas' employed by these tiger economies
can somehow be transferred into the Southeast Asia context.

However, economic activity does not take place in a social or cultural vacuum. The
separation of economic activity from the realm of human social and cultural activity is
purely artificial. The South Korean model, for instance, cannot be detached from its
social, historical and cultural context and plugged into the Indonesian social, historical
and cultural context. While this is not to suggest that lessons cannot be drawn from
various economic models around the world, countries like Indonesia with its own unique
cultural context, will need to find its own road to 'success' within the modern global
capitalist economy.

Cost of living in Indonesia

The cost of living in Indonesia can be very low, especially if you eat local food from local
restaurants or food stalls and shop in local markets- a rice based dish from a street stall is
between 4,000-7,000 IDR. Eating in Western restaurants or 5 star hotels and shopping in
Western supermarkets can be a lot more expensive with a meals costing between 30,000-
50,000 IDR. The reality is EF teachers tend to eat local food most of the time and "splash
out" on Western style meals once in awhile.