PLEASE SCROLL DOWN FOR ARTICLE...Habibie’s assumption of the presidency. ‘There is a question of whether he is ca-pable’, Soeharto said. Soeharto’s contemptuous dismissal of

PLEASE SCROLL DOWN FOR ARTICLE

This article was downloaded by: [University of Melbourne]On: 18 June 2009Access details: Access Details: [subscription number 905085178]Publisher RoutledgeInforma Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House,37-41 Mortimer Street, London W1T 3JH, UK

Bulletin of Indonesian Economic StudiesPublication details, including instructions for authors and subscription information:http://www.informaworld.com/smpp/title~content=t713406865

Economic policies of the Habibie presidency: a retrospectiveStephen V. Marks a

a Pomona College, Claremont, CA

Online Publication Date: 01 April 2009

To cite this Article Marks, Stephen V.(2009)'Economic policies of the Habibie presidency: a retrospective',Bulletin of IndonesianEconomic Studies,45:1,39 — 60

To link to this Article: DOI: 10.1080/00074910902836155

URL: http://dx.doi.org/10.1080/00074910902836155

Full terms and conditions of use: http://www.informaworld.com/terms-and-conditions-of-access.pdf

This article may be used for research, teaching and private study purposes. Any substantial orsystematic reproduction, re-distribution, re-selling, loan or sub-licensing, systematic supply ordistribution in any form to anyone is expressly forbidden.

The publisher does not give any warranty express or implied or make any representation that the contentswill be complete or accurate or up to date. The accuracy of any instructions, formulae and drug dosesshould be independently verified with primary sources. The publisher shall not be liable for any loss,actions, claims, proceedings, demand or costs or damages whatsoever or howsoever caused arising directlyor indirectly in connection with or arising out of the use of this material.

http://www.informaworld.com/smpp/title~content=t713406865

http://dx.doi.org/10.1080/00074910902836155

http://www.informaworld.com/terms-and-conditions-of-access.pdf

Bulletin of Indonesian Economic Studies, Vol. 45, No. 1, 2009: 39–60

ISSN 0007-4918 print/ISSN 1472-7234 online/09/010039-22 © 2009 Indonesia Project ANUDOI: 10.1080/00074910902836155

ECONOMIC POLICIES OF THE HABIBIE PRESIDENCY: A RETROSPECTIVE

Stephen V. Marks*

Pomona College, Claremont CA

B.J. Habibie ascended to the presidency in the midst of a severe economic crisis, and with a reputation as an economic nationalist rather than reformer. Nevertheless, Habibie had the mantle of reformer thrust upon him, and important steps toward economic reform were taken during his 1998–99 presidency. Among these were re-forms of domestic and foreign trade policies, the development of anti-monopoly and consumer protection laws, and the decentralisation of fi scal and regulatory au-thority. Through strict adherence to monetary discipline, moreover, Habibie accom-plished a macroeconomic stabilisation that had eluded Soeharto in his last months as president. Other changes in economic policies and practices under Habibie, nota-bly a populist program to distribute government largesse to cooperatives and small business and the extraction of election campaign funds from banks dependent on state authority, were steps in the wrong direction, if economic effi ciency and good governance were among the goals.

Ali Wardhana, an infl uential economic adviser to President Soeharto over much of the 1966–98 New Order period, famously observed: ‘Economic reform is rarely if ever undertaken for its own sake. Pressures for reform generally emerge from some crisis.’1 The economic crisis of 1997–98 unleashed such pressures. In his ascent from vice president to president in May 1998, B.J. Habibie inherited an economy that had been battered by the collapse of the rupiah against major currencies, rampant price infl ation and a double-digit drop in real economic activity.

The imperative for reform had long been building, driven by public discontent with collusion, corruption and nepotism in the latter years of the Soeharto presi-dency. Habibie was in a tenuous position by virtue of his close ties to Soeharto, but

* [email protected]. An earlier version of this paper was prepared for ‘Indonesia’s Reformasi: Refl ections on the Habibie Era’, Workshop and Public Forum Program, School of Advanced International Studies, Johns Hopkins University, Washington DC, 26–27 March 2007. The author thanks Ross McLeod, Thomas Willett, Jeffrey Fortner, Dewi Fortuna Anwar, other workshop participants and a host of attentive referees for their help-ful comments.1 Ali Wardhana, ‘Structural adjustment in Indonesia: export and the “high-cost” economy’, speech to the 24th Conference of Southeast Asian Central Bank Governors, Bangkok, 25 January 1989, quoted by Borsuk (1999: 165) and originally by Bresnan (1993: 260).

Downloaded By: [University of Melbourne] At: 10:59 18 June 2009

40 Stephen V. Marks

even beyond that he was an accidental president of sorts. Schwarz (2000: 361–2) describes a meeting between Soeharto and Muslim leaders in May 1998, as his hold on power crumbled:

In resisting pleas for an immediate resignation, he noted that this would mean Habibie’s assumption of the presidency. ‘There is a question of whether he is ca-pable’, Soeharto said. Soeharto’s contemptuous dismissal of Habibie confi rmed for many that he had never had any intention of grooming Habibie for the presidency. Rather, he had picked Habibie as vice-president to make himself look better by comparison. In effect, Soeharto was arguing: stick with me or you’ll end up with Habibie as president.2

Habibie was not an obvious choice as economic reformer. An economic nation-alist as State Minister of Research and Technology and mastermind of the state-owned aircraft company IPTN, he had often been at odds with the sober-minded economic technocrats who advised Soeharto. Habibie had in the past been ridi-culed for his ‘zig-zag’ theory that interest rates could be sharply lowered, raised, then lowered again to contain high infl ation (McCarthy et al. 1998). The exchange value of the rupiah, a barometer of confi dence in the economy, plummeted in January 1998 when Soeharto signalled the selection of Habibie as vice president by saying that the position should be fi lled by someone with a background in technology.

Critics argued that the Habibie cabinet was not suffi ciently reform-minded to restore investor confi dence.3 The most prominent member of the economic team, Ginandjar Kartasasmita, the Coordinating Minister for Economy, Finance and Industry, was an experienced and effective pragmatist but, like Habibie, an engi-neer. There were also tensions between the cabinet and the international institu-tions, some over the populist initiatives advanced by Adi Sasono, a social and political activist and member of the Indonesian Association of Muslim Intellectu-als (ICMI), who became State Minister of Cooperatives and Small and Medium Enterprises under Habibie.

Habibie recognised that his own legitimacy as president required that the country move decisively from economic crisis to recovery, and that endorsement by the International Monetary Fund (IMF) was critical to that end.4 Some policies he initiated—such as domestic and foreign trade liberalisation, reduced govern-ment interference in commodity markets and the development of a competition law and enforcement institution—thus coincided with IMF priorities.5

2 Schwarz draws the Soeharto quote from Waldman, Pura and Bruachli (1998).

3 Aware of his own credibility problems, Habibie privately insisted that his fi rst speech to the nation as president be checked by Indonesia’s most respected economic technocrat, Widjojo Nitisastro (Habibie 2006: 72).

4 President Soeharto had asked for IMF assistance in the last months of 1997, and a com-prehensive IMF program had been put in place, but the economy had not stabilised by the time Habibie ascended to the presidency.

5 From 1997 to 1999 I was an economic adviser to the Ministry of Industry and Trade in Jakarta, sponsored by the US Agency for International Development (USAID), and worked in all of these policy areas.


Economic policies of the Habibie presidency: a retrospective 41

There were also intense pressures from outside Jakarta for decentralisation of fi scal and regulatory authority, though the Habibie government seized upon that process as its own. The Habibie team also took steps that were inimical to eco-nomic reform but offered short-term political advantages, such as a populist pro-gram intended to benefi t cooperatives and small businesses.

Upon taking offi ce, Habibie pledged to tackle the corruption that the public had long perceived to exist up to the highest levels of government, but in which Soeharto had never acknowledged his own role. Habibie signed anti-corruption legislation into law a year later, but his government never waged a serious war on corruption. The Bank Bali corruption scandal that eventually entangled the Habi-bie government and the Golkar Party indicated to many that real reform required a more complete break from the past.6

This paper outlines the history of economic policy making under Habibie and offers some perspectives on the steps forward and backward along the path to economic reform during his 17-month presidency. I survey macroeconomic policy and the decentralisation initiative, domestic and foreign trade policies, and the development of the competition and consumer protection laws, as well as the populist measures undertaken by the Habibie government. I also touch on the restoration of the banking system, a critical part of recovery from the 1997–98 eco-nomic crisis. To the extent possible, I assess whether policy changes under Habibie contributed to economic effi ciency and equality as well as to good governance—criteria commonly applied in policy evaluation. I assess some policies against their own stated goals, and share the views of Indonesian economists on some aspects of policy.

MACROECONOMIC AFFAIRS AND THE IMFUntil the economic crisis of 1997–98, and despite some signifi cant economic shocks such as the decline of oil prices in the mid-1980s, Soeharto over much of his presidency maintained macroeconomic stability characterised by low budget defi cits, moderate infl ation and robust economic growth. The door was opened to the crisis more by weak fi nancial regulation and inadequate risk management than by macroeconomic policy miscalculations. Because Indonesia had been more or less open to capital infl ows and outfl ows since 1970, these defi ciencies left its banks and other companies with unhedged foreign currency debts vulnerable to depreciation of the rupiah triggered by capital fl ight.7 The sudden realisation that the end of the Soeharto era was near also contributed to the severity of the crisis, given that the economy had depended so heavily on his personal rule over three decades.

Once the crisis was under way in late 1997, it created severe macroeconomic stresses. Repeated injections of liquidity into troubled commercial banks, appar-ently at the direction of Soeharto, led to monetary expansion, which caused the

6 Golkar is a contraction of ‘golongan karya’ or ‘functional groups’. The Golkar Party was the successor to the Golkar organisation that Soeharto had used for years as his political machine. The Bank Bali scandal is discussed later in this paper.

7 Hill (2000) offers a more complete and nuanced analysis of the causes of the economic crisis.


42 Stephen V. Marks

value of the rupiah to plummet and infl ation and interest rates to soar.8 As the crisis deepened, Soeharto dithered. For weeks, despite objections from the IMF, he talked about initiating a currency board regime, which would have fi xed the exchange rate rigidly against the dollar and taken all monetary discretion away from Bank Indonesia.

President Habibie inherited an economy in disarray, but within a matter of months had returned it to relative stability. The rupiah recovered some of its value, infl ation slowed and output growth resumed, if modestly. McLeod (2003) argues that the dramatic reduction in monetary growth toward the end of July 1998 was mainly responsible. Boediono, one of Indonesia’s most respected economic policy makers, argues that monetary discipline was restored under Habibie after his advisers were able ‘to convince him that a really tight monetary policy was neces-sary to break the prevailing infl ationary spiral’ (Boediono 2002: 388).9 This was a very positive development, given that Soeharto had stopped listening to his economic team in the last months of his presidency.

Fiscal restraint became necessary mainly because of the enormous costs of bank recapitalisation, but also in support of monetary restraint, given the limited mar-ket for government debt at the start of the crisis. Boediono notes that President Habibie became a strict adherent to fi scal discipline, despite his reputation as a spendthrift from his years as State Minister of Technology and Research and as director of IPTN.

The macroeconomic stabilisation that Habibie achieved was not reform per se, but without it genuine reform would have been diffi cult to achieve. In the midst of the political and economic uncertainties of a country in crisis, few in govern-ment or business may be willing to set aside short-term opportunistic motives and focus instead on shared future pay-offs.

DECENTRALISATION OF AUTHORITYSetting in motion a dramatic decentralisation of fi scal and regulatory authority—and the parallel political changes needed to facilitate local democratisation—is one of the Habibie government’s most signifi cant achievements. Decentralisa-tion was not being pushed by the IMF, which was concerned mainly with the impact it might have on the central government’s budget defi cit. There was intense political pressure from outside Jakarta, however. Elites around the coun-try pressed for greater control over local resources, following decades of auto-cratic rule under Soekarno, and especially under Soeharto, whose personalised rule through a sort of hub-and-spoke model extended to the farthest reaches of the archipelago. It was generally believed that there would have been no

8 The governor of Bank Indonesia at the time has revealed that, at a cabinet meeting in September 1997, Soeharto directed that banks that were healthy but had liquidity problems were to be assisted (Djiwandono 2000).

9 Boediono was State Minister for National Development Planning under Habibie and Minister of Finance under Megawati Soekarnoputri; he became Coordinating Minister for the Economy under Susilo Bambang Yudhoyono in September 2006, and was appointed governor of Bank Indonesia in May 2008.



signifi cant change in the relationship between the centre and the regions had Soeharto remained as president (Turner and Podger 2003: 1).

Given the geographic dimensions of the country, the size and diversity of the population, and the overall level of economic development, decentralisation was overdue in Indonesia, if the experience of other countries is any guide (Alm, Aten and Bahl 2001: 84). Decentralisation offered the promise of greater responsiveness by government to local concerns, but also presented a chicken-and-egg problem: the establishment of genuine democracy within the regions was critical if decen-tralisation was to bring greater accountability and improved governance, but authority had to be decentralised for local democracy to matter. Thus, there were simultaneous efforts to democratise the political system at regional levels and to transfer fi scal and regulatory authority to the regions. The two laws enacted in May 1999 to further these goals took effect on the fi rst day of 2001. These laws and the detailed regulations that followed were produced on a rush basis that neces-sitated much improvisation as the process unfolded.

Concern about possible impairment of central government revenues, brought to bear partly by the IMF and the World Bank, meant that the transfer of con-trol over taxes was less extensive than that over expenditure. To compensate the regions for their added fi scal and regulatory responsibilities, central government personnel were to be transferred to counterpart regional institutions, and a com-plex arrangement was established to transfer revenues from the central govern-ment to the regions. These transfers took the form of dana alokasi umum (general allocation funds) and dana alokasi khusus (special allocation funds). The former were intended primarily to cover the salaries of transferred personnel, while the latter were to be used more for special needs in certain regions. Regional govern-ments also retained for the fi rst time part of their natural resource revenues,10 as well as portions of local property tax and personal income tax revenues.

Decentralisation: an assessmentObservers of the decentralisation program in Indonesia tend to regard it as ben-efi cial on balance, but far from complete. Alm, Aten and Bahl (2001) argue that the fi scal decentralisation generally assigned the appropriate functions to the centre and regions: the regions were given greater autonomy and authority in all matters except defence, judicial, fi scal and monetary policies, foreign policy and religious affairs. Also on the plus side, the delivery of public services, such as it was, was not interrupted in signifi cant ways, partly because of the transfer of central gov-ernment offi cials to regional government units, along with the funds to pay their salaries.

The distinctive political features of the archipelago shaped the nature of the decentralisation that was undertaken. For example, the devolution of authority largely by-passed the provinces in favour of districts and municipalities, partly because of concern that provinces were the political units in which separatist movements might more naturally emerge. Thus, under Law 22/1999 on Regional Governance, provinces were no longer in a hierarchical position of authority over

10 Law 25/1999 on the Financial Balance between Central and Local Governments stipu-lated that the regions were to receive 80% of forestry and mineral revenues, but only 15% of oil and 30% of gas revenues.


44 Stephen V. Marks

districts and municipalities, though presumably they did have authority over matters that transcended the boundaries of the districts and cities within their borders.11

The law and related regulations did not provide a suffi ciently clear division of authority to avoid differences of interpretation by the various levels of gov-ernment, however. The resultant uncertainties have tended to hinder investment and thus economic development, since it has often been unclear which regulatory bodies have authority over business activities. Another way to put it is that the impediments to negotiating effi cient regulatory solutions to problems of regional or national interest have become more severe under decentralisation. Intense con-fl icts between governmental units have occurred over areas of regulation—such as forestry, land use and investment approval—that have historically been among the most lucrative. Thorburn (2004: 45) writes: ‘If land certifi cation and transac-tions were uncertain and risky ventures before reformasi, they have now become nigh impossible.’ Confl icts over control of forestry resources can also be costly because uncertainties about who is entitled to the spoils can exacerbate the exploi-tation of the resource, as discussed further below. In addition, because the power of the provinces has been much diminished in practice relative to that of districts and municipalities, some governmental responsibilities that transcend local polit-ical boundaries, such as fi sheries management or disease control, have not been addressed through effi cient integrated strategies.

Within some line ministries and other central government bodies there has been considerable resistance to the devolution of regulatory authority. Thus, the new forestry law of 1999 restored to the Ministry of Forestry many of the func-tions that otherwise would have gone to the regions under the decentralisation law. Similarly, the central agencies for land management and investment were able to get a presidential decree issued to exempt their agencies from the transfer of authority mandated by the decentralisation law (Hofman and Kaiser 2004). One cannot argue that retention of central authority in these areas necessarily enhanced economic effi ciency.

Within the regions, perhaps the biggest question has been how far the democ-ratisation of regional politics can go, and thus how accountable local politicians and bureaucrats will become to the public. Some have argued that along with the decentralisation of authority has come a decentralisation of corruption,12 though jaded observers have noted that the local populace can at least now fi nd and burn the houses of its tormentors! There has also been concern about whether local governments have the institutional and technical capacity to carry out their new responsibilities. Dick (2001: 90) put it succinctly: ‘From the viewpoint of good governance, decentralisation will be a tremendous transitional problem’.

Another issue to emerge since the implementation of the decentralisation pro-gram is the proliferation of regional government units. Between the 1999 passage of the decentral isation laws and mid-2008, the number of districts grew from 234

11 District and city governments are not in a hierarchical relationship with each other, but rather are separate entities on the same hierarchical level.

12 See, for example, the two-part series in the Jakarta Post (hereafter ‘JP’) on the ‘Trans-formation of corruption’ by Teten Masduki, coordinator of Indonesia Corruption Watch (Masduki 2001).



to 377, the number of municipalities from 71 to 95 and the number of provinces from 26 to 33.13 Most of the fragmentation occurred between 1999 and 2003, but there were further changes in 2007 and at the start of 2008.

This development refl ects in part a natural fragmentation of the country along ethnic and cultural lines. However, as Fane (2003) and Hofman and Kaiser (2004) show, the formulas by which funds are allocated to the regions have created incentives for the proliferation of both local and provincial governments, through a fi xed monetary component in the payments to the regions and a component for government buildings. Hofman and Kaiser also note that urban areas may have incentives to split from the districts in which they are located to avoid sharing their retained personal income tax revenues.

Hofman and Kaiser point out the wide regional variation in population sizes, and see much of the regional fragmentation as amounting to a failure to exploit economies of scale in regional governance. At the end of 2004, provincial popula-tions ranged from 912,000 in the new North Maluku province to 37 million in East Java, while the populations of district-level units ranged from 12,000 to 4 mil-lion. Hofman and Kaiser conclude from their data analysis that local government labour costs per resident tend to be markedly higher in populations below about half a million residents.

Other problems with decentralisation may be due partly to the haste with which it was carried out. In the implementation of the new fi scal system in 2001, the national legislature insisted that the new formulas not cause local govern-ments to lose revenues. The subsequent changes to the transfer system reduced its equalisation effects so that, contrary to the original intentions of the decentralisa-tion law, resource-rich regions were favoured relative to resource-poor ones. The changes also meant that regions were compensated more directly for the salaries of their employees. Regional governments that cut the number of their employees would lose transfer funds the following year (Podger 2006). Bahl and Martinez-Vazquez (2006) argue that, had a fi rm plan been established for how the new transfer arrangements would be phased in, it would have been harder for the legislature to make these changes that undermined the fulfi lment of the law’s original intentions.

Fane (2003: 165) notes a further problem in the funds allocation formulas: two local government areas, one with many more poor persons than the other, could receive identical poverty funds allocations under the formula. In this respect as well, the equalisation provisions of the plan that went into effect were fl awed.

The rush to complete the decentralisation process also aggravated a problem that probably would have existed even if the process had been meticulous: the central government was not equipped to monitor the new taxes and other meas-ures enacted to boost revenue at the provincial and local level. A 1997 law had strictly limited the sorts of taxes and fees that local governments could collect, but a 2000 law allowed all regional governments to impose user charges, and

13 The fi gure given for the number of provinces before decentralisation excludes East Timor, over which Indonesia relinquished control in 1999. Data are based on calculations by the author using online information from the Department of Home Affairs (Departemen Dalam Negeri) and <http://id.wikipedia.org/wiki/Pemekaran_daerah_di_Indonesia> [Proliferation of regions in Indonesia].


46 Stephen V. Marks

local governments (but not provinces) to impose new taxes. Although all of these new revenue measures were to be subject to central government review, many were never submitted for review and many of those that were submitted were not reviewed (Lewis 2003).

The lack of central government oversight is a serious problem, because many of the revenue measures that regional governments have used have amounted to taxes on commerce between regions, tending to contribute to the ineffi cient fragmentation of the economy and, in many cases, to damage the competitive environment. South Sulawesi province, for example, applies a fee of Rp 50 per kilogram (about 0.5% of the price) on all shipments of cocoa beans out of the province. The provincial government gets 80% of the revenues, and the provincial offi ce of Askindo (the Indonesian Cocoa Association) gets the remainder. Annual cocoa shipments from the province have been about 200,000 tonnes of beans in recent years, so the fee has generated about Rp 10 billion per year, or upwards of a million dollars. The supposed purpose of the provincial portion of the fee is to provide extension services to cocoa farmers, but the funds just go into the general revenues of the province (rekening gubernur), and no special programs have been implemented. Because the fee depresses the price of cocoa beans within the prov-ince, it benefi ts processors of cocoa beans there at the expense of farmers, the vast majority of whom are small land-holders (Marks et al. 2005).

TRADE AND RELATED POLICIESThe IMF program in Indonesia included major reforms of domestic and for-eign trade and related policies, most of which were completed or at least in the works before Soeharto stepped aside in May 1998. Export taxes were reduced for products such as logs and rattan, and eliminated for leather, cork, metallic ores and scrap aluminium. The export monopoly for plywood was ended. The import monopolies of the national logistics agency (Bulog) were ended for wheat and fl our, among other products, though not for rice. Many local taxes and other impediments to trade within Indonesia were eliminated. Soeharto even pledged in the last weeks of his presidency, after some initial resistance, to end the clove trading monopoly that he had awarded in 1991 to his youngest son. In July 1998 Habibie shortened the list of sectors closed to foreign investment. Among the important sectors opened were palm oil plantations and large-scale retail trade.

Structural reforms like these were among the most controversial aspects of the IMF intervention in Indonesia, both inside and outside the country, because they did not bear directly on the primary causes of the economic crisis, were per-ceived to intrude too much on matters that should have been left to Indonesians to decide, and distracted top offi cials from resolution of the fi nancial problems that had caused the crisis. However, crony capitalism under Soeharto had led to widespread discontent in the later years of his presidency, and a great many of his policies in those years furthered neither economic effi ciency nor equality. There is clear evidence, for example, that the clove monopoly hurt poor farm-ers, nominally its intended benefi ciaries, and led to widespread abandonment of clove trees (Bennett, Marks and Muslimin 1998).

Other reforms were made possible by the easing of the crisis. From Janu-ary through March of 1998 the government had banned exports of all palm oil



products, because the 75% depreciation of the rupiah against the dollar between June 1997 and January 1998 had caused sharp increases in the price of cooking oil, an important household staple. The export ban created powerful incentives for smuggling, and threatened to throw the industry into chaos, particularly because of the limited storage capacity within Indonesia for palm stearine, a major prod-uct that is obtained from the refi ning of crude palm oil and that congeals if it is not kept in heated tanks.14 With IMF oversight, the ban was replaced by export taxes on crude palm oil and its derivative products, and these were progressively reduced as the value of the rupiah stabilised against other currencies in the sec-ond half of 1998. These measures were benefi cial for oil palm farmers and the economy generally.

The Habibie government enacted additional reforms for rice and other com-modities in cooperation with the IMF. Rice is the most important food staple in Indonesia, and its price surged during the crisis as the rupiah depreciated. Bulog was tasked with importing rice, and to counter the depreciation it received an exchange rate subsidy. In August 1998 the market price for low-quality rice was double the reference price that the government had set. Cooperatives minister Adi Sasono conjectured that rice was being hoarded by big traders and smug-gled to Malaysia because of the wide price differential between the countries (JP, 1/9/1998).

As part of the social safety net provisions of the agreements with the IMF, a program to provide subsidised rice to poor families in a more targeted way was developed in cooperation with the World Bank. The Bulog exchange rate subsidy was ended, and new subsidies targeted to the poor were put on the state budget. Although there were reports of leakages of subsidised rice from the new program, it provided on balance a more effective and less costly way to hold down the price of rice to needy families.

Also within the framework of the agreements with the IMF, subsidies on urea and other fertilisers were eliminated in December 1998. Application of these sub-sidies had required a ban on urea exports, since in 1998 the external price was 200% higher than the domestic price (JP, 18/11/1998). Also, because the subsidies were supposed to be limited to small farmers, an elaborate distribution apparatus had been run through the state-owned fertiliser companies and rural coopera-tives, presumably to ensure that the subsidised fertiliser did not go to large plan-tations or the export market. Shortages of various fertilisers in rural areas had been common. The amount of fertiliser smuggled out of the country or diverted

14 The comprehensive ban on exports of all palm oil products was actually intended to make smuggling more diffi cult. Previously, only the exports of crude palm oil and palm cooking oil (palm olein) had been banned, but olein had been smuggled out of the coun-try by being classifi ed for customs as stearine, which resembles it when hot. On a trip with relatively senior staff of the government’s Tim Tarif (Tariff Team) in early 1998, I saw 180-kilogram drums being fi lled, supposedly with stearine, at a refi nery at a port in Riau province. The drums were identical to those in which a brand of olein had previously been exported, and it would have been impractical to remove congealed stearine from them at the destination. A supervisor at the refi nery made the implausible claim that putting the alleged stearine in the drums under pressure would keep it liquid!


48 Stephen V. Marks

to the plantations has not been estimated, but these problems were extensive by all accounts.

Agricultural economist Bungaran Saragih, who later became Minister of Agri-culture under Megawati Soekarnoputri, welcomed the end to the subsidies, which he stated had not been effective in helping farmers (JP, 7/12/1998). Economist H.S. Dillon, who had previously served as assistant to the Minister of Agriculture and who objected to the elimination of the fertiliser subsidies in the midst of the crisis, nevertheless observed that for farmers the availability of fertiliser was more important than the subsidies.15

The urea fertiliser export ban was re-instated in August 2000 by the government of Abdurrahman Wahid, who succeeded Habibie as president. Fertiliser subsidies were restored to the state budget by the government of Megawati Soekarnoputri in 2003. Reports of fertiliser shortages and even sales of fake fertiliser in rural areas have continued.16

The fertiliser case illustrates a risk of including structural reforms in the IMF program—that the Indonesian elite would not buy into them,17 and could revert to old policy approaches in the future. Sugar trade is another example. Sugar mills on Java, which are all state owned, are highly ineffi cient and are chronically under threat from lower-cost imports.18 Bulog had been in control of sugar imports until September 1998, when imports were freed under the agreements with the IMF. This liberalisation of the sugar trade was arguably too abrupt. Import duties had been set at zero, and the imposition of new tariffs would have required notifi cation to the World Trade Organization and regional trading partners. As an emergency measure, Rahardi Ramelan, the Minister of Industry and Trade under Habibie, gave the mills on Java all sugar import rights from August 1999 until the end of the year. Real sugar prices in the world market at that time were near their lows of the past 40 years, and were about one-third lower than a year earlier, while the rupiah had rebounded in value against the dollar by more than 60% over that

15 ‘End to fertilizer subsidies is pure folly’ (interview with H.S. Dillon), JP, 21/12/1998.

16 Farmers in Lampung province on Sumatra reported in 2006 that they could not obtain fertiliser, and had suffered crop failures because some of the subsidised fertiliser sold to them was fake (Saroso 2006). Adulteration is an expected consequence of sales of a product at artifi cially low prices, particularly if the price is held down only for a group of relatively unsophisticated buyers. In a similar way, subsidised gasoline has often been diluted with lower-priced kerosene, leading to engine damage for many.

17 Thee (2006) argues that this problem also existed for the 1999 anti-monopoly law con-sidered below; it too was mandated by the IMF, though certainly it had supporters within Indonesia.

18 Many of the mills are antiquated, dating from the Dutch era, and have capacity well below the minimum effi cient scale in the modern industry. There are also serious coordi-nation problems between the mills and the small land-holder farmers who supply much of their cane. For example, the mills typically have an ineffi ciently long milling season, so that the sugar cane stands too long in the fi elds; this leads to reduced sugar content and prevents some farmers from getting other crops planted on time. Moreover, irrigated rice fi elds are generally poor locations to grow sugar cane. Thailand and Australia are the most competitive sugar producers in the region; their plantations and mills are integrated, and harvests are mechanised. Private mills on dry land outside Java also have lower costs than mills on Java.



year, so sugar producers in Indonesia were under intense competitive pressure from imports.

Real sugar prices in the world market were only slightly higher several years later, though the rupiah had weakened somewhat relative to 1999. Between 2002 and 2004, Rini Soewandi, the Minister of Industry and Trade under Megawati, imposed extensive controls on both foreign and domestic trade in sugar, the effect of which was to create a cartel in the Indonesian market.19

ECONOMIC POPULISMPresident Habibie was under intense pressure to assemble a winning electoral coa-lition for the Golkar Party in the early general election he promised. Adi Sasono became a major supporter in that effort, through his ekonomi rakyat (people’s econ-omy) program. The populist initiative was supposed to further distributive justice through the empowerment of smaller Indonesian entrepreneurs and cooperatives, and thus to ease social tensions. To a large extent it refl ected the widespread belief that the huge business conglomerates owned mainly by ethnic Chinese or rela-tives of Soeharto had fl ourished because of cronyism, and that small businesses owned by indigenous Indonesians faced many disadvantages.

These themes had a long history in Indonesia. The cooperatives played a cen-tral role in the socio-economic vision of the nation’s fi rst vice president, Moham-mad Hatta. The late Professor Mubyarto of Gadjah Mada University had long advanced the concept of ekonomi rakyat as an umbrella term for the economic activities of families and other small-scale entrepreneurs in the informal sector (see, for example, Mubyarto 2002). President Soeharto had lent some rhetorical support to the cooperatives (Borsuk 1999), but in practice was more concerned with the development of larger-scale entrepreneurs, indigenous as well as ethnic Chinese.

The ekonomi rakyat program conceived by Adi Sasono included initiatives for both the cooperatives and small entrepreneurs. Cooperatives would be involved in the distribution of certain strategic commodities, and would be granted owner-ship shares in forestry resources and perhaps in the assets seized from corporate debtors in default. Farmers and other small entrepreneurs would be given access to subsidised credit. Both groups would be given privileged positions under the new competition law, to be discussed further below.

In contrast to the offi cial rationales given for these measures, economists like Sri Mulyani Indrawati, who was to become fi nance minister under Susilo Bam-bang Yudhoyono, saw their purpose as being primarily to boost the prospects of Golkar and Habibie in the June general election (JP, 18/2/1999). Given the contro-versies that surrounded the program, it is worth a closer look.

Subsidised creditIn October 1998 the government introduced a subsidised credit package worth Rp 10.8 trillion (about $1.2 billion) to fund various activities of cooperatives, small businesses and farmers; interest rates under the scheme were between 6% and 16%

19 This was the conclusion of a study by the Business Competition Supervisory Commis-sion (KPPU 2005). See also the discussion below of the competition law.


50 Stephen V. Marks

annually, compared with nearly 40% for commercial loans (JP, 2/3/1999). The vast majority of the loans, Rp 8.2 trillion, were to go to farmers (JP, 7/12/1998). Most of these funds were disbursed within a few months.

Dillon (2001: 201) states that, under the Kredit Usaha Tani (KUT) farm credit scheme, trillions of rupiah were ‘handed out to Habibie supporters under the guise of KUT support’. The problem is that farmers have typically been able to obtain loans only through third parties, such as cooperatives, that have direct access to the funds. The farmer might see only a fraction of the subsidised credit lent, which the third parties would often deposit into interest-bearing accounts on their own behalf. Dillon (2001: 204) concludes: ‘A drastic shift away from disburs-ing credit packages to creating working rural capital markets is called for’.

Former minister Emil Salim (2001: 211) uses the term ‘money politics’ to describe the extension of farm credit under Habibie, though he does believe that some of the credit got through to farmers. There was independent evidence that the rural credit schemes were tainted by money politics on the part of Golkar and of a political party tied to Adi Sasono (JP, 27/5/1999). A new law on Bank Indo-nesia, put into effect in May 1999, ended the special liquidity credits from the central bank (Kredit Likuiditas Bank Indonesia) that had funded all subsidised credit programs such as KUT, but farm credit programs have since re-emerged in other forms.

Commodity distributionBulog had previously had major roles in the domestic distribution of cooking oil and sugar. In July 1998, a decree of the then Minister of Industry and Trade, Rahardi Ramelan, granted Bulog a monopoly on the distribution of bulk palm cooking oil made from crude palm oil produced by state plantations, and of sugar from the state trading company PT Rajawali Nusantara. Later that month, the cooperative Inkoppas was designated as the primary distributor of cooking oil for the greater Jakarta area. Within a matter of weeks, and amid evident tensions between Adi Sasono, Rahardi Ramelan and the head of Bulog, Beddu Amang, the Inkoppas arrangement was cancelled. At the end of October, however, with Beddu no longer at Bulog, a decree by Minister Rahardi gave a new association of cooperatives, Koperasi Distributor Indonesia (KDI), the exclusive rights to distribute the cook-ing oil and sugar that had previously gone to Bulog. The crude palm oil produced by the state plantations represented about 35% of total national production.

The role of KDI was controversial from the start. Critics charged that some of the cooperatives were unable to carry out the trade in rice, sugar and other staples, and simply paid ethnic Chinese traders do it for them; there were also charges that much of the subsidised credit granted to KDI participants went to their own con-sumption expenditures (Shari 2000). These are familiar stories in Indonesia.20

The minister rescinded the KDI exclusive distribution decree in early June 1999, just a few days before the national general election, but KDI reportedly remained

20 Similar charges were made about the infamous Benteng (Fortress) program of 1950–57, for example. It provided subsidised credit and import licences to indigenous Indonesian entrepreneurs to counter the economic clout of Dutch and Chinese traders. Some of these favoured parties sold their licences to Chinese importers, while others defaulted on their loans. Few of the indigenous businesses survived the end of the program.



active in the cooking oil trade into 2000. The general chair of KDI, Nurdin Halid, was later indicted for corruption in connection with the cooking oil distribution program, and in particular because KDI failed to repay Rp 169.7 billion (about $17.8 million) owed to Bulog. As in two other separate corruption cases in which the cooperative leader was implicated, Nurdin was eventually exonerated by a questionable court ruling (JP, 18/6/2005).

Asset redistributionThe Minister of Forestry and Plantations, Muslimin Nasution, announced in April 1999 that the government would distribute part of the forest land that had been taken over from old concessionaires—at least one million hectares—directly to cooperatives (JP, 19/4/1999). Two months later the minister announced that for-estry and timber companies that wished their concessions to be extended would be required to give at least 10% of their shares to companies owned by provin-cial governments, 10% to state timber fi rms and 20% to local cooperatives. The timber companies would also be obliged to raise the ownership share for coop-eratives by one percentage point per year, so that at the end of a typical 35-year concession the cooperatives would own 55% (JP, 15/7/1999).

A proposal identifi ed with Adi Sasono would have distributed other corporate assets seized by the Indonesian Bank Restructuring Agency (IBRA) as it tried to salvage the loan portfolios of troubled banks. Adi claimed the full support of Presi-dent Habibie in this effort, but the proposal met stiff resistance and apparently did not come to fruition. Economists warned that the proposal went too far against market principles and could impede economic recovery; Pande Radja Silalahi of the Centre for Strategic and International Studies stated: ‘The policy is not based on the right principle. The minister is not Robin Hood’ (JP, 16/12/1998).

Ekonomi rakyat: an assessmentIt is ironic that B.J. Habibie, with his background in heavy advanced industries and scepticism toward small and medium enterprises (SMEs) and even labour-intensive industries (Hill 2001: 252), would back the ekonomi rakyat initiative, but clearly among his foremost political imperatives as president was the need to dis-tance himself from Soeharto and to develop his own political base.

If the ekonomi rakyat program led to ineffi ciencies and corruption, it was per-haps not very different in principle from many policies of the Soeharto years. The main change was the number of benefi ciaries: ekonomi rakyat was more broadly based than New Order initiatives for indigenous entrepreneurs had been. If the cooperatives were not professional in handling the distribution of agricultural commodities like cooking oil, it is not clear that Bulog had done much better. If the failure by KDI to repay its debt to Bulog was a major scandal, it was no more reprehensible than other abuses of funds obtained through Bulog, such as the notorious 1995 land swap between Bulog and a company owned by the young-est son of President Soeharto, or a 1999 scandal that involved Rahardi Ramelan (who had become head of Bulog as well as Minister of Industry and Trade) and Golkar Party head Akbar Tandjung.21 If the cooperatives were not particularly

21 The land-swap scandal is estimated to have cost Rp 95.4 billion in state funds (JP, 2/3/2001) and the 1999 scandal Rp 62.9 billion (Saraswati 2004).


52 Stephen V. Marks

good custodians of forest resources, it is hard to argue that the powerful individu-als who had access to the forests under Soeharto had done much better.

On the other hand, the subsidised credit schemes were clearly a step backward in economic terms. Banking reforms in 1983 and 1988 had led to the substantial elimination of subsidised credit (Hill 2000: 120). This was of value for several reasons. Such subsidies invited corruption, as noted earlier, and it was unclear how much of the credit actually reached the putative benefi ciaries, particularly farmers. There was also a question whether an economic rationale existed for sub-sidising farm or other business activities. Was there some market failure for which subsidised credit was the best policy solution? It is doubtful.

Announcing future transfers of the rights to the stream of income from for-est concessions could induce the original concessionaires to cut down the trees faster, and not to invest in replanting—though admittedly not much of the latter has been observed anyway, in part because of the relatively short duration of for-est concessions. There would have been less distortive ways to extract additional rents or royalties from the holders of the concession rights.

Finally, the cooperatives were by no means ideal recipients of asset redistribu-tion. Typically ineffective and corrupt—in most cases imposed from the top down by the state rather than emerging from the bottom up—the cooperatives were political institutions that refl ected the rural power structure. Thus, it was not clear that the ekonomi rakyat program favoured distributive justice, because much of the spoils went not to those who were productive but to those who had political con-nections, such as the managers of cooperatives.

The agreements with the IMF in March and May of 1999 mentioned the peo-ple’s economy program. The IMF was concerned that real lending rates be positive and adjust to market conditions, that property rights be respected, that policies promote economic effi ciency and growth, and that monetary and fi scal control be maintained. Adi Sasono mentioned that the IMF and other donors demanded tight monitoring of the disbursement of the subsidised loans (JP, 10/2/1999), but it is not clear that this was done.

Few economists would dispute that SMEs should be allowed at least a level playing fi eld, or that credit markets could work better. However, the ingredients of true reform on behalf of the SMEs were largely overlooked by the Habibie team. Overhead and other costs related to sometimes arbitrary business regula-tion imposed severe burdens on small enterprises (see, for example, Hill 2001). Clearing these obstacles from the path of small entre preneurs required persever-ance and hard work. The Habibie team was interested in a faster pay-off.

The ending of the basis for subsidised credit in the 1999 Bank Indonesia law and the revocation of KDI’s exclusive distribution rights both came in the run-up to the June 1999 election. These developments may have indicated that the ekonomi rakyat program had served its main purposes, and that the elite in the government and the parliament, both under the control of Golkar, recognised that the excesses of the program could not be sustained over time.22 They also refl ected a reining in

22 President Habibie, in his October 1999 accountability speech, noted simply that Bank Indonesia could no longer administer subsidised loans because of its independent status under the new law (see the section on banking below).



of Adi Sasono, who had formed a new political party and had used the program to further his own political ambitions.

Toward the end of 1999, out of public offi ce and in a new role as chair of ‘Indo-nesia Bangkit’ (Indonesia Arises), Adi Sasono stated: ‘All forms of corruption that cause high transaction costs occur as a consequence of a system that is closed and protective … Strong entrepreneurs are not created by being engineered or through a preferential system.’23 These observations seem as relevant to his ekonomi rakyat program as to crony capitalism under Soeharto.

THE COMPETITION AND CONSUMER PROTECTION LAWSActivists within Indonesia had been calling for the enactment of an anti-monopoly law since the late 1980s, but such a law would have been inimical to the crony capi-talism practised under Soeharto. Among the activists were Adi Sasono and Dawam Rahardjo, both of whom urged the development of an anti-monopoly law at a 1996 ICMI seminar on the empowerment of SMEs, for example (Republika Online, 30/3/1996). The crisis of 1997–98 created an opportunity, and passage of an anti-monopoly law appeared as a goal in the third agreement between Indonesia and the IMF in April 1998. The new law, the Prohibition against Monopolistic Practices and Unfair Business Competition, was signed by President Habibie in March 1999.

Developed with input from the World Bank, USAID and its German counter-part GTZ (Deutsche Gesellschaft für Technische Zusammenarbeit), the law man-dated the creation of a Business Competition Supervisory Commission (KPPU, Komisi Pengawas Persaingan Usaha) that would perform the regulatory func-tions related to competition law, subject to judicial review.

It is undeniable that widespread resentment of the relatively prosperous ethnic Chinese minority, and of the fortunes amassed by members of the Soeharto family, had animated the push for the law. An effort to differentiate in the law between pribumi (indigenous Indonesian) and non-pribumi businesses was defeated in the national legislature in November 1998 (McCawley 1998), however, and to his credit President Habibie subsequently ordered that these terms not be included in any government documents.

The new law was broadly consistent with international norms of competi-tion law, but featured some distinctly Indonesian themes. Small enterprises and cooperatives were exempted,24 and state enterprises were to be regulated separately. However, the KPPU was mandated to consider and comment on gov-ernment policies that could be connected with monopolistic practices or unfair competition. This was important in light of extensive state interference with the market mechanism, particularly in the latter years of the Soeharto presidency.

23 My translation of his ‘Ekonomi kerakyatan dalam dinamika perubahan [The peo-ple’s economy in the dynamics of change]’ speech to Konferensi Internasional Ekonomi Jaringan: Menuju Demokratisasi Ekonomi di Indonesia [International Conference on the Networked Economy: Towards Economic Democratisation in Indonesia], 6–7 December 1999, Jakarta, available at <http://pustaka-ekonomika.blogspot.com/2007/10/ekonomi-kerakyatan-dalam-dinamika.html>.

24 Only cooperative activities aimed at serving their members were exempt, but in prac-tice this could have encompassed almost any activity of the cooperatives.


54 Stephen V. Marks

The law also included structural criteria by which market power could be pre-sumed to exist. It stipulated that a fi rm could be deemed a monopoly if it had a market share greater than 50%. Two or three fi rms with a combined market share of greater than 75% could be deemed an oligopoly.25 If these structural cri-teria were met, there was a presumption that the fi rms controlled the market in a way that could lead to monopolistic practices or unfair competition, and the fi rms could be subject to investigation by the KPPU. If their conduct was found to be unfair or to hamper competition,26 they could be subject to strict administrative or criminal sanctions, which could include payment of compensation or fi nes.

One of my own contributions to the development of the law was to point out problems in a late draft that used the market-share criteria as prima facie indicators of market power and allowed the imposition of sanctions equal to triple the prof-its earned by fi rms found to constitute a monopoly or oligopoly.27 This sanction was apparently conceived in parallel with the notion of triple damages payable to victims, such as under US anti-trust law, but it would not have required identifi ca-tion of victims or estimation of the damages suffered—important disciplines on the enforcement of the law. Instead, it amounted to a criminalisation of profi ts. Its omission from the fi nal version of the law was wise: Indonesia could not afford to threaten its corporate sector in that way if investor confi dence was to be restored.

Although the fi nal version of the law was far better than earlier versions that automatically would have branded fi rms meeting the structural criteria as monopolies or oligopolies, the threat that the criteria could trigger an investi-gation remained an issue. It highlighted a common concern among Indonesian entrepreneurs: they did not want to become so big as to be noticed by the govern-ment. This concern could deter the growth of fi rms with attractive products and low costs, and could lead to less rather than more competition. It could also mean higher costs for an industry: production could shift to higher-cost fi rms, if mar-ket leaders felt pressured to raise prices or fi nd other ways to slow their growth when they came close to the threshold market shares. Furthermore, market lead-ers might not be able to realise the full extent of economies of scale.

Economist and politician Faisal Basri (2002: 352), recently a member of the KPPU, regards the exemption of various types of enterprises from the law as one of its weak points: ‘Anyone (private fi rms, cooperatives, state enterprises) that has market power, wherever, whenever, in all relevant markets, will tend to exploit it to dominate the market in ways that are anti-competitive’ (my translation).

The exemption of small businesses and cooperatives from the law is prob-lematic because the archipelago economy of Indonesia includes many relatively

25 In the Indonesian cultural context, competition between large and small fi rms has been seen as inherently unfair without reference to any anti-competitive conduct on the part of the large fi rm (Marks 2007).

26 The term ‘unfair’ posed some problems for the drafters of the anti-monopoly law. The text of the law commonly uses the term ‘tidak sehat’ (‘unhealthy’) to mean ‘unfair’, but this can lead to ambiguities if it implies that too much competition is problematic. The law also uses the term ‘tidak jujur,’ which usually means ‘dishonest’ but in this context can also mean ‘unfair.’

27 The secretary general of the Ministry of Industry and Trade had been assigned the lead in development of the law (see also footnote 5 above).



isolated areas in which such enterprises may predominate. If only one or two traders buy nutmeg on some isolated island off North Sulawesi, for example, the concern is that their exercise of market power, individually or in collusion, could affect the primary source of income for many households. This concern would be greater if the traders had somehow managed to limit the entry of rival traders into the market, perhaps through their close ties to local civilian or military offi cials. It would be useful for such parties to ponder whether their conduct could be classi-fi ed as anti-competitive and subject to sanction.

The law had other questionable provisions. For example, some of the more clearly harmful practices (such as bid-rigging conspiracies or price fi xing) were subject to lesser criminal penalties than were some of the practices with more ambiguous wel-fare effects, such as vertical integration or mergers. The extensive powers granted to the KPPU were also of concern, given the weakness of governance in Indonesia. Hill (2000: 289) questioned whether the competition law and commission were even needed—arguing that an open trade regime would maintain competition within most markets, and that many of the anti-competitive arrangements in Indonesia had been precisely those created through government sanction.

The worst fears have not been realised so far,28 and the KPPU at times has acted upon its mandate to point out anti-competitive government policies. A 2005 KPPU study directed by commissioner Faisal Basri, for example, examined how domestic and foreign sugar trade restraints imposed between 2002 and 2004 allowed a cartelisation of the market (KPPU 2005). However, the market-share criteria included in the law re-emerged as cause for concern in 2007. In a con-troversial decision, the commission forced the Singapore sovereign wealth fund Temasek to divest part of its Indonesian telecommunications assets and pay about $25 million in penalties, ostensibly because Temasek held more than 50% of the cellular telephone services market.29 Temasek and its subsidiaries actually held minority ownership shares in the two largest Indonesian service providers, and so by defi nition could not have had a 50% market share (Kong and Ramayandi 2008: 26–7).30 In any event, Temasek sold its entire stake in the second-largest service provider in June 2008, and lost its appeal to the Indonesian Supreme Court three months later (Nurhayati 2008). The case led to renewed concern about the invest-ment climate in Indonesia.

A draft consumer protection law had been in development at the Ministry of Industry and Trade since about 1996; it had been submitted to President Soeharto, but was never completed during his presidency. The draft of the law was brought to completion in 1999, and President Habibie signed it in April, six weeks after

28 Thee (2002, 2006) offers an overview and critique of the anti-monopoly law and its ini-tial implementation under the KPPU.

29 In the same determination, the largest Indonesian cellular telephone service provider, Telkomsel, was found to have over-charged its customers. It was required to reduce its tariffs by at least 15%, and was fi ned a similar amount.

30 Antara News (21/11/2007) reported that Temasek owned a 54.15% share in the SingTel Group, which held a 35% stake in Telkomsel, while Temasek fully owned Singapore Tech-nologies Telemedia, which owned 75% of Asia Mobile Holdings, which in turn owned 41.9% of Indosat. Telkomsel and Indosat together account for about 90% of the cellular telephone service market in Indonesia (Kong and Ramayandi 2008: 27).


56 Stephen V. Marks

signing the competition law. It was a credible and comprehensive piece of con-sumer protection legislation that drew upon the laws of other nations to offer protection from goods of low quality and from a variety of deceptions, misrepre-sentations and failures to disclose relevant information. It was clearly important in symbolic terms, demonstrating that the government thought consumer inter-ests worthy of protection.

Was the law necessary? Its delineation of consumer and producer rights and responsibilities is useful, although many in Indonesia do not have access to rem-edies via the legal system. Western economists tend to favour market-oriented approaches to consumer protection—based on fi rms’ interests in maintaining their reputations and in getting repeat business from buyers. Of course, many consumers have limited access to information about companies and their prod-ucts and customer service. However, governments can facilitate a free fl ow of information in various ways. One is through a standardisation of the informa-tion that producers must disclose for various kinds of products. In addition, the 1999 law prominently features the goal of helping consumers to protect them-selves, and encourages the emergence of independent institutions that can pro-vide information and other resources to consumers. In addition to the Indonesian Consumer Foundation (Yayasan Lembaga Konsumen Indonesia), which has sup-ported consumer interests for many years, new players have emerged; for exam-ple, the Media Konsumen website offers consumers opportunities to express their views and learn what others have said.

THE BANKING SYSTEMThe May 1999 law on Bank Indonesia prominently featured a theme that Presi-dent Habibie had emphasised as a product of his experience in Germany, and that had been advocated by the IMF—that decisions taken by Bank Indonesia should be independent of infl uence from the government or other external par-ties. The law stated that governors of Bank Indonesia could not be removed from their positions unless they were convicted of a crime or became perma-nently disabled.

McLeod (1999) questions whether such independence is achievable in Indo-nesia, and even doubts whether it would lead to better monetary policy. It is true that improved monetary policy in the second half of 1998 was not a function of increased central bank independence per se (Kenward 1999: 125) and that, not long after the enactment of the 1999 law on Bank Indonesia, monetary policy argu-ably developed a more infl ationary bias, which McLeod (2003: 308–9) attributes to ambiguities in the law that leave Bank Indonesia with much discretion about what its proper objectives are. Nevertheless, formal acknowledgment that the central bank should be independent of political infl uence represented consider-able progress for Indonesia, particularly in comparison with the last months of the Soeharto era, when injections of liquidity into banks caused a loss of control of the money supply and left taxpayers with a huge debt burden.

Efforts to restructure troubled state and private banks under IBRA auspices, and to recover the assets of their corporate debtors, were major pre-occupations of the Habibie administration. Progress was slow, and corporate resistance to repayment was extensive, given the weakness of bankruptcy courts and other



institutions.31 Soesastro (2000) points out that the Habibie government did not assist in the recovery of any assets from companies owned by relatives of Soe-harto, and that IBRA overall recovered only about 32% of the government funds that had been used to restructure the banking sector.

The bank restructuring process was put under a global spotlight by the revela-tion of the June 1999 Bank Bali scandal, in which Rp 546 billion (about $74 mil-lion) was diverted from the bank to Golkar Party operatives, presumably to be used for the 1999 presidential election. The bank had paid the amount as a com-mission, akin to an extortion payment, for recovery of its assets from other trou-bled banks. Members of the Habibie inner circle were alleged to be involved, and the reputations of IBRA, the Ministry of Finance and Bank Indonesia, and of the leaders of these institutions, were damaged (see, for example, Saludo 1999). The IMF, the World Bank and the Asian Development Bank suspended their loan pro-grams pending the results of an outside audit, which President Habibie refused to release. The funds were eventually returned to Bank Bali, and the international institutions resumed their lending programs after the election of Abdurrahman Wahid to the presidency.

The Bank Bali scandal was not an isolated case: evidence emerged that other banks had been asked to participate in similar schemes.32 There had also been intervention in state banks to hide non-performing loans of politically connected companies (Soesastro 2000). Perceptions that the bank restructuring process was corrupt made it harder to attract new investors for banks and other companies. Perhaps the only good that came of the scandal was that it was recognised as such, rather than being accepted as standard practice.

CONCLUDING REMARKSB.J. Habibie may be remembered less for his economic policies than for the moves that Indonesia made toward freedom of expression and genuine democracy on his watch.33 In the newly competitive political environment in which he found himself, it was imperative for Habibie to allow early elections, which he did in 1999 instead of the originally scheduled 2003.

The position of political weakness from which Habibie operated as president contributed to both the best and worst of his economic policies and practices. Habibie could not afford to resist the structural reforms advocated by the IMF. Most of these policies were not very costly to him politically in any case, though one was costly to him personally: the ending of government budgetary support for his national aircraft company, which had long failed to contain its costs.34

31 Pardede (1999) and other surveys of the Indonesian economy in this journal around the time of the economic crisis of 1997–98 provide useful perspectives on bank restructuring.

32 Bank International Indonesia reportedly was similarly squeezed (JP, 3/8/1999); see also Landler (1999).

33 He will also be remembered for granting independence to East Timor. All of these top-ics were examined by participants in the 2007 workshop on ‘Indonesia’s Reformasi: Refl ec-tions on the Habibie Era’, mentioned in the initial footnote to this paper.

34 McKendrick (1992) provides a useful assessment of the fundamental problems that the company faced.


58 Stephen V. Marks

One set of reforms that did not gain traction under Habibie was the privatisa-tion of state enterprises; in his defence, progress on privatisation has remained slow to this day.35 His acceptance of IMF-backed monetary restraint led to the stabilisation of the economy in 1998, which proved to be to his decided political advantage. Finally, Habibie was not in a position to maintain absolute central government control over economic resources, given the strong political pressures from the regions. The rapid decentralisation of fi scal and regulatory authority during his presidency had its costs, but pointed in a direction that in the long run is almost certainly for the better. On the other hand, Habibie and his political cir-cle were drawn to a costly if expedient populist program and to the extraction of funds from banks dependent on state authority. Notwithstanding his promise to attack the corruption that had led to widespread discontent with Soeharto, Habi-bie in the end failed to transcend that culture of corruption.

Despite his failures, Habibie was an important transitional fi gure in both stylis-tic and substantive terms. Boediono (2002) observes that genuine policy debates were waged openly between Habibie and his economic team in a way that would have been unimaginable in the latter years of the Soeharto regime. Habibie was a product of a culture of governance in which the application of policies incon-sistent with competitive market forces was common, and which favoured the bold stroke through the application of state power and resources, as exempli-fi ed by the national aircraft company he had headed.36 Acceptance of the demise of that company and other costly public endeavours, formulation of a modern anti-monopoly law, establishment of a basis for local democracy and decentralisa-tion of fi scal authority, and public acknowledgment that corruption was a serious problem were among the fi rst in a series of necessary steps that ushered Indonesia into an era of economic reform.

REFERENCESAlm, James, Aten, Robert H. and Bahl, Roy (2001) ‘Can Indonesia decentralise successfully?

Plans, problems and prospects’, Bulletin of Indonesian Economic Studies 37 (1): 83–102.Bahl, Roy and Martinez-Vazquez, Jorge (2006) ‘Sequencing fi scal decentralization’, World

Bank Policy Research Working Paper 3914, Washington DC, May.Basri, Faisal (2002) Perekonomian Indonesia: Tantangan dan Harapan bagi Kebangkitan Indonesia

[The Indonesian Economy: Challenges and Hopes for the Rise of Indonesia], Penerbit Erlangga, Jakarta.

Bennett, Christopher P.A., Marks, Stephen V. and Muslimin, Lukman (1998) The Clove Monopoly: Lessons for the Future, Unpublished manuscript, TIP (Trade Implementation and Policy) Project, US Agency for International Development and Ministry of Indus-try and Trade, Jakarta, November.

Boediono (2002) ‘The International Monetary Fund support program in Indonesia: com-paring implementation under three presidents’, Bulletin of Indonesian Economic Studies 38 (3): 385–91.

35 Privatisation was advocated not only by the IMF but also by economists like Faisal Basri (2002: 103).

36 Marks (2007) offers historical and cultural perspectives on how the economy and eco-nomic policy are viewed in Indonesia.



Borsuk, Richard (1999) ‘Markets: the limits of reform’, in Indonesia Beyond Suharto: Polity, Economy, Society, Transition, ed. Donald K. Emmerson, M.E. Sharpe, Armonk NY.

Bresnan, John (1993) Managing Indonesia: The Modern Political Economy, Columbia Univer-sity Press, New York NY.

Dick, Howard (2001) ‘Good governance and the Indonesian economy’, in Gus Dur and the Indonesian Economy, ed. Anthony L. Smith, Institute of Southeast Asian Studies, Singa-pore: 83–92.

Dillon, H.S. (2001) ‘The crisis and agriculture policy’, in Gus Dur and the Indonesian Econ-omy, ed. Anthony L. Smith, Institute of Southeast Asian Studies, Singapore: 197–205.

Djiwandono, J. Soedradjad (2000) ‘BLBI dan zaman serba edan [BLBI and the time every-thing went crazy]’, Kompas, 4 February.

Fane, George (2003) ‘Change and continuity in Indonesia’s new fi scal decentralisation arrangements’, Bulletin of Indonesian Economic Studies 39 (1): 159–76.

Habibie, Bacharuddin Jusuf (2006) Decisive Moments: Indonesia’s Long Road to Democracy, Ilthabi Rektama, Jakarta.

Hill, Hal (2000) The Indonesian Economy, Cambridge University Press, Cambridge.Hill, Hal (2001) ‘Small and medium enterprises in Indonesia: old policy challenges for a

new administration’, Asian Survey 41 (2): 248–70.Hofman, Bert and Kaiser, Kai (2004) ‘The making of the “Big Bang” and its aftermath: a

political economy perspective’, in Reforming Intergovernmental Fiscal Relations and the Rebuilding of Indonesia: The ‘Big Bang’ Program and Its Economic Consequences, eds James Alm, Jorge Martinez-Vazquez and Sri Mulyani Indrawati, Studies in Fiscal Federalism and State–Local Finance, Edward Elgar, Cheltenham UK.

Kenward, Lloyd R. (1999) ‘What has been happening at Bank Indonesia?’ Bulletin of Indo-nesian Economic Studies 35 (1): 121–7.

Kong, Tao and Ramayandi, Arief (2008) ‘Survey of recent developments’, Bulletin of Indo-nesian Economic Studies 44 (1): 7–32.

KPPU (Komisi Pengawas Persaingan Usaha, Business Competition Supervisory Commis-sion) (2005) Laporan Akhir: Kegiatan Evaluasi Kebijakan Pemerintah yang Terkait dengan Persaingan Usaha di Sektor Industri Gula [Final Report: Evaluation of Government Poli-cies Related to Business Competition in the Sugar Industry Sector], KPPU, Directorate of Competition Policy, Jakarta.

Landler, Mark (1999) ‘Baligate, and why it matters: Indonesia’s recovery, and democracy, tested by scandal’, New York Times, 29 September.

Lewis, Blane D. (2003) ‘Tax and charge creation by regional governments under fi scal decentralisation: estimates and explanations’, Bulletin of Indonesian Economic Studies 39 (2): 177–92.

McCarthy, Terry, Colmey, John, Liebhold, David, Branegan, Jay and Waller, Douglas (1998) ‘Who is B.J. Habibie?’, Time Magazine, 1 June.

McCawley, Tom (1998) ‘A people’s economy: that is what activists inside and outside the cabinet want for Indonesia. Will they succeed?’ Asia Week, 18 December.

McKendrick, David (1992) ‘Obstacles to “catch-up”: the case of the Indonesian aircraft industry’, Bulletin of Indonesian Economic Studies 28 (1): 39–66.

McLeod, Ross H. (1999) ‘Crisis-driven changes to the banking laws and regulations’, Bul-letin of Indonesian Economic Studies 35 (2): 147–54.

McLeod, Ross H. (2003) ‘Towards improved monetary policy in Indonesia’, Bulletin of Indo-nesian Economic Studies 39 (3): 303–24.

Marks, Stephen V. (2007) ‘Mental models of the economy and economic policy in Indo-nesia’, in Neoliberalism: National and Regional Experiments with Global Ideas, eds Ravi K. Roy, Arthur T. Denzau and Thomas D. Willett, Routledge Press, London.

Marks, Stephen V., Paryadi, Anas, Titik and Wicaksono, Teguh Yudo (2005) An Assessment of Major Issues in the Cocoa Sector and Policy Proposals to Support Cocoa Processors,


60 Stephen V. Marks

Unpublished manuscript, GIAT (Growth through Investment, Agriculture and Trade) Project, US Agency for International Development and Ministry of Trade, Jakarta, June.

Masduki, Teten (2001) ‘Transformation of corruption’ (two-part series), Jakarta Post, 14–15 March.

Mubyarto (2002) ‘Ekonomi rakyat Indonesia [The Indonesian people’s economy]’, Jurnal Ekonomi Rakyat [The People’s Economy Journal] 1 (March), viewed 14 November 2008 at <http://www.ekonomirakyat.org>.

Nurhayati, Desy (2008) ‘Temasek loses last appeal’, Jakarta Post, 13 September.Pardede, Raden (1999) ‘Survey of recent developments’, Bulletin of Indonesian Economic

Studies 35 (2): 3–39.Podger, Owen (2006) ‘Why regional governments are unfriendly to business’, Jakarta Post,

22 June.Salim, Emil (2001) ‘Comments on Indonesia’s economic reform’, in Gus Dur and the Indo-

nesian Economy, ed. Anthony L. Smith, Institute of Southeast Asian Studies, Singapore: 211–14.

Saludo, Ricardo (1999) ‘Unraveling Bank Bali: the fallout could hobble Indonesia’s econ-omy—and its presidency’, Asia Week, 3 September.

Saraswati, Muninggar Sri (2004) ‘Bulog corruptor’s appeal tossed out by Jakarta High Court’, Jakarta Post, 14 January.

Saroso, Oyos (2006) ‘Subsidized fertilizer hard to get in Lampung’, Jakarta Post, 16 May.Schwarz, Adam (2000) A Nation in Waiting: Indonesia’s Search for Stability, 2nd ed., Westview

Press, Boulder CO.Shari, Michael (2000) ‘Wages of hatred: Indonesia’s hostility to a minority costs the country

dearly’, Business Week Online, 9 October.Soesastro, Hadi (2000) ‘The Indonesian economy under Abdurrahman Wahid’, in Southeast

Asian Affairs 2000, Institute of Southeast Asian Studies, Singapore. Thee Kian Wie (2002) ‘Competition policy in Indonesia and the new anti-monopoly and

fair competition law’, Bulletin of Indonesian Economic Studies 38 (3): 331–42.Thee Kian Wie (2006) ‘Indonesia’s fi rst competition law: issues and experiences’, in Compe-

tition Policies in Asia: Models and Issues, eds Cassey Lee and Cheong May Fong, Univer-sity of Malaya Press, Kuala Lumpur.

Thorburn, Craig C. (2004) ‘The plot thickens: land administration and policy in post-New Order Indonesia’, Asia Pacifi c Viewpoint 45 (1): 33–49.

Turner, Mark and Podger, Owen (2003) Decentralisation in Indonesia: Redesigning the State, Asia Pacifi c Press, Canberra.

Waldman, Peter, Pura, Raphael and Bruachli, Marcus W. (1998) ‘Suharto’s fi nal days as president were marked by shifting loyalties’, Wall Street Journal, 22 May.


PLEASE SCROLL DOWN FOR ARTICLE...Habibie’s assumption of the presidency. ‘There is a question of whether he is ca-pable’, Soeharto said. Soeharto’s contemptuous dismissal of

Documents