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Problems of the Indonesian inflation
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PROBLEMS OF THE INDONESIAN INFLATION
J. A. C. MACKIE
MONOGRAPH SERIES
MODERN INDONESIA PROJECT
Southeast Asia Program
Department of Asian Studies
Cornell University
Ithaca, New York
1967
S2.00PROBLEMS OF THE INDONESIAN INFLATION
J. A· C, Mackie
MONOGRAPH SERIES
Modern Indonesia Project
Southeast Asia Program
Department of Asian Studies
Cornell University
Ithaca, New York
1967
WITH THE COMPLIMENTS OF THE CORNELL MODERN INDONESIA PROJECTc
1967 by Cornell Modern Indonesia ProjectFOREWORD
These essays have developed out of a number of ideas which I began to
sort out during a semester at Cornell in 1963-64, but which were not finally
reduced to their present form until early in 1966· During that time, the
inflation had accelerated to such an extent that it was becoming impossible
to treat the later stages as fully as I would have liked. Consequently my
emphasis may seem a little lopsidedly concentrated on the earlier years
rather than on more recent developments. However, I do not think the main
outlines of my argument are seriously weakened for that reason, since the
lessons of 1957-63 are still painfully relevant to the present situation.
I must stress the very tentative character of many of the hypotheses
I am putting forward here. Much more research needs to be done on all
these issues before they can be analysed with any accuracy. My hope is
that these essays will stimulate others to pursue some of these lines of
enquiry more intensively. I have not been able to examine many of the
published materials in Indonesian which would throw light on the questions
I raise here. A great deal of information could be gleaned from a thorough
investigation of them, provided that the researcher is prepared to sift
them patiently and knows what to look for. But my aim here is simply to
look into certain questions which are not usually answered by economists
or political scientists operating within the confines of their self-con-
tained theoretical models. The answers I have offered are by no means
conclusive. This is very definitely an interim report.
I would like to thank the many people who have helped and encouraged
me to get these ideas into their present form (though they should not be
held responsible for the final product, of course). The Carnegie Corpora-
tion and Cornell Southeast Asia Program made it possible for me to spend a
semester at Cornell in 1963-64, without which I would never have attempted
to write these essays. Like all who have enjoyed the hospitality and
stimulus of 102 West Avenue, I owe a great deal to its occupants at that
time for their help and friendship — above all to George Kahin for his
great kindness.
To Dan Lev and George Hicks I am particularly indebted for hours of
valuable talk and many fruitful ideas which are inadequately acknowledged
throughout these essays. Herb Feith, David Penny, Ken Thomas and Lance
Castles have helped in various indirect ways. My wife and children have
kept my spirits up in periods of gloom and been more understanding than
any man has a right to expect.
Over the past decade, so many Indonesians have helped and enlightened
me in my attempts to unravel the complexities of their economic and poli-
tical problems that it would be impossible to thank them all individually
and invidious to choose between them, so I will simply have to thank them
collectively. But I would like to make one exception and dedicate these
essays to my former colleagues in the Biro Perantjang Negara, with whom it
was a pleasure to have been associated in 1956-58 and under whose greatly
respected Directors, the late Ir. Djuanda and Mr. Ali Budiardjo, it was my
privilege to work.
iiiABBREVIATIONS
BE	Bukti Ekspor (Export Certificate)
BIES Bulletin of Indonesian Economic Studies (Australian National
University, Canberra, 1965-66)
BKI Ekonomi dan Keuangan Indonesia (Indonesian Economics and Finance)
MPRS Madjelis Permusjawaratan Rakjat Sementara (Provisional People's
Consultative Assembly)
NU	Nahdatul Ulama (Islamic Scholars' Association)
PKI	Partai Komunis Indonesia (Indonesian Communist Party)
PNI Partai Nationalis Indonesia (Indonesian Nationalist Party)
PRRI Pemerintah Republic Revolusioner Indonesia (Government of the
Revolutionary Republic of Indonesia) - the rebel government set up
in West Sumatra, February 1958. Allied with North Sulawesi
Permesta movement (Perdjuangan Semesta - Universal Struggle), pro-
claimed March 1956.
PSI Partai Sosialis Indonesia (Indonesian Socialist Party)
SWI Sumbangan Wadjib Istimewa (Special Obligatory Contributions)
ivTABLE OF CONTENTS
CHAPTER	Page
I.	INTRODUCTION .................................... 1
Phases of Inflation ......................... .....	2
The Political Determinants	of Economic	Policy ....	2
The Economic Mechanism .................................... 5
The Political Background .................................. 9
II.	GOVERNMENT POLICIES AND INF1ATI0N, 1957-65	.................. 19
1957-61 The Political Background to Inflation ....	23
1961-62 Inflation Rampant	......................... 30
1963-65 Stabilisation and	Confrontation .................. 37
III.	THE POLITICAL CONSEQUENCES OF INFLATION ................... 50
The Atrophy of Instruments of Control Mechanism ...	53
The Retreat from Socialism............................. 60
Income Redistribution: Social and Regional Aspects .	62
Discontent as a Threat to Governments? ........	66
IV.	THE RESILIENCE OF THE ECONOMY................................. 73
The Notion of "Resilience"................................ 74
"Self-Sufficiency?" ...................................... 78
How Do People Survive?.................................... 81
Business Enterprise Under Inflation ...................... 88
APPENDIX
Table 1. Annual Trade Figures, 1950-63	................ ·	95
"	2. Public Finance, 1950-65 .......................... 96
"	3. Quarterly Finance and Trade Statistics, 1957-65	98
Chart 1. Semi-logarithmic Graph Showing Money, Prices
and Black-Market Value of Rupiah 1950-65 ...	100
vCHAPTER I
INTRODUCTION
Indonesia has experienced almost continuous inflation since the
Japanese overran the Dutch colony in 1941. Her transformation within less
than 20 years from a colony geared to one of the hardest currencies in the
world into an independent nation with one of the weakest has set in train
profound social and political changes whose end is not in sight. But for
many years the rate of inflation was sufficiently gradual for political
analysts to treat it as little more than one of the several background
factors to be mentioned when setting the scene for their particular studies,
as something which may have periodically influenced political developments
in Indonesia, but which could still be treated as incidental to the poli-
tical process rather than a central aspect of it. This ceased to be the
case at the end of 1965, when the inflation began to accelerate at an almost
exponential rate. It is now impossible to consider Indonesia's political
future without reference to the problems of checking the inflation, which
are themselves as much political as economic.
Not only in its length, but also in its intensity during the last few
years, Indonesia's inflation has come to rank among the outstanding
examples of this phenomenon in modern times, comparable in many respects
with the disastrous Chinese inflation of 1937-49. Yet it has so far
attracted disappointingly little attention from either economists or poli-
tical scientists -- perhaps because the former see its causes and cure as
hinging round political rather than essentially economic problems, while
the latter tend to avoid the economic technicalities involved. However,
the economic problems are not essentially difficult to grasp and their
political significance is often considerable. A multi-disciplinary ap-
proach — or at least a willingness to peer over the fences that rather
artificially divide our academic disciplines — is likely to result in
much better comprehension of the processes and problems of this inflation,
for economic and political factors have all along been inextricably inter-
twined. Only if the political scientists as well as the economists succeed
in clarifying the relationships between these factors, in both the long
run and the short, can any of us hope to help our Indonesian colleagues to
find ways out of the tragic predicament in which they find themselves.
Quite apart from our personal involvement in Indonesia's search for
solution, we will find, too, that the problems of analysing Indonesia's
inflation are fascinating on theoretical grounds. Among the obvious
puzzles is the paradox of Indonesia's apparent "resilience" from inflation.
How is it that overall production has remained so little affected by the
strains and disruptions of the financial system? Why had there not been a
more rapid acceleration in the velocity of circulation of money before
1965? Prices did not spiral exponentially (as in the later stages of China's
Inflation, or the classic European inflations in Germany and Hungary),
despite the constant depreciation of the currency: evidently people were
not rushing to purchase goods so as to get rid of Rupiah. In fact specu-
lation against the Rupiah seems to have been only an intermittent factor
pushing up prices, rather than a major dynamic in the inflationary process.
But why was this the case for so long, and why did matters change so
12
dramatically in 1964-65? Why is it, moreover, that governments have at
times been able to take drastic and momentarily effective action to curb
the inflation, yet have never been able to tackle the problem at its roots
by holding their budgets in balance for any length of time?
All these questions have ramifications which need to be studied far
more closely than we can hope to do in these brief essays. But let us
begin by setting the inflation in a broad historical perspective. Since
1949, when the Dutch surrendered full sovereignty to the independent
Republic of Indonesia, the inflation has passed through four distinct phases
Phases of Inflation
In the first period, until the end of 1956, inflation was a persistent
and serious problem but was largely due to abnormal circumstances (the Korea
boom and the strains of reconstruction and readjustment after the Revolu-
tion), so that there was no reason to fear that it could not be curbed. On
several occasions it was checked temporarily: a graph showing the increase
in prices and the volume of money in circulation is jerky, reflecting the
efficacy of attempts by different governments to cope with the problem.1
In the second period, however, from early 1957 to late 1961, both money and
prices increased at an average rate of about 307. per annum, as the govern-
ment virtually abandoned budgetary stability while it concentrated on the
more pressing task of crushing the regional revolts in Sumatra and Sulawesi,
and restoring the nation’s security and political unity. Inflationary pres-
sures did not get entirely out of hand in this period; in fact an impressive
degree of stability was achieved in 1960 after the government had taken
draconian measures to remedy the situation. But another sharp rise in the
rate of price increases in late 1961 ushered in a third phase of inflation
through 1961-64 during which both the volume of money and the cost of
living roughly doubled every twelve months. The government's resources for
coping with the problem became less and less adequate as the foreign ex-
change reserves dried up and exports declined. Its budget policies, instead
of serving as an instrument for controlling inflation, bore little relation
to actual expenditures and revenues. When the price rises again accelerated
sharply to an unprecedented rate in the last quarter of 1964 (both prices
and money almost doubling between December 1964 and June 1965) a new and
very dangerous phase of inflation began. The economic and political prob-
lems of taking preventive action were now really formidable and in the last
weeks of 1965 prices were doubling within a few weeks.
The Political Determinants of Economic Policy
In these essays, I will be concerned as much with the political causes
and consequences of Indonesia's inflation as with the narrowly economic
problems. "Since late 1950, the prime determinants of economic performance
have been political", wrote Doublas Paauw. "The behaviour of economic
variables ... must be viewed as responses to a particular concatenation of
political events". The need to comprehend the political background to
economic policy in the subsequent years has become even more pressing. But
in tracing this background we will find ourselves led beyond a mere survey3
of the political system and the political history of 1957-65 to ponder
certain broader questions about the links between economic and political
change in Indonesia. Why have political considerations so frequently out-
weighed what seems to be economic sense in Indonesia? Why has no one been
strong enough to make a stand for economic stability? Why is it that the
political system seems so much more impervious to the shocks and strains
occurring in the economic sphere than vice-versa? The underlying cause of
the inflation, in my opinion, has been Indonesia's unresolved political
crisis of the last ten years; the outward political stability of 1960-64
was misleading, for it was largely contingent upon budget deficits which
represented a failure to resolve fundamental political problems.
Yet while we are considering the connections between economic and
political factors, we may also notice another point which would also have
puzzled Karl Marx -- the fact that no substantial change in the political
system can be attributed directly to the two great economic upheavals of
the last decade, on the one hand the inflation and, on the other, the
"takeover” and nationalisation in 1957-59 of the huge Dutch plantations
and business enterprises which had dominated the modern, capital-intensive
sector of the economy throughout most of the preceding century.If the
change in property relations resulting from the 1957-58 takeovers has
significantly modified the disposition of power within Indonesia, its poli-
tical implications are only discernible after careful examination. The
same may be said of the inflation, with its far-reaching effects in redis-
tributing incomes and wealth. Political forces seem to have been more
potent than economic in Indonesia. The political sphere of the nation's
life has had an almost autonomous rationale of its own, with its own
singular dynamics·^· In fact, economic and administrative institutions
have become heavily politicised and drawn into the power struggle. Yet
the converse has not happened. Insofar as we can point to examples of
developments in the economic sphere having significant repercussions on
the political, they have not been earth-shaking upheavals of the kind one
might expect after such turbulent economic changes. Crude economic inter-
pretations of Indonesia's political history have often been spectacularly
wrong -- for example, in 1957-58 when it was widely believed that the
wealthy, export-earning regions of Sumatra and Sulawesi must ultimately
prevail in their struggle with Java, or in 1964 when it seemed that the
strains implicit in inflation and falling exports must compel her to call
off her "confrontation" of Malaysia. Was Marx so completely astray in his
economic interpretation of history? Is this paramountcy of political
forces a tribute to the mighty force of the ideas behind the Indonesian
revolution which Soekarno so eloquently extols? Or is it simply that the
full consequences of these two economic upheavals (one widely desired in
Indonesia; the other almost universally decried, in many respects a counter-
revolution) are still working themselves out and are not yet fully manifest'
While there are no simple answers to any of these questions, an
obvious consideration is that the political economy of a nation in a state
of equilibrium is, of course, very different from that of one experiencing
severe inflation. We may almost draw a parallel with a rubber band which
has lost its elasticity: it no longer springs back after being stretched
taut, but merely sags. Or, to change the metaphor, so long as a government
can go on drawing drafts on the future, it can behave very differently from4
one which knows its cheques will be cashed immediately· Conversely, its
creditors lack an effective sanction to compel it to live within its means·
The bookkeeping of both parties will be adjusted to a state of continuing
inflation, not to a condition of balance· I do not think it very useful,
however, to continue with elaborate speculations about the roles and mutual
relationships of “political” and “economic” factors, as if these terms were
substantially more than a heuristic device· One is constantly tantalised
by several problems which presuppose such a distinction -- e.g· the strik-
ing predominance of immediate political considerations over longer range
economic ones in what I will here characterise as the “kraton-state” and
the peculiarity that important economic interests are not strongly repre-
sented in it, their requirements not well “articulated” in the political
system·But I will explore these in their specific manifestations, not in
terms of abstract speculation. Political and economic factors in Indonesia’s
national life interact in many unexpected ways, not always as we would ex-
pect from our own experience in a very different society· This needs to be
clearly recognized by economists and political scientists (whose views often
prove to be very conventional and unreflective when they are operating in
the neighboring discipline) without being elevated into a mystique· My aim
in these essays is not to develop any large new theories, but to clear away
certain ill-examined though commonplace misconceptions, some of which re-
quire a familiarity with the two disciplines· I hope that the economists
will not prove too technical for the non-economist and that the discussions
of Indonesia’s singular political system will not take too much for granted
in the way of prior knowledge· Brief introductory summaries on each are
included simply to provide a background for what follows·
A word should first be added about the limitations of these essays·
They are not intended to be comprehensive surveys, but merely preliminary
explorations of some important themes· Many other factors could well have
been taken into account to explain the economic deterioration of recent
years. For example, the personality of President Soekamo and his sublime
unconcern with economic issues have obviously been of very great signifi-
cance in the policy-making process, in view of his dominating political
position between 1959 and 1965. The pervasive influence of the Armed
Forces deserves closer investigation than I have been able to give it --
both in the demands they have made on the budget and on scarce material
resources, and in their impact on economic life at the local level, through
the appointment of former officers to managerial posts in the State enter-
prises, the regulative powers of martial law authorities, and through the
extortions practised by officers and men at all levels in circumstances
where there was no effective redress against their demands. The lack of
technically qualified and competent officials in the civil service is
another factor which is sometimes too easily overlooked, sometimes absurdly
overstressed· (Many of us were inclined to play down the importance of
this factor at the time when Dutch and other foreign technicians were pushed
out of Indonesia, since it implied too gloomy a counsel of despair — and
had not Indonesians shown many times previously that they could rise to the
occasion when challenged by new tasks and could acquit themselves more
creditably than anyone had given them credit for? But the circumstances of
constant economic decline and political interference since 1957 would have
taxed the abilities of the most capable officials and it has gradually be-
come more and more obvious that too many men in high places were utterly5
unqualified for the posts they held.) Much could also be said about the
powerful indirect influence of the Conmunist Party on economic policy-
making, through its attacks on "reactionary" officials (which unnerved
many good men who could hardly have been described as right-wingers in an
ideological sense) and through its skilful exploitation of Soekamo's
radical but woolly slogans, which worked to destroy any doctrinal basis
for the advocacy of pragmatic economic policies which smacked of "liberal-
ism".
The Economic Mechanism
A very simple explanation of the basic mechanics of the inflationary
process is offered here for the non-economist, with further references to
other works in which some of the more technical or controversial aspects
are discussed in detail. 1 will take for granted some general familiarity
with the broad configuration of the Indonesian economy, which can easily
be obtained from other works.
Essentially, Indonesia's inflation has been characterised by a steady
increase in the volume of money in circulation, which has been accompanied
by roughly corresponding increases in prices, since aggregate production
of goods and services has not risen to anything like the same degree·'
Some economists are inclined to stress the lack of increase in production
as the major factor underlying the inflation, arguing that if the problem
is to be tackled "fundamentally", it must be done on the production side,
not by mere fiddling with the monetary aspect, which is seen as a second-
ary and merely "technical" problem. While this is incontrovertible in one
sense, it is also a very crude oversimplification, since it neglects all
the re-distributive and "political" questions of how the burdens and
benefits involved in increasing production are to be allocated, as well as
the fact that the impediments to increased production in Indonesia over
the past decade have been very much bound up with the disorders of infla-
tion, which in turn has been brought about primarily by budget deficits,
i.e., by excessive government expenditures in relation to its revenue from
taxation and other (minor) sources.
The close long-term correlation between the increase in money supply
and the general price level since 1950 may be seen clearly in the graph in
the Appendix and I do not consider it necessary to split hairs about it.
It is true that over short periods the correlation may not be at all close,
because prices are influenced by many factors beside the pressure of de-
mand generated by expansion of the money supply: for example, rice and
other food prices will depend greatly on short-term supply factors (the
state of the harvest, stocks in hand and expectations of import levels),
while prices of other imported goods are affected by world market prices
and the effective rates of exchange applying to different categories of
commodities, or by price controls in some cases and particularly by specu-
lative hoarding in anticipation of future shortages. Controls and specu-
lation have had all sorts of erratic effects on prices over recent years.
But the general rule still prevails. If price rises lag substantially
behind the purchasing power created by prodigal Rupiah expenditures,
latent inflationary pressures are built up, initially in the form of Rupiah6
hoards ("hot money" is rarely held in bank accounts where it is too
vulnerable to investigation and regulation)? which will eventually burst
onto the market and force up prices in one sector or another.
Strictly speaking, money is created not by the government but by the
Bank Indonesia, the central bank, in the form of bank notes or credits
advanced within the banking system. When the government needs additional
funds to cover a short-fall between its revenues and reserves as against
expenditures, it "borrows" (in return for treasury bills) from the Bank,
which is responsible for the actual printing of its notes. In the days
before 1961, when the Bank Indonesia still published its weekly balance
sheet, it was easy to keep track of the extent of inflationary pressures
arising from the budget deficit by watching the extent of the government’s
indebtedness to the Bank Indonesia. The deficit has been, without any
doubt, the main cause of Indonesia’s inflation. Bank credit has had a
relatively minor influence on the money supply in Indonesia, although it
is a major determinant of the money supply in countries with a more devel-
oped financial and credit system (being expanded or contracted very easily
by slight adjustments of interest rates or reserve requirements in accord-
ance with the monetary policy appropriate to business conditions and prices
at a particular time.) Since 1957 the government’s monetary policy has
only occasionally been a significant inflationary or deflationary factor
in the overall situation.
Inflation can also have external origins. The sudden rise of prices
on world markets during the 1950-51 Korean War boom was the primary cause
of Indonesia’s influence at that stage (as with so many other exporting
countries) since the high incomes of exporters increased domestic demand,
at the same time as rising prices of imported goods were adding greatly
to the upwards pressures on the general price level.9 Foreign aid can also
add to inflationary pressures, even though it may be a great help in solv-
ing the government’s foreign exchange problems. If it entails large
expenditures on long-term projects (as it generally does) whose productive
contribution to the economy will not be felt for some years, prices are
pressed upwards by both the demand for local commodities and services and
by the additional cash incomes generated.Even if the donor country is
generous with the foreign exchange component of a project’s costs, it
usually requires the Indonesian government to meet the Rupiah expenses --
and this creates a strong inducement for the government to maintain high
developmental expenditure even at times when retrenchment ought to be
attempted. The massive foreign aid receipts of 1961 appear to have con-
tributed largely to the inflationary expenditures which burst out in 1962.
Douglas Paauw, writing about a relatively early phase of the inflation
in the mid-’50s, put the problem in a broader context when he stressed that
it arose from steadily increasing aggregate demand for available goods and
services (from both the private and public sectors) in the face of a rela-
tively inflexible supply situation, since the production of agricultural
crops could not be rapidly increased.The same point was often put
colloquially by moralists when they said that Indonesia was living beyond
her means. The main factor in this excess demand during the ’fifties was
government policy, not merely because budget deficits have represented an
excess of expenditure over revenues, but also because the government’s7
reluctance to make firm decisions about economic priorities tended to raise
expectations all round to a higher level than the economy was able to sus-
tain. Since 1957, the rapid increase of government deficits has disastrously
increased the inflationary pressures, largely because of much greater ex-
penditure on the Armed Forces to meet the three security crises posed by the
PRRI Permesta revolt, the West Irian campaign and confrontation of Malaysia.
We should not, however, infer from this that deflation per se would solve
any more problems than it would create. Expressed in real terms (i.e. at
constant prices) expenditures have declined during this period and are cer-
tainly a lower fraction of national income than they were. The problem is
not just one of reducing government expenditures, but even more of raising
additional taxes (and ultimately of increasing productivity in the economy
as a whole) which poses very difficult administrative and political ques-
tions.^ But a much greater (and sustained) degree of budgetary stability
is a necessary condition of attaining a general economic equilibrium.
In theory it does not greatly matter whether budgetary stability is
achieved by reducing expenditures or increasing tax revenues. In practice
a combination of both is probably essential. Reducing expenditures by dis-
missing government servants poses political problems which have proved
insurmountable in the post-independence period. The only cabinet which
made a serious attempt to prune back the personnel budget, which used to
account for the largest part of government expenditures, was the Wilopo
cabinet of 1952 -- and it came to grief disastrously as a result. Subse-
quent governments have learned from this example and have avoided touching
such a hot potato, although occasional prohibitions on recruitment of new
staff have been intended to bring about a reduction of personnel —
apparently without much success.** (Paradoxically, the real incomes of
civil servants have been slashed severely by rising prices: so has govern-
ment expenditure on personnel, in real terms. But no government would
consciously have dared to undertake what the relentless but unintended
logic of their policies has accomplished.) It cannot be said, however,
that the remedy to the inflation should therefore have been concentrated
solely on the revenue side. Laxity on the expenditure side has, in fact, been
a constant cause of deficits, as a comparison of estimated and actual budget
figures reveals (See Appendix, table 2). Determined attempts have been
made from time to time to restrain them. But here political problems have
inexorably intruded: in a government which in effect amounts to a loose
coalition of political groups, each has its own patronage claims to promote
or defend. Budget allocations are a key factor in the contest for power
within the coalition. Hence, there is a built-in tendency to raise, not
lower, the total expenditures, for unless the President or his Finance
Minister is strong enough to impose upon the other ministers a formula for
dividing up the cake, most of them will be attempting to obtain more,
whether at the expense of others or not. Factional alliances and deals
become necessary to win backing for their claims in such a situation, in a
manner familiar to many countries and institutions. Whenever the political
problems of satisfying all the claims become insoluble within a predeter-
mined expenditure limit, it is easy to simply increase the notional size of
the cake and hope that the rise in expenditure can be met by raising more
revenue (the Finance Minister's headache!) or else by putting up with yet
another deficit. After all, prices will probably rise in any case.8
Thus the main attack on deficits has generally had to be made from the
revenue side, for it is administratively easy and politically not too painful
to raise some taxes, particularly indirect taxes on exports and imports which
are paid, in the first instance, largely by foreigners (Chinese, and until
1958, Dutch trading firms) who lack political influence. Time and again we
have seen the foreign exchange regulations and import duties revamped to
bring in massive revenues through the simple device of widening the spread
between the effective rates of exchange applying to exports and imports
respectively. Direct taxes are less easy to adjust to constantly rising
prices, so that in real terms their contribution to the revenue has been
steadily shrinking; the administrative failure to extract more income tax
from urban wage and salary earners, or the rural equivalent from farmers,
has been disastrous. Paauw pointed out in 1954 that there was considerable
taxable capacity in the rural sector which was not being tapped: that reser-
voir may have dried up somewhat in the meantime, but there can be little
doubt that more could have been raised, if the machinery of taxation had not
atrophied.The relatively efficient tax apparatus inherited from colonial
times has simply not been able to cope with the tremendous additional demands
made upon it under conditions of inflation. Blunter instruments have had to
be substituted, such as the special levies on property (not income) which
have been imposed from time to time: but they can only be undertaken as
emergency measures and do not represent a long-term solution to the problem
of attaining budgetary equilibrium.
When expressed in constant value terms, tax revenues have shrunk appall-
ingly in the early 'sixties, as the following table dramatically reveals.15
Government expenditure and revenue at 1960 prices
(in billions of Rupiah)
	Expenditure	Revenue	Deficit
1960	58.3	50.3	8.0
1961	64	45	19
1962	32.2	19.4	12.8
1963	38.4	18.9	19.5
1964	18.1	8.5	9.6
Nothing demonstrates Indonesia's fundamental fiscal problem more starkly than
this table. The government's sheer inability to command the fiscal resources
It used to have at its disposal has led to steady administrative deterioration
as its mammoth Rupiah expenditures have diminished in purchasing power. Defi-
cits have unavoidably become a larger and larger fraction of total expenditures,
even though they have not greatly increased (or may even have declined) in real
terms. In the years since 1962, the deficits have been largely due to the
fact that real revenue has declined more than real expenditure. It can even
be argued that by 1964-65 it was not so much the deficit that was determining
the pace of Indonesia's inflation as the increase in velocity of circulation
of money and the anticipatory rises in prices. The essentially cumulative,
interacting nature of the processes involved have been neatly summarised by
George Hicks: "Through a series of vicious circles involving monetary, real
and speculative factors, the inflation is both a consequence of other forces
and a cause of further inflation. Falling exports led to falling imports of
production materials and capital goods, which led in turn to inflationary9
pressure from falling production. Falling exports and imports had another
consequence in that they caused government revenues to fall, deficits to
rise and mounting inflationary pressure. This in turn contributed to fall-
ing exports and domestic production, rising velocity of circulation, hoard-
ing and speculation."
The tragedy of all this is that exports and the capacity to import
have been declining as the government has been growing more dependent on
indirect taxes which fall on the foreign trade sector (and are borne by
export producers in the last resort).1® Moreover the scope for imposing
even heavier taxes on imports and exports Cthe latter not directly, but in
the form of an overvalued rate of exchange for the Rupiah) by widening the
margin between effective rates for exports and imports has reached a point
where any further spread is likely to prove self-defeating. It has become
increasingly difficult over the last four years to increase tax revenues
sufficiently to match expenditures -- hence the huge budget deficits. The
limiting factors now tend to be economic rather than political.
For the same reason, Indonesia’s government has lost the ability to
counter inflationary pressures generated in the budget sector by releasing
extra foreign exchange from the reserves to flood the market with imports
and bring down prices, as was done in 1955 and 1960. By 1963, there simply
were not sufficient reserves, so that import levels became very closely
geared to the level of export earnings, at the very moment that large debt
repayment obligations began to fall due. Since then, the combination of
foreign exchange shortage and tightening pressures to repay foreign debts
has constricted the government's freedom of manoeuvre in economic policy
above all other considerations. Thus budgetary equilibrium has had to be
accorded a lower priority and the volume of money has just been allowed to
go on increasing.
The Political Background
Why have Indonesian governments lacked the ability or the will to
curb the inflation which their own budgetary policies have created? Why
has President Soekamo's aspiration to build a "just and prosperous society"
failed so disastrously, when he commands such wide powers over a vast state
sector of the economy, as well as the private sector, and has so little
over opposition to contend with?
Indonesians would give several different answers to these questions
-- in terms of lack of economic and administrative skills, or "not enough
experience", because the Dutch failed to prepare them sufficiently for in-
dependence (a true but inadequate reply, for other newly developed countries
have done better with even fewer trained people); or in terms of the ex-
ploitative and disruptive character of colonialism, capitalism and foreign
interests, Chinese as well as Dutch, British or American, which have domi-
nated the modem commercial sector of the economy and prevented vigorous
development of an Indonesian business class; or excessive bureaucracy and
political interference in economic matters; or the government's failure to
"find the right system" appropriate to Indonesia's needs and characteristics
Communists would put the blame on the reactionary classes of "bureaucratic
capitalists" and "feudal" elements in Indonesian society. Their enemies are10
just as inclined to blame the PKI for all the country’s ills·
Obviously many factors have contributed to Indonesia’s poor record of
economic performance. I am here going to stress just one of them rather
strongly, the relative weakness of her governments in most areas of economic
policy-making, because I believe that the political weaknesses of Indonesian
governments have been at the root of most of the country’s economic troubles
since 1957, despite their outward display of authority and strength. Unless
we realise why they have not been able to act strongly, we will not be able
to anticipate situations in which they can.
Despite the symbiotic relationship between the Army and President
Soekarno and despite the highly authoritarian system of Guided Democracy
they built up after the defeat of the regional rebels in 1958, the Indonesian
government has not been strong in the sense normally attributed to the word.
It has been hamstrung in taking action on many matters where it should be
able to give a firm lead, despite its aspiration to do so. Feith has com-
mented aptly that "desiring determined government, they (the nation’s leaders)
are restricted because of the existence of a great number of small power
centres, each in a position to veto some types of government action." Essen-
tially the same point had been made by Soedjatmoko some years previously,
before the rebellion: "Power is not concentrated in Indonesia, but dif-
fused. "17 There is still much truth in this, although the central govern-
ment’s power vis-a-vis the regional authorities was greatly strengthened by
its victory over the rebels. But it has only been in the maintenance of
national unity and internal security that the government has been able to
act strongly and effectively, not in promoting development or controlling
the economy. Maintaining unity has been no mean achievement, of course:
it may well come to pass that Soekarno will be looked upon in the future
as the man who held Indonesia together in a period of dangerous ideological
tensions. (Or did he also contribute to those tensions through his great
stress on the paramountcy of ideology?) But political unity was bought at
a high price in terms of economic stagnation and inflation.
The government’s resort to deficit financing since 1957 was, in effect,
a means of putting off decisions of a politico-economic nature which might
have caused dissension between elements within the government. A political
balance was maintained, precariously at times, at the cost of economic
equilibrium. Up to the end of 1965 economic stagnation had not posed any
immediate threat to the government in the way that the necessity to apply
policies entailing greater austerity for elements within the government it-
self would have done. What I mean by this generalisation will be elaborated
in terms of government policies between 1957-63 in the next chapter. But a
little more should first be said about the political system itself during
that period.
Until the parliamentary system began to crumble in 1957 and give way to
the presidential system which took shape in July 1959 with the "return to
the 1945 Constitution", political parties were the key elements in the Indo-
nesian political system and the relationship of the government to the
Parliament was not outwardly very different from that of any orthodox par-
liamentary democracy. Governments came and went according to their ability
to muster a majority in Parliament, while Parliament represented an11
electorate based on universal suffrage, at least in theory and to some
extent also in fact. After the 1955 general election, political parties
polarised rather sharply into two camps. The PNI, NU, and PKI (all draw-
ing their electoral support mainly from Java) formed the bulk of the camp
identified with the President and his policies, the Masjumi, PSI, and some
minor parties (the former drawing their strength mainly from outside Java)
led the opposition to him. Since the establishment of the presidential
system in which the two representative bodies, Parliament and the Provi-
sional People’s Consultative Assembly MPR-S, have had virtually no real
power to curb the President and his ministers in their day-to-day adminis-
tration, the key elements in the political system have been very different.
Parties have had narrowly circumscribed influence, with the one remarkable
exception of the Communist Party, which was generally regarded between
1959 and 1965 as one of the three major elements, along with the President
and the Army, in the triangular contest for power and control over the
"course of the Indonesian Revolution".
The nature of this "triangle" (if such it was) and the elusive dyna-
mics of the political system since 1959 have been more fully described
elsewhere. ’ There is always room for argument about the adequacy of any
such account, for the system is a subtle, everchanging blend of diffuse
and vaguely-definable components of which the "expressive" aspects of
government -- exhortation towards visions of a glorious future, symbolism,
indoctrination and ideology — have been just as important as the "in-
strumental" aspects, policy-making, control over financial resources,
exercise of patronage, etc. Moreover, the power structure itself changed
significantly during this time. Feith in 1962 used the metaphor of a "tug-
of-war relationship" between President and Army, describing the political
system of that time largely in terms of the tensions between them and their
reciprocal need for each other in various ways.20 Soekarno, lacking
organised power to counterbalance the Armed Forces' nationwide organisa-
tion and near monopoly of armed force, preserved his dominance partly by
ranging behind him the support of the major political parties, partly by
ensuring that the commanders of a number of key units of the Armed Forces
were loyal to him and supporters of his eclectic "Nasakom" political
formula. The PKI, as the most effectively organised political party and
the only nationwide organisation remotely comparable to the Army as a
potential aspirant to sole power, inevitably tended to loom largest among
the President's supporters and as the greatest threat to the Army's exten-
sive civil powers (Indonesia was under martial law from early 1957 until
May 1963), but the other parties too had their own reasons for wanting to
minimise Army power and advance the Nasakom principle as a means of in-
creasing their own influence. But whereas the role of the PKI was one of
the issues on which the Soekarno-Army tug-of-war was being fought out in
1959-61, with the Party itself exercising relatively little direct power
within the political framework of that time, by the end of 1962 the PKI
had gained a good deal of influence, just at the time that the Army was
losing some of its leverage vis-a-vis the President.
Something like a triangular relationship of more nearly equal forces
now came into being, although the common metaphor of a balance between
them (or a seesaw with PKI and Array leadership at opposite ends and the
President at the fulcrum maintaining an equilibrium between them) was12
rather misleading in some of its implications. “The triangle changes
shape,” noted Feith two years later, after the PKI had achieved a remarkable
series of political victories in 1963-64, which the Army seemed either
powerless or reluctant to oppose. So strong was the steady pull towards
the left in the two years between the break with Malaysia in September 1963
and the abortive coup of October 1, 1965, that every attempt to organise
some power nucleus around which the anti-Communists could make a stand was
defeated and discredited. Even Soekarno himself at times seemed hard put
to maintain a balance between left and right — if, indeed, this was ever
a specific objective for him, for it is hard to believe that he could not
have checked the drift to the left (as he did in 1963) if he had chosen to
do so; the first priority for him was, of course, to maintain the outward
unity of the regime and avoid being forced into dependence on any single
political group, particularly a right-wing group, since he has always been
instinctively a man of the left, seeking personal identification with the
masses and the radical policies he expects of them.
To explain these changes in the relationship between the three major
elements in the Indonesian power struggle we would properly need to trace
the political developments of the last few years in considerable detail.
There has been nothing mechanistic or predetermined about the ’’course of
the Indonesian Revolution” at any stage of its course. Great consequences
have often hinged upon the merest quirks of fate, as the momentous events
of the October 1 coup and counter-coup dramatically revealed. I cannot go
into that story here, but will simply draw attention to some of the salient
features of the power struggle and their implications for economic policy-
making.
The exercise of state power in any country is essentially a matter of
determining the government’s policies, appointing the officials who will
execute them and allocating the resources (financial, material or human)
involved. In Indonesia the patronage aspect of government has generally
been considered a good deal more important than the policy-making aspect,
for jobs and funds are the crucial sinews of power. Policy programmes are
rarely defined in specific and unambiguous terms, in any case -- even by
the PKI, which came closer than any other party to a position where it was
building up support and political influence through its ability to insist
on adherence to a programme rather than through its tenure of key offices.
This should not be taken to mean that political programmes are unimportant.
On the contrary, the determination and manipulation of the official State
ideology, the Pantja Sila and Political Manifesto, to which all parties
and individuals are expected to give their adherence, was a source of tre-
mendous advantage to President Soekarno. But it was important for manipu-
lative purposes rather than because it imposed a particular commitment to
particular policies. Although the Manipol ideology was initially used to
excoriate ’’liberalism” and had a socio-economic character that was strongly
dirigiste, collectivist, and egalitarian, it was vague enough to mean all
things to all men. Opponents of the government would not openly oppose it,
but they soon discovered that there were innumerable ways to get around it.
The government itself represented so many diverse shades of political
opinion that it was not difficult to find ministers who would give some
degree of protection in return for support or services. ’’Guided Democracy”,
like most coalition forms of government, functioned essentially as an13
accommodation-mechanist!, oriented towards the achieving of consensus rather
than the posing and making of decisions between rival programmes as a two-
party system tends (in theory, at least) to do. No group within the coali-
tion was strong enough to make a bid for supreme power by itself and none
would be so foolish as to provoke its partners intolerably or threaten to
withdraw from the coalition into the political wilderness simply to impose
its will or to protest over an issue of policy or programme. 1 Access to
the circles where decisions are made about jobs and funds and slogans is
all-important. Decisions of a "programmatic" character matter much less.
99
Although the political system tended to compel the various aliran
with divergent ideologies and interests to work cooperatively together
at many levels from the Cabinet down to the lowest regional councils, and
eliminated the intensely divisive features of the former system of party
democracy, it had an adverse effect on decision-making processes in three
ways. First, the degree of commitment felt towards government policies
was often very low. The FKI’s ambivalent attitude to Soekarno's regime,
even after it achieved ministerial portfolios of a sort, epitomised this
attitude but it was not the only party whose ministers gave verbal ap-
proval to the "unanimous" policy decisions reached by the government and
then did their best to alter, oppose or subvert them. Most parties gave
no more than lip-service to the government’s Stabilisation Programme in
1963 and only a few individual ministers seemed to have stirred themselves
to make it work. The President himself made some highly ambiguous public
comments on it.
Second, and related to the former, is the effect on the general
character and quality of political life in a situation where cynicism
and sophistries so abound. Clarity of vision was clouded by the need for
so many euphemisms, and by the evasion of the risk of calling a spade a
spade. The all-pervasive national ideology (Manipol-Usdek), while doubt-
less fulfilling a valuable function in providing an acceptable basis for
political unity, became both a distorting lens through which Indonesians
saw the world around them and a framework within which all political
expression had to be fitted. The boundaries between myth and reality
tended to become blurred in many areas of political thinking. The impor-
tance of upholding the validity of the ideology for its own sake pushed
into the background the solution of more mundane problems. For example,
"liberal" economic policies were at a discount because incompatible with
Socialism a la Indonesia. This does not mean that they were entirely
avoided, but that they had to be elaborately disguised in other ideological
verbiage, as when the ambiguous Economic Declaration paved the way for the
stabilisation programme in 1963 or the slogan Berdikari (Standing on Our
Own Feet) served to cover the retreat from a Guided Economy in 1965 when
greater reliance on the private sector became unavoidable.
The third effect of the consensus principle on decision-making arose
out of the need to reconcile multiple pressures and demands at the cabinet
level. Because so many aliran had to be represented at the top level
(hence given some access to the patronage available), the number of minis-
ters proliferated from 43 in 1959 to 90 by 1965. The "cabinet" as a full
committee of ministers virtually ceased to be a meaningful body since
about 1961. 3 It met in plenary session only rarely. Various experiments
with an Inner Cabinet of about 10 "Coordinating Ministers" and a Presidium14
of three Deputy First Ministers were tried since 1959, apparently without
reaching any very satisfactory result. The key decision-making body since
1962 has been KOTI, the small Supreme Operations Command consisting of the
President and several senior ministers. A good deal of political manoeuvr-
ing has centered around its membership.
Any notion of ’’collective responsibility” that survived in these cir-
cumstances tended to be minimal, only so much as was necessary to maintain
the outward appearance of consensus, to avoid putting oneself in an exposed
political position of vulnerability to attack for not being in line with
the ’’course of the Revolution” and to keep onside with the President who
exercised the preponderant influence over the disposition of offices and
power at this level. Since no elections were held after 1955 and the quasi-
representative bodies in the system (MPR-S and DPR-GR) had no real power to
hold ministers or ’’the government” as a whole accountable for their policies,
the latter were not directly responsible to ’’the people” so much as to the
President and to the aliran through which they achieved their prominence.
Failure to stabilise the economy brought grumbles all /round but no real
danger of repudiation by the ’’constituency” so long as no serious loss of
influence at the centre and access to government patronage was involved.
Political failure (or military, in the case of the Armed Forces) could prove
much more dangerous. Thus neither the political system nor the economic
structure functioned in such a way as to impose responsibility for inept
economic policies or performance in a way which ensured some sort of change
or penalty for failure.
Perhaps I can best summarise the description given above of government
under Guided Democracy with a quotation from Feith:
”... this is not a government which can easily exert much weight of
power. Many of its decrees are effectively ignored by those who are
charged with their implementation. This is sometimes attributed to
the ineffectiveness of its administrative machinery. But it is more
accurately described in terms of the weakness of the political elite’s
cohesion, the heavy dependence of this elite on the bureaucracy as a
social class, and the great importance of intra-bureaucratic politics
as a force for immobilisation of the government.”2^15
Notes to Chapter I: Introduction
1.	See Appendix, Chart 1, for graphs showing the rate of increase in
prices and volume of money on a semi-logarithmic scale.
2.	Douglas S. Paauw, “The High Cost of Political Instability in Indonesia"
in B. Η. M. Vlekke (ed.), Indonesia's Struggle 1957-58 (Nederlands
Genootschap voor Internationale Zaken, The Hague, 1959), p. 41. A
valuable study of the interaction between political and economic develop-
ments in Indonesia during the years 1950-58 is to be found in Hans 0.
Schmitt, Foreign Capital and Social Conflict in Indonesia 1950-58 (Uni-
versity of Wisconsin, Social Systems Research Institute, 1961?).
3.	It could be argued that there was some causal relationship between the
system of Guided Democracy introduced in 1958-59 and the take-overs of
Dutch property at that time, insofar as the latter provided the govern-
ment with a great deal of patronage would not have been so enthusias-
tically backed. But the political tide was flowing strongly in the
direction of Guided Democracy well before the take-overs occurred and I
would reject any suggestion that the former was a consequence of the
latter, or even that the political system under Guided Democracy was
significantly influenced by the change in property relations brought
about by the take-overs. The latter were not even a necessary condition
of the political change, though they were doubtless a contributory
factor in easing the way.
4.	The fullest account of the political system as it has developed since
1959 is given by Herbert Feith, "The Dynamics of Guided Democracy" in
Ruth McVey (ed.), Indonesia (New Haven, H.R.A.F. Press, 1963) ch. 8.
See also his "lndonesia*s Political Symbols and Their Wielders," World
Politics, xvi, 1, October, 1963, pp. 79-97, which illustrates why
symbolic activities contributing towards the maintenance of power have
so frequently been treated as more important than measures directed at
the solution of economic and administrative problems· ,bThe basic issue
is always the same; is power to be with those who want to gear society
to the maximisation of production, or is it to be with those, both
symbol wielders and military men, who can best sustain the mood of ’the
Revolution goes on’?’1
5· The term "kraton-state" should here be understood as no more than an
abbreviation for the rather clumsy circumlocution, "a political system
oriented towards and dominated by a central government which has many
characteristics of a traditional Javanese court or kraton"· The Javanese
kraton was not by any means coterminous with the entire realm· But it
was looked upon as the mystical centre and heart of it, and the ruler had
as much reason as Louis XIV to assert that "l’etat c’est moi"· The
Weltanschauung of both rulers and ruled is not likely to have been as
radically transformed during the era of colonial domination as the in-
struments of government and it is all too easy to demonstrate elements
of continuity in attitudes to government in traditional Java and latter-
day Djakarta· Java is not Indonesia, of course, but it has long been
the cultural leader as well as the political centre. The Indonesian
political system as a whole belongs to the tradition of the Javanese16
kraton-centred, “patrimonial-bureaucratic” polities rather than to that
of the essentially riverine Malay sultanates which were characteristic
of Sumatra and Borneo, in which the Sultan, although accorded great out-
ward respect as the embodiment of sovereignty in the community, appears
to have exercised little more power than the local chiefs (Rajas) who
were the effective rulers in their own districts. In the Javanese
polity, effective as well as symbolic power was centralised as far as
possible in the hands of the ruler and his ministers. Overmighty subjects
were kept in check so that no focus of countervailing power could arise.
“At its apex stood a virtually all-powerful god-king ruling in an ornate
palace, the kraton, a microcosmic replica of the universe. Surrounding
the monarch in a stately, stylised, and intricate etiquette was a re-
splendent, hierarchically ordered court entourage. Yet for all its
magnificent splendour, the Javanese realm was politically unstable, fra-
gile, and even brittle. For as long as he could rule the king’s was all
the power, all the glory, and all the land; but the polity was not ade-
quately institutionalised for dynastic survival. Instead of a landowning
gentry or feudal nobility exercising territorial administration, a tax-
farming, aristocratic bureaucracy collected revenues for the court mostly
at the court, but above all at the whim and pleasure of the ruler. The
resultant chronic political instability was in large measure counter-
balanced by the profundity and longevity of a transcendental, often
mystically tinged, religious world view...,” Harry J. Benda, “Decoloni-
sation in Indonesia· The Problem of Continuity and Change,” American
Historical Review, LXX, 4, July 1965, p. 1063. One might debate whether
it was on the matter of dynastic survival and political instability, or
of incapacity to adjust to changing circumstances that the Javanese
polity was inadequately institutionalised, but in other respects I am
in agreement with Benda’s account. For a contrasting (although in some
respects similar) picture of the Malay Sultanate see J· M. Gullick,
Indigenous Political Systems of Western Malaya, (Athlone Press, London,
1958).
6.	For general surveys of the economy since 1945, see Douglas S. Paauw
“From Colonial to Guided Economy1’ in McVey, op. cit. and J.A.C. Mackie
“The Indonesian Economy, 1950-63“ in Studien zur Entwicklung in Sud- und
Ostasien, Neue Folge, Teil 3, Indonesien, Band XVI (Institut fur Asien-
kunde in Hamburg, 1964), pp. 115-157. A useful and provocative statis-
tical analysis of inflation in the earlier years is given by K.D. Thomas
and P. Drysdale, “Indonesian Inflation, 1951-60,“ Economic Record (Mel-
bourne), XL, 92, Dec. 1964, pp. 535-553.
7.	This correspondence was first emphasised by the then Finance Minister,
Professor Sumitro Djojohadikusomo, in “Stabilisation Policies in 1955,”
IKI, IX, 1, Jan. 1956. The point is endorsed by Paauw, loc. cit., p.
206 -- “a rather striking correlation between the expansion of money
supply and the rate of price increases.” On the supply side of the in-
flationary equation, it should not be overlooked that national income
rose by 9% between 1958-62 (as also did population), with major food
crops showing slightly greater increases. The acute shortages in some
sectors reflected the capriciously changing composition of the gross
national product, a decline in the industrial and estate sectors, but
not an overall decline. I am indebted to Mr. George Hicks, formerly of
BAPPENAS in Djakarta, for information on this matter.17
8.	The government has asserted the right to investigate private bank
accounts since the first widespread anti-corruption investigations in
1957. It attempted — without success -- in January 1965 to compel
firms to use cheque accounts rather than cash for major transactions
so that they would be more readily subject to scrutiny, in the hope
that illegal operations would become harder to conceal.
9.	On two other occasions when export prices were high, 1955 and 1959-60,
the immediate effect in Indonesia was counter-inflationary, since in-
creased imports became possible and high revenues from imports helped
to curb the budget deficit. Conversely, when world prices have been
depressed, lower export earnings and reduced tax revenues have re-
sulted in an increase in inflationary pressures.
10.	The Gresik cement plant near Surabaya provided a striking example of
this, for the American contractors paid wages substantially higher
than normal in order to minimise labour troubles: purchasing power
rose perceptibly in that area.
11.	Paauw "The High Cost of Political Stability," loc. cit., p. 30.
12.	Some interesting comments on both the revenue and expenditure aspects
of achieving budgetary equilibrium in 1960 may be found in Ralph
Anspach, "Monetary Aspects of Indonesia's Economic Reorganisation in
1959," EKI, XIII, 1-2, pp. 38-42.
13.	Jusuf Wibisono, the Masjumi Minister for Finance in the second Ali
Sastroamidjojo cabinet, spoke publically of a 307. cut in the personnel
budget in 1956, soon after the general elections, but nothing was done
about it. An order against new appointments to government departments
was issued by Ir. Djuanda immediately he became Acting Minister for
Finance in early 1957, but it too seems to have lapsed completely.
14.	Douglas S. Paauw, "The Role of Local Finance in Indonesian Economic
Development," EKI, VIII, 1, Jan., 1955, pp. 2-25. On the tax structure
generally, see M. D. Dris, "Taxation in Indonesia," EKI, XI, 10-12,
15.	Table compiled by Mr. George Hicks for an unpublished paper on the
mechanics of the inflationary process in 1964-65. For further details
on the course of the inflation in 1965-66, readers may refer to the
"Survey of Recent Developments" prefacing each issue of the BIES.
16.	Taxes have not been directly levied on exports as such since 1953, but
taxes on the sale of foreign exchange have amounted to the same thing.
The ultimate effect was always to give the exporter less purchasing
power than he would have enjoyed if the taxes had been levied in some
other way. Importers could generally pass on to the consumer any price
increases created by taxes (although they might be momentarily hurt by
liquidity shortages whenever taxes are raised). For the mechanics of
the system of trade taxes, see W, M. Corden and J. A. C. Mackie, "The
Development of the Indonesian Exchange Rate System," Malayan Economic
Review, VII, 1, April 1962, pp. 37-60.18
17.	Soedjatmoko, "The Role of Political Parties in Indonesia," in Philip W.
Thayer (ed.), Nationalism and Progress in Free Asia, (Baltimore. 1956),
pp. 128-40. In this account of the political system as it has
developed since 1960, I have also drawn largely on Herbert Feith's
"Dynamics of Guided Democracy" in McVey, op. cit. and other articles
by him which are cited below. Another valuable survey may be found in
G. McT. Kahin, "Indonesia" in Kahin, Major Governments of Asia (Cornell
University Press, 2nd ed., 1963), pp. 636-687.
18.	See Feith, loc. cit., and also his "President Soekarno, the Army and
the Communists: The Triangle Changes Shape," Asian Survey, IV, 8, Aug.
1964, pp. 969-80.
19.	Herbert Feith, '*ΓΗβ Dynamics of Guided Democracy," loc. cit., pp. 336-42,
356.
20.	Ibid., pp. 366-72.
21.	To resign on an issue of principle would have entailed political impo-
tence: the unhappy eclipse of Dr. Hatta and Sutan Sjahrir after they
withdrew from active participation in the government served as an object
lesson to most Indonesian politicians. The PKI, on the other hand,
penetrated to the very threshold of government power by identifying it-
self closely with the President, despite its distaste for many of the
policies it had to endorse.
22.	The term aliran (lit. "stream, current") means "more than a mere
political party, certainly more than an ideology: it is a comprehensive
pattern of social integration": Clifford Geertz, '*ΓΗβ Javanese Village"
in G. W. Skinner (ed.) Local, Ethnic and National Loyalties in Village
Indonesia: A Symposium (Yale Southeast Asia Studies, 1959), p. 37.
Political parties have, at least in Java, generally drawn their following
from within one or other of the major aliran, either santri (strictly
Muslim) or abangan.
23.	A list of all Indonesian cabinets up to 1965 is given in Republic of
Indonesia Cabinets 1945-1965, compiled by Susan Finch and Daniel S. Lev
(Cornell Modem Indonesia Project, Interim Reports Series, 1965.)
24.	Herbert Feith, "Indonesia's Political Symbols and Their Wielders," World
Politics, XVI, 1, Oct. 1963, p. 92.CHAPTER II
GOVERNMENT POLICIES AND INFLATION, 1957-65
If we were to trace the course of Indonesia's inflation since 1957
with the aim of discovering who was primarily responsible for it, we
would have to make a close study of the formulation of economic policy
during those years in all its complexity. Various scapegoats have been
held to blame for the disasters that have afflicted Indonesia since then
-- the President for his utter unrealism (and apparent unconcern) in
economic matters, the Army for the crippling effect its expenditures have
had on budget stability, the bureaucrats and managers of State enterprises
for their technical incompetence, private businessmen for their failure
to engage in productive investment, "economic saboteurs" and speculators
for frustrating the high purposes of the government. All of them must
certainly bear some of the responsibility, although all could advance
persuasive arguments by way of exoneration. But it is not my intention
here to measure out the blame in coffee-spoons. It is obvious that many
factors and many people contributed to the vicious circle of inflation and
economic decline in Indonesia. In this chapter I am simply concerned with
a few of the general and particular reasons why the government's policies
turned out to have such disastrously inflationary consequences in spite
of its efforts to prevent them.
It would be very easy to assert that members of the government (and,
in fact, of the entire ruling elite) came to have a vested interest in
inflation, once they had learned how to accommodate themselves to it. This
may well have been true for many since about 1962: disinflation has hurt
and threatened more vested interests at high official levels than the con-
tinuance of inflation has. But it would be far less true of the earlier
period, when the government was by no means passive in its response to
inflationary pressures (even though they were generated largely by govern-
ment deficits): at times the government resorted to intensely unpopular
measures to curb them. Yet it has never managed to sustain that determi-
nation. Good intentions have been undermined time and time again. Before
we look at the particular historical reasons why the government's policies
went wrong on so many occasions however, several general observations may
help to clarify this second-order question about these constant failures.
First, we must start with the paradox that this highly authoritarian
and apparently broadly-based government^which did not have to worry unduly
about an electorate or public opinion polls or the reactions of its oppo-
nents, was not at all strong when it came to applying policies which hurt
its supporters. While it was able to put through some extraordinarily
radical, controversial, and harshly disruptive measures from time to time
(e.g. the BE system of 1957, the take-overs of Dutch enterprises, the
"monetary purge" of August,1959, the 1963 trade break with Singapore-
Malaysia), these have all been sudden and irreversible decisions, made
without prior debate. Their immediate political impact was indiscriminate
or uncertain, they did not obviously favour one group of the government's
backers at the expense of another. Thus there could be no serious argument
1920
about them and they posed no threat to the unity of the region* Moreover,
they could all be explained away as necessary sacrifices in the struggle to
meet the regional threat or defeat the Dutch (later, Malaysia or "Nekolim”)
or to "complete the Revolution”. (Their economic rationale was highly
dubious in every case.) But once the deed was done, no great political
steadfastness was demanded in implementing the follow-up measures, since
there could be no going back on the key issue. Always, too, government
statements explained these desperate leaps into the unknown in an apocalyp-
tic vein, as if they signified the beginning of a new era of economic life
which would be free from the vexing problems of the previous epoch, or as
if the nation, having screwed up its courage to face yet another great test
of its endurance, could soon expect to have triumphed over the difficulties
that had been plaguing it.
By contrast, attempts to restrain the inflation firmly and persistently
at its source, by holding the budget in approximate balance over a long
period, failed on almost every occasion they were tried, except in 1960 --
for example, in 1957, in 1961 and in 1963. Never since 1957 has the govern-
ment been able to keep its realised expenditures within the budget estimates·1
Policies demanding firm and continued restraint over expenditure, or debate
about budgetary priorities, entailed far more difficulties for the government
than harsh, once-for-all attempts to "wrench the wheel round” (banting stir).2
If budget expenditures had to be drastically pruned to keep them in line with
revenues, either the Armed Force or the Ministries involved in heavy ex-
penditures (generally influential ones) would suffer; or else some subsidy
to ordinary consumers might have to be cut, which would cause an outcry on the
left. The loose coalition of political groups supporting President Soekarno
since 1957 was never stable and united enough for the Finance Minister to be
allowed to take any risks of causing dissension among them by slashing ex-
penditures. (How many of the Finance Ministers since 1957 are even remembered
today?) So governments generally tried to increase tax revenues, (which was
not very painful politically so long as the main burden fell on imports), or
else put up with yet another deficit in the hope that things would be better
next year.
The second general reason for the government’s inability to act firmly
and effectively against the inflation therefore was that budget deficits
have served as a kind of political safety-valve during a period of instabil-
ity and crisis. They have enabled it to sidestep awkward questions about how
to make ends meet, whenever this might have entailed decisions which would
have antagonised elements in the political community whose support was
essential to the regime. Fiscal austerity would have necessitated deliberate
choice between competing claimants -- and the political balance was always
too precarious to allow any risk of defections from the ranks of the regime’s
supporters. In 1957, when the government was preoccupied with the regional
threat, it frankly abandoned economic stability (temporarily, as it was
thought, and despite the financially orthodox inclinations of Prime Minister
Djuanda, who had previously been a strong believer in balanced budgets) to
the more pressing political exigencies of coping with the rebellion; later
it tried to remedy the financial damage in other ways. But the lesson was
learned all too quickly. Both in 1961 and in 1963, the government again
simply abandoned previous commitments to keep the budget in equilibrium when
it realised that the political tensions that were developing threatened to
get out of hand.21
Thirdly, it must be remembered that since 1957 no influential group
within the government had a direct interest in stability per se« On the
contrary, the primary interest of nearly all of them was in big budget
allocations. Before 1957 this was not so: the representatives of the
exporting regions had (or felt they had) a direct interest in curbing the
inflation which was depreciating the currency and eroding their real in-
comes, and the governments of that period could not entirely ignore them.
From time to time individuals of the Djuanda stamp attempted to restore
financial stability, but those ministers who were beholden to parties or
significant political organisations, even the Army leaders, showed no
great enthusiasm for deflationary policies. The unhappy fate of the 1963
"May decrees" revealed how their short-term interests overrode any long-
term concern to check inflation. Not that they necessarily saw the
problem as simply and crudely as that. Many preferred to clutch at straws
and believe economists who assured them that what the country needed first
was not fiscal austerity but an increase of production, hence continued
investments in "basic industries". Willingness to be the deceived and at
times, I suspect, sheer naivete about the worth of the conflicting economic
doctrines put before them may have sometimes clouded their understanding
of the basic issues, but they would not long have remained deceived if
inflation had been purely disadvantageous to them.
It is a little puzzling that from amongst the heterogeneous institu-
tions that made up the State administrative machine, none emerged as having
an over-riding interest in seeing the economy put to rights so that at least
some sectors of the nation's productive apparatus could be restored to
higher efficiency. No "countervailing" political pressures were built up
which could induce the government to pursue different economic policies.
In 1960 it seemed possible that the managers of State plantations and some
regional military and civil authorities might find common cause in standing
up to the central government for the sake of protecting regional interests.
This did not happen to any significant extent, however, for various
reasons, one of which has been that lavish deficit financing enabled both
the Djakarta and provincial authorities to avoid unpalatable choices in the
allocation of scarce resources, and all became enmeshed in the inflationary
system.
In fact, prevention of inflation for its own sake was rarely a primary
concern of Indonesia's leaders after 1957, not even a primary economic
concern. Other objectives were more important to most of them — averting
the threat of territorial disintegration, maintaining the mystique of the
^evolution, eliminating Dutch or Chinese or other foreign enterprises,
strengthening their own political and economic positions, etc. A few
ministers like Djuanda were concerned about economic stability and realised
that inflation must be curbed as a first step. But they were not politic-
ally strong enough to insist on budgetary stability when moments of crisis
arose, although lip-service to this abstract principle was fairly widely
given. And as people became more and more inclined to say "We have learned
how to live with inflation: we have managed to survive all those disasters
predicted by the foreign experts" — and the leaders discovered that it was
not disadvantageous to them, that it was not dysfunctional to the maintenance
of their power in the short run, at least -- the sense of urgency to tackle
the inflation diminished. At the same time, the sharpness of the instruments22
available to the government to curb it were blunted. Consequently the
primary economic goals of Indonesia's leaders changed since 1957 from the
grand design of establishing stability and development (in the strict
sense of fundamentally transforming the economy, increasing production
and generating new investment) to the desperate obsession after 1962 with
the month-to-month problems of maintaining foreign exchange reserves at a
level sufficient to keep the machinery of government running as best could
be· By 1965, however, even that was an almost impossible task.
•Λ·	*	*	*	*
In the sections which follow, the main features of government policy
during the three main phases since 1957 are briefly outlined for the light
they throw on our question about the failure of the government's attempts
to curb inflation.
My starting-point is the beginning of 1957. A brief word of explana-
tion of the reasoning behind this is perhaps necessary, for others have
regarded the ’’take-over” of Dutch businesses in December 1957 as a more
significant turning-point in Indonesia’s recent economic history· I dis-
agree with this view, for I regard the intensification of inflationary
pressures over the last decade as stemming more from a cluster of political
changes arising out of the regional crisis^ that welled up between December
1956 and March 1957, rather than from the economic changes resulting from
the expropriation of Dutch enterprises at the end of that year.
Until the end of 1956, Indonesian governments were restrained in their
use of deficit financing as a way to cope with their budget problems
because of several political considerations which ceased to apply during
1957. The Bank Indonesia Act of 1953 imposed a statutory requirement that
the Bank must retain gold and foreign exchange reserves to the value of 20%
of its advances. This meant, virtually, that the government’s indebtedness
to the central bank could not exceed five times the nation’s current gold
and foreign exchange holdings without resorting to the emergency provisions
of the Act which required the approval of Parliament. Hence there was a
significant legal and political limit on the extent to which the supply of
money could be inflated, for governments were exposed to severe criticism
in Parliament whenever they utilised the emergency provision and it would
have been politically dangerous at that stage for a government to have
resorted to this device simply as a way out of the statutory limitation on
its right to borrow from the Bank. However, the reserve requirement was
modified by Parliament in February 1957 and the effectiveness of this
limitation on government prodigality virtually broke down altogether, for
at about the same time the entire political structure changed with the
appointment by President Soekamo of the ’’extra-parliamentary” Karya
Cabinet. The statutory reserve requirement became one of the least of
the government’s worries, since further modifications could easily be
pushed through the brow-beaten Parliament.
In other words, a legal and political restraint had inhibited
governments from excessive resort to deficit financing in the 1950-56 period,
but both these restraints were swept away by the political crisis brought on
by the regional revolts of early 1957. While cabinets had been responsible23
to a Parliament which was the formal centre of power, and itself answerable
to the people (more than just in theory), rising prices posed a grave
threat to their survival. But with the breakdown of parliamentary democ-
racy in 1957, the legal restraint was first eliminated and later the poli-
tical, for the position of a government was no longer endangered by the
mere fact that the money supply had been inflated beyond an arbitrary
limit. It might be endangered by the hardships accompanying price rises
-- and even the Karya Cabinet could not afford to ignore these entirely.
But it was even more vulnerable to political assault on other grounds, so
that it was forced in 1957-58 to give higher priority to preserving its
immediate authority in the face of the regional challenge than to the mere
maintenance of price stability. Balanced budgets became a political luxury
which the central government could not afford. Better to put up with a
short period of inflation, mobilise maximum resources (initially political
and economic; later also military) against the regional dissidents by satis-
fying as many as possible of the claims and grievances of allies and waverers
in the struggle, rather than to alienate them with stringent financial poli-
cies. Disinflation could be attempted later, when the government's authority
had been restored. The government's decision to put aside budgetary re-
straint in the face of the mounting political challenge can almost be plotted
from the weekly balance sheets of the Bank Indonesia. In December 1956,
bank advances to the government and the total volume of banknotes in circu-
lation began to increase by Rp. 100 million or more per week, and this rate
was maintained steadily throughout 1957.®
Advances
to
government
Banknotes
in
circulation
Average weekly
i
advance s
increase in
ii
banknotes
1956
May 30	Rp.	4.4	bill.	Rp.	7.9
Nov.	28	Rp.	6.1	"	Rp.	8.3
1957
Jan.	2	Rp.	6.9	bill.	Rp.	8.8
Dec.	31	Rp.	15.3	"	Rp.	13.8
bill.
" )
)
)
bill.)
Rp.
Rp.
Rp.
65.4 mill.
160.0 "
162
Rp. 15.4 mill
Rp. 100
Rp. 96
1957-61 The Political Background to Inflation
During the years 1957-61 the increase in both prices and the volume
of money averaged about 307. per annum -- although not without some fits
and starts, of course, as various government measures had a curbing or
intensifying effect. The money supply had begun to swell steadily at an
unprecedented rate from the last weeks of 1956, as the government grappled
with the political problems posed by the regional challenge, at the expense
of price stability and balanced budgets. It had little choice but to neg-
lect the latter, unless it was prepared to risk political suicide. Its
first priority had to be the safeguarding of Indonesia's political and
economic unity, which could all too easily have been shattered in 1957-58
if the Djakarta government had played its cards differently. Hence the
economic policies it pursued were very much determined by the political
circumstance of the time. Long-range economic plans and policies had to24
be subordinated to the most immediate necessities of survival· Short-
lived, ad hoc measures to keep the economy on an even keel were all that
could be attempted, because it was simply out of the question for several
years to make stability and development the prime objectives of policy,
despite constant lipservice to these desiderata·
A summary of the government’s major economic measures during this
period will serve to illustrate my conclusion that during this period of
political crisis the government could do little more than try to contain
the most damaging consequences of the inflationary expenditures it was
resorting to. Its first major economic reform, the introduction of the
BE certificate system' in June 1957, was a brave (or quixotic) attempt to
achieve stability in the foreign exchange sphere, tantamount to a devalua-
tion to a floating exchange rate determined by the supply and demand for
foreign exchange· In principle, the new system seemed to make good poli-
tical sense as a concrete assurance of greater real incomes to the export-
ing regions and as a device to ensure an equilibrium rate of exchange --
although the latter was to be achieved solely by market forces, which
meant that the government had virtually abandoned its most powerful single
instrument for regulating economic activity. In practice, this BE system
failed either to satisfy regional discontents or stabilise the official
rate, which very soon began to depreciate inexorably until the government
was forced to step in and peg it arbitrarily at Rp. 37.8/$US in April 1958·
The uncertainties and economic dislocations which followed towards the end
of 1957 (including a doubling of rice prices) were then greatly intensified
by the sudden takeover of Dutch properties in December, affecting most of
the nation’s large business and industrial enterprises and about half the
plantations -- the most far-reaching economic measures of the decade,
although by no means premeditated except in the vaguest terms·® This
further compounded the speculative and inflationary pressures; for agri-
cultural production and exports, as well as the commercial network,
deteriorated sharply (though only temporarily) in 1958: the value of the
Rupiah on the black market was halved over the next twelve months. The
government made several attempts to withdraw large sums of money from
circulation during 1958-59 by increasing importers” prepayments^ (about
one-seventh of the total money supply was tied up in this way by early
1959, a severe restraint upon the liquidity of importers); yet prices still
rose steadily throughout this period, with the one notable exception of
rice,iQ which had doubled in price during late 1957, but then hovered
around the same price range, Rp. 6-8 per litre on the Djakarta free market,
for the next three years.
Price controls and direct government intervention in the flow of goods
to the markets were invoked more and more in 1958-59 in order to prevent
shortages and curb price rises, though usually without much success· It
was a time of intense reaction against ’’liberalism” and capitalism, the
high tide of Socialism a la Indonesia and trust in the Guided Economy as a
panacea.H Private importers were excluded from a wide range of imports
and left a mere 25% of the market. State enterprise and an ambitious mew
Development Plan were to create an entirely new society. Government-
supplied sandang-pangan shops and kampung cooperatives were to serve as a
channel for essential commodities, to be sold at fixed prices on a ration-
card system. But prices and the quantity of money in circulation were25
still rising regardless. Finally, in the notorious "monetary purge" of
August 1959, described below, the government attempted to "freeze" a
substantial fraction of the currency in circulation, especially the
speculative "hot money" which was pushing up the black-market price of
the dollar at an alarming rate in raid-1959. It also devalued the cur-
rency formally from Rp. 11.4 per $US to 45 and revised the foreign ex-
change regulations completely, then overhauled the entire structure of
direct taxes and imposed a regime of budgetary restraint which succeeded
in reducing the deficit from Rp. 13.3 billion in 1959 to Rp. 8 billion
for 1960. These measures achieved their primary purpose. Prices stabi-
lised quite impressively during 1960, the foreign exchange reserves rose
to their highest level since the Korean War boom and for the first time
since 1957 the government was able to contemplate some relaxation of the
austerity policies it had been driven to and to undertake substantial in-
vestments in long-term developmental projects. A liberalisation of impact
restrictions in August 1960 paved the way for a flood of imports in 1961,
which certainly helped to stabilise prices and to provide much of the tax
revenue needed for the ambitious development budget of 1961. But this
leads us into part of the story of the succeeding phase of government
policies and new inflationary pressures.
In early 1961, the economy appeared to be again on an even keel; the
political troubles of 1957-60 were ending and even the vast new public
sector of government estates and trading companies seemed to be gaining
in administrative competence. Yet the political settlement was based on
unstable foundations so long as the government had not resolved the finan-
cial problem of living within its means. The events of 1961-62 were to
show that it was still not doing so. Hence the resumption of virulent
inflation in the last quarter of 1961 at a more dangerous rate than had
ever been experienced in Indonesia before.
Some of the non-economic reasons why the government’s ability to con-
trol the economy deteriorated during this early period will be briefly
outlined below.
1. During the years 1957-61, the government was never as severely pressed
on the economic front as it became after 1962, for it had ample
foreign exchange reserves to deploy against the inflationary pressures when
this was appropriate. The dangers of inflation were recognised clearly
enough, but no sustained attack upon it could be attempted until the poli-
tical crisis was past. It should be remembered that in early 1957 few
people expected that the regional conflict would last so long, or turn out
to be such a crise de regime. In the circumstances there was political
sense in putting up with a brief period of inflation while the political
crisis was being resolved (and even some economic sense, if it meant that
a stronger government would emerge): and it would have been an ingenious
idea to cope with the consequent depreciation of the Rupiah by letting it
find its own external value on a free market had it not been for the over-
sight that its rate was bound to depreciate steadily so long as the volume
of money continued to increase. What made the resort to inflation on the
1957-58 scale damaging was that it lasted for so long and could finally
only be stopped by the drastic, disruptive expedient of the "monetary purge".
Furthermore, it created conditions in which control over government ex-
penditure became much more difficult and much more lax: the disparity26
between budget estimates of expenditure and the actual disbursements in
1957-60 reveals the diminishing political authority and administrative con-
trol exercised by the Finance Ministry, for precise economic forecasting
became almost impossible and the struggle for budget allocations a more
intensely political, rather than technical dispute.
2.	Parliamentary control over the budget process virtually disappeared
during this period, too, just as its control over the resort to
deficit financing had disappeared -- not that this represented the elimi-
nation of a very significant restraint by 1959, since Parliament by then
lacked the political power to exercise its constitutional right to deter-
mine the budget, and was rarely even given the opportunity or information
to criticise it effectively. When the Parliament did assert its right to
examine the very sloppy budget estimates for 1960, it was promptly ’’re-
tooled1’. H Thereafter it appears to have been little more than a rubber
stamp in relation to the budget.
3.	Increasingly, after 1957, the key factor affecting the size of the
budget deficit was the revenue yielded by taxes on the foreign trade
sector. Direct taxes did not automatically rise in proportion to the
volume of money and were only overhauled once, in September 1959 (signi-
ficantly, in the ’’new broom” phase of Soekamo’s presidential regime),
whereas taxes on imports or exports and foreign exchange tended to be
changed more and more frequently and drastically·^ In August 1960, the
government began to utilise the insidious device of making a fraction of
the foreign exchange available for ’’free list” imports at a specially high
rate (Rp. 200/$, at a time when the main effective import rates ranged
between Rp. 45-82) for the sake of the huge revenues thus acquired. The
principle was later to be embellished and expanded until the government
became so dependent on this source of revenue that it lost effective
power to regulate the use of a large fraction of its shrinking foreign
exchange. This danger point had not been approached in the 1957-61 period,
when the foreign exchange reserves remained bouyant. But even the impres-
sive degree of price stability maintained in 1960-61 owed a good deal to
this rich new source of revenue and to the running down of foreign exchange
reserves. There had been no real improvement since 1956 (in fact, probably
the reverse) on the expenditure side, where political rather than economic
considerations tended to dominate. The finance portfolio in the cabinet
steadily diminished in importance, misappropriations and waste became pro-
gressively harder to eliminate and financial discipline steadily deter-
iorated after 1960-61.
4.	The ’’politicisation” of economic decision-making processes during the
1957-61 period was another factor which added to the difficulties of
the financial authorities in pressing for sustained and rational anti-
inflationary policies. Although outward agreement on the broad principle
of a Guided Economy was always ensured, there was by no means a consensus
of political opinion on the mechanics of economic policy. The line of de-
marcation between primarily ’’economic” and primarily political or social
considerations influencing policy (never clearcut in any circumstances) was
increasingly blurred, partly by the all-embracing eclecticism of the
’’Socialism a la Indonesia” ideology, partly by general politicisation of
the entire State administrative machine.The latter extended also to the
vast new public sector of the economy and even to that part of the private27
sector which depended on the bureaucracy for licenses, orders, credit or
even for crude political protection against arbitrary levies or inter-
ference. Friends at court and political influence in high places became
increasingly necessary for mere survival. Hence senior politicians and
administrators themselves were drawn into degrees of involvement in the
consequences of policy decisions which affected their interests in chang-
ing or maintaining the prevailing system. This process became much more
marked after 1961 when the "retooling" threatened in President Soekarno's
Political Manifesto was applied vigorously and the economy began to slide
more quickly down the Gadarene slope. The reasons for it are to be sought
as much in the nature of the new diffusely-structured political system,
with its tremendous emphasis on ideology and "expressive" rather than
"instrumental" politics, as in the economic deterioration. But both
factors contributed to the vicious circle in which each aggravated the
other.
5. The story of the grandiose Eight Year Overall Development Plan, de-
vised by the National Planning Council (DEPERNAS) and formally
endorsed by the Provisional People’s Consultative Assembly (MPR-S) at its
first session in November-December 1960, illustrates all too well the
political obstacles in the way of ministers anxious to restore the economy
to rights. The Plan itself, described by President Soekamo (not without
irony) as "rich in fantasy", was in no sense a rational allocation of
priorities for the utilisation of available resources, but a mere hetero-
geneous rag-bag of projects and financial estimates which in many cases
bore little relation to reality. The DEPERNAS had been a large body
representing all the main political groups, but lacking even a secretariat
of expert economists. Its estimate that Rp. 30 billion p.a. could and
should be devoted to development projects, without resort to deficit
financing, was based on figures plucked out of thin air. The projects on
which the (then) huge sum of Rp. 240 billion was to be spent over the next
eight years were merely bundled together from the hastily compiled re-
quests submitted by the respective Departments, without serious investi-
gation as to their costs, feasibility or desirability. But what really
mattered was not the contents of the Plan so much as the political question
of who was to execute it — and who would control the disbursement of those
seemingly endless funds. This affected the outward form of the political
manoeuvring that went on. After DEPERNAS chairman Yamin had ceremoniously
presented the Plan in its symbolic 8 parts, 17 volumes (batik bound) and
1945 chapters to the President exactly one a year after the installation
of DEPERNAS, it was discussed and severely criticised in the cabinet be-
fore being submitted to the MPR-S. But it was not opposed openly or com-
pletely in either place, for the new political style of Guided Democracy
required unanimous agreement on all such decisions, hence compromise and
mutual concessions. Djuanda was primarily concerned to ensure that certain
key development projects were carried out (by having them classified in a
way which ensured some priority of execution of the Plan in the hands of
his more sensible and technically expert ministers). Chairul Saleh, as
Minister for Basic Industries and Mining, as well as Chairman of the MPR-S,
was trying to have the latter body made responsible for the execution of
the Plan, which would have greatly increased his influence. He succeeded
in frustrating Yarnin’s attempts to make DEPERNAS the executing authority,
but the outcome of the MPR-S deliberations was essentially a non-decision.2G
The President was designated pelaksana (executor) and it was obvious that
he would have to decide how to delegate this responsibility· (But every
project would still have to be endorsed by Parliament -- a virtual repudia-
tion of any ’’planning" process·) In the various obscure manoeuvres which
followed, Djuanda’s hopes of entrusting the control to a small, expert group
of Ministers were also defeated. The Badan Pembantu Pelaksana (Board of
Assistants to the Executor) was finally established as a large, amorphous
body containing representatives from the several Nasakom groups on the
DEPERNAS and the DPA, as well as the Cabinet. (Later, we find Chairul
Saleh also staking a claim for the MPR-S to be associated with the Plan’s
execution, but without any apparent success.) No effective decisions could
be made, or economic priorities determined. The only significant outcome
of the whole affair was to add legitimacy and prestige to the claim for
heavy development expenditures in 1961, one of the major causes of Indo-
nesia’s next bout of inflation.
As it happened, the Plan was soon entirely irrelevant to the economic
realities, and was abandoned years before the fact was formally admitted by
the MPR-S in March 1965. Even the budget for 1961 blatantly flouted one of
its fundamental tenets, avoidance of deficit spending. With the virulent
inflation and acute foreign exchange crisis of 1961-62, little more was
heard of the Plan or its executive body. Other organisations set up in
the crisis period of 1962 soon superseded it in importance.
6. Since long-range planning and sustained exercise of authority by the
government in the economic sphere posed such formidable political
difficulties, it is hardly surprising to find that government policy came
to resemble a zig-zag course from one desperate, heavy-handed crisis
measure to the next. Instead of constant, steady application of pressure
through the use of many control mechanisms, the government was forced to
rely on massive, once-for-all interventions in the economy, either through
some forcible contraction of the money supply or a radical change of foreign
exchange regulations. (The latter posed fewer political problems in some
respects.) It has not been mere reluctance to apply unpopular or “depriva-
tional” policies that accounts for this procedure, as we can see from a
glance at the 1959 “monetary purge”, the most outstanding instance of this
kind of measure.
The necessity for some drastic steps to deflate the economy arose out
of the alarming increase of prices and the volume of money throughout the
earlier part of 1959.^-θ The budget deficit was running at a much higher
level than had been anticipated and the printing of more currency was the
inevitable result. The black-market value of the Rupiah began to decline
alarmingly in mid-year (from about Rp. 100/$ to 150 between April and July).
There were rather special reasons for this: a flight of Chinese capital
caused by fears about the closing of Chinese rural stores; diversion of
large holdings of Rupiah from the lucrative importing business into other
outlets; the liquidation of large funds held by the government as prepay-
ments on imports -- but the impression that the velocity of circulation was
increasing and the economy towards a dangerous inflationary spiral intensi-
fied the feeling that something had urgently to be done. This was all the
more necessary because President Soekarno had newly assumed full executive
control under the Presidential constitution which had been reimposed on29
July 4, so that he was seeking to recreate the revolutionary atmosphere of
bold, determined action to deal with the nation’s problems. The nation
expected firm measures and was prepared for austerity. Measures which
bore hardest on speculators and private businessmen, especially on the
alien, capitalist Chinese, would arouse few tears at a time when private
enterprise was under a cloud and a "Guided Economy" the current panacea.
The "monetary purge" was one of a series of measures undertaken by
Soekarno’s new government on August 25, 1959 of which the most spectacular
was the decimation of the value of Rp. 500 and 1000 banknotes to Rp. 50
and 100 respectively and the "freezing" of 90% of all bank deposits.
Its effect was to reduce the volume of currency in circulation from Rp.
34 billion to 21 billion overnight, a tremendous deflationary blow which
brought in its wake a disastrous liquidity crisis, some slight and short-
lived reduction of prices and many months of severe disruption and hard-
ships in economic life. So drastic were the consequences, in fact, that
the government immediately had to release extensive bank credits to prevent
an administrative and economic disaster, with the result that within six
months the volume of money was back to its former level. The purge was
imposed suddenly and without adequate preparation for dealing with its
immediate financial implications (for which hurried emergency regulations
had to be drafted). It was indiscriminate in its impact, although for the
most part it fell on the rich rather than the poor, or more precisely, on
holders of large cash balances -- particularly speculators holding the
"hot money" which had been circulating at an alarming rate in the previous
months.
The purge was accompanied by a formal devaluation of the Rupiah and
was followed shortly after by the first major overhaul of the tax system
since independence. Insofar as these measures were intended to stabilise
prices (at a new higher level) and keep the budget in balance, their
rationale was admirable, even though the planning and execution left much
to be desired. In the months that followed, inflationary pressures were
effectively contained, after an initial period of re-adjustment, and the
economy was restored to something like normal. It was an impressive feat
of beIt-tightening and recovery.
Nevertheless, the "purge" was a terribly clumsy way to achieve such
a result. Quite apart from the disruption of commerce and production that
ensued until the administrative tangles and liquidity crisis were over-
come, it could be criticised on the ground that what counted in that
situation was not the elimination of "hot money" so much as the determined
maintenance of a balanced budget afterwards. One might reply that only
some similarly dramatic proof of the government’s determination to reverse
the highly inflationary course of mid-1959 would have carried sufficient
conviction to succeed. But was such a clumsy and savage blow necessary
for this? Anspach concludes that no alternative measure would have had a
sufficiently rapid impact on the money supply to contain the built-in
inflationary pressures — though he also argues that there was not much
real danger from "hot money" and deprecates the argument that it was
necessary to protect the country from the inflationary overhang of 1957-58.
His resolution of this apparent contradiction leads however into debatable
territory. No doubt a determination to hit the wealthy holders of "hot30
money" was a main consideration in the minds of Djuanda and Soekarno, the
only men involved in the decision· Anspach is also on firm ground in
stressing the "simplicity and equity" of the purge as a most persuasive
consideration, since secrecy would be almost impossible to maintain for
any more complex operation· But it is a pity that the government could
not have demonstrated its determination to restore stability in a less
hamfisted manner.
Partly because of the purge, partly because of high export prices,
1960 was in several respects an encouraging year for Indonesia’s government.
Prices gradually stabilised, export earnings were good and the foreign ex-
change reserves were buoyant· The government accordingly felt justified
in loosening its belt after the austerity of 1958-59 by increasing imports
substantially (in August 1960) and by embarking on the ambitious Eight Year
Plan projects in 1961· The State enterprises seemed to have recovered from
the disorganisation of the takeovers· There were still however some dis-
turbing clouds on the economic horizon. The relatively low budget deficit
of 1960, while impressively small in contrast with earlier years, had been
achieved more by increasing revenues than by curbing expenditures· In
fact the 30% increase of expenditure was only a fraction below the record
jump in 1957-58. There was still a long way to go before financial disci-
pline was assured. Moreover, the considerable expansion of bank credit in
1959-60, very largely to State enterprises and semi-public institutions,
offset much of the benefit of a better performance in the budget sector
itself· Even the improvement of exports was largely due to high prices in
1959-60 rather than increased volume: ominously, rubber prices began to
fall towards the end of the year. In the circumstances, caution in budget-
ary and foreign exchange policies in early 1961 would have been wiser than
the ambitious course actually followed.
1961-62 Inflation Rampant
With the advantage of hindsight several years later we can see that the
Indian summer of 1960-61 was the last occasion when the Indonesian government
still had the economy reasonably well under control. In September 1961
the relative price stability of the previous twelve months was dramatically
shattered. Rice prices rocketed within a few weeks from the relatively
stable level of Rp. 6-8 per litre of the previous three years to as much
Rp. 50-65 by the end of the year. Intensification of the West Irian campaign
towards "military confrontation" in early 1962 destroyed all hope of budget-
ary stability. Thus began the virulent inflation of 1962-65, which was only
again to be checked during one brief period in mid-1963·^
Why did such a sudden upward surge of prices occur? Could the govern-
ment have prevented it, maintaining the stability of 1960-61 and the buoyant
foreign exchange reserves, if it had pursued more prudent policies? The
West Irian campaign is not an adequate explanation. The commitment to mili-
tary action in West Irian did not occur until after President Soekarno’s
Trikora speech of December 19, long after the break in price and budget
stability. Although some increase of military spending in anticipation of
such an eventuality was probably under way during the last quarter of 1961,
the search for causes must be taken a good deal further back than that.31
No single explanation can be given for the fact that various infla-
tionary pressures which had been held in check could not be contained any
longer. A severe drought in October and falling rubber prices were ex-
ternal developments which helped to aggravate the speculative tendencies
that suddenly broke loose in the last few months of 1961, but the essential
trouble was that the economy was already dangerously over-stretched.
Danger signs had been evident for some months. In July businessmen were
already predicting continuous price rises of 5-7% per month for the rest
of the year.l’ Food prices did not decline in the second quarter as they
usually do when the harvest comes in. Rubber prices were slipping far
below their high 1960 level and the value of exports fell seriously be-
tween mid-1960 and mid-1961, despite increased oil production, θ in June,
the Bank Indonesia submitted to the government a confidential report on
the 1961 balance of payments position, stressing the urgent need to safe-
guard the reserves and cut down on "free list" imports. Altogether, the
government had gone too far in relaxing its belt after the austerities of
1958-60.
In the 1961 Budget, announced in February, routine expenditures were
estimated at Rp. 53 billion, only 3 billion more than in 1960. But in
addition, "development" expenditures of Rp. 30 billion were to be under-
taken in accordance with the Eight Year Plan. The total expenditure of
Rp. 83 billion entailed a deficit of nearly Rp. 17 billion, far larger
than the previous year’s deficit -- and flatly contrary to the Plan's
proscription of inflationary budgets. (Revenues were only estimated at
Rp. 62.7 billion, compared with an actual outturn of Rp. 50.3 billion in
1960.)21 Insofar as the government was relying on the numerous foreign
credits and grants being promised at this time to get the development in-
vestments under way, there was some justification for the deficit,
especially as the very considerable increase of imports could be expected
to exert a strong anti-inflationary effect. But such a budget was bound
to stimulate the bullish tendencies in an economy that was already in a
state of very precarious balance at best. Building materials were in
short supply and their prices rocketing, particularly cement, which was
urgently needed to complete the Asian Games complex in Djakarta, where
government contractors were making huge profits through misappropriations.
With the volume of money steadily increasing, businessmen could still be
confident that importing would be profitable at almost any price. They
had little incentive towards more productive investments in export agri-
culture or industry, where returns were low and the risks high. These
fields were in any case dominated by the State although little of the
development budget was devoted to bringing about an immediate increase of
production there. Far too much of it was concentrated on long-term pres-
tige projects like the Tjilegon-Lampong iron and steel complex and to the
expensive Asian Games stadia.
To blame the government's budget policy in 1961 for not anticipating
all the troubles which were to follow later in the year would, of course,
be absurd. The West Irian crisis and the domestic political wrangle asso-
ciated with it were far more important reasons for the economic disaster
of 1962. But it is hard to avoid the conclusion that the 1961 budget was
a major step in the wrong direction, for reasons which (although perhaps
inevitable) clearly illustrate the basic political problems underlying
economic policy-making in Indonesia. Ideally, the government should have32
set as its primary objective keeping its own expenditure in check, ensuring
that financial discipline and budgetary control were established, channeling
available private funds into productive investment and, above all, reaching
some decision on the most urgent development priorities before taking any
further risks of inflation. All this would have entailed choices of economic
and political preferences, however, which might have split the unity of the
forces behind the regime. If government expenditure had to be pruned (for
the budget could hardly be balanced by raising direct taxes further so soon
after the 1959 increases) and criteria of administrative efficiency or
economic rationality were to be applied, where would the axe fall -- and
who would make the decisions? It is hardly surprising to find that good
reasons were discovered for not relying on old-fashioned ’’liberal1' market-
oriented criteria of economic efficiency. Instead, everyone gladly accepted
the heady doctrine that under the new ’’Guided Economy" production would
rapidly increase and the problem of inflation be solved at its roots. An
ambitious and optimistic budget enabled the government to avoid facing up
to fundamental political decisions once again.
When the inflationary spiral resumed in late 1961, the Djakarta cost
of living index showed its sharpest rise since 1950, from an average of 281
in the third quarter to 542 in the first quarter of 1962 and 711 by the
fourth (1958: 100). The West Irian campaign, which began to enter a new,
more intense phase of overt military conflict not long after President
Soekamo’s "Trikora" speech in December 1961, was obviously the major factor
in all this, for military expenditures contributed heavily to a huge budget
deficit in 1962. But the West Irian struggle was not responsible for the
initial price break in September, for armed conflict still seemed far from
likely then and other factors seemed to have had a prior impact. Nor
should it be assumed that the Army leaders seized the opportunity of a
military conflict to justify bigger defence expenditures. On the contrary,
they seem to have been the "doves" and President Soekamo the leader of the
’*hawks" in the 1961 debates on a war or peace strategy to recover West
Irian. Actually, it appears that military expenditures were beginning to
increase substantially several months before the Trikora speech, for some
of the equipment obtained from Russia under the 1960 arms agreement (and
from other countries) was beginning to arrive. Moreover, the Army needed
large sums to accommodate and sustain the former rebels in Sumatra and
Sulawesi, who now began to lay down their arms and "return to the fold of
the motherland" in large numbers: the expenses, although short-lived,
were considerable^ and not significantly offset by the cessation of the
Army campaigns against them. In any case, for one reason or another, the
budget deficit jumped alarmingly^ in the last months of 1961 -- and went
on doing so throughout 1962 and well into 1963, as the following figures
indicate.33
		Bank Indonesia Claims on Government	Money in Circulation
End of	quarter		
IV -	1960	Rp. 34.4 billion	Rp. 47.8 billion
I -	1961	36.7	48.7
II -		39.4	48.5
III -		45.0	54.1
IV -		60.7	67.9
I -	1962	72.0	77.1
II -		82.2	94.3
III -		101.4	113.4
IV -		121.4	135.3
The immediate cause of the September 1961 price increases (quite
disproportionate, in the case of rice, to the increase in the money supply)
seems to have been a compound of uncertainty and speculation brought about
by the state of the foreign exchange reserves. This was where the chickens
came home to roost, in view of the government’s excessive reliance on im-
ports and the copious revenues from "free list" imports at the Rp. 200/$
rate. Rumors of impending import cuts and a cessation of "free list"
imports had been current in commercial circles in June (when the Finance
Minister had to deny them, not long after the Bank Indonesia submission
on the problem) and again in September. An I.M.F. loan of $41.25 million
was negotiated in August to strengthen the dwindling reserves. Then, in
September, "free list" imports were virtually suspended and import controls
considerably tightened, though without the public fanfare that new regula-
tions would have entailed, so that importers would not be alarmed into a
scramble for foreign exchange. As this was the first foreign-exchange
crisis since the suppression of the Bank Indonesia weekly reports earlier
in the year (intended to prevent speculation against the Rupiah), the
true situation was not known: reserves were, in fact, still far from
negligible, although they had fallen fast. The black market rate for the
dollar was not a good economic indicator, but for many people it was the
only one available — and it began to slide from Rp. 165/$ in September
to 315 in January 1962.
These were familiar signs of crisis and, in addition, there were
prospects of a rice shortage. Rice prices generally rise about September,
but this year speculation greatly exaggerated the seasonal rise. High
hopes — and large Rupiah funds -- had been invested in the Rice Self-
Sufficiency campaign, designed to provide fertiliser, better seeds and
credit to the tani through the establishment of 500 "paddy-centres" in
Java and Madura. But reports of widespread embezzlement became common
and a long drought as the time for the planting season approached in
October cast a pall over the whole program. From December to April rice
prices rocketed and an atmosphere of near-famine prevailed. As it turned
out, the 1962 harvest was well above those of previous years, although not
sufficient to dispense with rice imports. But little more was to be heard
of Rice Self Sufficiency in the following years, except the unhappy echoes34
of proceedings against the embezzlers, many of them local dignitaries and
officials·
Political uncertainties compounded other destabilising factors about
this time· President Soekarno’s health was bad and in October he went to
Vienna for his first major hospital treatment» Djakarta was more than
usually full of rumors and apprehension about whether he would be able
to take up the reins again. There were many signs of a tense factional
struggle within the cabinet in which the President and certain of the more
radical, ideologically motivated ministers anxious to force the West Irian
campaign to a conclusion by military action were in bitter conflict with
the Armed Forces leadership (excluding the Air Force) and the more conser-
vative ministers who were alarmed by the economic and social disturbances
such action would entail· Not only strategy was at stake in this tug-of-
war: there was also the fundamental struggle for power and influence
within the government itself· Power depended not only on position, but
also on patronage and resources -- especially on the share of the budget
to be allocated to the Armed Forces if they were to undertake the hazardous
and onerous task of launching attacks on West Irian· When the 1962 Budget
first came under discussion in the preceding November, one of General
Nasution’s deputies referred to the estimates of revenue and expenditure
as Rp. 62 billion and 71 billion respectively — if true, a very tough re-
striction of expenditure by contrast with the Rp· 80 billion of expenditures
in 1961. An austerity Budget may well have been under consideration at
that stage, but the delays in finalising the estimates for Parliament
testified to continuing disputes within the government on the matter, as
did the long period of silence about it until April, by which time the
immediate political crisis had eased and the commitment to military con-
frontation had been accepted by the entire government. The Budget then
announced to Parliament represented an utter negation of austerity and
fiscal stability. The Armed Forces were to receive 487O of the ’’ordinary”
budget, quite apart from the ’’special” Budget for the recovery of West
Irian. Economic stability had been entirely subordinated to the demands
of the national struggle against the Dutch· Makeshift policies would have
to suffice until that was settled, simply to tide over the most pressing
problems of foreign exchange crises, food shortages,and the excess of ’’hot
money” being generated in an overstretched economy. The few noteworthy
economic measures of 1962 reveal all too clearly the abandonment of long-
term objectives and the emergency, ad hoc character of economic policy in
a situation where there was obviously no hope of achieving financial
stability.
The Budget for 1962 (published in April in the barest outline, after
nearly six months of discussion at the cabinet level) provided for an un-
precedentedly large deficit of Rp. 37 billion -- and even that excluded
secret, unspecified ’’special expenditures” on the West Irian campaign. 5
Revenues of Rp. 61 billion and expenditures of Rp. 97.9 billion (excluding
the ’’special” expenditures) were antiticipated, as against an actual outturn
of Rp· 63 and 86 billion respectively for 1961. No new sources of revenue
were indicated; the compulsory ’’guided savings” introduced in mid-1961 were
continued, but 82% of the revenue was to come from customs, excise and taxes
of the usual kind. Overall expenditures were to be pruned back in real
terms, in view of the price rises of the previous 12 months, and ’’develop-
ment expenditures” in particular were to be restricted, although this does35
not appear to have meant an immediate abandonment of the large-scale pro-
jects of Chairul Saleh’s ministry (which did not run short of funds until
late in 1962); apparently it merely entailed retrenchment on housing and
transport expenditures in all ministries. In practice, however, expendi-
tures were not effectively curbed and the deficit for 1962 was closer to
Rp. 60 billion than 37. A supplementary budget had to be brought down in
October, authorising expenditures of Rp. 116.7 billion and revenue of
Rp. 77 billion (still excluding the West Irian budget). With price in-
creases now approaching a rate of 100% per annum, close budgetary control
was becoming more difficult than ever. As in 1957, no real attempt to
stabilise the economy could be made until the military emergency was over.
A new set of foreign exchange regulations, introducing the so-called
SIVA system, also implied an economic strategy very similar to that of
1957.2® The ostensible purpose of the new system was to eliminate the
notorious "price discrepancy" which was making export transactions un-
profitable except by resort to illegal practices: the exporter was to
receive 15% of his foreign currency earnings in the form of a SIVA certi-
ficate (Surat Idzin Valuta Aeing) which could be sold on an open market
to importers who were required to purchase them in order to obtain certain
categories of non-essential imports. In principle it resembled the early
BPE and BE systems, but applied to a smaller share of the market than the
latter. It succeeded in raising the effective rate of exchange for ex-
ports from about Rp. 40 per dollar during 1961 to Rp. 135 in April, over
Rp. 180 in June and over Rp. 240 by early 1963. In the prevailing cir-
cumstances of unavoidable inflation and constant, barely controllable de-
preciation of the Rupiah, it provided something of an automatic equili-
brating mechanism which gave exporters a steady (although small) increase
in their incomes at the direct expense of importers. A good deal of cur-
rency was in this way drawn into the financing of this segment of the
nation's imports, mostly of luxury goods which were generally a profitable
investment at almost any price, since they were less subject to price
control. Insofar as it encouraged luxury imports, the SIVA system (and
the SPP system which replaced it in 1964, in slightly different guise but
on essentially similar principles) was an utterly retrograde step. It was
also a denial of economic planning and a return to an intrinsically
laissez-faire method of allocating precious foreign exchange. Perhaps
for that very reason it had its attractions to a harassed administration.
It enabled the government to keep its head just above water on the foreign
exchange side, although the reserves were at a critical level throughout
most of 1962 and "how close Indonesia came to defaulting on its foreign
payments in the early months of this year may never be known". ' But she
was to come even closer in the years of "living dangerously" which followed.
Although the government's budget and foreign exchange policies would
be considered by an orthodox economist as its major instruments of economic
control, several other makeshift measures in 1962 attracted more public
attention within Indonesia as evidence that the government was utilising
its powers energetically to remedy the country's difficulties. During the
period of acute rice shortage and high prices early in the year, rice
kitchens were set up by regional authorities in some of the main towns.
Efforts were made in several areas to improve or increase the "injections"
of subsidised rice through government departments and rukun kampung36
(neighborhood associations), but complaints about the inadequacies, misuse
and failure of these measures were common· At best these were palliative
measures, benefiting limited classes of people· The government's rice
purchasing program in the rural areas was functioning badly because of
rising prices, since peasants were reluctant to sell to its agents at
prices which constantly lagged behind the free market price.28 Big rice
imports became necessary, despite a record harvest in 1962·
Because of the crisis over food shortages and "near-famine" reports
in March-April, President Soekamo cancelled (at the last minute) a long-
awaited official visit to Great Britain and, in a "life-and-death" broad-
cast to the nation on April 22, ordered the establishment of Rice Purchase
Advisory Councils and Rice Distribution Councils at all regional centres
from the province down to the village· National Front representatives were
to participate alongside government officials in fixing quotas for collec-
tion, arranging distribution methods and fixing prices· In the same spirit
of active and direct intervention in economic life, a Supreme Command for
Economic Operations (KOTOE) was set up, headed by the President in his
capacity as Supreme Commander and with four senior ministers, all designated
as Deputy Commanders or Chiefs of Staff, with high service ranks "so that
they can command"· A flurry of statements, instructions, and tours of
enquiry by ministers followed (the notion that the West Irian struggle
entirely occupied the time of the top ministers to the exclusion of econo-
mic concerns is utterly fallacious), including a widely-publicised tour of
investigation into harbour congestion, where a scandalous bottleneck in the
transportation system had developed· A good deal of sound and fury was
generated by all this activity, but the basic ills of the economy were not
cured.
After the West Irian campaign had been brought to its successful con-
clusion in August 1962, it was widely believed (or hoped) that the govern-
ment would at last settle down to the mundane problem of restoring stability
in the economy· The American authorities published the report of the 1961
Humphrey Mission which had recommended substantial US aid ($325-390 million,
including multinational aid) to help the Indonesian government put its
Eight Year Plan into effect. An IMF mission visited Djakarta later in the
year to advise on a stabilisation scheme, in conjunction with further
foreign aid to finance imports. But the political implications of any
such plan were formidable and it took well over six months before President
Soekarno was ready to take the plunge into the chilly waters of a Washington-
showered stabilisation program. Meanwhile hand-to-mouth policies continued
and prices went on rising steadily· A special levy on motor-cars and houses
of specified categories known as the SWI was imposed in the October supple-
mentary budget, in the hopes of contributing Rp· 20 billion to the state
treasury.29	proved to be a disappointing source of revenue, difficult
to administer and a considerable disrupter of markets, to the benefit of
speculators and the dismay of others. New import classifications in October,
amounting to a further devaluation of effective import rates but not modi-
fying the SIVA system, brought some slight improvement in the foreign exchange
reserves -- although at the cost of intensified upward pressure on prices
and, within a short time, renewed speculation about the necessity for the
repetition of a devaluation· Yet the shops were by no means empty in late
1962 as they had been two years earlier· The SIVA system made possible the37
imports of a surprisingly wide range of goods, mostly in the luxury class
— though all at prices far beyond the reach of ordinary fixed-income
workers.
1963-65 Stabilisation and Confrontation
The stabilisation programme of 1963, epitomised in the "May 6
regulations" and the philosophy behind them, was a major landmark in
Indonesia's recent economic history. In its economic aspects, it was not
a particularly novel or remarkable series of measures, as we shall see —
essentially just a combination of budgetary austerity, relaxation of price
controls and a "crash program" of imports backed by foreign credits and
loans. It was the political implications, however, which made it so im-
portant, for the decision to undertake the stabilisation scheme represented
a significant political commitment by President Soekamo's government.
And it was because of its political implications that opponents of the
scheme (who comprised a wide spectrum of organised opinion in Djakarta)
seized the opportunity provided by the "confrontation" of Malaysia to
force the government onto a quite different political and economic course
which entailed the abandonment of the stabilisation programme only a few
months after it was attempted.
The background to the May 26 regulations and the mode of introducing
them are as interesting as the new policies themselves.Talk of a
stabilisation scheme involving some sort of devaluation had been rife in
Djakarta ever since the visit of an IMF mission in November 1962, but
action was delayed in anticipation of a long-awaited cabinet reshuffle.
Demands for a reshuffle and the formation of a Nasakom cabinet, including
representatives of the PKI, became quite intense in January 1963. There
were many reasons for a change -- the end of the West Irian struggle and
the approaching abolition of martial law provided the political parties
with grounds for seeking a reduction of military influence in the cabinet
(something that the President himself was by no means averse to); many
ministers were under fire for "mismanagement" in their departments; the
First Minister, Djuanda, was in shaky health; above all, the PKI must have
been feeling that this was their moment to press hard for inclusion in the
cabinet, before the anti-communists found some new way to consolidate
their power. It was also widely believed in Djakarta that the Russians
were insisting on a Nasakon cabinet as one of the conditions for any con-
cessions to Indonesia in the phasing of repayments on the massive arms-
purchase loans. Because the question of a Nasakom cabinet was very tightly
bound up with Indonesia's problems of finding the foreign exchange to meet
her increasing repayment commitments, President Soekarno was caught on the
horns of a dilemma. Some deferral of loan repayments to Russia was sorely
needed, but if the price was to be a Nasakon cabinet, it was almost certain
that substantial American aid would not be forthcoming. The State Department
was already having trouble getting its foreign aid program for Indonesia
through Congress, so inclusion of PKI members in the cabinet would make it
almost impossible to obtain the finances to implement the recommendations
of the Humphrey Report, on which the IMF stabilisation scheme largely
depended.3* For President Soekarno, the decision for or against a Nasakom
cabinet virtually meant a choice between relying on the Communist bloc for38
foreign aid or on a Western consortium of capitalist nations working through
the IMF and the OECD*
The decision finally went against the Communists· No cabinet reshuffle
occurred and by March the government was beginning to prepare the ground
politically for a shift to the right in economic strategy· (The President
is even said to have instructed Aidit to call off the campaign for a Nasa-
kom cabinet, asserting that ",1 am NasakomI") It is hardly surprising, for
the Russians were unlikely to be as forthcoming with financial aid as the
Americans, while a move to the left would have meant a greater degree of
dependence on the communists, both externally and internally, than would
have been acceptable to many elements in the government. By inclining to
the right, Soekamo ran the risk of antagonising the PKI and the Russians,
but neither was in a position to do very much about it in the short run.
The Russians even agreed to a rescheduling of the loan repayments later in
the year· The PKI was given some satisfaction through the development of
the confrontation policy against Malaysia, but at the same time it was
stymied in its opposition to the new economic policy by the roundabout way
in which it was introduced·
The formulation of a new policy to allay the country’s financial
difficulties was entrusted to the Musjawarah Pimpinan Negara in early March,
shortly after an IMF mission arrived in Djakarta for further talks· A com-
mittee made up of senior ministers and the leaders of the main Nasakom
parties was entrusted with the formulation of a report to the President, on
the basis of which he made the policy speech known as the Economic Declara-
tion (DEKON) on March 28. In itself the DEKON did not commit the government
to any particular policies, for it was couched in very general terms which
could mean all things to all men — no doubt the President’s express inten-
tion. An assurance was given that drastic monetary measures would not be
taken, such as devaluation or a monetary purge (although a disguised devalu-
ation was, in fact, impl cit in the May 26 regulations). The most striking
feature of DEKON, however, was that it contained references to certain
phrases and principles which had often been decried in the period of
enthusiasm for a Guided Economy. The role of small producers was extolled,
as well as the large State enterprises; the need for incentive to private
producers and for deconcentration of management in the State sector was
mentioned; the price mechanism was (in rather gingerly fashion) unveiled
from behind the screen of disdain which had surrounded it. Altoghether, it
contained a number of pointers towards a slightly more "liberal" or market-
oriented approach to economic policy, although to describe it baldly as
"liberal in tone" is an exaggeration.^ if any particular principles of
political economy underlay it, they were derived from the Yugoslav model.
Socialism was to be achieved, it said, in two phases, first the "national
and democratic" phase in which "all vestiges of imperialism and feudalism
in the economic sphere" were to be eliminated; then was to follow the
second phase of "the Indonesian socialist economy, without exploitation of
man by man...." The entire Declaration was framed in such a way that no
party could take positive exception to it, particularly the PKI, for their
acceptance of the DEKON, which was subsequently elevated to the dignity of
being the nation’s Economic Manifesto, ranking with the Political Manifesto
of August 1959, could subsequently be held to bind them to support for the
substantive policies introduced in its name.39
Before the government took the plunge of committing itself openly to
the 14 regulations of May 26 and the concomitant budget policy, it waited
nearly two months while party reactions were gauged and the Parliament
and MPR-S expressed their approval of the DEKON. It was soon clear that
the speech had introduced a new economic atmosphere, more favorable to
the private sector (and to foreign capital, according to many reports)·
But that alone did not curb the increase in prices or the steady rise of
the SIVA rate from Rp. 900 to 1350 between December and May, despite some
alleviation of fears of a ruthless cut in the value of the Rupiah· Anti-
Chinese outbursts in April-May were, in part, a manifestation of discontent
with economic conditions and the political situation was tense in May,
despite the crowning success of West Iran’s formal transfer to Indonesian
administration and the accompanying abolition of martial law· But suddenly
the President gave his approval to the May 26 regulations and then left
the country (before they were actually announced) on a trip to Japan,
during which he made two other decisions which could be considered as a
turning away from policies congenial to the PKI. He negotiated what seemed
to be a final settlement of the long-argued oil agreements with the three
big foreign companies^ and he held talks with Tengku Abdul Rahman which
seemed to presage a settlement of the Malaysian dispute·
The economic strategy underlying the May 26 regulations and the
stabilisation program consisted of five main elements:
i· price controls were largely dismantled and certain public utility
and service costs, notably postal and transport and electricity
charges (which had become absurdly cheap to the consumer), were
raised by 400-600%, largely in order to reduce the losses suf-
fered by the State enterprises concerned;
ii· salaries and allowances to civil servants were roughly doubled
to give some recompense to fixed income workers;
iii· a new set of foreign exchange regulations was introduced,
eliminating the SIVA system and raising the effective rate for
exports, other than oil, to Rp· 450/$ (plus 15-207· of non-
transferable foreign exchange, according to the category) and
for imports to Rp· 315, 810 and 1620 for the three new cage-
gories; the latter were considerably higher than the former basic
import rates, although less spectacularly higher than the effec-
tive SIVA rates, but the government’s receipts from the greater
spread of rates were greatly increased;
iv· foreign exchange was immediately released for a “crash program"
of imports, particularly of spare parts and raw materials for
industry, which had been running far below capacity -- $40
million in the first stage, with more generous sums envisaged
for the later stages;
v· austerity in government expenditures was to be ensured and the
Budgets for 1963 and 1964 were to be held tightly in check so
that the deficit would be eliminated in 1964 and financial
stability gradually attained·40
The draft Budgets for 1963 and 1964 were not made public until JulyJ
the Parliament reluctantly approved them since it could do little else
(with the PKI expressly withholding its assent) late in August.^ The
deficit for 1963 was to be cut to half the 1962 figure and by 1964 it was
to be almost eliminated, mainly through an anticipated increase of revenue·
(The rise in expenditure envisaged would barely have absorbed the addi-
tional costs and wages bill created by the May regulations, so that in real
terms expenditures were being reduced.
The effects of the stabilisation scheme were dramatic but shortlived.
It was intensely unpopular in nearly all quarters for the increased prices
and costs it imposed. Yet in the few brief months for which it was in
force, the beginnings of a dramatic improvement in the economic situation
became apparent, reminiscent of late 1960. The price index began to flatten
out between June and August as increased imports flowed in.^5 Speculators
were forced to unload their stocks on to the market. Exports stepped up
sharply for a few months, as they always do, of course, immediately after a
rise in the exchange rate. But the other side of the picture was a severe
liquidity crisis, aggravated by a tight money policy imposed on the banking
system, as importers and industrialists desperately groped for funds to
take advantage of the liberalised import policy. Many firms which had dis-
posed their funds in anticipation of steadily rising prices were suddenly
faced with stable or falling prices, just as in 1952 and 1956. And even
businessmen joined the chorus demanding that the May regulations be recon-
sidered. But the government — or First Minister Djuanda, at least, if not
the President, who behaved with characteristic ambiguity on this issue —
refused to reconsider the stabilisation policy in its essentials. Speaking
in early September, Djuanda promised to look into some particular problems
it had created, but expressed his satisfaction with the general financial
situation. A week or so later, however, the conflict with Malaysia flared
up and the entire stabilisation scheme was dramatically wrecked when mobs
assaulted the British and Malayan embassies, confrontation was intensified
by armed incursions over the Sarawak border and all commercial relations
with Singapore and Malaysia were broken off.
From an economic point of view, the stepping-up of confrontation in
September 1963 had three immediate effects: the cessation of further
foreign aid from the IMF, the Americans and the OECD consortium; a substan-
tial decline in export earnings as a result of the attempted diversion from
Singapore and Malaysia of almost half of Indonesia’s export trade; and the
destruction of any further possibility of holding budget expenditures within
the tight limits set by the IMF as the essential conditions for stabilising
the economy. The most pressing requirement of the first few months was to
cope with the disruption of trade, particularly in the ’’Border Area”
(Daerah Perbatasan) of the Riau islands, Sumatra and Kalimantan, where trad-
ing links with Malaysian ports had been very close. This entailed consider-
able expense and the diversion of desperately needed ships (even water had
to be taken in by tanker to the Riau islands, which had been heavily dependent
on nearby Singapore). So the volume of money continued to increase faster
than ever. Confrontation meant that stabilisation was out of the question.
Why the conflict with Malaysia was given precedence over the attempt to
stabilise the economy in this dramatic fashion is a complex question which41
cannot be analysed here. It has been suggested that Soekamo seized upon
the opportunity to resume confrontation in September because he had become
aware that the stabilisation programme was politically too unpopular and
that the tight budget policy could not be maintained. While this may have
been a contributory factor, I believe that the explanation is to be sought
more in the realm of foreign policy and domestic politics than of economics.
Ministers frequently stated at the time the trade break with Malaysia was
announced, that this was the realisation of a long-felt aspiration of the
Indonesian people to be free of Singapore’s grip over their trade. There
is evidence that some ministers had this objective in mind during the dis-
pute with Malaya and the British (although it was not at the time an avowed
goal of the PKI) and I do not think that this would have been a significant
consideration if other factors had not precipitated the crisis of September
16-21. One major aim of opponents of the Western-inclined course the
government had embarked on in mid-1963 was to wreck the policy embodied in
the May decrees on the rock of confrontation. But whatever the motive for
the break, its effect was to create a situation from which there could be
no going back within the next two years.
Late in 1963 Dr. Subandrio (who became First Deputy Prime Minister
after Djuanda’s death in November) conceded in reply to criticism that the
economic policy epitomised by the May decrees was now outdated. But the
government obviously had no definite alternative to offer in its place.
Not until April 1964 were the May decrees formally abrogated -- not in the
sense that prices and charges were lowered (as the critics wanted), but in
the formal abandonment of the "liberalism" underlying the decrees and the
reimposition of price controls which were virtually useless in the circum-
stances. 36 In practice, the main result of the April 17 regulations was a
reversion to a foreign exchange certificate system, the SPP (Surat Pendorong
Perdagangan), which functioned in almost the same ways as the SIVA certi-
ficate -- and represented the same despairing admission that since inflation
could not be checked, exporters must be reimbursed by a market-determined
rate of exchange through an inducement certificate.
By 1964 there was little that the government could do to re-establish
control over the economy and there are few signs that it ever had any
positive economic strategy to do so. It was fully occupied with coping
with the most immediate crises as they occurred. The foreign exchange
reserves were infinitesimal and exports lower than ever. The government
deficit amounted to roughly 50% of total expenditure in both 1963 and 1964,
generating a steady increase in the volume of money from Rp. 265 billion to
Rp. 676 billion during 1964 -- and there was little the government could do
about it while large expenditures had to be maintained in order to "crush
Malaysia". The surprising aspect of the story really is that the economy
was not in worse condition, in view of the bad harvest of early 1964 and the
phasing out of American SAC rice shipments. Much publicity was given to a
Food Conference in March which pointed ambiguously towards both closer
"social control" over rice purchases and a more "realistic" price policy.
Exports actually picked up a little after the disruption of the first few
months. (Illegal exports to Singapore began to creep back towards pre-
confrontation levels by mid-1964 -- making nonsense of any claim that the
purpose of confrontation was to prevent this. However, it was later stopped
entirely from the Malaysian side, in order to prevent the smuggling of arms42
to terrorists there·) Some half-hearted efforts were made to mobilise pri-
vate capitalists to the government's purposes, but no significant new
measures or new lines of economic policy were attempted throughout 1964·
Domestic political tensions were so acute that there was little time or room
for manoeuvre for any political leader to tackle economic problems·^?
Inflationary pressures suddenly intensified in the last quarter of
1964, highlighting the fundamental disequilibrium which had prevailed over
the previous twelve months· As in 1961, the break was partly speculative
in origin. The black market value of the Rupiah fell from about Rp. 3000
per US dollar in September to over SOOO in December. Prices of most com-
modities (except rice, significantly) doubled in October-November. Rumors
of an imminent currency reform in November were partly responsible for the
sudden rush from the Rupiah, but the leak made it impossible for the
government to take action^® — and, in any case, a tense political crisis
during the following weeks wrecked any hopes of firm economic measures·
The speculative bubble burst in January and during the next few months
prices rose surprisingly slowly. A good harvest in early 1965 helped. But
by the third quarter, just before the dramatic coup and counter-coup of
October 1, prices were again beginning to spiral alarmingly, with the
government powerless to do anything more effective than threaten to shoot
"economic saboteurs". All this contributed to the electric, almost revo-
lutionary, atmosphere in which the coup occurred and which continued for
months after it. Effective economic stabilisation was out of the question
until political stability was restored. A drastic devaluation and money-
cutting measure on December 13 had virtually no effect in curbing the in-
flationary spiral which reached the most rapid rate of increase Indonesia
has ever known in the last weeks of 1965.
The only ways the inflation could be checked by the beginning of 1966
were through a dramatic inflow of foreign aid, or through a revolutionary
political change to a strong, economising government capable of greatly in-
creasing revenue and slashing expenditure simultaneously. Little more could
be done within the paramaters of the 1959-65 political system. The crucial
questions after the accession to power of General Suharto, Adam Malik and
the Sultan of Jogjakarta in March 1966 hinged around these two factors.
Could they gain immediate relief on the foreign exchange front and time to
undertake longer-range remedial policies by persuading the rest of the world
to grant Indonesia financial aid and a moratorium on her debts? And were
they firmly enough in the saddle to be able to apply firm and unpopular
economy measures? Both questions were essentially political ones in the
first instance, although their answers must also depend on the longer view
economic aspects. The immediate omens were not entirely encouraging, but
there were some grounds for hope in the dramatic reversal of many of
Soekamo's more extravagant policies of the previous years, particularly
the ending of confrontation. Some foreign aid is sure to be obtained, but
whether it will be enough to offset the crippling burden of $2400 million
debts remains to be seen. The one point that is clear is that unless the
new government can now solve its own budgetary problems, the long-term
prospects of economic and political stability will remain utterly gloomy.43
Notes to Chapter II: Government Policies and Inflation 1957-65
1.	See Appendix, Table 2, for tables of Budget estimates and actual out-
turns.
2.	The term banting stir was made the keynote of Soekarno's rather obscurely
defined change of economic strategy in April 1965, expressed in his
"Berdikari" speech: see ch. 3, note 19. The budgets of 1961 and 1962
(discussed below) exemplify the difficulties of maintaining firm restraint
over expenditures.
3.	R. M. Djuanda Kartawidjaja was Prime Minister from April 1957 until
August 1959 at the head of the "extra-parliamentary, emergency Karya
Cabinet" formed as a result of President Soekarno's personal interven-
tion in the political crisis of March-April 1957: at that time the
Provisional Constitution of 1950, providing for a parliamentary system
of government, was still in force. After the Presidential system was
introduced with the 1945 Constitution in July 1959, the cabinet's status
changed and Djuanda's title became "First Minister". His influence
with the President remained much the same, but (as before) he was little
more than one among several key figures around President Soekarno.
Djuanda was Soekarno's indispensable lieutenant in economic matters and
had more influence on the shaping of economic policies in the 1957-63
period than any other minister. His thinking on economic policies was
initially cautious, orthodox and sensible; one of his first actions on
becoming Acting Finance Minister in early 1957 was to call for a stop
to new civil service appointments, in the hope of reducing the personnel
budget. But he obviously realised the need to bow to political pressures
in order to preserve some degree of influence. Many people regarded him
as the main piller of economic sanity in the government, others as a
compromising time-server. It was indeed a tragedy that a man with such
excellent intentions found himself identified with policies which were
to prove so utterly disastrous to the economy in the long run. See the
perceptive assessment of Djuanda in an excellent new survey of the
period when he was Prime Minister by Daniel S. Lev, The Transition to
Guided Democracy: Indonesian Politics 1957-1959 (Cornell Modern Indo-
nesia Project, Monograph Series, 1966^, pp. 176-182.
4.	The economic consequences of the regional crisis of 1956-57, which grew
into the PRRI — Permesta revolt of early 1958 in Central Sumatra and
North Sulawesi deserve much closer examination than I can give here.
The most balanced accounts of its political origins and aftermath are
to be found in Feith, Decline of Constitutional Democracy, pp. 520-48
and 578-97; and H. Feith and Daniel Lev, "The End of the Indonesian
Rebellion," Pacific Affairs, XXXVI, 1, Spring 1963.
5.	The statutory reserve requirement of the legislation establishing the
central bank is outlined in Benjamin Higgins, "Central Bank Reserve
systems and Indonesia's foreign exchange problem," EKI, VII, 11, Nov.
1954, pp. 737-53. This provision of the Bank Indonesia Act of 1953 was
modified in February 1957 by Law 3/1957 and again on April 29 by44
Emergency Law 14/1957, which virtually suspended the requirement: see
Bank Indonesia Annual Report 1956-57, p. 223 and ibid», 1957-58, p. 247·
By Law 84/1958, Articles 16 and 19 of the Bank Indonesia Act were com-
pletely revised to provide a much more flexible reserve requirement which
raised the limit of Bank advances to the government to 507, of the budget
revenues of the previous year; if this were exceeded, the government must
report it to Parliament: see Bank Indonesia Annual Report 1958-59, p.
292-3. There is nothing sacrosanct about the ratio of 20% between Bank
advances to the government and the nation’s gold and foreign exchange
holdings. Any other reserve requirement might do equally well. The
important thing is that if there is such a requirement, it must have an
effective political sanction behind it -- as Indonesia’s did until
February, 1957, but not thereafter.
6.	See Bank Indonesia Annual Report 1956-57 and 1957-58, Appendix E.
7.	The BE certificates (Bukti Ekspor) were issued by the central bank to all
exporters and others, who sold it foreign exchange: they were then sold
on a freely fluctuating market (the government annexing a tax of 20% on
the Rupiah proceeds) to importers who had to produce BEs to the face
value of the foreign exchange they wished to purchase from the bank. In
principle, it amounted to an almost complete reliance on the forces of
supply and demand for foreign exchange to attain an equilibrium rate of
exchange. A fallacy in the reasoning behind it was revealed in an article
by Sarbini Sumawinata, Pedoman, 7 June 1957: so long as the money supply
continued to be swollen by deficit financing and importers knew that the
demand for goods would maintain the upward pressure on prices, it would
pay them to keep buying foreign exchange as fast as they could, in anti-
cipation of further price rises. Thus there would be no downward pressure
on the price of BEs caused by expectations of a fall in prices or demand.
The system had a built-in tendency towards escalation of prices, not
towards equilibrium. (The supply of foreign exchange was unlikely to in-
crease substantially in the short run.) For a brief account of the
workings of the BE mechanism, see Corden and Mackie, op. cit., pp. 52-3.
8.	The circumstances in which nationalisation of the Dutch properties came
about are briefly outlined in K. D. Thomas and Bruce Glassburner,
’’Abrogation, Take-Over and Nationalisation: The Elimination of Dutch
Economic Dominance from the Republic of Indonesia,” Australian Outlook,
XIX, 2, August 1965, pp. 158-179. See also Schmitt, op. cit., and the
unpublished Ph.D. thesis of Ralph Anspach, The Problem of a Plural
Economy and Its Effects on Indonesia’s Economic Structure: a Study in
Plural Economic Policy (Berkeley, 1963), pp. 344-66.
9.	See Corden and Mackie, op. cit., pp. 50-54. Importing was becoming an
almost gilt-edged investment for speculative funds at this time, as
stocks were diminishing but monetary purchasing power remained high.
10.	Prices of imported goods rose much faster than food prices in 1957-59, as
the figures below reveal:45
		19 food- stuffs in Djakarta retail market (1953: 100)	Rice in Djakarta retail market (1953: 100)	Imported textiles in Djakarta retail market (1938: 100)	3 main textiles in Java rural market s (1938: 100)
June	1957	160	155	4202	5080
Dec.		244	343	5951	7080
June	1958	229	249	7378	9128
Dec.		287	347	10619	13152
June	1959	300	249	23823	28108
Dec.		325	291	32329	32592
Source: Statistik Konjunktur Tables D4, D8, D9, D7.
11.	President Soekamo’s "Political Manifesto" of August 1959 epitomises
the panacea expectations associated with the rejection of the "liberal"
past, which was to be brought about by "retooling" in all fields,
political, administrative, social and cultural, as well as economic.
"This better fate can only come one hundred per cent when society no
longer contains imperialism and capitalism. For it is that system
which like a parasite grows on our bodies, which lives and flourishes
from our energies, from whatever is good in our lives, on the very
vitals of our society...." Cf. also note 15 to chapter 4.
12.	The budget estimates for 196Q submitted to Parliament soon after the
"monetary purge" and based on over-optimistic assumptions about price
levels, aroused considerable opposition in Parliament, which was
already restive about the subordinate status it had been reduced to
since the return to the 1945 Constitution. The inclusion of the un-
popular tax reforms of 1959 added to its objections to the budget:
attempts by the government to achieve agreement with the deputies
through the process of musjawarah (the proclaimed political style of
Guided Democracy) broke down during February, with the party leaders
complaining that it was time the government offered some concessions
towards a compromise. When one Minister threatened that the President
might use his emergency powers to proclaim the budget by decree,
Parliamentarians replied that article 23 of the Constitution unequi-
vocally vested the power to determine the budget in the Parliament.
They called upon the government to reconsider the budget in toto. The
President replied on March 5 by "suspending" Parliament (not dissolving
it, in official parlance!) and then 'tenewing" its composition by
arrangement with the three main party leaders, who had no choice but
to accept what little they were offered. The episode provoked an angry
reaction, culminating in the curious challenge to Soekarno's authority
by the short-lived Democratic League, but the President had little
difficulty in maintaining his dominance over his opponents and the
political parties. Consequently, Parliamentary ratification of the
budget has never since given rise to any serious political problems,
even in 1963 when the PKI was intensely critical of a budget which was
extremely unpopular.
13.	Major changes in the foreign exchange regulations and taxes (amounting46
in effect to partial devaluations, although the word was generally
avoided) occurred in August 1959 (an admitted devaluation to Rp· 45/$US),
August 1960, September 1961, April 1962, October 1962, May 1963 and
April 1964.
14. For detailed accounts of this phenomenon, see the chapters in McVey,
op. cit.. by Paauw and Feith, especially pp. 206-14 and 368-95; also
Lance Castles, "Socialism and Private Business: the Latest Phase,"
BIES, no. 1, June 1965, pp. 13-45.
15. A sympathetic but critical outline of the Eight Year Plan is given in
the so-called Humphrey Mission report of 1962, later published as
Indonesia: Perspectives and Proposals for United States Economic Aid
(Yale Southeast Asia Studies, 1963). Guy Pauker gave an extremely
charitable summary in "The Indonesian Eight-Year Overall Development
Plan," Pacific Affairs, summer 1961, pp. 115-30. Humphrey himself took
a broader and more critical view in "Indonesia’s National Plan for
Economic Development," Asian Survey, II, 10, Dec. 1962, pp. 12-21.
None of these accounts takes sufficient cognizance of the political
background and purpose of the exercise.
16.
The following End of month	figures clearly reveal the		background to the Imported tex- tiles in Dja- karta retail market (1938:	100)	"purge": Black market rate of $U.S.
	Currency in circulation (Rp. bill.)	Government indebtedness to Bank Indonesia (Rp· bill·)		
June 1958	15.4	19.0	7 378	Rp.	66.5
Sept.	16.5	20.7	8 699	100
Dec.	19.9	24.8	10 619	91
March 1959	20.1	27.4	17 155	97
June	22.8	30.1	23 832	125
July	24.2	30.7	26 835	150
Sources:	: Statistik	Konjunktur, tables FI, F5A, D9;		
17. The fullest account of the "monetary purge" and measures related to it
is given by Ralph Anspach, "Monetary Aspects of Indonesia's Economic
Reorganisation in 1959," EKI, XII, 1-2, 1960, pp. 2-47. Anspach draws
attention to the President’s express distinction between the money-
cutting purpose of the bank-note reduction and that of the freezing of
bank deposits, which was allegedly aimed at shifting resources from
private to State hands. This was, however, little more than a symbolic
difference, which is not generally taken into account in assessing the
total monetary effect. The rapid reflation of the economy, particularly
the government sector, soon made all such bookkeeping distinctions
irrelevant anyway.
18. The collapse of price stability in September 1961 may be seen at a glance
from thefollowing statistics:47
	i Money in circula- tion	ii Index numbers for retail price of rice in Djakarta (1935: 100)	iii Index numbers for retail price of 19 food articles in Djakarta (1935: 100)	iv Black market rate of $U.S.
June 1961	48.5	389	446	200
August	N.A.	417	465	165
September	54.1	583	542	163
December	67.9	1028	760	230
March 1962	77.1	2501	1527	350
June	94.3	1389	1397	(800)
Source: International Financial Statistics, for table i;
Statistik Konjunktur, for tables ii and iii;
Pick^ Currency Yearbook (and private information) for
table iv.
19.	See Far Eastern Economic Review, 20th July, 1960, p. 145.
20.	The rubber price index for 1960 averaged 137 (1958: 100), but for 1961
only 105 and in 1962 it was down to 100. Exports, excluding oil, de-
clined in value from $619 mill, to $524 mill, between 1960 and 1961
(and then to $471 mill, in 1962). The deterioration in 1961 occurred
mainly in the first half of the year: rubber prices improved a little
in the second half and the volume of exports increased also.
21.	These budget figures for 1961 are quoted from the first official re-
lease, published in Berita Indonesia, 31 January, 1961: they differ
from those cited in table 2 of the Appendix below.
22.	Djuanda mentioned the high costs of accommodating the rebels after they
surrendered (usually on terms which provided for some guarantees in
this direction) as a factor creating difficulties in drafting the 1962
budget: see Berita Indonesia, November 24 and 29, 1961. See also
Herbert Feith and Daniel S. Lev, "The End of the Indonesian Rebellion,"
Pacific Affairs, XXXVI, 1, Spring 1963, pp. 43-5, for information on
the terms obtained by the rebels — some of which were later, allegedly,
not honoured by the government.
23.	Other factors which added considerably to the government’s expenses in
late 1961 were the need to accelerate construction activity on the
Asian Games project (retarded by a serious fire at Senajan in October),
in order for it to be completed in time for the 1962 Asian Games, and a
severe drought which brought in its train frequent failures in the
electricity supply during October.
24.	References to the expected provisions of the 1962 budget can be found
in Berita Indonesia, October 4 and 13; November 7, 22, 24 and 29.
Finally overall estimates of expenditure and revenues were announced in48
April, but very little detail was given. See Economist Intelligence
Unit, Three-Monthly Economic Review, Indonesia, 40, May 1962, p. 2
and 41; July 1962, p. 5
25.	The "special expenditures” on the West Irian campaign were later re-
ported to be Rp. 23 billion.
26.	On the SIVA system, announced on 5th March, 1962, see Economist
Intelligence Unit, Three-Monthly Economic Review, Indonesia, 40, May
1962, p. 7-8.
27.	Economist Intelligence Unit, Three-Monthly Economic Review, Indonesia,
42, October 1962, p. 5.
28.	The government’s rice-purchasing policy attracted a good deal of atten-
tion at this time, since it was almost impossible to carry it on
effectively at a time of rapidly rising prices: see Moh. Sadli, Ismael
and Kardiat, Pembelian Padi Pemerintah, (Universitas Indonesia, Lembaga
Penjelidikan Ekonomi dan Masjarakat, 1961) and Leon A. Mears, Rice
Marketing in the Republic of Indonesia (Pembangunan P. T., Djakarta,
1961).
29.	On the SWI see below ch. 3, p. 10 (and note 11). The Trade Minister’s
estimate of Rp. 20 billion of revenue, Suluh Indonesia, 1 October, 1962,
seems to have been wildly unrealistic. A later report suggested Rp. 4
billion.
30.	A brief summary of Indonesia’s zig-zag course in economic policy is given
by K. D. Thomas, ’’Recent Developments in Indonesia,” Australia’s Neigh-
bours, 4th series, 11-12, Jan.-Feb., 1964. A full study of this period
is badly needed.
31.	The hearings of the U.S. House Committee on Appropriations, Subcommit-
tee on Foreign Operations Appropriations (under Rep. Passman) are
extremely illuminating on the difficulties the State Department was
having during 1963 in persuading Congress to grant substantial economic
aid to Indonesia.
32O This observation was made in an otherwise useful article on the DEKON in
Far Eastern Economic Review, 25th April, 1962.
33.	The oil agreements seemed to embody an amicable compromise providing for
the complete nationalisation of foreign oil refineries in Indonesia over
a period of 10-15 years, during which time the oil companies would have
their investment gradually amortized. In practice, the agreement did not
work out as smoothly as was hoped and during 1965 the foreign oil com-
panies were, in effect, peremptorily expropriated. For a contemporaneous
comment on the 1963 agreements, see the Economist (London) June 8, 1963.
Later developments are summarised by Alex Hunter, ,bThe Oil Industry: the
1963 Agreements and After,” BIES, 2, September 1965, pp. 16-33.
34.	The Budget estimates for 1963 and 1964, which constituted the kernel of
the stabilisation programme, are baldly summarized in the Economist49
Intelligence Unit, Three-Monthly Economic Review, Indonesia, 46,
October, 1963, p. 8. Few details were ever revealed and the figures
were rendered utterly irrelevant within a few weeks by the collapse
of the stabilisation scheme when Confrontation was itensified again in
September.
35.	The Djakarta cost of living index (February 1958: 100) flattened out
in the May-August period, despite an increase in some costs and changes:
May
June
July
August
September
1160
1200
1240
1240
1370
(Source: IMF compilation, by courtesy
of Douglas Paauw)
36.	Parliament was asked (rather uncharacteristically) to submit its pro-
posals on the method of replacing the May decrees before the government
announced the April regulations. I suspect that the aim of this was to
make the political parties fully aware of their conflicting ideas about
how to deal with the economic situation and the very slight scope for
any significant change in government policies. See Suluh Indonesia, 4,
5, and 6 April, 1964, for the ambiguous and contradictory recommendations
of the parliamentary Working Committee.
37.	A fierce political storm was aroused in mid-1964 by proposals to merge
all political parties into a single national party under President
Soekamo's leadership -- obviously a move directed against the increas-
ing strength of the PKI, but apparently viewed not unfavourably by
Soekamo in the early stages, before it provoked violent opposition
among the political parties* The alignment of forces was virtually the
same as occurred over the BPS (Body for the Promotion of Soekamoism)
at the end of the year, which also seemed initially to have Soekamo's
blessing, but was banned when it gave rise to intense political con-
flict. Tensions were also being aroused in rural areas by conflicts
between Communist organisations and the wealthier landowners over land
reform and the crop-sharing law. "Unilateral actions" by peasant
organisations were breaking down the facade of Nasakom unity. The
President's efforts to preserve unity at any cost by offering crumbs
of satisfaction to all three aliran were proving less and less effec-
tive. A cabinet reshuffle in August 1964 slightly increased PKI
representation, but still left it far from satisfied. It began to
scent blood, however, as it hounded down its most vehement opponents
over the next 13 months, until it was crushed after the coup attempt
of October 1, 1965.
38.	An IMF team was in Djakarta discussing monetary reform at the time.CHAPTER III
THE POLITICAL CONSEQUENCES OF INFLATION
To what extent, and in what ways, have the inflation and economic
disruption of recent years weakened the effective power of the Indonesian
government? In this chapter I will briefly outline the most striking
manifestations of this weakening of the government’s effective control —
although I must emphasise in advance that this does not mean that the
political unity of Indonesia has been crumbling, or that any other centres
of power have yet become significantly stronger. While the government
apparatus has become gravely weakened, so also have most other institutions
in the country as a whole· Many of the potential sources of "countervailing
power" in the regions have also been crippled. How far we can measure these
tendencies in either direction, or decide whether the government is rela-
tively weaker or stronger as a result of the inflation, I will not attempt
to analyse schematically. The first step is simply to chart the broad
configurations of the problem.
My essential argument here is that the economic decline brought about
by inflation since 1961 has had three main consequences of political signi-
ficance. In the first place, the government’s control mechanisms have been
blunted, and its ability to regulate Indonesia’s economic life seriously
undermined. Despite the mass of regulations governing almost every type of
business transaction, or perhaps, paradoxically, because of them, the
government has lacked both sticks and carrots which might have enabled it
effectively to direct economic transactions as it aspired to. It has been
able fitfully to push businessmen around, but too often this has merely
tended to kill the goose that laid the golden eggs. The government has
threatened time and again to nationalise private businesses which did not
co-operate with it, but the threats carried little conviction when a few
days later public enterprises were warned that they would be sold to private
businessmen if they did not make profits! Along with this decline in the
credibility of the ultimate sanctions it could brandish has gone a loss of
ability to bestow desirable resources (foreign exchange, Rupiah revenues,
allocations of materials or licences) and to regulate the dominant market
forces of the economy in any significant way. Indonesia in 1962-65 re-
verted to an economic system in which nearly all the inefficient and
socially retrograde aspects of "free-fight liberalism" have had free play
simply because the government could do very little about them. Signifi-
cantly, the egalitarian and dirigiste catch-cries of the Guided Economy
period were quietly forgotten in 1964-65, to be superseded by "standing on
our own feet" — a slogan that could as well have been approved by Benjamin
Franklin and Sam Smiles as by Lenin or Mao Tse-tung.
Secondly, inflation has made virtually impossible the realisation of
the Socialist ideals of the Guided Economy towards which the government was
steering in 1960-61. The private sector has been granted, if not a reprieve,
at least an indefinite stay of execution.Neither nationalised ownership
of productive and trading enterprises nor state regulation of private enter-
prise has been able to work effectively in the unsettled conditions of recent
5051
years. It is hard to imagine how they could have. Socialism, after all,
presupposes effective government planning and control of the economy —
but planning and control have been virtually impossible in the circum-
stances of the last few years, when Indonesia's economy has been buffeted
not only by heavy inflationary pressures, but also by tremendous speculative
surges, both of which have exaggerated the physical effects of rises and
falls in world prices and domestic commodity flows, which are the main
exogenous determinants of Indonesian economic activity.
Thirdly, inflation has brought about a redistribution of incomes and
wealth, as it always does. "There is nothing like inflation for replacing
one pattern of class-distinctions with another" said Lenin. But who have
been the beneficiaries, and how does the change affect the pattern of poli-
tical power in Indonesia? The political implications and even the exact
nature of the redistribution cannot yet be discerned with any certainty.
I will suggest some regional aspects of the redistribution in due course,
but the degree and direction of the reallocation of the national product
as between individuals needs much more careful examination.
Paradoxically, the inflation has not seriously weakened the government
in the obvious way that might have been expected, by generating overt dis-
content and popular hostility to it. Opposition to its policies has been
dissipated, not just because its repressive apparatus has prevented public
protest, but for many complex reasons which will be briefly summarised at
the end of this chapter.
In his discussion of the "administrative effects, and ... political
dynamics" of the inflation, Dr. Feith has perceptively outlined some of
the processes which have contributed to economic decline, while helping
the government to maintain its power position.2 Feith is mainly concerned
with political factors which have affected the country's economic perform-
ance, whereas I am here looking at the other side of the coin, the effects
of economic change on the political structure. However, it is obvious that
no sharp distinction can be drawn between political and economic factors
in a situation like this where, in any case, they are interacting in such
a way that they all form part of that process of "circular causation" which
Riggs finds characteristic of the "bazaar-canteen" type of economy.My
rigid separation is purely a heuristic device, not an assertion of uni-
linear cause-effect relationships. One cannot overlook, for example, the
influence of both economic and political pressures in inclining people
(both the ordinary citizen and the political leaders) to drift with the
tide of economic deterioration, rather than to try and take effective
action to resist it. In some respects, the most disturbing effect of the
inflation has been just the economic disruption associated with it, but the
fact that it has undermined peoples' sense of responsibility for the finan-
cial plight their firm or their ministry or the nation have fallen into.
There are so many external factors one can easily blame. Individual or
corporate accountability cannot be rigorously demanded in such disturbed
circumstances and only the more outrageous cases of corruption are brought
to light and punished. It has been almost impossible, at any rate for a
businessmen and a fixed-income employee, to lead a completely honest life
under recent circumstances. Hence few people really expect them to do so.52
Demoralisation and cynicism are the inevitable result, even though exhorta-
tions to restore the old idealism of the revolution have become ever more
strident.
All this has tended to weaken the moral authority and respect accorded
the government. One might have thought that the economic troubles of the
last five years would have generated some countervailing political pressures
to reverse the tide, for it is obvious that without strong and effective
action by the government, Indonesia will never solve her economic problems.
Yet there has been virtually no sign of such pressures, except insofar as
the reaction against Soekarnoism, spearheaded by KAMI in 1966, may be con-
sidered as such — which is debatable. We will consider why at the end of
this chapter. But before going further we should briefly note Feith’s
account of the way the political system has influenced administrative and
economic performance.
Feith has depicted the Indonesian political system as one in which con-
siderations of administrative efficiency and economic rationality have been
entirely subordinated to the political implications of maintaining the
atmosphere of continuing revolution. "If the government were to speak less
and less of the need for revolution and instead to declare economic develop-
ment as the principal challenge of the present period, describing this as a
slow and difficult task, the men in both these categories" (i.e. the top
political leaders and heads of government enterprises) "would soon have their
positions contested in the name of the government’s ideology by others who
could claim greater technical competence."* He goes on to outline a number
of ways in which the economic deterioration and the decline of administrative
efficiency have mutually reinforced each other. First and most striking, of
course, has been the squeeze of rising prices on civil servants’ salaries
and the consequent need to resort to various efficiency-reducing devices,
many of them also demoralising ones, particularly the resort to secondary
occupations and the loss of real work time in the primary occupations. Cor-
ruption has been an obvious secondary consequence, made the more pervasive
by the general dirigiste philosophy of Guided Economy and the opportunities
to abuse government distribution of scarce commodities such as the sandang
pangan goods. Overregulation in an inflationary situation has merely in-
tensified the basic problem instead of curing it, and has encouraged the
propensity to bribe officials, since so little moral authority or practical
sense is attributed to many of the controls. Another political factor which
inclines the nation towards a larger public sector than it could afford on
a strict financial accounting (and has also buttressed the case for more
rather than less regulation) has been the necessity, for various reasons,
to absorb into government employment the young people emerging from high
schools and universities who, until recently, both expected and were obliged
to enter government service.
Feith also points out that corruption at the higher levels is not just
a function of inadequate salaries and overregulation, but is also a conse-
quence of the ineffectiveness of legal and other institutionalised controls
since 1958. The politicisation of the bureaucracy and channeling of re-
sponsibility for even minor decisions up to the Minister himself has coin-
cided with a weakening of legal restraints within the administration —
although political checks of various kinds still existed. This he explains53
further as "the result of an increase in intra-bureaucratic conflict, which
in turn follows from the blurring of the line between politics and adminis-
tration." Policies have become the "results of battles between politician-
bureaucrats, with rival cliques and empires growing in importance -- and
it is more important for these administrators to concentrate on maximising
their influence and power, if they are to hope to apply policies at all,
than to eschew the struggle for the sake of devoting themselves to effec-
tive application of the regulations they are responsible for." Thus the
business of government has become a matter of compounding the innumerable
pressures within the political apparatus itself, not of reconciling pres-
sures which develop essentially from outside it as in the theoretical models
of more "rational" communities. Hence the need for leaders of the govern-
ment to buy off threatening elements rather than to apply pressure against
them (for the bureaucratic machine is not now sufficiently well articulated
simply to impose the government’s will firmly, selectively and flexibly)
even if this means scattering its resources too thinly. "Government lead-
ers have tended to respond readily to the demands of various groups for
subsidies, protection, bonuses and projects, accepting inflation as the
economic price to be paid for political survival.Writing in 1962,
Feith did concede that some factors had been operating in the opposite
direction since 1957 -- some strengthening of the pamong pradja's position
and a weakening of the political parties, some improvements of ministries
where young trained people have entered and some increase in de facto
autonomy in certain provinces.
The Atrophy of Control Mechanisms
Many factors have contributed to the cumulative deterioration of the
government’s administrative apparatus over the past decade, but one deserves
to be stressed above all others. This is the disastrous decline in govern-
ment revenues (measured in real terms) and of the foreign exchange at its
disposal. The major weapon in any government's economic armory is its
power to levy taxes flexibly at various points in the system so as to regu-
late the supply and demand for goods and services. The atrophy of Indonesia's
fiscal mechanisms has seriously diminished the government's capacity to do
this. At the same time, less foreign exchange has been available for de-
ployment against inflationary pressures, for the volume of imports entering
the domestic market has declined and the revenues yielded by trade taxes
have also been shrinking. The government no longer commands the same con-
trol over resources as it used to before 1957 and this lessens both its
political patronage and its ability to manipulate the economic forces which
are intensifying the inflation.
Corruption and sheer administrative inefficiency have obviously had
serious consequences in blunting the sharp edge of the instruments of
economic control available to the government to combat inflation, but I
have nothing useful to add to the welter of rumors and anecdotes about this
subject. In any case, by putting too much blame on corruption, we can easily
overlook other important weaknesses in the system. Perhaps almost as damag-
ing as these has been a widespread scepticism about the efficacy of any
control measures introduced, coupled with doubts that any government will
have the determination to apply them vigorously. So long as business men54
are unconvinced that inflation can or will be curbed, speculation against the
depreciating Rupiah is bound to be a strong inflationary force·
An added difficulty of the last few years has been the sheer inadequancy
of the government’s deteriorating instruments of control to cope with the
pressures created by the discrepancy between aggregate demand and supply·
It had been possible for governments between 1950-56 to maintain reasonable
control over the economy through marginal adjustments of the conventional
economic regulators -- fiscal policy, monetary policy, foreign exchange con-
trol and, in limited areas, price controls· There were political reasons
for not using these too vigorously to deflate demand, but it would not have
been technically out of the question to do so in order to restore equili-
brium· But by 1964-65 the problems were as much technical as political·
The amount of additional revenue that could be raised by conventional methods
was very limited and the government was driven more and more desperately to
unorthodox measures which often had highly disruptive consequences and rarely
offered more than a temporary relief from its difficulties. Unorthodox
measures should not be condemned just because of their unorthodoxy: in fact,
it is now extremely dubious if Indonesia will be able to pull out of her
economic crisis without resorting to abnormal, harsh and arbitrary measures·
But the very fact that they are unorthodox is generally due to built-in
disadvantages which make them unsuitable to implement continuously, whether
in a capitalist, a Communist or any other economy. Regularity and predict-
ability have great advantages in economic policy-making. The defect of many
of the controls and unconventional ad hoc measures adopted in Indonesia
during recent years simply to overcome immediate crises, is that they have
been self-defeating in the long run, or else once-over, unrepeatable raids
on some part of the nation’s capital rather than its income. Before we look
at these, however, it will be instructive to notice the deterioration of the
more conventional instruments of economic regulation, for it is the atrophy
of these which compels the government to seize avidly at any others it can
find.
Public finance. Declining tax revenues, lax Finance Ministry control
over expenditures and almost ineffective audit procedures (highlighted by
the fact that figures for actual budget out-turns have become increasingly
delayed and unreliable since 1960) make up the gloomy picture of adminis-
trative deterioration in this sphere, although in most countries fiscal
policy and Treasury control over expenditure constitute the sharpest and
strongest instruments for regulating economic life. Only in a negative
sense have public financial policies been a potent regulator of economic
life since 1960, insofar as the size of government deficits has been a major
determinant of the intensity of inflation. In 1960 and 1963, austerity
policies were attempted for brief periods, but failed to achieve a balance
between expenditures and revenues. Although government expenditures have
been declining in real terms, no credit for this can be attributed to more
effective financial supervision or stronger control by the Finance Ministry,
which are the necessary conditions of effective budgetary policy. We have
already noticed that the government has periodically been prepared to "screw
up its courage to the sticking-point” and push through draconian once-over
measures in the hope of re-establishing some degree of equilibrium. But
these have never been followed for any length of time by sustained and de-
termined action to hold the money supply down through budgetary restraints55
or by the steady application of financial discipline over the whole area
of public finance.
On the revenue side, the increasing dependence on foreign trade^ taxes
is an even more serious development, for the efficient tax-collecting
apparatus inherited from the colonial regime has been disintegrating and
it will not be easy or popular to reestablish it. People have become un-
accustomed to paying direct taxes. Income tax, for instance, is only
levied on an infinitesmal percentage of the population who are enrolled
on the books of the Finance Ministry. Only the wealthy (people with cash
incomes over Rp. 3000) were liable to income tax before 1959; even the
lowest-paid workers were earning this by 1964, but the State was not able
(or willing) to subject them to income tax. Meanwhile the rates of tax
remained low and the total yield from income tax was nugatory -- an esti-
mated Rp. 15 billion in 1965, out of Rp. 671 billion budget revenues (and
an actual expenditure of more than twice that amount). Corporation tax
is heavier and easier to collect, but on the other hand, direct taxation
of rural incomes is an almost insignificant source of State revenues. The
decay of the tax machinery in rural areas is economically disastrous, for
there is far greater taxable capacity here than Indonesians will generally
admit: poverty is widespread in many rural areas, certainly, but there
are also pockets of wealth which are not effectively taxed by the erratic
incidence of indirect taxes, even though the burden of the latter tends to
be borne by primary producers in the last instance.' The essential trouble
is that fiscal policies are not related to capacity to pay or to their
effects in discouraging or stimulating desirable types of production —
which would require selective, efficient and honest tax administration.
Indirect taxes on trade have become the government's mainstay, mainly
because they are relatively easy to collect and politically least trouble-
some, especially taxes on foreign trade, which can be increased by simply
widening the spread between the effective Rupiah rate of exchange paid to
exporters and the much higher rates demanded of importers when they wish
to buy their foreign currency. But with foreign trade declining, the
government will have to increase its direct taxes if it aims to balance
its budgets. That raises both the administrative problems of resuscitating
the old fiscal apparatus and the political problems of how to extract reve-
nues from wealthier peasants who can most afford to pay, but who are also
the most influential in their regions and hence usually best able to resist
attempts to tax them. Taxing people is an intrinsically political act, not
just a technical one (despite the economic technicalities generally in-
volved in the consequences), and it will be premature to talk about poli-
tical stability or equilibrium in Indonesia until its governments have
resolved the essentially political problems involved in restoring their
public finances.
Foreign trade and exchange controls. Import policy has been a more
immediately effective means of curbing price rises than fiscal policy.
Whenever a government has been able to liberalise imports, market prices
for many commodities have fallen sharply, as is inevitable in a situation
where speculation and stockpiling play such an important part in influenc-
ing prices. But since the foreign exchange reserves became exhausted in
1962, the scope for such action has been very limited indeed. In mid-1963,
the release of a few million dollars for imports and the prospect of con-
siderably more contributed to a sudden flattening-out of the price curve56
for a few brief months. Even this operation was miniscule by comparison
with the huge surges of imports in 1955-56 and 1961, the two previous oc-
casions when inflationary pressures were checked by an increase in the
supply of imported goods. Since September 1963 the foreign exchange
reserves available for deployment against rising prices in this way have
become desperately scarce, while the inflationary pressures to be coun-
tered have increased. Neither by import policy nor fiscal policy alone
(or in conjunction) could an Indonesian government now check the spiral,
unless massive foreign aid were to be conjured up.
Because these have been relatively easy to administer, foreign trade
controls have been utilised for several quite separate purposes in inde-
pendent Indonesia. Initially the prime consideration was to safeguard the
balance of payments by regulating imports and (from time to time, through
subsidies and virtual devaluations) encouraging exports. The revenue
aspect has always been important, however, and has become much more so. A
counter-inflationary effect, through an increase of imports (when the state
of the foreign exchnnge reserves has made this possible) has also been an
important aspect of foreign trade policy at times. But it is not always
possible to serve all three purposes by manipulating one economic regulator,
no matter how elaborate a multiple exchange rate system be devised. In my
opinion, too much reliance has been put on this one all-too-convenient
instrument of indirect control, to the neglect of the others. With imports
now diminishing alarmingly, the adverse consequences of this dependence are
becoming tragically obvious.
Price controls. Price controls have proved to be an ineffectual, in
fact, counter-productive, instrument for holding back the rising tide of
prices, although they have continued to exist in many important spheres of
economic activity® throughout the post-revolutionary decades and the call
for "social control" to keep prices down has constantly been a popular one
among all parties. They have rarely been much more effective than walls of
sand before the sea. They may protect some small area briefly until the
flood washes over or past them. For the most part, however, consumers ulti-
mately have to pay a good deal more than the official price for any scarce
commodity or service (and almost any desirable goods or services are in
short supply, since the pressure of effective demand has been so strong) to
the ultimate retailer or black marketeer, whether it be for humble goods
like cigarettes, matches, soap, newspapers, railway or cinema tickets, or
many other services. They have had a downward effect on the cost of living
in some important areas. Kerosene and petrol, in particular, were for many
years available to most purchasers for most of the time at or near the arti-
ficially low pegged price; but the peculiar position of the foreign-dominated
oil industry makes these something of a special case. Many household neces-
sities (the "sandang pangan" goods of 1960-61 — rice, sugar, cooking oil,
cloth, soap, etc.) were sold at pegged rates through the official distribution
channels. This meant that some people, particularly state employees on low
fixed salaries, did get some part of their needs at the pegged prices which
were raised relatively infrequently. To this extent, price controls afforded
some slight protection from the merciless operation of free market forces —
although they did not protect the vast majority of the population and the
main areas of economic transactions. They certainly did not significantly
lessen the fundamental causes of inflationary pressures. And they were57
noticeably less effective by 1964-65, when the sandang pangan distribution
was in chaos and even petrol difficult to procure at the official price,
than in 1960 when they were still standing up to the inflationary pres-
sures reasonably well or in 1956 when one could actually buy most of the
price-controlled commodities, except cigarettes and matches, on the retail
market at the pegged price.9
Monetary policy. Of the other major instruments of economic policy
used by governments elsewhere, monetary policy has recently played a less
significant part than it did in the ’fifties. (Not that it has ever been
a very important anti-inflationary weapon in Indonesia.) Private savings
in banks and credit institutions make up far too small a fraction of the
total money supply to be significant. In some respects monetary policy
has become almost an extension of fiscal policy, insofar as a large pro-
portion of bank credit is utilised for the benefit of government or semi-
government enterprises. The locking up of large sums in importers’ pre-
payments has not recently been used as a major anti-inflationary device as
it was in 1958 or earlier. Monetary "purges", as in 1950, 1959, and 1965,
may perhaps be considered as desperate, once-for-all forays into the field
of monetary reform, but are best considered separately.
k	·&	*	-k
Thus it may be seen that the means available to the government to
curb inflation have been of far more limited effectiveness since 1962 than
they were before 1957. Stopping the inflation has been almost out of the
question: merely to prevent its acceleration and maintain the nation’s
capacity to continue to earn foreign exchange from her exports has been as
much as any government could do. Long-range plans to increase production
have had to take second place to the short-term requirements of juggling
with foreign exchange controls so as to stimulate exports, bring in tax
revenues to the government and, so far as possible, regulate the flows of
various import commodities to meet the nation’s most urgent needs.
Various unorthodox economic measures have been attempted in recent
years with the aim of siphoning Rupiahs out of the pockets of businessmen
and into the coffers of the State treasury. Special levies on certain
types of luxury property (Sumbangan Wadjib Istimewa or SWI — "Special
Obligatory Contributions") have been applied, once to weekend bungalows
in the hills and twice to cars. The yield in both cases however was far
below expectations. In an even more desperate attempt to reach sources of
untapped wealth, a special tax of 10% on illegal holdings of foreign ex-
change was imposed in September 1964. Since there was no way in which the
government could directly assess the illegal overseas holdings of any
individual or company, it had to rely on a combination of threats and in-
ducements to make them voluntarily declare their "black money" holdings so
as to legalise or "whitewash" them by payment of the tax. Many businessmen
hastened to declare at least a part of their holdings in order to avoid
being subjected to the suspicion and enquiries which would ensue if they
did not, for as one of them explained to me "the authorities know we could
not continue in business under present circumstances without having funds
abroad." The inducement offered was the opportunity to use these funds to
finance imports (a concession which had been granted similarly in 196058
with the parallel purpose of drawing privately-held foreign exchange into
the financing of imports at the high Rp· 200/$ rate)H or to invest them in
specified industries, for which a tax concession was granted. The yield
from this foreign exchange levy was expected to be Rp. 50 billion in 1965
(out of a total budget of Rp. 671 billion) — and it is reported even to
have exceeded expectations.™ But it was, of course, a once-over tax which
could not be quickly repeated.
Funds have also been raised from businessmen through a host of semi-
obligatory levies such as the Dwikora Volunteers Fund or the earlier West
Irian Development Fund. In both cases their patriotism and standing with
officialdom were likely to be measured by the size of their contributions.
The sums raised in this way do not bulk large in the national budget though
they must have been a burden to individuals at times. Of a similar but
less regular nature were occasional "auctions”, usually at Palace gala
entertainments, of such items as the President’s rice-bowl (which was bought
for Rp. 53 million by a bank director who was nonetheless arrested for cor-
ruption soon after) or a wrist-watch donated by General Jani. In much the
same category we may include the fund-raising dinners organised by one of
the President’s wives to obtain money to pay for the Afro-Asian Journalist’s
Conference in 1965. Businessmen found it expedient to contribute to such
collections in order to attain access to Palace circles and open the doors
to the special licences and other privileges which Palace connections might
bring. ,fcThe Palace millionaires" became a well-known group withi the
Djakarta political system. The relationship could be advantageous to both
parties, although the system was neither efficient nor healthy from a
national point of view.
Some of the other measures being taken by the government agencies
simply in order to obtain enough revenue to meet current expenses reveal the
same inability to look beyond the most immediate needs; the exigencies of
the moment increasingly took precedence over principles of broad national
policy. Departments frequently sold off their own capital assets simply to
obtain additional revenues. At times the government was even reported to be
selling scarce foreign exchange on the black market in order to obtain
Rupiahs or urgently needed goods. In the field of foreign exchange control
generally, the logic and order of the formal system of regulations tended to
be undermined by the principle of charging "what the market would bear" in
the allocation of import licences. For an importer, the key question became
the rate he had to pay (intermediate between the official and the black mar-
ket rate) to obtain his foreign exchange. By 1964 this practise applied to
imports of commodities well beyond the range of those luxuries obtainable
through the SPP system*^ (the latter-day version of the SIVA inducement-
certificate system, applicable to a limited range of imported goods) and
came to include also goods imported under "special licenses" granted to
businessmen with high political connections. In fact they were sometimes
permitted (even partially required) to import essential commodities like
textiles and foodstuffs, which had earlier been reserved solely for the
State trading companies. (The latter sometimes had difficulty in accumulat-
ing sufficient Rupiahs to purchase the foreign exchange they needed, since
they were hobbled by price-controls over a large area of their business.
Hence they were driven more and more into dubious arrangements with private
businessmen who could advance the funds they needed.) In effect, the59
allocation of foreign exchange was being determined less and less by the
intentional application of foreign exchange policy and more by the finan-
cial exigencies confronting the government.
Where the government had earlier been in a strong position to adopt a
"take it or leave it" attitude towards private businessmen in regard to the
scope of activities allowed them during the hey-day of the Guided Economy
in 1960-61, by 1964 it was virtually forced to bargain with them — and on
increasingly unfavourable terms as the supply of foreign exchange dwindled
and goods became scarce and expensive. The balance of advantage in what
was increasingly becoming a bargaining situation was tilting away from the
government. It was generally private businessmen and their "bureaucratic
capitalist" accomplices who had grown rich from the pickings provided by
economic dislocation and corruption: the funds and goods they controlled
could often not be taxed or directed onto the market by the government in
the normal ways, so that a combination of inducements and threats became
necessary, the inducements having to be made more and more attractive as
the government’s economic sanctions atrophied. The power to dispense
foreign exchange and import licences to those businessmen who were pre-
pared to cooperate with it was still of course a very potent asset in the
government’s hands. It would be misleading to imply that it had to go hat
in hand to a group of powerful and independent capitalists. But the amount
of foreign exchange at its disposal for disbursement was shrinking and it
could not dominate the market as it had been able to earlier.
One final observation should be made on the multitude of control
measures and unorthodox attempts at directly regulating prices or the flow
of goods in Indonesia that were taken during these years in the name of
the "Guided Economy" or "social control". In the end these were generally
self-defeating, merely rautliplying the opportunities for corruption and the
costs of evasion, inhibiting enterprise in socially desirable spheres or
driving scarce capital into unproductive or speculative forms of invest-
ment. Direct controls which might conceivably have worked in a stable,
smoothly-geared economy with an efficient and extraordinarily honest
administration completely failed to cope with the powerful pressures of
excess demand generated by the inflation. Hence the result has been mere
distortion of the nation’s price and cost structure.
Another reason why the mass of regulations that have proliferated in
recent years were almost bound to fail was simply that too many different
authorities have been empowered to take action of different kinds, fre-
quently without sufficient care to ensure that their areas of authority did
not overlap or their regulations conflict, and without clear lines of com-
mand up to the higher levels of government. All this makes for petty ex-
tortion and widespread evasion, for the businessmen quickly learn to buy
immunity by paying off the appropriate officials, who in their turn develop
vested interests in the status quo and have little desire for administrative
rationalisation or effective clarification of the lines of command. The
end result is a further disintegration of the government's authority and
capacity to take action.60
The Retreat from Socialism
The admirable ideals of equality, a "just and prosperous society" and
the merging of all individual efforts into the national struggle towards
development, which underlay the attempts to build a Guided Economy in
1959-61, have come sadly to grief since 1962. Some of the basic premises
of the official doctrine were wildly unrealistic in the first place,
particularly the pronounced tendency to regard private enterprises as more
exploitative, less worthy and less valuable from a national point of view
than public or cooperative enterprise.4-^ Yet Indonesia certainly needs a
strong public sector to achieve the economic development to which she
aspires. The tragedy of recent years has been that the state enterprises
have been given virtually no chance to prove their worth. Their managers
have been seriously discredited by their inability to cope with the eco-
nomic and political conditions facing them, lienee a political restructuring
along lines similar to Yugoslavia's, which may have been ieasibLe in 1961-
62, has been frustrated by the economic and administrative malaise that has
accompanied the inflation. Instead, the government has been forced into an
ever closer symbiotic relationship with the "bureaucratic capitalists" whose
interests and practises (whatever their ideals may be) seem to represent
the worst of both worlds. Whatever the pattern of social organisation that
crystallises over the next few years, it seems unlikely to be significantly
Socialist in any conventional sense.
Of the three main tenets of Socialist doctrine which were ardently
espoused in Indonesia when Socialism a la Indonesia was under discussion
— preference for State enterprise rather than private; great emphasis on
national planning; commitment to an egalitarian rather than elitist form of
society, with its corollary of distributive justice based on social needs
-- it is in regard to the first that we see most clearly the contrast be-
tween what was attempted and what has actually come to pass. The unfruitful
attempts to foster a national middle class during the relatively undoctri-
naire ’fifties were followed in 1958-59 by a marked shift of opinion in
favor of greater reliance on State enterprise, especially after the takeover
of Dutch properties left the giant's share of the crucial capital-intensive
organisations within Indonesia in the government's hands. The rejection of
liberalism and the stress on the collectivist quality of the truly Indonesian
society which was now to be recreated strengthened the pressure in this
direction. In early 1959, even before the drift towards a Guided Economy
became strongly marked, moves were made to exclude private businessmen from
all but about 20% of the lucrative importing business.15 it was made very
clear to them during the next two years, when the Eight Year Plan was being
formulated, that they would be tolerated only if they were prepared to co-
operate willingly with the government and that they would be confined to a
very limited field of operations. The government was to dominate the com-
manding heights of the economy. Yet within five years, some of the most
prominent national businessmen were being brought into President Soekamo's
cabinet, the State enterprises were under a cloud because of their almost
universal inability to make greater use of the private businessman and his
resources in the national interest -- and in 1965 even the Governor of
Djakarta was moved to tell a gathering of State officials: "To put it
bluntly, private enterprise seems to have more get-up-and-go.61
The shift of emphasis in government policies towards the private
sector, which has been well described by Mr. Lance Castles, has not been
a dramatically overt repudiation of the State enterprises, so much as a
tacit acceptance of the unpalatable fact that the former has a useful role
to play which the government can no longer afford to ignore. Formally,
the government has stressed that private business activities must be
diverted from importing and speculation into production and exporting.
But, in fact, even this is quietly ignored in practice. "Palace million-
aires" make their fortunes largely through "special license" imports.
Their contributions to the private, and occasionally to certain offical
expenses of Indonesia's top leaders are now too important to the latter
to be cut off at the source. Moreover, at least a few of the national
businessmen appear to have acquired the resources and skills which nearly
all of them still lacked a decade or so ago -- a consideration that one
is likely to overlook in stressing all the disreputable factors in their
recovery of official favor.
However, it was not less because the private businessmen had done very
well that the shift in government policy occurred than because the State
enterprises had done very badly. There were over-centralised and over-
regulated at a time when almost every business needed to be left free to
make its own adjustments to the irregular price rises, sudden shortages
and periodic liquidity crises of the last five years. There were many
things a bureaucratic organisation could not do that a private business
could — inter alia make big profits through foreign trade transactions at
black market rates. (It was not that this was not done within the State-
owned firms, but rather that it was generally graft on private account.)
At one stage it was impossible for the State trading companies to export
in a legal way without loss, because of the "price disparity".Hence
exporting fell much more to the private firms who covered the margin of
loss through the well-known illegal ways of amassing a fraction of their
foreign exchange earnings abroad and remitting them at the black rate.
Moreover, State trading firms were subject to frequent government inter-
ference and pressure on pricing policies, internal organisation and many
other matters on which they were required to observe the national interest
as well as the requirements of survival in stormy economic seas. They
would, of course, have had troubles enough on their own account even if
there had been no inflation, from inexperience, incompetence and corruption
of many of their managers. But the disruptions caused by inflation left
them little chance of making good — and, more seriously, gave their
managers conveniently convincing excuses for their shortcomings and a
cover for their corruption. At least the struggle for survival has had
the negative virtue of toughening some of the private businessmen, who have
had to learn to make do by fair means or foul.
Less significance need be attached to the abandonment of national
planning, formally expressed in President Soekarno's "Berdikari" speech
to the MPR-S in April 1965, but actually implicit as early as 1961 in the
failure to prevent inflationary budget deficits which the Plan specifically
and necessarily renounced.1® The Plan itself was essentially a political
gesture rather than a serious commitment to any set of economic priorities.
And as I have earlier suggested, planning in any meaningful sense was out
of the question in the circumstances of 1962-65, when governments were able62
to think of little more than lurching along from one crisis of immediate
political survival to another. But that in itself is one of the most dis-
astrous consequences of the recent economic disruptions, for there can be
little doubt that a firmly maintained long-term politico-economic strategy
(if not precise target planning) will be essential if Indonesia is ever to
get out of her difficulties.
Perhaps the most tragic political and social aspect of the de facto
retreat from Socialism since 1961 has been the growing inequality, the
blatant gulf between rich and poor. However much this is disguised behind
rhetoric about the national struggle to complete the Revolution or to
"Crush Malaysia", the fact of the matter (if not the reason) is outrage-
ously obvious. The well-to-do enjoy luxuries which seem incredible to an
outsider and they control funds of an order which would have been out of
the question ten or fifteen years ago (even allowing for the currency de-
preciation). All this could perhaps be accepted as an inevitable accom-
paniment of the embourgeoisement that is bound to come with economic
development (though one hardly expects it to precede itI) were it not for
the moral duplicity of continuing to talk about Socialism and distributive
justice when the trends are all in the opposite direction. The social
acceptance at the Palace of national billionaires and the inclusion of
industrialists like Pardede and Dasaad in high offices of State (excel-
lently though their experiences and success may qualify them to these posts)
marked an extraordinary reversal from the ethos of 1960. Even the sandang
pangan program for ensuring a minimum supply of necessities to all (or most),
in Which such high hopes were then put, largely broke down because supplies
were irregular, the costs to governments too high and the disparities
between regulated and open market prices too extreme for scandals of mis-
appropriation to be prevented. Only pegawai negeri now received fixed price
commodities, and those far from sufficient to their needs. By 1964-65
Indonesia was becoming a thoroughly laissez-faire economy, faute de roieux,
despite all the talk to the contrary.
Income Redistribution; Social and Regional Aspects
It is well-known that inflation hits fixed-income workers harder than
primary producers or wage-earners whose incomes are adjusted promptly to
rising prices. Profits are inflated in relation to wages and rents as a
fraction of national income. Hence the rich (or some of them, at least)
get richer, while others beside the poor get poorer. But does this work
also in regional terms — the poorer, deficit areas suffering at the expense
of wealthier, "surplus" areas? Or, in terms of broad social or political
classes? After all, if Gross National Product has been roughly constant and
inflation has been redistributing income shares, we would expect the conse-
quences to be visible by now, and perhaps certain political implications
also.
Little can be said with any degree of confidence about the social and
political aspects of income redistribution over the last decade until more
detailed studies have been made. I refer briefly elsewhere to some of the
questions that arise if we look into rural incomes with this question in
mind.I® As regards the urban population, it would be better to approach63
the problem not so much by making a conceptual division into questionable
economic or social categories and then seeking evidence about their share
of incomes before 1957 and today, but by identifying discernible groups
which have clearly moved up or down on the ladder of wealth and income,
then assessing the significance of these changes, both quantitatively or
in terms of political and social effects·
For example, the spectacular rise of the "new rich" (Prang Kaja Baru
or OKB) and the gain in material well-being and social status of the armed
forces, both officers and men, relative to the rest of the population,
poses many intriguing questions for the historian of social change· So
does the impoverishment of the middle class to which so many members of the
ruling elite of the early ’50s belonged· The impoverishment of the urban
poor, the kampung dwellers and wong tjilik or "little people", raises
problems almost too complex to analyse without extensive research, yet it
has created surprisingly little unrest so far. The political consequences
of these changes are not obvious, but it is inconceivable that they are not
going to prove to be of far-reaching importance in the long run. Has the
old bureaucratic elite been demoralised and destroyed by inflation and the
emergence of rival claimants to power?20 Are the OKB likely to function
as pioneers of a new society and an economically-oriented ideology? Is
the Army likely to prove a significant and constructive force in social
and economic life, or are its present advantages based upon sand? These
questions cannot be fruitfully examined in brief here· On the other hand,
the regional implications of redistribution can be clarified to some ex-
tent, if we make certain broad assumptions for which there is indirect
evidence·
Inflation does not redistribute incomes between regions as it does
between individuals· If anything, it seems to have had the reverse effect
in Indonesia so far· Since it has entailed a constant depreciation of the
currency, it has diminished the real incomes of exporting regions while
virtually subsidising those which are net importers· Sumatran producers
of export produce would have been vastly better off during the last decade
if the economy had been maintained in a condition of general equilibrium
with a stable exchange rate· But that could only have been achieved by
reducing the demand for imports and raising their real costs to a degree
that would have burdened Java intolerably, since something like 60% of im-
ports are probably consumed there>^1 Because of the multiple exchange rate
system, as well as the constant inflation, the Rupiah has generally been
considerably overvalued since 1950 in terms of its "real" purchasing power,
whether it be measured against the black market rate prevailing (which is
not at all a reliable indicator of its "real value") or against some
notional rate at which the supply and demand for foreign exchange would be
brought into equilibrium· Exporters have received less than they would
have with free access to world markets, while essential imports (rice,
textiles, capital goods and many raw materials)have in effect been subsi-
dised under the multiple exchange-rate system· The price of luxury imports
has been raised very high in Rupiah terms (although not especially so in
terms of foreign currency at black market rates) by the device of permitting
control-free imports under the SIVA and SPP systems, but necessities come
in at much lower rates· Java is by far the greatest beneficiary, since the
bulk of Indonesia’s population, especially the town population, and its64
factories are located there. Conversely, the main estate area around Medan
has been seriously starved for funds to increase production or even main-
tain old levels of efficiency, while the small-holders of Sumatran and
Kalimantan rubber or Sulawesi copra have been grossly under-paid for the
commodities which they have been forced^in various ways, to dispose of to
agents of the government.
To assert that Java has a vested interest in inflation whereas the
Outer Islands do not, would be an absurd oversimplification. Yet it is
true in a theoretical sense and it is also clear that they have differing
interests on the key question of how to stop it. The latter will tend to
benefit at the expense of the former from a minimising of controls and a
return to a market-oriented system of determining prices. The former will
suffer most from abolition of the many direct and indirect subsidies which
have become such a heavy burden on the state finances; it seems almost in-
evitable that they will have to be reduced or abolished if the government
deficits is ever to be reduced. J (But it should be remembered that Javanese
rice producers will also benefit if rice prices increase as a result of a
change in the government's policies on rice purchase and distribution.)
From a Javanese point of view, it would make more sense to maintain existing
exchange controls with their favorable redistributive effects and to curb
the inflation at its source by vigorously attacking the budget deficit
(assuming that this were practicable on political and administrative grounds,
which elsewhere I have tended to doubt), whereas from a Sumatran's point of
view relaxation of controls is probably of more immediate benefit. Policies
directed at balancing the budget will hurt them insofar as central government
expenditures and subsidies to regional authorities will be reduced. Outer
Island regional authorities want these just as much as their Javanese
counterparts do, but they would also like a greater share of the foreign ex-
change earned by exports from their region. There are indications that they
have been getting a greater share over the last few years and I believe that
they are likely to get more in the future.
This conclusion is speculative, but there seem to be strong grounds
for it. Let us assume that the inflation will somehow be brought under con-
trol before it reaches a point of disaster. For reasons mentioned in chapter
1 this is unlikely to be achieved solely by budgetary restraint through ruth-
less austerity in expenditures and draconian tax measures unless there is a
very substantial devolution of powers, including taxing powers, to the
regional authorities. It is more likely to be achieved by a greater degree
of decontrol, reliance on market forces and greater willingness to pay pro-
ducers an economic price for their goods, rather than hedge them round with
controls. On balance, this should benefit the export-producing areas most,
though I would not expect any radical dismantling of the foreign exchange
control and multiple exchange-rate system, with all its built-in redistribu-
tive effects.
Alternatively, let us assume that the inflation continues at its recent
rate, or even faster. The rapid depreciation of the Rupiah will hurt ex-
porters even more severely than in the past and they will either go to
greater lengths to smuggle commodities out (the resumption of "barter trade"
with Singapore in January 1966 making it a good deal easier to do so than in
1964-65) or they will go out of production. Probably the Djakarta authorities65
will make the concession of turning a blind eye to occasional shipments of
goods at "barter" rates for the sake of maintaining production and molli-
fying the regional authorities· It has been doing so from time to time
even during the grimmest phase of Confrontation, for it can no longer sup-
ply regional authorities with sufficient resources (in either goods or
foreign exchange or even rapidly-depreciating Rupiahs) to preserve their
loyalty to the central government. The easiest way to cope with the
situation is to allow them some opportunity to reap the benefits of a
limited amount of "barter trade" or smuggling, to which the central and
local authorities turn a blind eye· Some degree of control is maintained,
for the matter can be straightened out by deals between the central and
local authorities in a way that ensures their continued adherence to the
regime· (The Djakarta government in any case controls the ultima ratio
of armed force; this is what makes the situation very different from that
of 1957-58, when barter trade posed a serious threat to Indonesia’s
unity.) The only trouble with this procedure is that it seems bound to
have a cumulative effect unless exports increase, which is unlikely· As
the foreign exchange flowing into the central government’s coffers de-
clines and inflationary pressures increase, the regional authorities are
almost certain to retain as great a share of export earnings as they can,
thus compounding the problem. It would lead towards a situation where
every region would ultimately be in a position to retain the bulk of its
foreign exchange earnings, remitting to Djakarta only so much as it was
willing to. Long before that point is ever reached I would expect other
political and economic developments to arrest the process in a melee of
confusion, but in the immediate future I see no reason why it is likely
to be checked so long as the inflation continues.
Tendencies towards a system of "de facto federalism" or decentralisa-
tion have been observable in Indonesia for many years now· Despite the
strongly centralised constitutional structure and the centripetal pull of
the administrative and financial systems, the central government in
Djakarta has been unable in many cases to override local resistance to its
policies, but rather has had to work out modes of accommodation with local
interests. For instance, it has exercised political influence in the
regions by exploiting local feuds as in North Sumatra or in Central Kali-
mantan, where it threw its weight behind the non-Moslem Dayaks against the
restive Bandjarese, or utilising local grandees who were willing to co-
operate with Djakarta even where they were "feudal" or traditional aris-
tocrats, as in parts of Sulawesi, regardless of the strong condemnation of
such elements in the official State ideology. The stronger the bargaining
power of local authorities, the more concessions they are able to extort
in the application of national policies -- and the nearer Indonesia drifts
towards a system of de facto federalism in which the realities of local
politics and administration may diverge substantially from the formally
unified and centralised policies laid down in Djakarta. This drift has
been hastened, I believe, by the atrophy of the central government’s
administrative machinery -- particularly by the strains inflation has im-
posed upon the nation’s financial structure, which had been one of the
strongest unifying forces in that archipelago of diversities during the
preceding century. Regional smuggling is the most dangerous symptom of the
breakdown of central control, for unless the government has the financial
and administrative resources to retain the loyalty of regional officials it66
is bound to increase, thus compounding centrifugal tendencies throughout
the entire system.
The degree of "de facto federalism" achieved so far should not however
be overestimated. No province is in a position to challenge the central
government's authority as in 1957-58 and no regional military commander or
provincial governor has dared assert the same degree of independence that
several of their predecessors did in the 1956-60 era. It is nonsense to
talk about regional "war-lords" as was common in 1957. The central
government generally considers local sentiments to some extent in the ap-
pointing of regional officials (as much to smooth away potential dissidence
as because it must) but the last word has almost always remained with the
Djakarta authorities, not the region. (Contrast with this the very differ-
ent situation after the October 17 affair in 1952 and the great caution
Djakarta displayed in the matter of regional appointments until about 1961-
62.) In other words, the central government has insisted on maintaining
ultimate authority, even while it has been prepared to make ad hoc conces-
sions to particular regions on certain administrative and economic matters,
wherein it has perforce had to loosen its grips of the reins. Conceivably
it might have been much harder for the central government to maintain the
precarious balance with the various provincial authorities if it had been
compelled to work within tight financial limits, operating within a fixed
budget and on the basis of rational economic criteria rather than political
rule of thumb. Inflation has functioned here also as a means of avoiding a
commitment to any clearly-defined principles concerning an extremely conten-
tious issue. On the other hand, its effect in the long run must certainly
be to weaken the real strength of the central government in the bargaining
process, disguised though the political consequences may be in the short run.
Yet although the central government's resources are weakened by the in-
flation, it would be quite wrong to assume that the regions are to that extent
the stronger. Dangerous crystallisations of power and potential opposition in
the regions have been skilfully broken up by the Djakarta authorities since
1958. The lack of coherent, purposive regional leadership in defence of re-
gional interests is most striking. Potential aspirants tend to be drawn
towards the seat of power in Djakarta — either willingly, in the belief that
only through access to the kraton can effective influence by exercised, or
unwillingly through promotions or "mutation" to posts of no importance. And
just as the Susuhunan of Mataram took care to clip the wings of any overmighty
subjects, including his own governors, along the pasisir 9 north coast trading
area), his latter-day successor around whom the realm and its affairs revolve
— no less justly fit to be called the Nail of the Universe — does likewise
with equal logic and, until 1966, with great effect. But is it Mataram or
Majapahit that we should recall, the former undermined by an outside power
(after crippling its own maritime strength by a disastrous trade policy which
virtually monopolised exports under royal control)the latter by its in-
ability in the long run to prevent the emergence of the pasisir harbour-
principalities whose incomes from trade and orientation to the outside world
made possible their independence from the kraton-State?
Discontent as a Threat to Governments?
Surprisingly little overt discontent has been aroused by the inflation,67
even though the PKI was sometimes fanning the embers during 1964-65 by
encouraging mass demonstrations against the ministers "responsible" for
rising prices· Signs of dissatisfaction and disenchantment with the
government’s economic policies were evident at every turn, but 1 think it
is safe to say that the Soekamo regime had never, until the October 1
coup in 1965, been in any danger of overthrow because of popular unrest.
Serious outbreaks of mob violence attributable to economic pressures have
been few and more often directed at scapegoats or particular government
agencies than at the regime in general· The main examples have been a
riot in Kediri in late 1961 provoked by the expropriation of squatters from
government-owned plantation lands, anti-Chinese riots in various parts of
Java and north Sumatra during April-May 1963 and the many "unilateral
actions" over land reform issues during 1964-65, which had a political
motivation even though they probably owed a good deal also to economic
distress·^
Of the several reasons for the outward tranquillity, the most obvious
is the fact that the government could bring such overwhelming force to
bear against an insurrection that it would be almost certain to fail· Yet
this is only a small part of the story: insurrections have occurred else-
where against desperate odds, in Hungary and Poland, for instance· And it
is noteworthy that the government, including the Army leaders, have gener-
ally been most reluctant to brandish the big stick if they could avoid it·
Stories of Army officers grinding the faces of the poor have been too
widespread to be disregarded,of course, but they have generally related
to minor peculations rather than the kind of heartless extortions that were
rife in C hina before the Communist takeover. How far the pervasive
Socialist ideology and doctrines of the identity of the Army and the people
really mitigate the severity of an essentially authoritarian regime or how
far they merely camouflage it are questions which we cannot fully analyse
here.
Lack of politically and culturally acceptable outlets for the expres-
sion of hostility to the authorities is a more persuasive explanation of
the general acquiescence of the populace· The PKI has been the only party
which might have taken any initiative in arousing or articulating popular
discontent, but it found itself in a tactical position where it paid better
not to provoke open conflict with other elements in the government by
doing so· The events since October 1965 have shown that mass demonstrations
and violence can be manipulated easily and effectively for political pur-
poses in Indonesia, but until that time no party attempted to do so and the
political circumstances were not ripe for it. National solidarity behind
the Nasakom slogan was required of all participants in the government; open
criticism or opposition would yield no fruits at all. The only way the PKI
or any other organisation could indirectly attack others was by associating
them by inference with the broad ideological condemnations of imperialists,
feudalists, reactionaries and class enemies -- but even this had to be done
carefully so as to avoid pointing a finger too blatantly at ministers in the
government·
We cannot easily estimate how far the outward tranquillity of the
masses merely reflects the fatalistic attitude with which many Indonesians
passively accept whatever fate befalls them· In several communities there68
are strong cultural inhibitions against direct challenge to the authori-
ties. There are also long-established modes of individual and group protest
in intolerable or desperate circumstances, often millenarian in character,
which constitute a traditional (but rarely very effective) alternative to
revolt. In any case, it is not usually the starving and delibitated who re-
volt (think of the lower castes in India) so much as those who see better
opportunities ahead but are frustrated in reaching them. And finally, some
allowance must be made for the fact that, even though the government has
offered more symbols and circuses than bread to the people, these things do
meet certain psychic needs amongst a generation whose old world and tradi-
tional verities have been upset, so that there has been a need at the least
for ideological assurance as a hope to which to cling.69
Notes to Chapter 3: The Political Consequences of Inflation
1.	See Lance Castles, "Socialism and Private Business: the Latest Phase,"
BIES, no. 1, June 1965, pp. 13-45.
2.	Herbert Feith, "Dynamics of Guided Democracy," McVey, op. cit., pp.
389-95.
3.	Fred Riggs, "Prismatic Society and Financial Administration," Adminis-
trative Science Quarterly, V, 1, June 1960, p. 27. "Those with power
use it to acquire wealth with which to confirm their power position.
The pariah capitalist, lacking power, must pay, not to acquire power
for himself, but to buy protection and exemptions and to finance the
power position of the elite."
4.	Feith, op. cit., p. 387.
5.	Ibid., p. 395.
For a detailed examination of the incidence of taxes in the first years after independence, see Douglas S. Paauw, Financing Economic Development the Indonesian Case (Glencoe, The Free Press, I960;, ch. 4-6. The main sources of government revenue (in billions of Rupiah) for 1961-65 are summarised below, as published in BIES, 1965, no. 1, p. 5 and no. 2, p. o ·					
(Billion Rp·)	1961	1962	1963	1964	1965
Income tax	3.2	6	12.8	28	15
Corporation tax	8.4	11.4	20.1	41	100
Import duties	5.1	4.2	12.5	34	158
Foreign exchange	15.5	4.9	51.5	70	?
Sales tax and excise	levies	11.6	15.8	36.8	63	187
Profits of State enterprises 3.0		1.1	1.5	1.5	10
Gross recipts	62.2	74	162	300	671*
*Budget estimate	only given for	1965: all	other	figures ,	are provi-
sional out-turns.
7.	See the article by Douglas Paauw, '‘The Role of Local Finance in Indone-
sian Economic Development," EKI, VIII, 1, Jan. 1955, pp. 2-24, which
epitomises the administrative and political problems of raising greater
tax revenues without devolving wider taxing powers to local authorities.
8.	Price controls have been applied to a variety of commodities and services
from time to time under legislation dating back to the tariff policies
of the 1930’s. Most factory products (e.g. soap, cigarettes, matches,
some textiles) are subject to price control as they are sold from the
factory. Petrol and kerosene prices have been pegged for different
reasons, usually at absurdly low levels. The prices of imported "neces-
sities" are frequently limited to specified mark-ups (hence the relative
attractiveness of importing luxury goods). Charges for many services70
have also been regulated, notably bus, rail, air and shipping charges,
electricity, cinema tickets and newspapers.
9.	Much more could be said, of course, about the adverse effects of price
controls in handicapping the producer at the expense of the black-
market distributor, inhibiting production (e.g. even of rice, in areas
where semi-obligatory sales to the government purchasing agencies at
below-market prices were required) and encouraging corruption. But the
raison d’etre of price controls is very widely accepted in Indonesia,
even (grudgingly) in trading circles, where many merchants have tended
to price their goods, during this period of unpredictable price in-
creases, not by crude application of the principle of "what the market
would bear" so much as a series of conventionally accepted mark-ups on
demonstrable costs. For no one can be sure that he may not be called
upon to justify himself against accusation of overcharging before one
of the ad hoc authorities (quite separate from the old and narrowly
confined Kantor Urusan Harga of the Ministry of Trade) which inter-
mittently exercise wide discretionary powers in this field. It is then
one’s innocence which must be proved, not one’s guilt.
10.	Some details of the SWI Dwikora of 1965 are given in BIES, 2, September,
1965, pp. 7-9. Initially the expected yield was estimated at Rp. 10
billion and even that was said to be difficult to collect. Similarly,
the original SWI in 1962 was expected to yield Rp. 20 billion, but was
later reported to have brought in only Rp. 4 billion. The rate on motor
vehicles then ranged from Rp. 120 on old motorcycles to Rp. 200,000 on
large new cars; private houses built or purchased since 1955 were sub-
ject to a 5% levy on their cost price: for details, see Suluh Indonesia,
11 and 13 October 1962.
11.	The August 1960 regulations governing imports at the Rp. 200/$ rate are
summarised in Corden and Mackie, op. cit., p. 158. This system proved
extremely lucrative to the government, since it tapped a large part of
the profit previously accruing to importers who were basing their Rupiah
prices on the black-market rate. It was also convenient to importers
since it spared them some of the time-consuming and expensive formali-
ties involved. But the offer of an amnesty on funds illegally held
abroad was treated with a good deal of suspicion by importers initially.
Later the holding of foreign exchange abroad was legalised.
12.	BIES, 2, September 1965, p. 8.
13.	Both the SPP system (Surat Pendorong Produksi - Production Incentive
Certificate) and the SIVA (Surat Valuta Ekspor Asing - Foreign Exchange
Certificate) were devised to give the exporter an additional increment of
Rupiahs in return for his foreign exchange, over and above the official
rate. Each embodied the characteristic feature of earlier inducement
systems, a negotiable certificate for part of the foreign exchange earned
from exports, which importers of certain types of commodities had to
purchase on a free market. Details of the SIVA system may be found in
Economist Intelligence Unit, Three Monthly Economic Review, Indonesia,
40, May 1962, p. 7.71
14.	President Soekarno’s Political Manifesto (August 1959) amply illus-
trates the reaction against "liberalism” and individualistic "scrap-
ing up wealth at one blow," to which the panacea solutions were to be
State control, "retooling" and "total mobilisation". The Eight Year
Plan epitomised the unrealistic optimism of the time about what could
be achieved: see above ch. 2, pp. 9-10. For a critical survey of
socialisation and control measures in this period, see Douglas Paauw's
"From Colonial to Guided Economy" in McVey, op. cit.. pp. 206-14.
15.	In April 1959 the import of the major categories of goods, amounting
to nearly 807. of all imports was restricted to eight State trading
companies. Statements by several ministers revealed a further in-
tention drastically to reduce the number of national importers for
the background to this change, see J. A. C. Mackie, "The Political
Economy of Guided Democracy," Australian Outlook, XIII, 4, pp. 289-90.
16.	Lance Castles, op. cit., p. 34. The man concerned happened to have
considerable business interests of his own. But Indonesian Communists
were strikingly undogmatic, even sympathetic to private business, pro-
vided it was "progressive".
17.	The much-quoted "price disparity" refers to the difference between the
domestic Rupiah price of export products and the Rupiah proceeds ob-
tained if the same goods were sold abroad and the foreign exchange
converted into Rupiahs at the official exchange rate. The former was
generally somewhat higher -- hence exporting could not be carried out
without suffering losses, except by illegal means, such as union-
invoicing and an accumulation of an illegal margin of foreign exchange.
(The market price in Rupiahs would presumably be bid up by exporters
to such methods to the limit at which they could still export the
goods profitably and safely.) For a discussion of the matter see Moh,
Sadli, "Masalah ’Dispariteit Harga* dan Export," EKI. XIV, 3-4, March-
April 1961, pp. 137-41.
18.	As the MPRS (Consultative Assembly) had originally authorised the
Eight Year Plan at its first session in 1960, it was summoned to its
third session to legitimise its abandonment in April 1965: President
Soekarno offered two slogans as the basis of a new economic policy,
banting stir (literally, a sharp turn of the steering wheel) and
Berdikari ("standing on our own feet"). The new economic philosophy
was to be "a thunderous revolutionary spirit, combined with down-to-
earth handling of problems as they arise". A useful note on the
Berdikari policy is given in BIES, 1, June 1965, pp. 1-2.
19.	See ch. 4, pp. 5-8.
20.	Selo Soemardjan describes how the inflation during the years of war
and revolution decimated the real incomes of the pamong pradja (the
regional official of the Ministry of the Interior) in Social Change
in Jogjakarta (Cornell University Press, 1962), pp. 254-5.
21.	To justify the figure of 607. would require a set of calculations of
the "real" value of both inter-island and international imports and72
exports, and of differential price trends, for which the statistical
data are simply not available. Douglas Paauw has made some interesting
preliminary calculations for the year 1958 (an abnormal year, because
of the PRRI rebellion) which illustrate the dangers of facile generali-
sations on this matter, in McVey, op. cit., pp. 167-71.
22.	A dismaying example of the pressures put upon rubber smallholders in
Riau province in the name of "confrontation" is the story of one of the
"Palace millionaires" of 1964-65, T. Markam, related by Lance Castles
in "Socialism and Private Business: the Latest Phase," loc. cit., pp.
37-38.
23.	The drastic economic reforms of December 1965 were allegedly aimed at
the elimination of subsidies. But so long as some prices of services
provided by government agencies are pegged and inflation continues,
losses borne by the budget deficit (i.e. subsidies) are unavoidable.
24.	Some of the major economic and administrative factors bearing upon the
constant tension between centrifugal and centripetal factors in Indonesia
are easy to identify, but others are more recondite. I have attempted a
preliminary analysis of this problem in an article on "Aspects of Poli-
tical Power and the Demise of Parliamentary Democracy in Indonesia" in
R. N. Spann (ed.), Constitutionalism in Asia (Bombay, Asia Publishing
House, 1963), pp. 207-10.
25.	It could be argued that the Communist Party (PKI) articulated a great
deal of popular discontent with the government and that it loomed as an
even greater threat to the existing regime between 1961 and 1965 for
this reason. It was certainly the party in closest touch with the
poorer people and of all parties it had the greatest interest in socio-
economic change. But the PKI did not owe its gains to overt manifesta-
tions of popular discontent (which it generally encouraged only where the
PKl’s tactical purposes were served) so much as to its exploitation of
ideological and organisational issues.
26.	Sultan Agung of Mataram reduced the pasisir towns to subjection through
military force in the first instance and appears to have then used a
monopoly of rice exports to curb any dangerous tendencies towards the
recovery by their nobility of their former wealth and independence.
D. H. Burger speaks of this as a deliberate policy by the rulers of
Mataram to maintain their own power by keeping the nobles weak. See
D. H. Burger, Structural Changes in Javanese Society: the Supra-Village
Sphere (Cornell Modem Indonesia Project, Translation Series, 1956),
pp. 7-8.CHAPTER IV
THE RESILIENCE OF THE ECONOMY
How do people survive the hardships created by the inflation? How is
it that an economy which time and again has been described as being on the
brink of collapse (whatever that means) has proved able to put up with
shocks and strains which would have been ruinous in most countries?
"Indonesia defies the rules of conventional economics" we are some-
times told, both by Indonesians who take perverse nride in their feat of
survival and by outsiders who are mystified by it.* "Racing inflation does
not spell doom to the Indonesian economy because the great majority of the
people barely participate in the monetary system" is another common half-
truth. Both propositions imply that in some way Indonesia has a degree of
immunity to the pernicious effects of inflation. Individuals often shrug
off the problem wigh the assertion: "We have learnt how to live with in-
flation" -- which certainly seems to be true of many people, particularly
the wealthy.
Misconceptions about these matters arise partly from terminological
confusion, partly from the difficulty of seeing the problem in quantitative
proportion. The term "economic collapse" is itself misleading and, in re-
gard to Indonesia, owes its widespread currency largely to the reports of
visitors who have been appalled by the rising prices or the astronomical
black-market rates of the Rupiah: they have hastily concluded that "things
can’t go on like this". Yet food production has been rising (slightly, and
all too little, it is true — but certainly not "collapsing") during the
past decade. It is mainly the urban and monetised sectors of the economy
which have deteriorated. It would be nonsense to suggest that the inflation
has not wrought serious damage to the entire economy, for there are all too
many signs of severe deterioration in the country’s basic capital stock.
But nations do not "collapse" in the sense of going bankrupt, like private
individuals or companies do. They may run short of foreign exchange (as
Indonesia has) even to the point of repudiating their debts; and their
governments may have to resort to deficit financing because their expendi-
tures exceed their revenues — i.e. because they are "living beyond their
means". In either event, however, they can carry on for some time if they
take appropriate compensating measures, without reaching a breaking point
comparable with bankruptcy in the case of a private person or firm.
On the foreign exchange side, they can first of all cut imports,
either by direct controls or indirectly through devaluation, or they can
defer payment on foreign obligations -- and even, in the last resort, re-
pudiate them in part or whole. (This will make it very hard to raise
further loans, however, and is perhaps the nearest equivalent to "going
bankrupt" insofar as it generally implies sheer inability to pay the debt;
but the consequences for an individual bankrupt are far more rigorous.)
On the budget side, excessive deficit financing will lead to depreciation
of the currency and -- eventually, if people lose confidence in it -- to
run-away inflation such as China experienced in the years 1946-49. But
7374
even then the capacity of an economy or a government to survive inflation
often seems almost incredibly elastic· In the Chinese case, for instance,
military defeat seems to have played as important a part in the collapse of
Chiang Kai-shek’s regime as the spiralling inflation of 1948 — although
the two phenomena were no doubt interconnected.
At some stage, runaway inflation is bound to erode the administrative
resources of a nation to a point where the government's effective power is
undermined. China seems to have reached that point by about 1948. Indo-
nesia’s rate of inflation in 1965 was still well behind China’s in 1948 (it
was roughly comparable with China’s 1945-46 rate) and her food-producing
capacity was far less severely disrupted. It is impossible to guess how
much more inflation the economy could tolerate before the monetised sector
of the economy, and in particular its foreign exchange earning capacity,
would become too disrupted to sustain the government in its present form.
My own guess is that Indonesia was reaching a critical point by the end of
1965, for she was less self-sufficient and more dependent on her foreign
exchange earnings than China, even though her inflation had not reached such a
pitch of intensity. One danger was looming perilously close -- a sheer in-
ability to finance the imports she had come to rely on so heavily. The
other was the threat of more rapidly spiralling inflation, not so immediately
pressing, but likely to prove dangerously disruptive to the nation’s political
unity if it continued much longer.
Some of the mystery about Indonesia’s "resilience" to inflation has been
due to premature cries that the moment of crisis had been reached. We have
been told many times that Indonesia’s plight was desperate. Usually this
has meant that the foreign exchange reserves were exhausted and exports de-
clining -- a cry that has been heard intermittently since the end of 1961.
If the situation really was as bad as it was often depicted, it is indeed
puzzling that the country was able to sustain moderately high levels of
imports through 1962-64 and that inflationary pressures did not intensify
much more rapidly. Part of the explanation appears to have been that there
was more in reserve than the figures revealed (much of it in illegal private
accounts abroad), that a good deal of scope for beIt-tightening still re-
mained (stocks were replenished in 1963) and that the foreign exchange
situation was not as desperate as highly coloured reports indicated, until
at least the end of 1964. And, just as the man who cries "Wolf" too often
finds himself ignored when there really are wolves, the people who cried
"Collapse imminent" came to be regarded with scepticism by the likes of
Soekarno, who were more than willing to believe that Indonesians had some
special genius for living dangerously in defiance of the principles of
"liberal economics". Many visiting journalists came to share the notion
that Indonesia had some special quality of resilience to economic strains.
The Notion of lrResilience"
The alleged "resilience" of Indonesia’s economy is often related to the
observation that everyday life goes on, particularly in the rural areas, in
much the same way as it has for decades, despite the alarming depreciation
of the currency and the running down of basic services·^ People who use
this notion frequently go on to link it with the fact that the vast majority75
of Indonesians live in rural villages, supposedly self-sufficient and
independent of the monetised economy· The sharp dualism between town and
country in nations like Indonesia is sometimes invoked to explain all
sorts of differences between these countries and the industrial West, even
more than the facts of the situation warrant: Boeke’s all-embracing theory
of ’’dualistic economies” is an unfortunate illustration of the pitfalls
one can fall into· Up to a point it is true that the adverse effects of
inflation have not been as serious for Indonesia as they would have been
for a more industrialised country· For example, underdeveloped agrarian
economies with high levels of unemployment (open or disguised) are rela-
tively little affected by the decline in new investment which generally
results from serious inflation. In an industrialised, full-employment
economy, business activity generally reacts very sensitively to fluctua-
tions in investment: hence marginal adjustments of minor regulators such
as interest rates, hire-purchase terms or taxes may have far-reaching
effects. Even in Singapore the relatively small reduction of employment
brought about by confrontation in 1963 sent ripples right through the
economy because it is so closely intermeshed. Indonesia’s economy is much
more loosely structured, although it is by no means a self-sufficient
system or a ’’barter economy”, as sometimes suggested — a point I will
return to later in this chapter.
One other puzzle about Indonesia’s inflation is the fact that people
have not lost confidence in the currency to the extent of rushing to buy
goods in order to get rid of their Rupiahs before they depreciate further
in value. Firms and wealthy people do buy goods as a hedge against price
rises, of course, and the velocity of turnover has been increasing, it is
true: but it has generally not accelerated exponentially as fast as one
might have feared. Here the contrast with China’s inflation in the later
stages seems noteworthy. Two explanations may be offered for this fortunate
state of affairs.
In the first place, wealthy Indonesians often hold surprisingly large
cash reserves -- usually in their homes, rarely in bank accounts, where
they can be investigated too easily. The opportunities to make large
windfall profits if one has a ready store of liquid funds are lucrative
enough to outweigh the losses through depreciation. Prices move very un-
evenly in different sectors of the market at different times. On a few
occasions, the expectation of rapid general price increases has generated
a surge of demand for goods (e.g. the sudden rise in vegetable prices in
December, 1964), but these surges usually reached a limit when liquidity
shortages arose and the speculative bubble burst, as it did in January 1965.
The second factor which helps to restrain speculative bidding-up of commo-
dity prices is the concomitant rise in the black-market price of hard
currency which will make it more profitable to purchase export products,
and so tend to attract Rupiahs into the export sector. Sometimes firms
even find it necessary to sell their hard currency to obtain black-market
Rupiahs to finance exports. Then the bubble of speculative buying of
black-market dollars is pricked and prices will tend to stabilise for a
time on a new, higher plateau. Thus the relatively wide possibilities of
making profits in the export sector (sometimes quite large profits, through
the acquisition of an illegal foreign exchange margin) have some counter-
acting effect on the purely speculative push on domestic prices and black-
market currency.76
The predominantly rural character of Indonesia’s economy, however, has
obviously had a good deal to do with the country’s resilience to inflation·
But just how it has done so needs to be more closely examined· It is true
that peasants who grow foodstuffs and sell part of their crops for cash
have been cushioned against price rises to some extent by the fact that their
cash incomes have risen also. (Whether they have risen commensurately with
the prices of their consumption goods is a complex question which deserves
closer investigation: it seems probable that they have not.) Nearly 85%
of Indonesians live in rural villages, many of them obtaining their liveli-
hood, directly or indirectly, to a greater or less extent, from agriculture·^
We therefore tend to assume that the rural population has not suffered from
the inflation as severely as town-dwellers and civil servants on fixed in-
come (the latter mostly town dwellers, but not all)· Does this mean that
inflation has entailed a redistribution of income to the relative advantage
of the rural sector?
If that were the case, we would expect to see indications of a flow of
population away franthe towns, back towards the villages, as during the
Depression.® I have seen no evidence of such a trend; on the contrary, the
drift to the big cities still seems to be continuing, partly because of
“push factors” (over-population, insecurity in some areas, etc.) and partly
because of the pull exerted by the advantages of city life·? To infer from
this that standards of living must still be higher in the towns would, of
course, be dangerous; many unverifiable assumptions would have to be made,
especially about the distribution of income and the wide variations of real
income from place to place· It would be easy to cite both wealthy rural
areas and poverty-stricken towns, or vice-versa· It could be argued, too,
that the urban sector benefitted much more than the rural from government
policies in the early years of independence and that the balance of advantage
has not yet been changed by the redistributive effects of inflation, despite
tendencies in that direction· Hence the town-dwellers are possibly still a
little better off, on average, although less so than previously. This would
also be a debatable proposition, requiring corroborative statistical evi-
dence -- although I have the impression that it is broadly correct. But if
we ask ourselves how this can be so, when urban industries and services
seem to be declining or stagnant, while rural production and incomes still
show some signs of increasing (and the rate of increase in urban population
is far outstripping the overall national figure), surely one answer, perhaps
the main answer, is that it is into or round the towns that the huge Rupiah
expenditures of the government are mainly being pumped. Here, incomes are
being generated by the initial injection of purchasing power and its circu-
lation through many hands. Some of it reaches the villages eventually by a
trickle-down effect, but the rate of turnover would presumably' be much
slower there. It is hardly surprising that a villager needing to earn a
few quick Rupiahs has the impression that the towns are the oases of oppor-
tunity -- especially if he comes from an area where employment opportunities
are limited.
There are two further dangers in over-stressing the dichotomy between
rural and urban sectors of the economy in this matter. First, it would cer-
tainly be fallacious to assume that all or most of the 90 million or so
village-dwellers in Indonesia conduct their daily work independently of the
monetised sector as if in a barter economy, so that they escape the worst77
effects of inflation· (Advocates of “dualist” theories tend to imply that
they do)· Any notions of “self-sufficiency” or “barter economies” at the
village level are entirely misleading, except for perhaps a tiny handful
of primitive communities· By no means all individual land-owners (and
certainly not all peasants) are even self-sufficient in foodstuffs --
probably many fewer than half· A great many peasants own so little land
that they must seek a supplementary income from other sources, either as
share-croppers or field laborers (paid sometimes in cash, sometimes in
kind) or as wage-workers·
The other, related danger is the failure to realise that in assessing
the welfare effects of government policies (not only of inflation, but the
whole range of economic measures) over the last fifteen years, the differ-
ences of impact upon rich peasants and poor villagers, or upon the wealthy
town-dweller and the urban poor, are probably far greater than any no-
tional difference between their aggregate effects on dwellers in town and
countryside respectively· Until we know a great deal more about the dis-
tribution of incomes in each sector, generalisations about the impact of
inflation on town and countryside are fraught with uncertainty·
A certain amount is known in broad terms, however, about the dis-
tribution of landownership and incomes in some rural areas, and some
hypotheses are worth further consideration· In many villages of Java,
over half the inhabitants no longer own any land and many more are little
better off· They depend for a living on laboring or share-cropping of
other (usually richer) peasants’ land, the latter generally during the
season of secondary crops.θ Those of them who have been receiving a con-
stant payment in kind whose cash value has kept pace with the general rise
of prices are presumably neither worse nor better off as a consequence of
the inflation -- although any cash earnings they depend on may have de-
clined proportionately· One would expect them to be subject to some
pressure from the landowners to accept a smaller share of the produce
(since the latter too are presumably feeling the squeeze), although the
Crop Sharing Law of 1960 seems to have created temporarily strong political
pressures tilting the scales against the landowner, while the sense of social
obligation to avoid depriving a fellow-villager,of his livelihood appears
to have played a considerable part in some areas, at least -- though not
all·^ One would also expect that when smaller landowners fall irredeemably
into debt, which must be common among those who have depended heavily on
their cash earnings in fields where income rises have lagged behind the
general price level, they would be driven to forfeit or sell their land;
if so, the land of poor peasants must be coming onto the market increasingly
and falling into the hands of the richer peasants -- who, in turn, would
then be so much better fortified against rising prices· Again, the two
previously mentioned political and social pressures would tend to have
dampened any such effect. Moreover, Indonesians generally deny that this
has been happening -- but if not, why not?
Inflation brings one great benefit to the poor, of course -- it tends
to reduce the burden of debts, since money values have depreciated by the
time they are repaid. Kahin has related how the immediate postwar infla-
tion relieved many peasants of long-standing debts to Chinese money-lenders,
but this kind of windfall benefit will not be repeated often before interest78
rates are raised by the creditors. Higher interest rates and reduced
availability of credit seen to have been accompaniments of Indonesia’s
recent inflation -- which would add to the difficulties of the poorer
peasants whenever they fall into debt -- although more precise investiga-
tions of this whole question is needed, since too little is known about
the sources and volume of rural credit or the social pressures applying.
Although the notion of "self-sufficiency" is fallacious when applied
to most individual peasants or village communities, or to the main food
deficit areas of Indonesia, there is a sense in which it has appeared to
have some validity when applied to the national economy as a whole.
Indonesia is nearly self-sufficient in foodstuffs (and could quite easily
become so if a few simple agricultural changes could be effected) and has
continued to earn sufficient foreign exchange, despite the economic dis-
ruptions of 1957-65, to pay for its immediate needs of essential imports.
She is, as we shall see, very far from self-sufficient in most manufactured
goods. Until 1965, at least there was still ample scope for belt-tighten-
ing on imports without creating intolerable hardships for the people or
immediate disruption of the national economy. Her food problems are not
of the same proportions as India’s or China’s. Her soil is so much more
productive and her climate so much more equable that superficial impres-
sions tend to be beguiling. People can make do with remarkably little,
as they did throughout the Japanese occupation. Even her national dis-
asters like the rat plague and bad harvest of 1964 have seemed minor by
comparison with those of other countries. Yet these things do not mean
that Indonesia has some peculiar immunity to the consequences of inflation,
but merely that her economy has been well cushioned to withstand and adjust
to the initial impact. It is very important that this matter should be
seen in perspective as accurately as possible, for Indonesia cannot afford
to tolerate economic deterioration indefinitely without experiencing the
compounded effects of many adverse tendencies upon her economic, social
and political life.
"Self-sufficiency"?
Let us first attempt to quantify Indonesia’s degree of self-sufficiency,
then notice briefly the trends and prospects of her export sector from
which her all-important foreign exchange is derived.
In regard to foodstuffs, the scale of the problem of self-sufficiency
is easily stated. In 1962 (the last year for which the appropriate statis-
tics are available to me), rice production was estimated at 8,952,000
metric tons and imports were 1,047,000 metric tons. In addition, maize,
cassava and other cereals would have amounted to about 85% of the total
calorific value of rice (although their protein content is much lower, ex-
cept in the case of corn, which however has other serious disadvantages as
a staple diet.^-θ I will not here go into the unhappy question of protein
sources, fruits and other requirements of a balanced diet, since it is the
total calorific content of the essentially carbohydrate foods that, in the
short run, constitutes the most immedaitely felt measure of whether the
nation’s stomachs are full or not. In effect, Indonesia has been importing
the equivalent of about 6% of her actual calorific consumption of carbo-79
hydrates since 1960, when rice imports approached (later to exceed) the
one million ton level, making her the world’s biggest rice importer. Even
this high level of imports has been somewhat inflated by a political
rather than purely economic factor -- the government’s need to hold large
stocks of rice for its own purposes, for supplementing the real wages of
civil servants and soldiers, or for ’’injections” into urban markets to
stabilise prices and prevent unrest.
Rice production has, in fact, risen by more than the quantity im-
ported since 1957 (though population has also increased by 17%) and there
is little doubt that the purely agricultural problems of attaining self-
sufficiency in foodstuffs could be overcome relatively easily. Application
of fertilisers would achieve increases in yields of up to at least 20% in
many parts of Java (in some areas much more) and the saving on rice im-
ports would outweigh the costs of the fertiliser.There are however
other non-economic problems connected with the drive towards self-suffi-
ciency (and some essentially economic ones of relative costs and prices).
The failure of the 1961-62 Rice Self-Sufficiency program revealed the
difficulties involved. It is noteworthy that by 1965 the government was
talking of self-sufficiency in foodstuffs not just in rice, and devoting
a good deal of publicity to the desirability of substituting corn for rice
in the diet. New strains of com bred at Bogor with American assistance
have shown the possibility of remarkable increases in yields. One could
query, too, whether self sufficiency in foodstuffs should rank higher on
the scale of economic objectives than the restoration of agricultural
eicports (e.g. sugar, which is a competitor with foodstuffs for land and
labor), but for political and social reasons the former will probably be
more easily achieved. But whatever the longer-term arguments about the
desirability of self-sufficiency in foodstuffs may be, it would not be a
particularly difficult goal to attain.
In nearly all manufactured goods and raw materials for her infant
industries, however, Indonesia is heavily dependent on imports, with two
or three important exceptions, such as petroleum products, soap, matches,
etc. The textile industry is the only one which has developed to any
significant extent, but in the "normal” years of the mid-fifties, her
weaving and knitting factories only produced about 20% of the nation’s
total cloth consumption, her spinning mills about 5% of the yarn utilised.
Capacity in both spheres has since increased, but the flow of raw mater-
ials and the output of factories has become so irregular that it would be
difficult to make a similar comparison for later years. Production has
not risen significantly, despite the more desperate need. In any case,
the raw cotton has to be imported and the prospects of ever growing it in
Indonesia are not good, for climatic reasons. Nearly all other industries
also depend either completely or to a major degree on imported raw
materials and capital equipment.
If she is ever to approach industrial self-sufficiency (itself a
chimaerical goal -- industrialised nations usually become more dependent
on imports, not less), or even simply to maintain the productivity of her
existing industries, Indonesia must be able to devote a substantial amount
of foreign exchange to raw materials and capital goods. In 1956-57, ap-
proximately $400 million p.a. was utilised for these purposes (excludingso
oil company transactions), considerably more than was spent on consumption
goods· Later, the sum declined drastically· To try to calculate the
minimal allocation of foreign exchange needed to maintain existing indus-
trial output and tertiary services would be a highly academic exercise,
since so many unknown factors are involved. It is hardly necessary to do
so simply for the sake of demolishing the notion that Indonesia is self-
sufficient. She was not earning sufficient foreign currency from exports
during the years 1960-63 to pay for her imports, even though the latter
were well below the total for any other four-year period since 1950.
Something like $200 million p.a. was being drawn upon from foreign loans
and credits, grants and reparations (quite apart from military loans),
simply to maintain the existing pattern of international payments. Any
substantial change in that pattern is almost sure to entail far-reaching
changes in Indonesia’s internal economic structure.
Up to 1964, export earnings were still sufficient to hold off any
such changes, despite the steady decline in non-oil exports since 1959 and
the inexorable pressure developing on Indonesia’s payments account, as ex-
ternal repayment obligations increased and sources of additional foreign
aid dried up. This unexpected elasticity of the foreign exchange position
has tended to puzzle outside commentators for several years, for it had
been widely asserted that Indonesia’s gold and foreign exchange reserves
were exhausted as early as 1962.13 Evidently there have been more exten-
sive sources to draw on (including illegal private holdings abroad which
'nave to some extent been tapped to pay for imports) than had been realised.
Nevertheless, at some point soon, the capacity to import must be directly
and primarily limited by the decline of export earnings, unless new sources
of foreign aid are found. The export producers, particularly the planta-
tions, have suffered severely from the shortages and the distorted cost-
price structure of recent years, although even here there are some cushion-
ing factors -- government-owned plantations can be ordered to keep up
production of export commodities even if they are suffering losses: peasants
sometimes have little alternative but to go on producing the same cash crops
even for low Rupiah returns. It would be as foolish to assume without
further qualification that continuing inflation will soon bring the export
sector to disastrous collapse as it would be to assume that it has some
special immunity to the damage being wrought by the inflation. We need to
assess the effects of the various factors working in both directions.
Hany of the predictions of imminent economic disaster in Indonesia
have proved to be premature because they were based on misleading indices
or fallacious inferences. For example, the black market rate of the
Rupiah is an extremely unreliable indicator of the state of the economy,
for many different factors affect it, some of them highly speculative.
Startling jumps in the rice price, as in late 1961 and 1965, do not in
themselves signify that disastrous rice shortages are already being ex-
perienced; there may be exaggerated speculative pressures involved. The
harrowing stories of famine and rat plague in 1962 and early 1964, though
tragic enough, referred to rather narrowly localised areas. The overall
harvest in 1962 was a record and in 1964 by no means disastrous. When we
come down to figures of actual aggregate production or exports or imports
over a longer period, the picture is rarely as bad as it has been painted.
The tendency to over-dramatise the seriousness of momentary troubles is31
often followed by bewilderment that things have not turned out as badly as
expected. This is not due so much to a peculiar resilience as to a lack
of true perspective in the first instance.
How Do People Survive?
How do individuals manage to cope with the continual price rises? The
question refers mainly to the fixed-income employees, particularly the
civil servants, whose cash incomes have been raised only by infrequent,
inadequate jumps, so that they lag far behind prices.For peasants or
pedlars or betjak-drivers, rising prices bring at least some increase in
incomes. They have suffered sever hardships too, of course, but more from
the unevenness of price changes and the disruptions of supply caused by
inflation than from inflexibility of their cash incomes. For them, the
economic situation has been nowhere near as hard as it was during the much
milder inflation under the Japanese occupation, when clothing, metal and
most imported goods became simply unobtainable, even gunny sack was in heavy
demand for making clothes, while forced labour and forced deliveries of food
loomed as a terrible, capricious threat over rich and poor alike. In fact,
throughout all classes of the population an important psychological factor
during the last few years has been the memory of how they survived in the
much more straitened circumstances of the war and Revolution. The shops
have rarely been as empty as they were then. Goods have generally been
available, sometimes in astonishing range and quantities, even though the
prices have been high -- in the case of luxury goods, astronomical to the
ordinary wage-earner, because che prices have been geared to the prevailing
rate of the ’’hard” (i.e. black-market) dollar.
In order to see the problem in rough proportions, some figures for
earnings and costs of living may be cited. A civil servant in category F. 1
(i.e. a university graduate newly recruited, hence a middle-level official)
would have been receiving a basic monthly salary of nearly Rp. 600 and a
total salary of about Rp. 1200 in 1956-57, plus certain family allowances,
subsidised rice, and other essential commodities, very cheap housing and
transport to his office, etc. By early 1960 the basic salary had risen to
about Rp. 2000; after some intervening minor adjustments, salaries were
doubled in mid-1963, when the total reached approximately Rp. 8000 and in
mid-1964 salaries were again doubled. But during this period prices rose
roughly thirty-fold and at the end of 1964 they began to spiral at an even
more rapid rate.
A more precise index for the earnings of factory workers has been
compiled by the Ministry of Labour. This gives a slightly less distorted
impression than civil servants’ salaries might suggest, for rises in the
latter have lagged absurdly far behind prices, whereas factory earnings
have kept pace with prices a little better. Yet the fall in real earnings
still appears to be dramatic.82
		Earnings index	Consumer goods price index	Real earnings index
1953	July	100	100	100
1959	January	106	126	84
	July	103	146	71
1960	January July	108	158 Not available	68
1961	January	127	187	68
	July	145	205	71
1962	January	190	428	44
	July	202	568	42
1963	January	307	999	33
	July	485	1331	36
1964	January	682	2134	32
	July	1010	2450	41
2
Source: Departemen Perburuhan, Angka Indeks Penghasilan dan
Penghasilan Njata pada Perusahaan Industri di Djakarta·
(index figures for earnings and real earnings in Djakarta)
Even these fiigires however must be treated with caution. They may not be
’’typical” of wage-earners as a whole. Moreover, it should be borne in
mind that only a small proportion of the labour force would be employed in
factories. In some traditional industries, notably batik and kretek (which
employ very large numbers of workers in Central and East Java), the workers
are mostly women who are presumably not the sole breadwinners of the family.
Methods of payment vary also, piece-work being very common in many indus-
tries. Hence actual earnings are likely to vary greatly at a time of acute
shortages of materials and low-capacity operation of plant.
Another way to look at the question of how people have coped with the
inflation is to look at estimates of the minimal income needed for a "normal"
middle-class family of about 5-6 persons in Djakarta· A family which could
get by comfortably with Rp. 3-4000 per month in 1956 could just manage with
Rp. 30,000 by early 1963 and by the end of 1964 a minimum of Rp. 100,000
was said to be necessary, at a very frugal middle-class standard of living.
These figures are taken at random, of course, and give only the crudest
indication of the disparity between earnings and needs. Circumstances
varied greatly from family to family and much more precise details would be
needed to give an accurate impression. But the overall effect of the
squeeze on urban salary and wage earners is clear.
It is obvious from these figures that for some years before 1965 a
single government salary was far from sufficient to sustain a man with a
family, or even a single man or woman in most circumstances. Somehow,83
supplementary sources of income had to be found· A few of the ways in which
civil servants may have been able to make ends meet are outlined below.
"We all find our own ways of making do” observed one of them several years
ago, sometimes in quite legitimate ways, sometimes not. One of the most
obvious and common ways of increasing the family income, of course, is to
put one’s wife to work· If she takes employment elsewhere than in a
government department, she may very well earn far more than her husband,
although his job may ensure a low-rent house and a basic supply of cheap
rice and other necessities. Well-educated women in particular have a high
earning potential in a community which desperately needs teachers and
graduates of all kinds. Indonesia is unusually enlightened in putting very
few legal or socio-cultural obstacles in the way of women in employment.
In fact working wives are very numerous at almost all levels of society,
from wives of senior officials to shopkeepers and servants. (In most parts
of the countryside women also play a very important role in agricultural
production, petty commerce and handicrafts.) Thus it is really changes in
family incomes over the past decade which we would need to compare with
price increases in order to measure the effect of inflation on real earning,
rather than a notionally "typical” wage. Sometimes the family will be a
large one, with several children or relatives contributing to the household
expenses. Moreover, relatives will often help each other to a greater
extent than in more individualist societies. Or a town-dweller might re-
tain some property or familial ties with his village of origin and fre-
quently obtain rice or other foodstuffs from it at little or no cost --
although it should not be inferred that an "extended family” system in the
strictly anthropological sense is a significant factor here since most
Indonesian communities have a nuclear family system with rather loosely-
structed kinship ties. But it is probably true to say that one finds
relatively few individual wage-earners living lonely and self-sufficient
lives in the big cities of Indonesia, except the young bachelors, of whom
a high percentage live in government asrama (hostels or messes) of one
kind or another, at very low rentals.
Indonesian salary and wage-earners have never seemed especially well-
paid in comparison with the well-heeled Europeans in their midst. Hence
it has always been something of a puzzle that rising prices have not
destroyed any margin for savings or economies they ever had and forced them
to a standard of consumption below the subsistence level. Several Indone-
sian civil servants to whom I have put the question: "When did you begin
to find it impossible to live on your government salary alone?” mentioned
1956-57 as the answer, others put it as late as 1961. Circumstances differ
greatly from person to person, of course, but it seems to be broadly true
that since the disastrous inflation of 1961-62, not even the most frugal
and devoted of civil servants could possibly have managed on one salary
alone, without some additional source of income. A crude spot-survey of
middle-class families in Bandung in 1960 revealed both the practice of
duplicating jobs (still somewhat frowned upon officially at that time) and
the remarkable initiative of the wives of civil servants in turning their
energies to small shop-keeping, dress-making, sewing classes (and other
forms of teaching), beauty parlors, flower shops, catering services and
various other types of minor commercial activity. It is also a little sur-
prising to find such thoroughly bourgeois, almost luxury services surviving,84
even flourishing, after a decade of inflation. There are many reasons for
this peculiar phenomenon — the need for status symbols, the emergence of
the ’’new rich”, a carpe diem attitude engendered by the profitlessness of
investment in more productive fields. A factor we tend to overlook, too,
is that the economy has not been under tight stress, as during Japanese
times. There has been a good deal of slack to be taken up in various ways.
Despite the remorseless pressure of population growth on gross national
product and the low average level of income, individuals have continued to
live in their own very different ways. One is constantly reminded of
Chekhov’s Russia (or sometimes Dostoievsky’s) in the economic behaviour of
urban Indonesians, rarely of Steinbeck’s Okies. ”Nanti saja harus mentjari
uang” (”l must go and earn some money some time·”) one long-out-of-work
young man cheerfully observed, (his family came from Borneo and had exten-
sive, though obscure, trading interests) with the air of one to whom there
was no particular virtue in the manner of acquiring it, nor any apparent
urgency, in spite of the rapid spiralling of prices at the time. That is
one of the charms and frustrations of studying the Indonesian economy.
Various supplementary sources of income available to some or all civil
servants (often, too, to employees of private firms) are briefly discussed
below. It would be valuable to have much more precise studies on all these
questions, but even the rough conclusions drawn here should be sufficient
to answer some of the obvious questions about how people survive.
1.	duplication
The most straightforward way for civil servants to supplement their
incomes has been to take several jobs. Because of the shortage of trained
personnel, it has been very common since 1950 for people with particular
qualifications to have another job or jobs in the evening, often in a
training or indoctrination course, advisory body, or such like. Official
working hours are only 7 to 2 (much less in practice, in most cases) and
many educational or training courses are held later in the city. In recent
years multiplication of jobs has become very general and is no longer con-
fined to out-of-work hours. Many government employees in the higher (and
middle?) ranks will divide their week between several different jobs,
drawing a salary on each and often spending relatively little time at either
office. Absenteeism has become a major impediment to office efficiency.
But it is not easy for the government to take effective action against it
when so many senior officials are required to participate in the many dif-
ferent advisory, supervisory or indoctrination bodies which have been set
up. Some of the lower-ranking government servants may also have jobs in
private business as bookkeepers, teachers or even petty businessmen: the
lower ranks may be driven to jobs as night-watchmen, chauffeurs or even
betjak-drivers. And directorships or consultative posts with private firms
which will pay handsomely for the contact are not uncommon among higher
officials.
2.	Travel allowances
Travel allowances can serve as a substantial — and perfectly legiti-
mate — source of supplementary incomes for some civil servants. Senior85
officials who travel abroad frequently on official business can do very
well by saving as much of their foreign exchange allowance as they can,
with which either imported goods or black market Rupiah can be purchased.
Only a small proportion of civil servants have opportunities for foreign
travel, of course -- though the number who managed to get themselves sent
abroad on some training course or other used to be astonishingly high.
Most able and well-placed young men seem to feel entitled to it and it is
a useful form of patronage at the government’s disposal. The travel and
expense allowances received by some Indonesian civil servants in foreign
countries often seem excessively lavish for a country in balance-of-
payments trouble, θ In fact some official junketing tours have been
blatantly scandalous.
Domestic travel does not offer such substantial margins for saving,
but can still be a useful supplement to the basic salary. It is an
unusual Indonesian who cannot find a relative or friend to board with, or
other means of saving on his allowances when travelling. With conferences,
inspection tours and frequent calls to and from Djakarta playing such a
large part in an overcentralised administrative system, travel opportunities
are fairly extensive. And travel brings a secondary benefit, not only to
the civil servant, but also to the private citizen who travels widely.
He can often bring home a small sack of rice or some fruit or a few batiks
from another town where supplies are more plentiful and prices lower. This
is only a minor contribution to the income gap, but the sharp-witted are
said to make quite useful sums from the knowledge they acquire of commodity
prices from one town to another. One has only to travel by rail or bus in
Indonesia to realise how many passengers are engaging in a form of quasi-
peddling trade in this way.
3. Corruption
Corruption and malfeasance in their many manifestations -- whether in
the form of accepting bribes, misappropriating government funds or prop-
erty, taking commissions on contracts or margins on official purchases,
requiring ’’presents1’ to perform some official service, even simply stealing
paper and pencils from government offices---- constitute another whole range
of methods by which many civil servants are able to supplement their in-
comes. It should be remembered however that many are simply not in a
position to resort to these practices, particularly the hard-hit lower State
employees. Mot much can be said about corruption in a systematic way or
with confidence without a much more thorough study of the problem.There
seems to be no doubt that corruption is now far more widespread than it was
six or eight years ago,^and press reports of the court cases reveal new and
ever more ingenious forms of malfeasance. ’*We are compelled to do many
things we are ashamed of”^#d one young civil servant in reply to a ques-
tion about his income: He was a devoted and serious middle-ranking official
whose position would not in itself create particular temptations to mal-
practice and who had deplored such behaviour a few years ago when there was
less justification for it. Regulatory controls and the issuance of licenses
for scarce resources always tend to create pockets of corruption (whether
for import licenses, allocation of new taxis, spare parts or materials, or
even for scholarships and tours abroad). At the other end of the scale
there occur petty misappropriations of goods which find their way into the86
thieves’ market, or of petrol vouchers which an office chauffeur draws in
excess of requirements· In more ambitious cases, as during the 1961*62
Rice Self-sufficiency campaign, quite large quantities of seed rice,
fertiliser or even money, with which the lurah or the heads of paddy-
centres had been entrusted, were quietly pocketed.
How far there is collusion and an overspill of funds among many
participants in large-scale corrupt practices cannot be gauged. We would
expect it to some extent, simply because many people at different levels
are likely to be aware of a senior official’s illegal acts or at least of
the opportunity for them. It is a far cry from the days when corruption
was simply a matter of personal dishonesty. On the other hand, there are
few signs that it has become as thoroughly "institutionalised” as in
Thailand, where the appropriate bribes for different services are well-
known, regular and predictable. There are some tendencies in this direc-
tion: exporters and importers, being limited in number and operating
within clearly defined channels, often establish regular "arrangements"
with the appropriate officials. The tukang tjatut are to some extent
brokers in this market for official favors; in some low-level activities,
such as the cornering of railway and cinema tickets, the tjatut prices are
regularised to some extent by competition between them. But inflation
itself nitigatesagainst stable prices in matters of large-scale corruption·
and the extremely unstable personnel policies at higher levels in recent
years, reflecting the nation’s lack of fundamental political consensus or
resolution of its basic tensions, added an element of uncertainty and risk
to illegal deals which one would expect to be minimised in a system of
institutionalised corruption.
4. Wages in kind
Insofar as most wage and salary earners are paid at least a part of
their income in kind, they are cushioned to that extent against price in-
creases. Rice, sugar, kerosene, soap and cloth have been made available
to State employees in varying quantities, at artificially low prices, from
time to time for over a decade. Many private firms also try to provide at
least rice, as well as Lebaran bonuses (usually cloth), which are now almost
obligatory. How great a part of family needs are met in this way? Not
enough, it would seem, despite the allowances for wives and children. I
will illustrate only some of the quantities and prices applying for State
employees at one particular period. There have been variations from time
to time and also considerable differences between State agencies and pri-
vate firms.
In early 1963, the rice ration for a civil servant in Djakarta was
8 kg. per month per member of family — at a price of Rp. 7^/kg., or about
107o of the free market price. Members of the Armed Forces received much
more, 18 kg. at prices as low as Rp. l/kg.^-θ The supply was not always
assured, least of all at times of shortage when price increases made it
most essential. But it was much more reliable than the flow to the sandang
pangan shops and cooperatives, which were supposed to receive 6 kg. per
month for their registered members at a low, fixed priceAn average of
10-12 kg. per month might be considered about sufficient for an adult pro-
vided that no other cereals are being consumed.87
Other commodities supplied in early 1963 included sugar kg* per
family member at Rp. 15/kg., as against Rp. 95 on the open market), soap
(a very small quantity, at about one-third the market price) and cotton
cloth according to availability· Kerosene, essential for cooking, had
been supplied in earlier years, but the practice later ceased. The cloth
ration was then 6 metres of printed cloth and one kain (about 2-ΐ; metres)
per year, with occasional windfalls becoming available for some depart-
ments from time to time. The price advantage was not as striking as in
the case of rice (e.g. Rp· 280 as against Rp· 350 for a kain in 1962, but
Rp. 56 per metre as against Rp· 230 for rough locally-made cloth) and
civil servants were not entitled to the government distribution of cloth
through the cooperatives. The quality of the cloth was not good. But
sometimes additional supplies would become available and a few well-placed
or lucky individuals then got more. It would seem that the value of this
cloth distribution for the ordinary civil servant lay more in the occa-
sional opportunity to obtain at least some cloth, however poor, at times
of desperate need, rather than in the subsidised price.
5. Housing
Very cheap housing is another real income subsidy that many salaried
civil servants enjoy, but rarely the lower-paid wage-earners. In fact
rents have remained so absurdly low compared with those ruling in the open
market that rent is now an infinitesimal part of the budget for many of
them· Those who are buying the government houses they occupy on terms that
were laid down as far back as 1950-51 may be paying as little as Rp. 250
per month over 20 years for houses worth several millions by 1963. Fre-
quently they will squeeze in a large number of relatives or lodgers whose
contributions are not subject to rent control. Official cars have, at
times, also been purchasable by very senior civil servants and ministers
at unrealistically low prices. Occasionally other windfall assets become
available (e.g. television sets for a lucky few in 1962 when they first
came in) from which a handsome resale profit may be gained.
In assessing the relative importance of these real wage contributions
to the civil servant's income, we must avoid exaggerating the universality
and regularity of such benefits. Breakdowns in the supply of commodities
often occur, usually at the worst possible times. Politically, these
distributions have been a very sensitive and troublesome issue, especially
during the 1960-61 high tide of the Guided Economy, when the government was
heavily committed to the ideal of distributive Socialism. Racketeers who
are strategically placed to influence allocations developed vested in-
terests in the system and it would have required very bold ministers to
modify it in the direction of a less distorted market mechanism. The im-
portance of the r&al wage component in a civil servant’s wage has increased
over the years as cash incomes have depreciated. In the earlier 'fifties
it was a matter of secondary concern for most of them, but since about 1959
it has become a prominent political issue. Any suggestion of abandoning
this expensive and clumsy system always aroused the ire of the PKI, which
was also always quick to exploit the numerous grievances arising from
breakdowns in the supply and to criticise the Ministers responsible.38
Business Enterprise under Inflation
When we recall the very severe obstacles put in the way of private
businesses in 1959*60 and the enormous advantages enjoyed by State enter-
prises, the mere survival of the former must be considered an impressive
feat· Yet since 1962 it has been clear that private businesses have been
able to cope much better than State enterprises with the conditions brought
about by intensified inflation· Even the government has tacitly recognised
the greater flexibility and initiative of the former. Among the various
reasons which could be offered to explain this — the normal bureaucratic
unwieldiness of overcentralised State enterprises in constantly changing
conditions, the politically-determined objectives they were called upon to
pursue, the lack of personal drives or idealism of their managers — one
stood out in particular· In an over-regulated economy wherein it was
almost impossible to do business entirely honestly and still make a profit,
the private firm had the advantage of gaining the benefit of any illicit
deal, whereas the manager of a State enterprise would be inclined to annex
to his own use any additional income from an illegal transaction. At one
stage in 1961-62 it became virtually impossible for a State enterprise to
export at a profit because of the "price discrepancy" between domestic and
world prices for export products· But a PPN branch in urgent need of
Rupiah might sell its commodities on the domestic market to a private ex-
porter who would under-invoice his export and collect a proportion of the
foreign exchange on his transaction abroad. In general, the big profits
to be made on black-market foreign exchange have provided a big (and un-
taxed) source of extra income to those private businesses able to engage
in transactions involving foreign exchange· The SIVA system opened a
channel for private importers to make big profits, quite legitimately, by
importing luxury goods on which price control did not apply. (Demand for
these luxury goods has not been significantly price-elastic under infla-
tionary conditions, for rather special socio-cultural reasons.) The later
SPP system had a similar effect. Imports at the lower, official rate,
although limited mainly to State enterprises and a few politically influen-
tial firms or individuals, have also been an assured source of profits for
the latter. Not all private businesses have had access to the foreign trade
sector, of course, but for those which have, the big profit margins on im-
ports and the black-market rate on illegally-acquired foreign exchange con-
stituted a lifeline through the storm.
Not enough is known about the impact of inflation on business firms to
permit any bold generalisations about bankruptcies or changes of ownership
or the ways in which the firms which have survived managed to accommodate
themselves to such adverse conditions. In some sectors, especially in the
textile industry, many smaller firms are said to be going bankrupt (but who
is taking over their assets?) since only those which are able to call on
large financial reserves (mainly Chinese-owned) can still survive. Here I
will simply outline some of the various considerations which bear upon this
problem, in the hope that further enquiries into this intriguing and impor-
tant topic will be provoked.
The relative increase of input costs of businesses as against their
earnings cannot be gauged with any great degree of certainty. If firms
are going bankrupt on a large scale, we would expect it to be due in large89
part to a more rapid increase in costs than earnings (or else to falling
demand, which is obviously not the case), yet the opposite would seem to
be closer to the truth. Many costs have lagged well behind the increase
in prices — wages in particular, electricity and petroleum fuel costs,
some transport charges (although other transport costs have become very
great indeed),^θ even some raw materials, for firms which are lucky
enough to get them — while the real costs of capital equipment have some-
times been astonishingly low for an economy in which capital shortage is
one of the major obstacles to development. Other costs have increased,
of course, especially spare parts, auxiliary raw materials and the "over-
head" costs involved in paying commissions, bribes and compensations on
almost every official transaction. In fact, it is the latter (the hidden
economic costs of "protection" merely to survive) that has probably hit
firms harder than the mere increase of prices per se. 1 The capriciousness
of government policy and constant uncertainty of raw material supplies,
prices and need for liquid funds have been the most damaging accompaniments
of inflation, for they have forced businessmen to become hoarders and
speculators, so that they have developed a vested interest in maintaining
the rate of price increases on which they have calculated, rather than in
stability and productive investment.
Some illustrations of these points may reveal the complexity of the
problem. Let us first take the case of raw material supplies for the
infant industrial sector. Most essential raw materials are imported at
very low rates of exchange (i.e. with a substantial subsidy in "real1 terms)
and in any case the adjustment of exchange rates for non-luxury items has
tended to lag far behind the general price level. Although the flow has
been irregular and internal distribution costs may have added substantial
mark-ups from graft and speculation before the goods reach the factory which
uses them, some firms will have received their materials relatively cheaply.
One especially valuable source of raw materials is a contract to supply a
government department such as one of the Armed Services, if it undertakes
to supply the raw materials needed and to purchase the finished product
(cloth, for example) on what amounts to a virtual cost-plus system of pric-
ing. By cheating slightly on quantities and taking advantage of its greater
technical know-how, a firm would often be able to ensure that a proportion
of the materials, probably obtained far below the market price, could be
diverted to its own use. On the whole, only well-connected and large (and
generally more efficient and reliable) firms have been able to benefit in
this way, and it was not a very sure source of supply.
Government policies and official contacts sometimes enabled firms to
import astonishingly expensive and modem equipment from abroad at very
favorable rates of exchange. By entering into collusion with the overseas
supplier seeking the order, a firm would arrange to overstate in its offi-
cial documents the hard-currency costs of the transaction and to skim off
a proportion of the sum paid either for holding in a foreign bank account
or for selling at inflated black market rates for Rupiah. The capital out-
lay in Rupiah would thus be relatively low in "real" terms. But in calcu-
lating the selling price of the goods produced (either to supply a government
contract on the cost-plus pattern or to justify the price to price-control
authorities) the overhead costs for depreciation would be based upon the
declared price of the equipment, not the real one. Frequently the costs of90
capital equipment could be written off in a very short space of time.
Hence it is not uncommon to find textile factories (and others) in
Indonesia which have rows and rows of cheap handlooms standing idle
while the lion’s share of the total output is produced by a few expensive,
modern machine-looms. This may seem crazy in a country where we might
expect labor-intensive production to be far more economical than capital-
intensive modes. But I have noticed the same phenomenon time and again,
not only in the years since inflation began to distort the country’s cost
structure severely, but even as early as 1956, when the distortions re-
sulted more from the multiple exchange rate system than from the relatively
mild inflation of that time. There may be good reasons for it from a
firm’s point of view -- a modem machine may enable a factory to maximise
its utilisation of scarce and precious raw materials, or become more com-
petitive with imports in terms of quality, or even, surprisingly, price.
(Labor intensive methods rarely produce goods which are price-competitive
with imports in Indonesia, except at much lower quality.) The net effect
of these peculiarities is that large firms with contacts in the government
and the cash reserves needed to pay bribes and to cope with shortages and
price fluctuations are often better able to survive than small establish-
ments relying on crude labor-intensive equipment. The latter also find
that any competitive advantages they might expect to accrue from their
lower overheads, more flexible labor supply (usually paid on a piece-rate
basis) and the lag between wage and price rises is offset by much greater
difficulties and higher prices in obtaining raw materials and spare parts.
All these factors contribute to the survival of the large, capital-inten-
sive establishments, possibly even at the expense of the small-scale
sector, whereas we might well have expected the opposite in the straitened
circumstances of recent years.
For all these reasons, the larger industrial establishments have been
able to survive long periods of very low capacity operation, frequently
well below 50%, sometimes even below 25%. Laborers can be laid off by
various strategems, in spite of legal obstacles intended to safeguard the
worker. With low overheads, the costs of maintaining idle capacity are
not as crippling as they would be elsewhere. A subsidiary income may be
derived from speculation and pentjatutan of materials -- i.e. illicit sale
on the black market for some purpose other than that for which the mater-
ials were allocated.
A great deal could be said about the ramifications of the various
tjatut practices which have been nurtured by the combination of excessive
controls and acute shortages. Whether the pentjatut is an economic
wrecker and traitor or a functionally necessary participant in an over-
regulated system like the tolkach in Russia is a question which depends
very much on one’s viewpoint and I do not want to engage in the argument
here. The tragedy of the Indonesian economic system has been that uncer-
tainty about the future has made speculation an almost inevitable part of
every cost calculation and blurred any sharp distinctions that ever existed
between illicit hoarding and legitimate anticipation of future price levels.
It has also put a premium on quick turnover and the almost-assured profits
of trading on a constantly rising market, rather than the uncertainties of
investing in manufacturing or slow-yielding forms of production. (Growing
rubber trees, for example, has declined whereas tobacco, on the other hand,91
has experienced quite a boom.) Even manufacturers have to become specu-
lators and tukang tjatut to some extent when uncertainties in the supply
of essential materials disrupt their productive activities. Shortages
of clothing and other necessities have not had the effect of encouraging
domestic production in Indonesia. Instead, domestic production has
declined while (and because) the circumstances creating those shortages
have encouraged speculation and discouraged productive investment.92
Notes to Chapter 4: The Resilience of the Economy
1.	President Soekamo expressed the point forcefully in his Independence
Day address, Tahun Vivere Pericoloso, on 17th August, 1964:
’’Dozens of times you have claimed that Indonesia under Soekamo will
flounder, will collapse, will be destroyed, but we are immune to
your psychological war. Last year they ’predicted’ that at the be-
ginning of 1964 the Indonesian economy would collapse. But at the
beginning of 1964 Indonesia did not collapse. And now they are say-
ing that in October this year Indonesia will collapse. Go to Helli
Indonesia will never collapse.”
2.	China’s inflation developed rather jerkily, for the war and physical
disruption of production and trade had a major influence on its course,
as well as political uncertainties. In 1943-44, the volume of currency
increased by about 250%, government expenditures and the deficit by over
300%. Both figures rose greatly in the following year, then dropped to
around 300% in 1945-46. But the inflation again accelerated in 1946-47,
with government expenditure up nearly 600% and the note issue up 800%.
By 1948, both figures increased more than ten-fold in a half-year.
These figures have been derived from Chang Kia-Ngau, The Inflationary
Spiral. The Experience of China, 1939-50 (M.I.T. 1958), pp. 56-101. A
much more sophisticated study by Shun-Hsin Chou, The Chinese Inflation,
1937-49 (Columbia University Press, 1963), goes far beyond these crude
indices in revealing the technical complexities of the inflationary
process.
3.	”While inflation is endemic, the Indonesian economy does not fall apart
because somewhere around 65-707. of economic activity is substantially
subsistence agriculture.” Don D. Humphrey ’’Indonesia’s National Plan for
Economic Development,” Asian Survey, December 1962, II, X, p. 17.
4.	Benjamin Higgins, ’ihe Dualistic Theory of Underdeveloped Areas,” Economic
Development and Cultural Change, January 1956, pp. 99-112 — also re-
printed in G. M. Meier (ed.), Leading Issues in Development Economics,
(O.U.P., New York, 1964), pp. 55-64. Boeke’s theory is briefly summarised
in Meier, op. cit., pp. 53-55, but can be appreciated more fairly against
the background of Dutch thinking on the subject in his Economics and
Economic Policy of Dual Societies (Haarlem, 1953) and in Indonesian
Economics: the Concept of Dualism in Theory and Practice (van Hoeve, The
Hague, 1961).
5.	The ’’urban” population was estimated at 15.5% (just over 15 million out
of a total population of 97 million) in the 1961 Census, although a
slightly higher percentage might have been given if functional rather
than administrative criteria of ’’urban” communities had been used. The
problem is discussed by Pauline D. Milone in ’’Contemporary Urbanisation
in Indonesia,” Asian Survey, IV, 2, August 1964, pp. 1000-12. It could
be added that many urban kampung have very similar characteristics to some
of the larger village settlements, although relatively few desa (villages)
would have a population exceeding 3000 (the Statistical Pocketbook refers93
to nearly 44,000 ’’villages” in the administrative sense in Indonesia)
and most of the undeniable ’’urban” centres of population would exceed
10,000, at least in Java·
6· W. Fo Wertheim, Indonesian Society in Transition, (van Hoeve, The
Hague, 1956), p. 104·
7· Evidence of “pull-factors” in the process of urbanisation is put for-
ward by H. J* Heeren, in “The Urbanisation of Djakarta,” EKI, VIII, 2
November 1955, p· 707· Wertheim disputes Heeren1s conclusions and
puts a case for “push-factors" in the countryside (low productivity,
over-population and increasing poverty) in his chapter on “Urban
Characteristics in Indonesia,” in East-West Parallels, (van Hoeve,
The Hague, 1965), pp. 169-78. But however powerful the latter may
be, Wertheim seems to have gone too far in denying the influence of
the former completely·
8.	Share-cropping is a widespread and important social phenomenon in
Indonesia on which relatively little has yet been written. The best
account in English is in H. ten Dam, “Cooperation and Social Structure
in the Village of Chibodas,” in Indonesian Economics: the Concept of
Dualism in Theory and Practice (van Hoeve, The Hague, 1961), pp. 345-82
9.	The pattern of values and social behaviour which Geertz calls “shared
poverty” is described in his “Religious Belief and Economic Behaviour
in a Central Javanese Town: Some Preliminary Considerations,” Economic
Development and Cultural Change, IV, 1956, p. 134. But in contrast to
idealised notions of cooperative harmony conjured up by the “shared
poverty” concept, conflicts in Central Javanese villages over the Land
Reform and Crop Sharing laws in 1964-65 also testify to acute class
conflicts.
10.	Rice production and import figures are cited by Joyce Gibson, “Rice
Production and Imports,” BIES, no. 1, June 1965, pp. 47-48. A compre-
hensive table of the overall food supply situation, with an assessment
of the calorific values of various foodstuffs, is given by Karl Pelzer
in his chapter on “The Agricultural Foundation” in Ruth McVey, ed·,
Indonesia (H.R*A.F., 1963), p. 133. It is from this table that I have
made the rough calculations of calorific equivalents and needs in this
paragraph. There are many other aspects to take into account, of
course, particularly the shortage of protein in the diet of many
people.
11.	The efficacy of fertilisers in increasing rice yields has been assessed
by Leon A. Mears in Rice Marketing in Indonesia (Institute for Economic
and Social Research, Faculty of Economics, University of Indonesia,
1961), Appendix X, pp. 217-228.
12.	These figures are based on calculations made in the Biro Perantjang
Negara in 1956. Spinning capacity is sufficient to supply only 117· of
Indonesia1s requirements for weaving and knitting, according to Ingrid
Palmer and Lance Castles, “The Textile Industry” in BIES, no. 2,
September 1965, pp. 34-48. Weaving capacity is there said to be suf-
ficient to supply the 9 metres per head normally consumed, but the
industry is operating far below capacity.94
13.	"How close Indonesia came to defaulting on its overseas payments in
the early months of this year may never be known." Economic Intelli-
gence Unit, Quarterly Report on Indonesia, 42, October 1962, p. 5.
14.	See Appendix, Chart 1, for a graph (semi-logarithmic) showing various
price increases for the period 1953-65.
15.	Early in 1963 General Nasution himself admitted publicly that it had
become impossible for civil servants to live unless they had more than
one job. A valuable article on job duplication which has appeared since
this essay was sent to press is Everett D. Hawkins, "Job Inflation in
Indonesia," Asian Survey, VI, 5, May 1966, pp. 264-75. This also adds
some excellent statistics on wages and prices in different sectors of
the economy.
16.	From a superficial comparison I made it seemed that Indian officials
and students travelling overseas had far less opportunity than
Indonesians to accumulate savings and bring back large quantities of
foreign goods.
17.	The only attempt to analyse corruption as a socio-economic phenomenon
in Indonesia is W. F. Wertheim’s essay on corruption in colonial times,
"Some Sociological Aspects of Corruption in South-East Asia," in East-
West Parallels (van Hoeve, The Hague, 1964), ch. 5.
18.	Civil servants were still receiving some rice in this way in mid-1965,
although less than in the 1961-63 period. The government announced in
early 1964 that a cash equivalent would be paid in lieu of the rice
issue, presumably because of the difficulty and cost of maintaining
supplies. This would of course be far less valuable to the civil
servant at a time of continuous price rises.
19.	The system of Sandang pangan shops (the term simply means "food and
clothing", the slogan having been one of the three constituting the
government's progranme after July 1959) was developed quite widely, at
least in the larger towns, in 1959-60, during the period of enthusiasm
for a Guided Economy. Certain shops in each kampung were licensed to
sell specified goods at fixed prices on a ration system, being provided
with their supplies by government agencies. The system was subject to
many abuses and virtually collapsed under the strains of rapid price
increases in 1962.
20.	Being subject to price controls which were infrequently adjusted, rail,
bus and air fares and freight charges were often ludicrously cheap.
But the demand was so heavy that substantial bribes generally had to be
paid to ensure tickets or cargo space. Moreover, losses through pilfer-
ing on public-transport and the appallingly high costs of maintenance of
private transport made the calculation of transport costs quite unpre-
dictable.
21.	For the idea of the hidden economic costs of ensuring mere survival and
immunity from political discrimination I am indebted to Lance Castles’
article on "Socialism and Private Business: the Latest Phase," BIES,
no. 1, June 1965, p. 44, note 54.APPENDIX95
TABLE 1.
ANNUAL TRADE FIGURES, 1950-63
(All figures in million $U.S. except rice imports.)
51
52
53
54
1955
56
57
58
59
1960
61
62
63
Rice Imports
Export Total	Imports Total	Oil Exports	Exports - excluding oil	(in 1000 metric tons)
800	440	147	653	334
1292	873	185	1107	529
934	948	191	743	766
840	765	201	639	372
867	629	227	640	261
946	630	216	730	128
924	860	255	669	763
955	804	303	652	563
791	544	315	476	681
931	483	286	645	604
840	574	221	619	962
784	794	260	524	1065
682	647	211	471	1047
696	502	(269)	427	1053
International Financial Statistics, supplement to 1963-64,
for all except rice imports which are taken from Statistik
Konjunktur, table C9, for the 1950-60 series and from
Joyce Gibson, "Rice Production and Imports" in Bulletin of
Indonesian Economic Studies (Australian National University),
No. 1, June 1965, p. 47 for 1961-63.TABLE 2
νθ
σν
PUBLIC FINANCE, 1950-65
(All figures in billions of Rupiah)
i ii	iii iv	v vi	vii viii	ix x	xi xii	xiii
	EXPENDITURE			REVENUE		DEFICIT		Money Supply at end of year
	Budget Estimates		Actual (provisional) Gross Net	Budget Estimates Gross Net	Actual (provisional) Gross Net	Budget Estimates Gross Net	Actual (provisional) Gross Net	
	Gross	Net						
1950	8.7		8.7	7.0	7.0	1.7	1.7	4.3
51	11.8		10.6	12.9	11.8	-1.1	-1.2	5.0
52	17.6		15.0	13.2	12.2	4.3	2.8	6.6
53	17.2		15.7	13.3	13.6	3.8	2.1	7.5
54	17.2		15.4	11.3	11.8	5.9	3.6	11.1
		10.8	12.1	8.2	8.5	2.6	3.6	
1955	17.6		16.3	13.6	14.2	4.0	2.1	12.2
		14.7	12.4	10.7	10.3	4.0	2.1	
56	21.0		20.0	18.3	18.5	2.8	1.6	13.4
		17.1	18.0	15.3	15.7	1.8	2.3	
57	25.6		25.6	20.1	20.6	5.5	5.0	18.9
		18.8	21.9	17.4	16.9	1.4	5.	
58	25.4		35.3	23.0	23.3	2.4	12.0	29.4
		31.4	31.7	18.2	19.7	13.2	12.0	
59I'	29.0		44.3	21.1	30.6	7.9	13.7	*	34.5
		44.8	44.3(?)	24.1	26.3(·)	21.8	13.8	
1960^	62.1		60.5	47.0	53.6	15.1	6.9	47.8
	57.7		88.5	49.9	62.2	7.8	26.3	67.9
621/	117		122.1	72.2	74.0	44.8	48.1	135
63*/	306		330	272	162.1-	34	167.7	265
64	5572/		600 2/	260 2/	300 2/	297	(ca. 300)2/	676
65	965^/			671 2/		294	(ca.1100)2/	180097
Notes to Table 2
Source i Figures for gross expenditure and revenue to 1961 and for money
supply are taken from Statistik Konjunktur, table F 5b, and
from Statistical Pocketbook 1957, table N 1 and ibid», 1963, tables N 1
and N 2. Figures for net expenditure for the years 1954-59 only are
taken from Bank Indonesia Annual Reports.
It would be unwise to put too much reliance on these statistics except
as rough indicators of the steady growth of expenditure since 1954, the
almost constant excess of actual expenditure over the budget estimate and
the widening discrepancies between expenditure and revenue. In recent
years estimates have been very crudely formulated and the figures for the
actual budget out-turns (which are merely provisional in any case) can
only be taken on trust, although the Bank Indonesia Annual Report figures
for net expenditure and revenue (available only for 1954-59) could be
taken as reasonably accurate until publication of its Annual Report ceased
after 1960.
(1)	Various figures for net expenditure and revenue in 1959 are given on
different pages of the Bank Indonesia Annual Report 1959-60: cf. pp.
55, 61, 62 and 63 (the latter page being further confused by misprints).
The "monetary purge" and the need for a supplementary budget late in
the year appear to have confused the accounting more than usual. (The
gross figures for the 1959 estimates given in Statistik Konjunktur do
not take into account the supplementary budget of Rp. 3035 million
revenues and Rp. 15,760 million expenditures.)
(2)	Actual gross expenditures and revenues for 1960 and 1961 are from
Statistical Pocketbook of Indonesia 1963, table N 2, but the estimates
(gross) for these years are from Statistik Konjunktur, table F 5b.
The estimates cited therein for 1961 differ considerably from those
announced in the budget in February 1961, which (including "extraordi-
nary" revenues and development expenditures of Rp. 30 billion) provided
for total expenditures of Rp. 83 billion and a deficit of Rp. 17 billion.
(3)	The estimates for 1962 include the additions made in the supplementary
budget submitted in October. Actual gross expenditure and receipts are
based on an IMF summary.
(4)	Budget estimates (gross) for 1963 and 1964 were submitted to Parliament
simultaneously in July 1963. However abandonment of the stabilisation
scheme made these estimates quite unrealistic and the 1964 budget was
later recast.
(5)	Provisional actual receipts and expenditures (gross) for 1963 have been
taken from an IMF summary, as also 1964 estimates.
(6)	Budget outturn for 1964 and estimates for 1965 were published in Busi-
ness News, 23 July 1965, cited in Bulletin of Indonesian Economic
Studies, no. 2, September 1965, p. 7.
(7)	The deficits for 1964 and 1965 have not been published, but can be in-
ferred roughly from other figures of budget out-turns or money supply.κθ
00
TABLE 3
				QUARTERLY FINANCE AND TRADE STATISTICS 1957-65							
				(All columns except i		and ii in million		$U.S.)			
		i	ii	iii	iv	V	vi	vii	viii	ix	X
		Money supply	Black								
		at end of	market		Foreign					Rubber	
		quarter	rate of	Foreign	exchange			Export s		exports	Rubber
		(in Rp.	Rp. per	exchange	liabil-	Imports	Exports	(exclud-	Oil	(small-	exports
		billion)	$U.S.	reserves	ities	(total)	(total)	ing oil)	exports	holders	(estates)
1957	1	13.4	33	218	165	196	204	150	54	51	25
	II	15.1	41.5	193	144	231	222	149	73	47	35
	III	16.9	46	241	148	188	283	206	77	68	51
	IV	18.9	46	224	173	183	245	146	99	38	35
1958	I	19.6	60	189	164	157	164	104	60	20	27
	II	21.7	65	177	51	127	176	101	75	24	26
	III	23.9	104	173	38	126	218	147	71	48	28
	IV	29.4	95	217	29	134	233	156	77	62	28
1959	I	30.0	97	240	19	93	166	112	54	48	23
	II	32.4	125	195	18	118	290	157	133	68	40
	III	(24.7)*	94	222	28	118	220	152	68	69	33
	IV	34.8	250	300	24	154	255	224	31	89	46
1960	I	39.7	310	377	26	121	214	159	55	68	35
	II	42.6	220	371	13	141	221	171	50	74	36
	III	43.3	270	350	6	142	196	143	53	49	34
	IV	47.8	210	341	12	171	201	137	64	52	29
1961	I	48.7	190	292	18	200	134	104	30	36	26
	II	48.5	200	207	12	189	187	137	50	46	29
	III	54.1	163	165	17	217	248	148	100	52	36
	IV	67.9	230	139	10	189	215	134	81	49	311962	I	77.1	470	107	19	167	150	105	45	43	24
	II	94.3	800	118	14	169	142	109	33	46	26
	III	113.4	900	88	8	155	203	115	88	51	25
	IV	135.3	1100	135	12	156	179	134	45	57	27
1963	I	144.5	1340	129	8	114	133	95	38	34	20
	II	177.4	1030	118	5	103	178	101	77	42	21
	III	212.6	1060	?	2	118	217	126	91	45	26
	IV	265.3	1400	2	2	(167)	167	104	63	29	27
1964	I	293	1730			2	(109)	(95)	(14)	25	23
	II	359	1950								
	III	472	3000	2	2						
	IV	(676)	( 7,125)								
1965	I	(817)	(5,100)								
	II	?	(8,100)								
	III	(1500)	(17,500)								
	IV	(1800)	(50,000)								
*The shortlived reduction in money supply (and the black-market value of the dollar) in September 1957 was
due to the "monetary purge" of August 25.
Source: All figures except column ii and the figures in brackets are based on International Financial Statis-
tics for 1957-63. Figures in brackets are derived from various private sources; they can be relied
on as reasonable approximations, but should not be regarded as belonging to an identical statistical
series. Black market values of the dollar, column ii, are taken from Statistik Konjunktur, table F
13, for 1957-59 (after which this information was suppressed), from Pick * s Currency Yearbook 1962
for December 1959 to December 1961 inclusive, and from various non-public sources since 1962.
vO101
KEY TO CHART I
This graph, based on a semi-logarithmic scale, enables us to compare
the rates of increase in the main indices of inflation throughout the
last decade. The volume of money, the price of rice, several price in-
dices and the black-market rate of the Rupiah against the dollar are
plotted.
In an inflationary situation, it is the rate of increase in prices,
money supply, etc., in a particular period which is of primary interest
to us, so a semi-logarithmic graph is the most suitable to depict this --
i.e. one with the vertical axis calibrated on a logarithmic scale. A
constant rate of increase appears as a straight line on a semi-logarithmic
graph, whereas it would appear as a parabola against an ordinary linear
scale. An exponential inflation (one which feeds upon itself and develops
at an ever-increasing rate through an accelerating demand for goods rather
than currency) would appear on a semi-logarithmic graph as an upward
curve. Indonesia's inflation has never had this character, although it
briefly seemed to be developing in this way between September 1965 and
April 1966.
■'	" Money supply at year end in billion Rupiahs.
_____ Weighted index numbers of retail prices of 19 food-
stuffs on the free market in Djakarta (1953: 100):
Statistik Konjunktur, table D 4, to 1962: unpub-
lished sources for later years.
..... Consumer price index (July 1958: 100) published by
Departemen Perburuhan in Angka - Indeks Penghasilan
dan Penghasilan Njata (sesungguhnja) pada Perusahaan
Industri di Djakarta (1^5)	---------------
—. —· Average retail price of rice (cheap quality) per
litre on the free market in Djakarta: based on
Statistik Konjunktur, table D14, to 1962; unpublished
sources for later years.
Black market rate of Rupiah per $U.S. -- various dis-
continuous series as recorded in column ii of Table 3.