ECONOMIC STABILIZATION AND REHABILITATION
The emergence of the New Order government as a replacement for the Old Order
government, as previously described, this regime endured unstable and crucial economic and
political conditions. The main emphasis of reform in this first stage as studied by Widjojo
Nitisastro (1965), Mohtar Mas'oed (1989), Yahya A. Muhaimin (1990), Mari Pangestu (1996), and
others is the restructuring of the foreign debt expansion schedule which amounts to around $
2,400 million; tackling soaring inflation creates a stable macroeconomy and rehabilitates
infrastructure, as well as boosting economic growth with import substitution policies. As a first
step to realize some of these ideals, the government issued policies whose essence is to
eliminate the fiscal deficit by reducing a number of expenditures, creating a balanced state
budget, prohibiting the creation of new money, and devaluation of the rupiah to reduce inflation.
Furthermore, in an effort to restructure Indonesia's economic and political structure at that time,
to strengthen consolidation inward, some advice from the IMF from capital injection was very
meaningful.
One of the IMF's key pieces of advice to the Indonesian government was to establish a
new stabilization program, which was later announced during the creditors' conference in Paris.
Four important grids of the statement (Far Eastern Economic Review, December 29, 1966 quoted
by Muhaimin, 1990: 58) are: first, market forces will play a vital role in economic stability. Second,
some state companies will operate competitively with the private sector. The provision of credit
and foreign exchange allocation based on preferences will be stopped, and companies will be
exempted from having to sell their production at low prices, but based on the market, so there is
no need for subsidies anymore. Third, the private sector must be encouraged to operate by
removing restrictions on import licenses for raw materials and equipment. And fourth, foreign
private capital investment will be stimulated by the new investment law. The new investment
laws are the Foreign Investment Law (PMA) No. 1 of 1967, and the Domestic Investment Law
(PMDN) No. 6 of 1968, as a replacement for the PMA laws of 1953 and 1958. The new PMA and
PMDN laws are symbols that provide a sign of freshness for prospective foreign investment and
for the business world about economic priorities and economic development (Hill, 1990a: 2). On
the other hand, the new PMA Law is a regulatory liberalization that seeks to restore the country's
credibility in front of foreign investors, due to disappointment during the Old Order period.
In 1973, the price of oil rose to $0.6 billion per barrel and grew to $10.6 billion in 1979.
This doubling of oil prices has a positive impact on the government, especially towards more
intensive development, because the results of oil exports can add to the government budget by
a net of 70% of the overall state budget. Economic stability, which is increasingly guaranteed due
to the country's increased foreign exchange from the oil sector, has had a positive impact on both
domestic investors around 18.7% in 1980 (see table 3.1) and foreign investors to invest their
capital in Indonesia and increase subsidies to SOEs, so that public services are also improving.
Ironically, conditions in various business sectors are improving, but inflation is still around 15%
per year, in other words inflation is still difficult to minimise. Macro-wise, economic development
at that time was relatively stable and the development strategy oriented towards economic
growth as the main goal (mainstream of development), which was mostly financed from the oil
sector, showed satisfactory economic growth results (GNP), which was approximately close to
8% per year (the World Bank provision was only 5% and Indonesia's GNP in the 1960s was only
4%). The progressiveness of the GNP percentage achieved at that time had a positive impact on
raising the degree of Indonesia's development achievements in front of world donors and other
developing countries. Therefore, it is appropriate that the World Bank at that time immediately
appointed Indonesia, as a developing country, because in terms of GNP Indonesia was able to
show good achievements, although on the other hand, the inflation rate could not be inhibited.
Another positive impact that is not realized, besides Indonesia's ability to pay off its foreign debt
in installments, is that the development progress at that time was able to lift the level of society
from the shackles of poverty (poverty reduction). The percentage of poverty that could be
reduced at that time
The crisis in Pertamina's department above has had a negative impact on foreign
investors, causing foreign investors to slightly reduce their confidence to invest their capital in
Indonesia. To restore the bad image, the government implemented a new policy whose most
important content in this context is two things, namely; First, BKPM's decisions on investment
applications are more open. One form is that BKPM issues a Priority Scale List (DSP) for the
projects being carried out. At that time, DSP contained 831 projects which were divided into 4
categories, namely; projects that are open with incentives, open with multiple incentives, open
without incentives, and closed. Second, in February 1978, BKPM expanded its projects to 1,095
by opening a number of projects that were originally closed to foreign investors (Hill, 1990a: 54).
Such liberalization statements, although in the form of minor administrative changes, are able to
re-upload foreign investors to invest their capital in Indonesia. Thus, this change still maintains
the stability of foreign investment.
The glory of the success of economic and political development in the first stage
achieved by the New Order regime (1972-1981), with a development strategy that developed the
import substitution industry sector (ISI), after the stabilization and economic and political
rehabilitation (1966-1971), turned out to be in 1982 with forced obstacles, due to global changes
in external conditions. World reviews related to development in Indonesia, in the form of
declining export commodities, such as; Decline in oil, tin, and rubber prices. In 1982, according
to Pangestu (1990), the current account deficit of this figure caused growth to decrease by
around 0.3%. The anticipation of the policy taken by the government at that time was in the form
of an adjustment policy, which aimed to maintain the stability of the balance of payments and
fiscal, and reduce the dependence of state revenue on the oil sector.
Practical steps taken to maintain this intention are; making regulations that encourage
export competition in the non-oil and gas sector; procurement of rupiah devaluation of around
28% with the dollar exchange rate; sharply reducing public expenditure in the form of subsidy
cuts in several large projects and state-owned enterprises; reform of the tax withdrawal structure
to raise state finances from the tax sector; and the provision of import allowances for goods by
reducing import tax rates (non-tariff barriers). It turned out that at the end of 1985 economic
stability could be created a little, with the current account deficit indicator being reduced by
around US$ 1.9 billion (2.4% of GNP) (Pangestu, 1990: 103). Meanwhile, the increase in total tax
revenue after tax reform, among others, income tax (PPH), land and building tax (PBB), value-
added tax, stamp duty, and other taxes also showed a significant increase. Especially for the
collection of customs tax, the government is reforming
If you break down the tax increase after the reform according to the BPJS report, Financial
Statistics, BI quoted by Mukul G. Asher and Anne Booth (1992) are: Total Income Tax of 1,606
billion to 2,313 billion in 1985; Sales Tax increased from 708 billion in 1982 to 2,326.7 billion in
1985; Bumid and building taxes from 105 billion to 167 billion in 1985; Cu kai tax increased from
620 billion in 1982 to 943.7 billion in 1985; and Taxes on imports rose from 522 billion to 607.3
billion in 1985 (see Asher and Booth, 1992: 52). The increase in government revenue from the tax
sector, especially after the reform, is quite meaningful for government budget revenues, which
can automatically be used to mitigate a number of crises that occur, even though the total
government revenue ratio (GDP) is still declining compared to before. Therefore, the government
curbs budget expenditure as much as possible in the form of subsidies. Total government
subsidies in all sectors in 1982 were around 14.3% reduced to 7.4% in 1985. From a number of
these efforts, the positive impact felt was that inflation at that time could be suppressed as low
as possible (brought by 5%), namely from 9.5% in 1982 to 4.7% in 1985. Likewise, the balance of
payments account deficit can be reduced from minus US$ 5,458 million in 1982 to US$ 1,950
million in 1985 (Warr, 1992:139). From a number of data as an indicator of the adjustment policy
above, it can be said that it has been successful, even though oil exports have experienced a sad
decline.
The swelling of Indonesia's foreign debt in the 1980s as mentioned above, according to
the author, is correct to say by Rachbini (1995), not because it was used for domestic
development, but most of the debt was reused to pay off debts that had been taken previously.
This kind of complicated problem not only results in the problem of interest payments and
interest installments, but also results in other political and economic problems, such as
corruption, the character of the bureaucracy that arbitrarily uses funds (inflation), cronies of
capitalism, and closed politics. Cronies of capitalism and corruption in the bureaucracy are a
socio-political consequence of the rapid flow of money from oil products in the 1970s. The
central policy taken by the government in overcoming the above crisis is known as political
adjustment or structural adjustment. Some literature that discusses adjustment policies, such
as; Pangestu (1992: 196-197), and Pangestu (1996: 103); Nelson (1990: 3-5); and Mas'oed (1994:
55-57), there are at least four policies, namely: First, short-term stabilization policies or demand
management policies in the form of fiscal, monetary, and currency exchange rate policies to
reduce aggregate demand. This policy recommendation is intended to; reducing the state budget
deficit by saving expenditure in the form of reducing subsidies; issuing a tight money policy to
control inflation; maintain a realistic exchange rate, if necessary, devaluation, such as the rupiah
devaluation on September 12
Third, policies that aim to expand economic production capacity through the promotion
of savings and investment. Increasing government savings through fiscal reform and increasing
private savings through financial sector reform. Meanwhile, increasing investment is carried out
by increasing investment incentives and reducing barriers to investment, such as; Pakdes 24/87,
regarding the simplification of a number of licenses and capital markets; Pakto 27/88,
concerning the liberalization of the financial sector and financial institutions, so that private
banks are mushrooming, even state-owned enterprises can invest as much as 50% of their
capital in private banks. Fiscal policy is emphasized on corporate and household-based taxes,
but with a low percentage of taxes and a neutral system, with the aim of restructuring important
sectors of the economy, including the privatization of SOEs. Fourth, policies create legal and
institutional conditions that allow market mechanisms to run effectively. The implication of this
policy is that reforms are carried out on laws, regulations and other rules of the game, so that
free competition is guaranteed, in addition to regulations on property rights guarantees. This kind
of conducive legal atmosphere is the most important part and is the hope of the World Bank.
For Indonesia, in the face of increasingly fierce competition in the business world, since
the 1980s it has deregulated several business sectors, with the intention of creating political
economic conditions that are able to stimulate the growth and development of investors and
business actors. The results of the above deregulation efforts were only felt in the early 1990s,
which was marked by economic growth of 7%. Meanwhile, in the period 1982-1987, the average
economic growth was lower at 3.5%, compared to the previous period of 7-8% (see INDEF, 1996:
42). The magnitude of economic growth in the early 1990s was attributed by Booth (1992:23) to
the important role of the development of the manufacturing industry sector and followed by other
secondary sectors (manufacturing, utilities, and construction) and the primary sector
(agriculture and mining). In fact, in 1991 the results obtained from the sector that became the
focal point of development (the manufacturing sector) amounted to 22% of the total GDP, and
from the agricultural sector only amounted to 19.9%. Meanwhile, the oil and gas sector
experienced a significant decline of 79% in 1980 to 45% in 1990 (Pangestu, 1996: 104).
In an effort to create a capital turnover in the business world, the May 1993 package
became a refinement of Pakjan'90, as follows: (1) the KUK credit ceiling was increased from Rp.
200 million to Rp. 250 million, (2) the old small credit provisions were only used for productive
credit, changed to credit for all fields with a maximum amount of Rp. 25 million, regardless of the
aspect of its use, (3) KLBI used for KUK, is taken into account in KUK, previously not, and (4) other
banks that have not fulfilled their credit portfolio for KUK can buy KUK petrol stations at other
banks that have exceeded KUK. A number of government policies in the banking sector above
seem to only increase the opportunities for large entrepreneurs to get credit, while small
entrepreneurs who lack capital find it difficult to get it. Finally, to reduce this gap, the government
issued Pakto, 95 (October 1, 1995) which contains the provision of Business Feasibility Loans
(KKU), with a maximum credit amount of Rp. 50 million. All of the above deregulation of the
banking sector shows the government's seriousness to create climate stability in the business
sector, even though it is realized that the facts of misuse of credit are not correct, such as the
case of Bank Duta, the collapse of Bank Suma, and Bapindo's bad loans amounting to Rp. 1.3
trillion. Therefore, to minimize the vulnerability of the banking climate, a more conducive touch
of government political will is still needed
Deregulation of the Investment Sector To increase investment in the 1990s, the
government first issued Presidential Decree 23/1991, which opened opportunities for investment
in the commercial vehicle industry, diesel vehicles, two-wheeled vehicles, and some heavy
equipment. In addition, it also contained a reduction in the Negative Investment List (DNI) from
75 to 60 pieces, then reduced again to 51 pieces, through the July 1992 Package. This July
package also contains about the simplification of procedures for foreign workers from the
recommendations of the Technical Department. In an effort to increase foreign investment (FDI),
Presidential Decree No. 34/1992, concerning the right to use business (HGU), which can be
directly granted if the form of FDI business is a joint venture within a period of 30 years. One of
the benefits of HGU is that this right can be used as collateral to get credit from the bank, and the
HGU can be extended for a maximum of 25 years.
Meanwhile, PMAs that already have HGB based on Ampera Cabinet Instruction No.
28/U.IN/17/1966 can be extended or changed their status to a joint venture. The next great
opportunity for PMAs, after the issuance of Pakto'93, regarding the requirements for ownership
of shares in PMA companies, both outside the KB/EPTE bonded zone and within the KB/EPTE.
Then the opportunity for the PMA work network is expanded again with PP. No. 20/1994. In this
policy, PMA can invest their capital directly in Dati II. In addition, (1) in the framework of a joint
venture, PMA is allowed to control 95% of the company's shares, and (2) PMA can invest its
capital in the public sector, such as; ports, production and transmission as well as distribution
of electric power for the public, telecommunications, shipping, aviation, drinking water, public
railways, atomic power plants, and mass media. The overflow of opportunities for FDI to invest
in Indonesia, deliberately created by the government in the 1990s with the hope that the amount
of investment through FDI, growth will be spurred to be even better, at least not
Deregulation of the Trade Sector Progressiveness of the increase in customs tax revenue
after the issuance of No. 4/1985, concerning the withdrawal of Customs from the Customs
Department to SGS; The May 1986 Package and the May 28, 1990 Package, on the elimination of
duties on imported capital goods, especially on import licensing, made the government more
confident in reducing import tariffs, in addition to adjustments to international trade
liberalization. The May 1990 package is a continuation of the reduction of nominal tariffs for
exporters and suppliers to go beyond import licenses and import tariffs. Meanwhile, importers
are also given the freedom to import a number of goods that were not allowed before, through
the June 1991 Package. The number of goods that can be imported according to the package is ;
185 tariff posts can be imported by both general importers and sole agents; only 43 tariff posts
goods should not be imported; 94 tariff posts of goods that are not allowed to be imported by
registered importers. A number of subsequent policies by the government increasingly
emphasize improving the trade system and reducing import duties (BM) and additional import
duties (BMT) for certain goods. The July 1992 package touched on the improvement of 10 items
in the real sector of imported goods.
The October 1993 package further specified the reduction of BM and BMT for certain
product groups, even the elimination of duties, such as; (a) upstream, intermediate, and
downstream steel products; (b) products that support the iron and steel industry; (c)
intermediate and downstream chemical products; and (d) agricultural products,
pharmaceuticals, ceramics, glass, plastics, sanitary goods, and several other components.
However, for certain commodities, the government still does not give import relaxation. In 1995,
the government further reduced the tariff post with the May 23, 1995 Package. The number of
tariff posts lowered through this policy is 6,030 (64.16%) out of 9,398 tariff posts. The
government's intention is to restructure the commercial sector above, except to prepare
domestic business readiness and carry out the commitments of AFT A, GATT/WTO and APEC.
Scheduled reductions are (a) BM/BMT tariffs that are equal to 20% or less will be gradually
reduced to 5% in 2000, (b) BM/BMT tariffs that are more than 20% will be reduced to 20% in 1988,
and 10% in 2003 (INDEF, 1996: 46).
The government's determination to carry out a number of deregulation, both direct and
indirect, since the 1980s, intends to improve the business climate in various sectors, although it
is often heard that the touch of deregulation is often inconsistent. Even the deregulation desired
by downstream entrepreneurs does not seem to mean anything, because deregulation is only
enjoyed by a number of entrepreneurs who can get facilities from the government (upstream
entrepreneurs). In fact, this is because upstream entrepreneurs are the most ready to accept
deregulation. In the end, from a number of existing deregulations, many political economic
analysts say that they are unable to change the concentration of business ownership. The reality
is that various business sectors are only owned by a number of entrepreneurs who have obtained
business political licenses from the government since the New Order government. The political
alliance between businessmen and the government or political patronage in domestic business,
until now seems clear. For example, when the government opens the capital market, it is seen
who owns the company, so that since then ownership information is known to the general public.
What is most surprising to many is the fact revealed by INDEF (1996:50) that a group of non-
indigenous businessmen (50 people) who are close to
