Indonesia's Economic Development

in comparison to South Korea and Taiwan

Gary Dean, September 1999

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

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

My perspective is shamelessly culturalist.  I shall start by giving an overview of the Indonesian economy and the social cultural framework within which it operates, including the influence of patrimonialism, the bureaucracy, and the educational and legal system.  I shall then contrast this with the state of affairs in South Korea and Taiwan, discussing some of the similarities, and then highlighting the many differences.

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

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

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

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

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

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

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

Within this bureaucratically paralysed system of administration, it should be no surprise that in the vast majority of cases the only way to get anything done by a bureaucrat at any level is to offer an inducement.  Many of these inducements are in the form of semi-official 'fees'.  A branch of a department will, for example, set a fee for a certain service and a portion of this will be redistributed to all members of the particular branch, much like a workers' cooperative; high officials naturally get the lion's share.  The appallingly low official wages paid to bureaucrats probably necessitates such practises.

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

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

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

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

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

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

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

All three countries, South Korea, Taiwan, and Indonesia, were clearly born out of serious warfare and severe civil disturbance in the five or so years after the Second World War.  However, despite these important historical commonalities, Indonesia clearly did not take the same route economically in the years following.  In fact, apart from some shared historical elements, Indonesia is quite radically different from South Korea and Taiwan.

Unlike Indonesia, South Korea and Taiwan are characterised by a very high level of cultural and linguistic homogeneity; both countries have no significant 'ethnic' minorities.[13]  This is in stark contrast to the nations of Southeast Asia, and in particular, Indonesia, where literally scores of different and competing ethnic groups have been corralled into arbitrary nation-states delineated by European colonialism.  Because Indonesia is a multi-ethnic society with ethnic minorities very active in the economy, public sector-private sector relations have often been conflictual.[14]

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

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

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

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

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

Notes

[1] Andrew MacIntyre (1994), "Business, Government and Development: Northeast and Southeast Asian Comparisons" in Andrew MacIntyre (ed), Business and Government in Industrialising Asia, Allen & Unwin, St Leonards: pg 2

[2] Andrew MacIntyre (1994), "Power, Prosperity and Patrimonialism: Business and Government in Indonesia, in MacIntyre ibid: pg 245

[3] MacIntyre (1994): pg 246

[4] MacIntyre (1994): pg 250

[5] See Richard Robison (1992), 'Industrialisation and the Economic and Political Development of Capital: The Case of Indonesia' in R. Mcvey (ed), Southeast Asian Capitalism, SEAP, New York. This work is, I think, fairly representative of Robison's broad approach to Indonesian economy and politics.

[6] MacIntyre (1994)

[7] Applying the atomised disciplines of Western academe, such as 'politics', 'economics' and 'sociology', to non-Western or non-Modern societies seems to produce erroneous analysis and a sense of unreality. 'Academic Indonesia' seems to exist on a different plane to that of 'Real Indonesia'. See Gary Dean (1998), 'Analysing the end of Suharto's Indonesia' at https://okusiassociates.com/garydean/works/suharto.html.

[8] Bernas, 21 September 1999, "Honor Minim, Pak Guru Nyambi Bruruh Pasir". This article discusses teacher wages in some primary and secondary schools, which range between Rp20,000-Rp30,000 per month. "In order to get enough to live on, after we [teachers] have finished teaching we are forced to become sand miners in the Klawing River. Yes, at first it was embarrassing, being seen by students, but now [I] couldn't give a damn."

[9] There is hardly a week goes by without an article in Indonesian newspapers reporting the death of an alleged criminal who was collectively attacked by an angry mob, a form of rough justice and vote of no confidence in the legal system. The alleged offences are sometimes relatively frivolous; chicken theft for example, hardly a capital crime. Police are powerless to prosecute even if they were so inclined, as a collectivity takes responsibility for the death. It's difficult to arrest an entire village. Torching houses and buildings is another popular form of people's justice. See Kedaulatan Rakyat (1999), "Curi Ayam, Tewas Diamuk Massa", 24 September.

[10] Richard Tanter (1990), "Oil, Iggi and US Hegemony" in Arief Budiman (ed), State and Civil Society in Indonesia, Centre of Southeast Asian Studies, Monash University: pg 61

[11] Tanter (1990): pg 73

[12] Richard Doner (1991), "Approaches to the Politics of Economic Growth in Southeast Asia", Journal of Asian Studies, 50, 4, 1991: pg 825

[13] Kwan S Kim (1997), 'From Neo-Mercantilism to Globalism: The Changing Role of the State and South Korea's Economic Prowess' in Mark Berger & Douglas Borer (eds), The Rise of East Asia: Critical Visions of the Pacific Century, Routeledge, London: pg 101

[14] Gary Hawes & Hong Lui (1993), 'Explaining the Dynamics of the Southeast Asian Political Economy: State, Society, and the Search for Economic Growth, World Politics, 45, 4, 1993: pg 657

[15] Kim (1997): pg 100

[16] Doner (1991): pg 832

[17] Kim (1997): pg 101

[18] MacIntyre (1994): pg 2


Commentary from JHVH1:

I agree with most of your analysis, but would like to raise the following points. Since I am an international relations major, most of what I have to say initially comes from a security POV. The latter comes from professional experience.

Firstly, two things kickstarted the Korean economic 'miracle'. Firstly the direction of belated war reparations received from Japan around 1965 that was initially earmarked to compensate victims of the occupation to state-approved development projects. This is largely how the chemicals, steel and ship-making industries were developed. Second, the massive investment by the United States, economically and militarily provided impetus for ongoing economic growth. In the instance of the latter, related manufacture and service industries served a vastly expanded and cashed-up military sector. In addition, the security guarantee extended to the ROK by the US strengthened the hand of the country externally and internally by allowing continuity of a strong government with concentrated power.

Education is an area in which Korea is now beginning to betray it's status as an OECD nation. Schooling in Korea relies on often centuries old theory in which rote learning and anything but Socratic method common place. Quantity is seen as a marker of quality and children are forced into cram schools and academies in which learning takes second place to memorization. Even the influx of foreign English teachers in the last ten years has done nothing to raise the English-speaking ability of the nation. Anecdotally, its not uncommon to meet a kid who has studied English for 10 years but giggles embarrassed when asked "how are you?".

This has led to a mass exodus of Koreans to study overseas. What quality human capital exists in this country has usually been fortunate enough to secure a degree from an American University. Increasingly, however, more and more of these people choose to stay abroad. And why wouldn't they? Business culture here is still premised on age and seldom awards merit.

The university sector here is similarly ageist and stagnate. Only two Korean institutes of higher learning, Korea University and KAIST (Korea Advanced Institute of Science and Technology) ranked in the Times' HES top 200 universities. Academia is an old boys' club, with tenure largely denied to foreign teachers. Whilst lip service is paid to imitating foreign models, resistance from entrenched interests prevents this.

Two other factors combine to make the Korean Tertiary Education sector worthy of scorn. First, it is widely known that many degrees here are on paper only. Once the hard work of the university entrance exam is over, college is simply a place to experience a few years of freedom before once again slotting into the grind of the workforce. Again, from experience, it is not uncommon to meet seniors majoring in English who cannot hold their own in a simple social context. I teach many like this. Secondly, the compulsory two years of military service that commonly interrupts university study means a loss of much knowledge acquired in previous years. The only real areas of excellence are technical subjects that can be learned in formulaic fashion. It makes for a glut of engineers capable of the narrow demands of adapting current technology, but produces a surfeit of critical thinkers.

Most of the section on education is not entirely relevant to the theme of your paper. However, it does display that much of the Korean economic miracle was fashioned on sheer hard work rather than educational excellence. What it does bare out, however, is the fact that this remains a significant impediment to further economic development as innovation becomes more and more critical.