In the history of Indonesia’s economic development, there were at least two schools of thought that guided the government in its effort to lead the people of Indonesia to prosperity and welfare. The schools were “Widjojonomics” and “Habibienomics.”
The term Widjojonomics was coined to describe the ideas of the main architect of economic development during the New Order era, Widjojo Nitisastro. Widjojo graduated with an economics doctorate from the University of California at Berkeley, and together with Emil Salim and M. Sadli was part of a group known as the Berkeley Mafia.
Conceptually, the economic development model backed by the group was inspired by the US economist Walt Whitman Rostow.
Rostow identified five stages of economic development: traditional society, preconditions for take-off, take-off itself, the movement to economic maturity and mass consumption. Industrialization, the basis of Rostow’s development model, was believed to be the fastest way to create a modern society.
By directing Indonesia’s economic development toward Rostow’s development model, Widjojo and friends planned Indonesia’s development with industrialization as its main target.
In short, the essence of Widjojonomics was the modernization of an economic system that comprised market, fiscal and other factors. Enlarging the economic cake was also a goal of Widjojonomics. When the size of an economy grows, the trickle-down effect is expected — profit for affluent groups trickles down to poor people through the expansion of work opportunities, income distribution and market expansion.
In the 1980s, a new economic group within the power circle of President Suharto emerged. This group subscribed to the Habibienomics school of thought. Membership consisted of engineers who graduated from German universities and was led by B.J. Habibie, the minister of research and technology at the time.
Germany’s experience in revitalizing its economy in the aftermath of World War II was the basis of Habibienomic thought. Germany undertook industrialization by the state taking an active role in mastering technology.
The paradigm difference between Widjojonomics and Habibienomics meant the groups were far from harmonious and collaborative. Instead of cooperating in developing Indonesia’s economy, the two economic groups were involved in a bitter rivalry in their efforts to influence the way the New Order developed its economy.
The 1990s was the golden time for Habibie and friends, as seen in their success in make Habibienomics the reference model for national development. The success led to more frequent and harsher political attacks against Habibienomics, from both inside the country and abroad.
Suharto’s fall and the crumbling of the New Order regime following the monetary crisis of 1998 resulted in the fading of support for both Widjojonomics and Habibienomics. Habibie had the opportunity to implement his ideas to lift Indonesia from the economic doldrums when he replaced Suharto as president. But the shortness of his time in office meant he was unable to make the most of that opportunity.
Now, after more than a decade in which Indonesia has been without any great economic schools of thought, the public is surprised to see the emergence of “Hattanomics.”
The term refers to the economic policies of President Susilo Bambang Yudhoyono’s second term, and is controlled by the coordinating minister for the economy, Hatta Rajasa.
Kevin O’Rourke, the founder of Reformasi Weekly, a political risk consultancy report, introduced the term Hattanomics in “The Politics of Indonesia’s Protectionism,” an opinion piece published in The Wall Street Journal in May.
According to O’Rourke, there are three characteristics of Hattanomics: protectionism, trade restrictions and the limitation of foreign capital. The three elements are on show in the policies on the renegotiation of the working contracts of several mining companies, restricting foreign capital, limiting foreign ownership in miners and imposing an export tax of mining products.
It seems there is a new direction in the management of mineral resources in Indonesia. The regulation on divestment of foreign-held stakes in a mining company, spelled out in government regulation 24/2012, is an example.
Here the government put an obligation on foreign mining companies to reduce their shareholdings gradually over 10 years by divesting stakes to Indonesian companies or the government until the local holding reaches 51 percent.
Moreover, the government also introduced a 20 percent export tax on 65 kinds of mining products. The aim is to get added economic value from Indonesian resources by pushing mining companies to build smelters inside the country. The government’s new direction in mineral resources management can also be seen in the formation of an evaluation team for the adjustment of mining work contracts and mining work agreements.
Apart from O’Rourke’s analysis on Hattanomics and his claim that Hatta is the mastermind of Indonesia’s present protectionism, the issues of economic nationalism and foreign possession has long been the subject of exhaustive intellectual debate in Indonesia. The permissive stand of the New Order regime on the inflow of foreign capital marked the beginning of those debates.
Hatta, as the target of O’Rourke’s analysis, denies intending to limit foreign capital and heighten economic protectionism. Instead, on several occasions, Hatta has restated Indonesia’s position in professing an open economy by providing room for both domestic and international investors.
During the recent Indonesia-Singapore Business Forum in Singapore, Hatta reiterated that protectionism to limit the flow of goods and services was not the solution to the global economic crisis. If a country implements protectionism and excessively shields its domestic products, other countries would follow suit and create a new recession.
For Hatta, however, Indonesia’s economic openness is not limitless. The government is still needed to ensure that each economic action pays attention to society’s interests and not just the narrow interests of investors as capital owners.
Hatta said the Indonesian economy was not built on neo-liberalism because the philosophy was ill-suited to the creation of justice. Extreme free market values are not suitable for application in Indonesia.
Hatta prefers to take the middle way, not implementing excessive protectionism but also not adopting an extreme free market. In short, Indonesia is a free market with justice.
Excessive worry over Hattanomics is not justified.
Bawono Kumoro is a political researcher at The Habibie Center in Jakarta.