Early post-independence contributions: 1950s∕1960s
The economic debates and policy orientation in Indonesia and Malaysia during the early post-independence were strongly influenced by their decolonization experiences, economic performance, and economic structure.
In 1949, the Dutch had attempted, successfully, to protect its commercial interests in Indonesia as part of the negotiations to recognize Indonesia's independence during the Round Table Conference in The Hague in the autumn of 1949. This was achieved when the Dutch delegation insisted on including a Financial-Economic Agreement (Finec) in the Round Table Conference (RTC) Agreement, which guaranteed that all the Dutch firms could continue their business operations as usual, including the remittance of profits (Meier, 1994, 157).Nationalization of the Dutch enterprises required mutual agreement, with compensation to be determined by a judge on the basis of their actual worth (Meier, 1994, 46). On December 15, 1951, the Indonesian government nationalized the Java Bank, which was the bank of circulation during the Netherlands Indies, by purchasing all the shares of the Java Bank held by Dutchmen and other foreigners. The sale of the shares of the Java Bank proceeded smoothly (Saubari, 2003, 27). Thereafter the Java Bank was renamed Bank Indonesia, which became Indonesia’s central bank. It is unclear whether any economic theories were articulated to support these actions.
In the case of Malaya, the process of gaining independence and transfer of power was peaceful and more gradual. Whilst the studies of foreign ownership were important — by scholars such as James Puthucheary — no nationalization policies were implemented in Malaya during the 1950s. Large-scale takeover (via equity purchase) of British-owned enterprises operating in Malaysia were only undertaken by government-linked corporations (GLCs) in the early 1980s. There is more documentation on the theories that have influenced the work on ownership in Malaysia.
Puthucheary (1960) argues that foreign capital was primarily focused on primary industries and thus had limited impact on industrialization in developing countries. This idea was influenced by the works of Hans Singer and Gunnar Myrdal from the 1950s.Debates about ownership in the modern sector (distributive trade and manufacturing) also took on an ethnic dimension. In Indonesia, this took the form of the Benteng (Fortress) Program which was introduced in 1950 to develop indigenous entrepreneurs (Thee, 2012). This was achieved by giving preferential treatment to indigenous Indonesia importers. There were other programs aimed at constraining ethnic Chinese businesses which were implemented in 1954, such as ownership restrictions in weaving mills, rice mills, and port services. Such policies were supported by some economists (Sumitro Djojohadikusumo, who from 1950 to 1957 was the Dean of the Faculty of Economics, University of Indonesia), whilst they were rejected by others (Sjafruddin Prawiranegara, the first Indonesian Governor of Bank Indonesia).
Ownership debates were also intense in Malaysia but took place after the late 1960s. The race riots on May 13, 1969 were the key event that triggered the implementation of the New Economic Policy (NEP) which was to become the most important affirmative-action based policy in Malaysia. The Policy was formulated during the period 1969—70. There was a major disagreement on economic thought within the circle of policy makers on NEP (Faaland et al., 1990). The “EPU School,” representing key planning and policy-making agencies such as the Economic Planning Unit (EPU), the Treasury and Bank Negara (central bank), emphasized economic growth: most likely, the Keynesian-inspired growth theories of Harrod, Domar, and Solow. The “DNU School” (Department of National Unity) favored a more radical approach involving more direct government intervention to correct the ethnic imbalance in income, employment and ownership of assets and capital (ibid., 32). The approach of this school was underpinned more by political economy considerations (equality and political stability) than by any identifiable economic theories.
The subsequent implementation of NEP, which signified the “victory” of the DNU School, was very much reminiscent of the dominance of the history- minded leaders (or solidarity makers) over the economics-minded (administrators) in the 1950s in Indonesia (Thee, 2012, 44-5).In hindsight, the EPU school’s emphasis is understandable, based on the economics literature in the 1950s and 1960s, which focused much more on economic growth and structural change. This was a period that witnessed the development of various growth theories by Harrod (1939), Domar (1946), Lewis (1955), Robinson (1956), and Solow (1956). This literature did influence the economic studies in both Indonesia and Malaya, albeit gradually and indirectly. In the case of Malaya, there was much emphasis on factor accumulation in terms of population growth and investment — both of which were seen as key factors driving the growth of the economy (Silcock, 1961). During this period, economists emphasized the open economy nature of economies of Indonesia and Malaya and how this impacted on economic growth. More specifically, economic growth was seen as being driven primarily by demand for primary commodities, such as rubber and tin.
Industry studies on rubber and tin also became important during this period. In the case of the Malaysian rubber industry, the focus of these studies has mainly been on the production structure (cost, smallholding versus plantation, replanting), government regulation, ownership (foreign versus local, ethnic groups), and the competition between natural and synthetic rubber. Important contributors in the 1950s and 1960s include P.T. Bauer and T.H. Silcock. Due to the nature of tin production — the most important topics studied in the tin industry were the nature and role of capital accumulation (tin being a capital-intensive industry) and commodity control agreements. Major contributors in this literature include K.E. Knorr, Siew Nim-Chee, Yip Yat-Hoong, and Ooi Jin-Bee. The heavy dependence on exports of primary commodities also led to discussions on the need for export diversification.
This coincided with the theories of export pessimism associated with Raul Prebisch and Hans Singer, who argued that development strategies based on exporting of primary commodities suffered from declining terms of trade. As a consequence, developing countries should undertake the development of their manufacturing sector via import-substitution strategies.Finally, starting after March 11, 1966 (when President Sukarno authorized General Suharto to take control of the government), General Suharto turned to a group of US and Canadian- trained economists at the Faculty of Economics, University of Indonesia (FEUI), referred to as the “Berkeley Mafia” (although not all had studied at the Department of Economics, University of California, Berkeley) for policy advice. The group include Widjojo Nitisastro (PhD, Berkeley, 1961), Ali Wardhana (PhD, Berkeley, 1962), Emil Salim (Berkeley, 1964), Moh, Sadli (M.Sc. MIT, Doctor in Economic Science, FEUI, 1957), and Subroto (M.A. McGill and Doctor of Economic Science, FEUI, 1957).
This group of economic advisers, even though it was not associated with any strong singular ideological orientation, was regarded by some as instrumental in the implementation of market- oriented policies, such as the removal of price controls and trade liberalization (Yasui, 2002). It is plausible that the thinking of the “Berkeley Mafia” evolved over time from one focused on Keynesian thinking (the Harrod-Domar model) and development planning (Mahalanobis), to a more market-oriented approach (Sadli, 1993).