Oil boom years and economic reforms: 1970s∕1980s
The two oil shocks in the 1970s and the stagflation that followed had significant impact on mainstream debates on Western macroeconomics (e.g. the Phillips curve), but the impact of the oil shocks was a bit different for oil-producing countries such as Indonesia and Malaysia.
The rise in oil prices marked the beginning of the oil-boom years in these countries which provided more resources for development programs.In Indonesia, the impacts of the oil booms were more destabilizing. Economists such as Arndt and Sadli were quick to point out that the gains from the first oil boom (1973/74) were quickly dissipated with the bankruptcy and bailout of the country's national oil company, Pertamina,
due to poor governance structures. The Indonesian rupiah was also devalued by 50 percent in 1978 just prior to the onset of the second oil boom (1979) to deal with the “Dutch Disease” problem from the first oil boom. During the second oil boom period (1978/79), policymaking was likely dominated by economic nationalists (rather than the economic technocrats belonging to the “Berkeley Mafia”). A manifestation of this is the implementation of a new industrial strategy based on a second round of import-substitution, which focused on state- owned enterprise, up-stream, basic, and resource-processing industries (Thee, 2012, 100). The economic arguments that were put forward by A.R. Soehoed (from 1978 to 1983 Minister of Industry) to support the strategy were premised upon market failures in the presence of the required high capital intensity, gestation period, and physical infrastructure. These arguments aside, the strategy was prematurely terminated with the end of the oil boom in the early 1980s.
In Malaysia, economic discussions and policy focused on the formulation of integrated regional development programs that would serve to achieve the objectives of the New Economic Policy.
Interests in this approach to development were partly in response to the failure of aggregative Harrod-type growth models in bringing about more equitable growth (Higgins, 1982). By the early 1980s to mid-1980s, economists began writing extensively on the implications and impact of NEP. These studies emphasized the importance of achieving high-growth rates in order to achieve the NEP targets without zero-sum effects on other ethnic communities (Young et al., 1980; Snodgrass, 1980). The implementation of NEP also motivated a number of major economic studies on income distribution in Malaysia in the late 1970s and early 1980s (Meerman, 1979; Tan, 1982). In addition to these studies, there were also class-based approaches to interpreting economic development and the NEP (Hua, 1983; Jomo, 1986).The end of the oil boom in 1982 (due to a weakening of the world oil market) and the economic slowdown in the mid-1980s shifted economic debates and policy focus to trade and policy reforms in both countries. Whilst these developments coincided with the advent of neoliberal economic ideas and policy reforms in the US and UK, the economic performance in Indonesia and Malaysia as well as external pressures were the main drivers of trade and policy reforms since the mid-1980s. In Indonesia, the rapidly deteriorating economy finally convinced the government to implement policy reforms that were advocated by efficiency-minded economists in the country (Pangetsu, 1996). Later works such as Feridhanusetyawan and Pangetsu (2003) highlighted the role of external events such as the Uruguay Round Agreement and the World Trade Organization in providing an impetus to trade liberalization during this period.
Malaysia also underwent significant change shifts in economic policy orientation beginning in the early 1980s. A second phase of import-substitution focusing on the development of heavy industries was pursued under the leadership of Mahathir Mohamad. This approach was heavily influenced by the industrialization strategies adopted in Japan and South Korea, although a minority of economists was openly critical of this approach (Chee, 1985). Other economists during this period were more concerned about technological development and transfer in the manufacturing sector (Fong, 1986; Ali, 1992). The Mahathir administration also embarked on an extensive privatization and liberalization program, and it took another ten years before comprehensive and often critical reviews of privatization programs emerged.