Self-sufficiency in New Order era
Learning lessons from the past, especially in connection with the core issue of rice, the Soeharto administration made rice production a top priority in its economic development program, and actually managed to achieve rice self-sufficiency. One key aspect of this policy was to put the role of the State Logistics Agency (Bulog) front and center, in addition to setting floor and ceiling prices. Bulog served as an instrument to maintain economic and political stability. The government took aggressive steps to keep food inflation under control and to determine how much and when to import rice and other basic foodstuffs. As a result, in the 1980s and 1990s Indonesia became self-sufficient in rice and several other food commodities.
Of course, Bulog was not the only reason behind the success. Other key actors were the Village Unit Cooperative (KUD) and Credit for Farm Enterprises (KUT) which provided capital support to farmers and farmer cooperatives during main harvest season, so surplus production could be absorbed by Bulog. This stock was then released to the market through market operations during the scarcity season, when prices tend to be volatile. There were also programs called BIMAS (mass education) and INMAS (mass intensification), which saw farm extension workers deployed to the villages, distribution of superior seeds, production equipment, fertilizers and pesticides, credit and institutionalization of village cooperatives, all of which played an instrumental role in achieving self-sufficiency. Of course, support from the State Budget (APBN) and credit allocation guaranteed by Bank Indonesia also demonstrated the Government’s strong commitment and policy direction.
Near the end of Soeharto regime, the world was moving toward trade liberalization, with the formation of the World Trade Organization (WTO). Even the Soeharto government could not avoid this trend. It started with banking liberalization in 1988, following capital market liberalization in the mid-1980s. The 1990s saw trade liberalization, marked by higher velocity of money in the economy, compared to the flow of goods, resulting in a “bubble economy.” Businesses even had excess cash liquidity due to overseas capital inflow, through a liberalized money market and capital market. Many businesses invested their excess liquidity in the productive sector, directing it to such assets as office buildings, hotels, real estate, shophouses and so on, with a generally low occupancy rate. The prices of food and non-food, including fuel, became uncontrollable, especially towards May 1998. As Indonesia’s monetary and economic situations continued to deteriorate, the Rupiah exchange rate went into freefall against the US dollar, zooming from Rp2,200 to Rp4,000, then Rp9,000 and bottoming out at Rp18,000. Several other countries in Southeast Asia also suffered a similar fall in exchange rates. In Indonesia, this was known as a “Krismon” (Monetary Crisis). Worst-affected countries in Southeast Asia were Indonesia, South Korea and Thailand. But Singapore, Malaysia and the Philippines were also affected.
The 1997/98 Asian financial crisis was especially severe in Indonesia, as it morphed into a full-blown political crisis, with the fall of the Suharto regime. The second President was then replaced by Vice President Prof. B.J. Habibie. With an exchange rate that touched Rp18,000 per US dollar, 77.63 percent inflation, a collapsing banking system and minus 14 percent growth, the International Monetary Fund (IMF) stepped in to help Indonesia, with a loan worth US$45 billion. Of course, it came with a lot of conditions attached. Among others, deregulation (reducing the role of the state in the economy) as well as privatization of a number of State-Owned Enterprises (BUMN), including reducing the role of various state agencies in the economy, such as aircraft maker PT Dirgantara Indonesia (PTDI), shipbuilder PT PAL and Bulog. Other IMF programs included subsidies and protection reductions, which it viewed as market distortion. The point is that the IMF carried out a process of economic liberalization, as contained in a Letter of Intent (LoI). This was followed by political liberalization, with the freedom to form political parties, freedom of the press, freedom of opinion, upholding human rights and so on.