The Evolution of Indonesia’s Economic Nationalism

I. Gede Wahyu Wicaksana

Department of International Relations, Faculty of Social and Political Sciences, Universitas Airlangga

Keyword: Indonesia; economic nationalism, Sukarno, Suharto, Reform era.

Abstract: This paper reviews the evolution of Indonesia’s economic nationalism. It provides analysis divided into three

sections which are based on the periodization of the alternate governments in the country, from the era of

Sukarno to Suharto and after Suharto or the Reform period. The argument is that there is a continuity within

the Indonesian governments’ perception of the international system which leads to the rise of protectionist

policies. Recently, and perhaps for the future, the trends of domestic political change and power structure

have become the underpinning factors to the persistence of inward looking economic governance.

1 THE ROOTS AND EVOLUTION

OF INDONESIA’S ECONOMIC

NATIONALISM

Economic nationalism is a consistent feature in

Indonesia’s foreign policy, even though the state has

undergone fundamental internal political changes

from the era of Sukarno’s leadership (1945-65),

Suharto’s dictatorship (1966-98) and the present

democratic government under Jokowi. Indonesia’s

economic nationalism is grounded upon the nation’s

struggle against colonialism, which informs

Indonesians about the nature of the global system and

its impact on their country. The global system is

viewed as exploitative towards developing countries.

Powerful states are always eager to maximize their

economic benefits from asymmetrical relations with

weaker states, particularly ones which are wealthy in

natural resources. In this system, Indonesia is

vulnerable to foreign threats by virtue of its natural

wealth (Weinstein 1972, 117-18). For this reason, the

function of Indonesia’s foreign policy has been to

save the country and the people from external

domination and exploitation. The nationalists refer to

the 1945 Constitution (article 33) which mandates the

state enforce economic sovereignty, which consists of

three pillars; protection of the country’s vital national

economic interests, the state’s intervention to

mobilize resources for economic development, as

well as prioritization of the public interest over

private or market interests.

1.1 The Sukarno Era

Indonesia’s independence, proclaimed on 17 August

1945, was soon followed by worsening economic

conditions. The nationalist government’s endeavours

to rehabilitate the country’s vital sources of income,

which were declining following the removal of

Japanese infrastructure and equipment, were

significantly disrupted by Dutch and Allied military

aggressions. The Dutch government particularly

wanted to regain control of Indonesia’s plantations

and controlled the circulation of commodities to

rebuild the old mechanism of colonial revenues for

post-war economic recovery (Dick 2002, 168-70).

Even after the process of transfer of sovereignty from

the Netherlands to the Indonesian nationalist

government in December 1949, political and

economic troubles continued. The political issue was

about the Dutch’s persistent objection in recognizing

Indonesian sovereignty over West Irian (West New

Guinea). The economic issue was derived from the

Finec (Financiele en Economische Overeenkomst)

agreement between the Dutch and the Indonesian

delegations to the Round Table Conference held in

The Hague, from August to November 1949. It was a

political compromise to end the Dutch occupation

(Wie 2010, 57-58).

The Finec agreement stated that Indonesia had to

take responsibility for the Netherlands East Indies

government to pay foreign debt to the Netherlands

government, an amount of approximately US$ 1.13

billion, much of which was used for military spending

during the Indonesia’s revolution (1945-49). In

addition, the Netherlands demanded Indonesia

276

Wicaksana, I.

The Evolution of Indonesia’s Economic Nationalism.

DOI: 10.5220/0010275900002309

In Proceedings of Airlangga Conference on International Relations (ACIR 2018) - Politics, Economy, and Security in Changing Indo-Paciﬁc Region, pages 276-283

ISBN: 978-989-758-493-0

guarantee the continuation of profitable Dutch

businesses operating in the country without any

hindrances. Nationalization would only be permitted

upon rigid court procedures and the compensation for

the Dutch business owners would be assessed in

accordance with real prices applicable at that time

(Wie 2010, 58-59).

The subsequent implementation of the Finec

agreement gave the maximum economic and

financial benefits for Dutch private companies

operating in Indonesia. On the other hand, the

Indonesian government was burdened by tremendous

debt payment obligations. The nationalists were

aware about the negative consequences of the

continuing foreign economic dominance to local

development. Moreover, the two principal

antagonists of the Cold War, the United States and the

Soviet Union, for their own ideological motives,

penetrated into Indonesia’s domestic affairs by

accelerating subversive activities against the

Republic by attaching themselves to proxies within

Indonesia (Kahin 1995). These political and

economic environments shaped the nationalist twin

interests; maintaining territorial and economic

sovereignty.

Jakarta began to be active in international

diplomacy with nationalist rhetoric. Sukarno stressed

that Indonesians had to see themselves as an element

of the global struggle against imperial forces

(Thompson 2015, 25). Indonesia was engaged with

like-minded postcolonial states from Asia and the

Middle East to promote worldwide decolonization

(Indonesian Ministry of Foreign Affairs 2005). The

high noon of Indonesia’s anti-imperialism campaign

was the holding of the Asian African Conference in

Bandung, West Java, in April 1955, which gave birth

to Asian-African solidarity based on values mainly

such as peace, equality, prosperity, and respect for

sovereignty among nations (Abdulgani 1980). In

1956 Jakarta declared that it supported the Egyptian

government’s decision to nationalize the Suez Canal.

Jakarta’s decision was framed in the discourse of anti-

imperialism and anticolonialism (Sukma 2003, 32).

Indonesia was successful in creating an

international society where its nationalist projection

was well-accepted. It provided Sukarno with political

morale to execute his revolutionary obsessions. When

the United Nations failed to accommodate

Indonesia’s claim over West Irian, and tensions with

the Netherlands increased, the nationalist leader

ordered nationalization of all Dutch business assets,

thus ignoring the clause of the Finec agreement. By

1959, 179 companies were taken over (Kanumoyoso

2001). In response to the Western endorsement of the

formation of Federation of Malaysia in September

1963, the Indonesian authority confiscated operations

of foreign corporations, including those owned by

Americans, Australians, Belgians, and British (Wie

2010, 63). The aspiration for economic sovereignty

was reached amid turbulent domestic and

international political situations.

1.2 The Suharto Era

During the Suharto government, economic

nationalism continued to characterize Indonesia’s

domestic and international policies. Although there

were different forms and manifestations of the

nationalist agenda, the essence was retained. In the

1970s Suharto focused on recovering the economy

from severe crisis. Unlike Sukarno, foreign policy

was revised into good neighbourliness to serve the

necessity for external stability in support of national

economic development. Confrontation was changed

to become cooperation (Malik 1968). Regional

institutions, mainly the Association of South East

Asian Nations (ASEAN) were established in order to

demonstrate Jakarta’s heart-felt and cordial attitude

towards bettering its relationships with neighbouring

countries. Suharto tried to recapture international

confidence in the Indonesian economy by amending

rules on investment. However, limits to external

capital were made to protect interests of local

businesses. The three most important policies

included the restriction in government projects which

could be conducted by foreign companies, special

requirements for corporations to employ indigenous

people, and affirmative action to uplift cooperatives.

The state intervened in the partially liberalized

economy (Mallarangeng 2002, 35-96). As a result,

along with the growing flow of international

investment and trade, local industries were thriving.

The oil boom in the early 1980s contributed

significantly to enhancing Indonesia’s economic

performance. Through a cartel like organization of

petroleum exporters (known as Organisation of

Petroleum Exporting Countries, OPEC), Indonesia

and other oil producers determined prices in the

global oil markets. Under the leadership role of

Indonesia’s technocratic economist and able

diplomat, Subroto, OPEC was united to cope with

problems stemming from the Gulf War and resistance

of the importing countries. The oil prices were kept at

an advantageous level for OPEC members. Revenues

from oil exports were allocated to empower

technological and agricultural sectors, thus by 1985

Suharto could claim that Indonesians had achieved

food self-sufficiency (swasembada pangan),

The Evolution of Indonesia’s Economic Nationalism

277

meaning that Indonesia no longer needed to import

rice to meet domestic demand (Wie 2005, 258-60).

With economic success, the New Order leader began

to expand Indonesia’s nationalist economic

orientation to the global political arena. In 1985 the

second Asian-African Conference was held in

Bandung. The main objective of the gathering was to

recollect the spirit of Third Worldism to respond to

challenges faced by developing countries. At the

forum Suharto sought a new kind of solidarity to fight

against dependency and underdevelopment. A

discourse of economic independence in the age of

technology was welcome by the participants.

Moreover, Indonesia emphasized that economic

sovereignty was its primary foreign policy interest

(Antara 1985).

Nationalism was getting more assertive. In 1992

Indonesia chaired the Non Aligned Movement

(NAM). Arguing against NAM critics saying the

group had no more relevance after the collapse of the

bipolar system; Jakarta promoted the concept of new

international economic order which would be more

just and equitable for the Developing Nations.

Indonesia’s foreign policy was redefined from the

response to ideological and political bipolarity of the

Cold War to be a tool for struggle for the Developing

South against the economic domination of the

Developed North (Anwar 1994, 157). The global

leadership of NAM was used as a strategic entry to

advance Indonesia’s economic interests especially to

market the nationalist high technological products of

the aircraft industries. Led by Bacharuddin Jusuf

Habibie – the president after Suharto, the national

aircraft industry turned out to be the iconic image of

Suharto’s economic nationalism (Amir 2007).

2 ECONOMIC NATIONALISM IN

THE REFORM ERA

Under the post-Suharto governments, economic

circumstances becomes an important part of political

considerations which drove the nationalistic policies.

Noticeably, an inward-looking stance on bilateral and

regional economic relations appeared to be the

approach to cope with stressing internal issues

(Aspinall 2016, 80-81). It began with the Asian

financial crisis in 1997-98 which hit Indonesia hard.

The country lost its pride and esteem in becoming an

emerging economy. Moreover, the government in

Jakarta had to compromise for urgent help from

international financial institutions, mainly the

International Monetary Fund (IMF).

2.1 Liberal Reform then Economic

Nationalism

The IMF’s rescue programs comprised market-

facilitating reforms in order to restructure the

Indonesian economy (Djiwandono 2000). They were

followed by extensive liberalization of public sectors

formerly controlled by state owned enterprises

(SOEs). Import tariffs were decreased, although

bureaucracies were still somewhat influential.

Indonesia joined ASEAN FTA with China (CAFTA),

which was implemented in 2010, accompanied by a

series of regional institutional building to prepare for

an Asian regionalism (Chin and Stubbs 2011).

Indonesia became an active participant in the

ASEAN-led organisation advancing economic

integration. The scheme of ASEAN+1 FTA was

being expanded into the Regional Comprehensive

Economic Partnership (RCEP) which embraces all

six ASEAN main dialogue partners in the Asia

Pacific region (Fukunaga 2015). On the global stage,

Jakarta uses the Group of 20 as its diplomatic vehicle

to promote the values of open economy linked to

good governance.

However, the liberal reforms did not last long.

Mounting domestic criticisms of the IMF presence,

which were framed in the discourse of defending

economic sovereignty against the United States’

intervention, resulted in the government of President

Megawati Sukarnoputri quitting the ongoing reforms.

Some regulations were launched to return the

controlling function of SOEs over circulation of

imported goods. The government issued quotas for

imports especially directed to limit inflows of

agricultural products from other countries. The turn

towards economic nationalism re-emerged under

President Susilo Bambang Yudhoyono’s second term

in office. Perhaps, the global financial crisis in 2008

and 2009 was a factor intensifying Indonesian

nationalist sentiment. The government favoured by

the parliament passed new laws on trade and

investment which further legalized restrictions on

imported goods, foreign capital, and professionals

working in the country. The trend of local economic

protection has strengthened since 2012, and is

continued by President Jokowi’s administration. The

focus is on sectors which are considered as strategic

to the state and public interests, such as agriculture,

horticulture, mining, farming, fishery, and

telecommunication (Negara 2015, 7; Patunru and

Rahardja 2015, 4-7; Warburton 2017, 3-9).

In international economic affairs, Indonesia’s

involvement within the proliferating free trade

multilateralism is confined to low-impact legalization

ACIR 2018 - Airlangga Conference on International Relations

278

or soft law. Although there are binding obligations

created through issue-based arrangements, the degree

of their implementation is dependent on cost and

benefit calculations as well as the goodwill of the

signatories (Abbott and Snidal 2000, 422-23;

Ravenhill 2013, 59). Jakarta avoids formal

submission of its external conduct and sovereignty to

the supranational entities. This is why Indonesia is

always allergic to the idea of rethinking the

nationalist code of conduct called the ASEAN way,

mainly in terms of non-interference in other states’

domestic affairs. Nevertheless, Jakarta is eager to

demonstrate its international assertiveness. In the

forum of the Asia-Africa Summit in 2015, Jokowi

openly criticized the World Bank and IMF for their

hegemony and double standard in dealing with the

economic problems of the developing world

(Jakartagreater 2015). He tried to revive the global

nationalist impetus which in past decades had given

Indonesia much energetic momentum in becoming a

leader in antineocolonialism. In line with this view

the Jokowi government has started to review trade

deals with external parties which were considered to

be disadvantageous for Indonesia (Deny 2015). At

RCEP rounds, Indonesia opposed the legal rights for

investor state dispute settlement (ISDS) in which

foreign companies can bring lawsuits against the host

state. Together with other developing countries

within RCEP, Indonesia asked for the withdrawal of

proposals about the reduction of the state’s

intervention to protect domestic public service sectors

(Das 2017, 4-5). Mietzner (2015) calls Jokowi’s way

the representation of technocratic populism.

2.2 Pressing Economic and Political

Circumstances

There were pressing domestic situations which had

the Jokowi government retain and even strengthen the

nationalist bids. After his cabinet was formed in the

last week of October 2014, Jokowi had to manage

Indonesia’s economy, which was in shambles due to

the impact of the global economic go-slow. The trend

had been happening since 2012 under the Yudhoyono

government. Three indicators were visible; export

revenue, currency strength, and investment growth.

By 2010, Indonesia enjoyed a high increase in exports

of commodities, especially to China. The application

of China-ASEAN free trade led China to become

Indonesia’s largest trading partner, the volume of

Indonesia’s trade with China exceeded that with the

United States and Japan. Indonesia-China total

bilateral trade was upward from US$ 15.7 million in

2010 to US$ 22.9 million in 2011. Indonesia’s major

exports to China were raw materials. However, there

was a downward trend to US$ 21.6 million in 2012,

although it increased again by about US$ one million

in 2013, and Indonesia suffered from a deficit with

China (IMF data 2017). The plummeting prices of

main export goods, such as coal, natural gas, and

palm-oil, have also significantly affected Indonesian

account balances. Meanwhile, the growth of exports

slowed down and was even negative in the last two

quarters of 2014 (Damuri and Day 2015, 6-11).

The direct implication of the declining exports has

been the slump in the value of the rupiah. Since 2013,

the rupiah has depreciated about 12 per cent, and by

the end of September 2015 the exchange rate had

reached 14,750 rupiah for one US dollar. This sent a

message that there was a significant pressure on the

Indonesian currency. It lost consumer confidence in

the Indonesian export goods. At the same time, the

country’s most favourite export commodities were

unreplaceable. Psychologically, households shifted

their portfolio to foreign currency, particularly the

American dollar, instead of holding the lesser

performing rupiah (Glienmourinsie 2015). Domestic

industries were greatly affected by the weakening of

the rupiah. This was because they relied on imported

components for production. In addition, foreign debts

rose along with the strengthening of the dollar.

Consequently, prices of products must be increased to

meet rising production costs. This in turn weakened

competitiveness against imported industrial goods.

All segments of the society were impacted by the

surge in daily need prices (Okezone.com 2015).

Observers viewed the condition as worse than in the

1998 crisis. In fact, the rupiah value at the beginning

of the Jokowi presidency was the worst since August

1998.

Perhaps, the most challenging economic

circumstance during Jokowi’s first year in office was

the downfall of private foreign investors’ confidence

in investing in Indonesia. The decline began in early

2014. Previously, foreign direct investments had risen

and hit a peak in the third quarter of 2013 amount to

US$ 7.4 billion. This figure dropped to US$ 6.9

billion by April 2014 (Detik.com 2014). The decrease

continued through 2015. The Coordinating Agency

for Investment noted that at the end of 2015 total

investment in Indonesia was US$ 5.5 billion, 12 per

cent lower than the number over the same period in

2014 (Republika 2016). This was despite the fact that

Jokowi has repeatedly affirmed his personal

commitment to reforming the investment climate in

the country, including promotion of tax incentives

and simplification of bureaucratic procedures. At the

World Economic Forum in early 2015, Jokowi

The Evolution of Indonesia’s Economic Nationalism

279

persuaded foreign investors and grinned that he

would intervene if needed to remove any hurdles.

However, it was not effective. Concrete realization of

foreign investment in projects remains very low

(Chilkoti 2015).

Many were concerned about the deteriorating

economy, although it was understood that the real

causes came not only from inside, but were mostly

related to external factors taking effect during

Yudhoyono’s final years. Whilst, Indonesia’s overall

productivity growth has not fully recovered on

account of the Asian financial crisis, unlike that of

Thailand and Malaysia, the Jokowi government was

faced with below target economic growth, estimated

at about 4.7 per cent in 2015. It was lower than that

of other ASEAN countries such as the Philippines and

Vietnam and much less than China and India (Patunru

2015). Bearing this fragile economy in mind, the

government’s ambitious infrastructural development

programs, for example building 24 new airports, over

1,400 seaports, 7,800 kilometres of highways, 35,000

megawatt power plants, all of which requires around

US$ 70 billion (Tempo.co 2017), seem unlikely to

succeed..

Politics was also not conducive for the newly

formed government. The democratization in

Indonesia which took place after Suharto’s

resignation in May 1998 gave rise to different nature

of business-state relations. Under the New Order,

politics was controlled by bureaucratic elites. Of

course they had business interests which were

patronized by the cronies of Suharto’s family,

including those of the ethnic Chinese conglomerates.

However, after Suharto the authoritarian regime

changed into a democracy which was characterised

by patron-client relationships between the ruling elite

and the oligarchies. The widening space of political

parties to compete for power and public participation

in general elections were intruded by business vested

interests, mostly through money politics. This had

nothing to do with the changing economic policies,

but rather the alternating hierarchical position of local

business in politics. The indigenous entrepreneurs

became more assertive and powerful in both politics

and the economy, and subsequently occupied the

strategic posts of executive structures and legislative

authorities. The ethnic Chinese business, however,

did not much benefit from this development by virtue

of most of them being reluctant to run into open

political competition (Fukuoka 2012).

The oligarchs’ primary interests are to

monopolize access to the state’s resources, which can

be exploited to accumulate individual or group

wealth, as well as social influences (Winters 2013).

Thus transactional politics between politicians and

business was pervasive in the post-Suharto

administration. Local tycoons such as Aburizal

Bakrie, Arifin Panigoro, Jusuf Kalla, Surya Paloh,

and Taufik Kiemas are some examples of the leading

business actors whose political influences determine

process of strategic economic decision making.

Robison and Hadiz (2017, 5) claim that agenda of

economic liberalization, development policy reform,

decentralization of governance, and power

consolidation have been severely co-opted by the

complex objectives of the rent-seekers. With this in

mind, it can be argued that protectionist policies

applied under the Yudhoyono government and the

Jokowi government are by-products of the oligarch’s

strategies to protect their businesses from the effects

of the free market. An indication of which, Robison

and Hadiz (2017, 5) explain, is that none of the

Indonesian conglomerates have been able to expand

worldwide businesses, especially in strategic sectors

such as mining, agriculture, infrastructure, and

energy. They have focused on tightening their

monopolies in the domestic economy. This is in

contrast to the Chinese and other Asian entrepreneurs

who have developed global corporations to compete

in the free market.

The penchant for protectionism is to some extent

consistent with the ambivalent worldviews generally

held by Indonesian political elites in describing

external environments. On the one hand, there is

growing pride and esteem of the political leaders who

envisage their country as an emergent global, or at

least regional, power. Indonesia’s international

importance is shaped by its demographic size,

strategic locations in the crossroads of the Indo-

Pacific regions, huge natural resources, and economic

advancement, making it an undeniable political and

economic giant. Consequently, the discourse of

prioritising the national interest over regional states’

interests has characterised Jakarta’s foreign policy in

the last decade. For example, the neighbouring

countries’ concerns about certain issues are ignored

because they are seen as contradicting the Indonesian

stance. On the other hand, Indonesian elites continue

to worry about the vulnerability of being deeply

engaged in the predatory global capitalist system.

Therefore, they believe that Indonesia has to keep a

distance to outsiders, especially those who have the

predation tendencies. The most extreme expression of

this xenophobic point of view is reflected in

unreasonable suspicion and objection toward

anything foreign (Fealy and White 2016, 98). There

are even politicians who justify exclusivism

particularly towards Western foreigners by referring

ACIR 2018 - Airlangga Conference on International Relations

280

to cultural and religious moral obligations. Their

attitude tends to be resistant to globalization and the

Western way of life.

The stage for the nationalist politics is most

observable during the 2014 presidential elections

when Jokowi vied head-to-head with Prabowo

Subianto – a retired army general who then turned to

business and politics (Aspinall 2015). Both

candidates campaigned on almost similar

nationalistic themes, mainly economic autarchy and

sovereignty. Although Jokowi’s tune was heard as

more moderate than his rival, many had not expected

that there would have been a better prospect for

economic liberalization. Moreover, Jokowi’s triumph

in the contest was made possible by the combination

of his attractive technocratic populism and the

dynamic roles of the oligarchs. Fukuoka and Djani

(2016) mention it as the post-clientelist initiatives in

which material political capital merged with pro-poor

agendas such as improvement in public services and

local economic empowerment. Hence, it is

understandable if later Jokowi had to compromise

with the oligarchic interests.

Jokowi faced political turbulence. Politics in the

parliament was adversarial and polarized. The newly

shaped cabinet was overwhelmed by problems due to

lack of coordination within. Tensions emerged

between Jokowi and his party elites. The president’s

popularity rate waned (Warburton 2016, 297). These

problems were undeniably related to the consequence

of power sharing among Jokowi’s oligarchic

sponsors. In that unfavourable atmosphere, Jokowi’s

economic team became the centre of attention.

Anything unpopular could provide the opposition

politicians with critical issues to discredit the

government. Whilst troubled economic conditions

had to be dealt with through proper responses, the

options available for Jokowi were constrained by the

oligarchic structures. As a result, the government took

a conservative policy to prolong protectionism.

3 CONCLUSION

The origin of Indonesia’s economic nationalism can

be traced back to the postcolonial periods when the

newly independent republic had to cope with

economic predicaments. Problematic relationships

with the Dutch forced the nationalists to disregard

bilateral economic and financial agreements, and

eventually nationalized Dutch businesses operating in

the country. Sukarno’s nationalistic actions were

buttressed by international diplomacy in which

anticolonialism and antiimperialism became their

chief agenda. Within the forum of the Asian-African

Conference, Jakarta founded the global setting for its

nationalist economy. The same nationalist substance

was continually present in Suharto’s foreign policy,

albeit in a different form and scope of issue. Suharto’s

economic nationalism was supported by

multilateralism such as OPEC and ASEAN. The latter

has become the major vehicle of Indonesia’s

nationalist policies up to now. ASEAN provides

normative structures, called the ASEAN way, which

have secured Indonesian interests from external

interference.

The recent unfavourable domestic economic and

political conditions are evident as the cause of the re-

emergence of Indonesia’s economic nationalism.

Liberal reforms inculcated by international

organisations following the Asian financial crisis

were left and economic policies turned once again

inward-looking. The regional economic institutions

only function to maintain Jakarta’s participation in

world affairs, even though they are engaged with half-

hearted commitment.

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