New Order and New Economic Policy

Capitalism, with intervention and guidance

The task in Indonesia was to restore economic growth and ensure its better distribution, restore the confidence needed to attract foreign capital and aid, improve agricultural production, and create the foundations of an industrial economy. The New Order government faced formidable immediate tasks in checking hyperinflation, reversing some of the nationalization that had been carried out, and dismantling a large part of the economic regulation and apparatus of inefficient state enterprise bodies created under Sukarno. Much of this was accomplished very speedily although, as Hill (1994) shows, without truly relinquishing central economic guidance; many of the parastatal corporations remained intact. Progress toward economic liberalism might have gone further than it did but for the enormous windfall of the oil price rise in 1973/74, which enabled Indonesia to fund much of its development programme for the next 12 years from oil revenues. Only after the price of oil and some other export commodities collapsed in the mid-1980s did substantial progress toward economic liberalism resume.

Malaysia already had strong economic growth and a stable currency in 1969, but there was a great need to slant this growth in favour of the Malays, to reduce foreign ownership without discouraging new investment, and to diversify the economy away from its dependence on a narrow range of industrial raw materials. As in Indonesia, Malaysia's "New Economic Policy" espoused a philosophy of free-market capitalism but, in practice, modified this significantly in the pursuit of national goals. Thus existing parastatal enterprises and authorities were strengthened, and others were set up for agricultural, industrial, and trading purposes. In the process, national corporations acting mainly on behalf of the Malay ethnic group bought controlling shares in many multinational enterprises over a period of years. Regulations provided for progress toward a pattern of capital ownership in which at least one-third would be Malay, for the most part held through organizations set up for this purpose, and strong preference was given to Malays in employment policy, the award of contracts, and opportunities for advancement.

Macroeconomic policy in the two countries has therefore tended to converge. Whereas Indonesia moved toward a liberal economic system without really getting there, post-1969 Malaysia found it had a tooliberal economy, and moved away from it without denying the basic philosophy. Although the oil boom gave Malaysia less advantage than it did Indonesia, it similarly assisted national financing of the development drive during the same 1973-1985 period. Late in this period under Dr. Mahathir Mohamad, a fervent Malay nationalist who became prime minister in 1981, a philosophy of guided management not unlike that of the Indonesian New Order took root. Hence, when the mid-1980s depression also forced a return to liberalism in Malaysia and the abandonment of some objectives, a strong nationally directed core still remained, capable of undertaking major new directions of policy.² Indeed, throughout the past 20 years, Malaysian national planning has been firmer than Indonesia's, where successive "Repelita" plans have required modification soon after their appearance, and planning targets have more consistently failed to be met (Hill, 1994). To note these similarities is not to deny the great differences in economic achievement between the two countries, or the radical differences in the patterns taken by state investment. Malaysia is now going beyond its "New Economic Policy" to a "New Development Policy," which aims to attain the status of a developed country by the year 2020 (Government of Malaysia, 1991b); Indonesia's now-old "New Order" may be changing, but it has not yet formally sought new directions.

In the rest of this chapter we comparatively examine some specific sectors across the two countries, with emphasis particularly on their relevance to the region that was still largely forest in 1950 - Borneo and the eastern side of the Peninsula. Because of its macroeconomic significance, we begin with the energy sector, then turn to industrialization and only after that to the land.