B.E. Assessment

Policies for PSD in Indonesia, ADB Institute, 2006

    This paper surveys the historical evolution of private sector development in Indonesia in the post independence period, with a particular focus on policy towards foreign investment and small enterprises.

    During the early years of independence in the 1950s policies were mainly aimed at countering the economic dominance of Dutch business and ethnic Chinese economic interests. Affirmative programs were used to advance the interests of indigenous (pribumi) entrepreneurs. However, with the introduction of President Sukarno's "Guided Democracy and Guided Economy" policy, state-owned enterprises were promoted as the pillars of an Indonesian-style socialist economy.

    During the Soeharto era these policies were reversed and the role of private entrepreneurs, including ethnic Chinese, was again promoted. However, instead of fostering a healthy development of the private sector, the New Order nurtured the growth of a dependent capitalist class of client entrepreneurs through patronage, and preferential treatment was not given based on good economic performance.

    The New Order government did not have a clear and consistent view of the expected role of foreign direct investment (FDI). Hence, unlike Singapore, Indonesia has not been able to reap the full benefits of FDI, including effective technology transfer and technological upgrading. Since the early 1970s there have been several nation-wide small- and medium-scale enterprise (SME) promotion programs to advance the welfare of economically weak social groups. These programs were largely unsuccessful in nurturing healthy development of viable SMEs. Vigorous private sector development requires the establishment of a favorable investment climate that does not discriminate on the basis of ethnic origin (pribumi versus non-pribumi), size (small versus large firms), or source (domestic investment versus FDI). This should be supported by effective competition policies, including proper enforcement of the New Competition Law of 1999.