Debt and Development
An Indonesian Experience
by Josef Widyatmadja
Yayasan Bimbingan Kesejahteraan Sosial
(Social Welfare Guidance Foundation)
I Brief History
Indonesia is the largest archipelago in Asia. It consists of 13,500
islands from east to west with a total population of about 187 million people. From 1600
to 1942, Indonesia was under Dutch rule; and for a few years, the country was ruled by
British Gen. Raffles. From 1942 to 1945, Japan occupied Indonesia. On Aug. 17, 1945,
Sukarno and Hatta proclaimed Indonesias independence.
II. The Path to Capitalism
Sukarno, the first president of Indonesia from 1945 to 1966,
established a nationalist ideology in politics as well as in economics. His policies
caused tension with Western countries because of his opposition to Western imperialism.
Because the regime was under economic and political pressure from Western countries,
Indonesia was confronted with an economic crisis, which caused Sukarno to seek support
from socialist countries, such as the Soviet Union and China.
In 1965 after the failure of the Communist coup, the Indonesian army
led by Maj. Gen. Suharto took over and ruled the country beginning on March 11, 1966. More
than 300,000 people accused of being Communists were assassinated, and more than 100,000
people were imprisoned as political prisoners without a trial.
Under Suharto, the new regime reconstructed the path of capitalist
development by inviting international capital to resolve Indonesia s economic
crisis. Some Western countries and Japan formed a consortium - the Inter-Governmental
Group on Indonesia (IGGI) - to help Indonesias financial crisis in 1966. In return
for the assistance of Western countries and Japan, the new regime agreed to abandon its
nationalist policies in politics and economics and encouraged foreign investment through
the foreign capital investment law enacted on Jan. 1, 1967. The law guaranteed:
No nationalization of foreign assets;
A tax holiday for up to three years;
The free flow of foreign currencies;
The free transfer of profits; and
Freedom to recruit foreign technicians.
The new law also guaranteed cheap labor and control of trade unions.
This policy has produced a new economic elite from the higher echelons of the civil and
military bureaucracies, including a number of people of Chinese origin. The emergence of
domestic capitalists, especially among the Chinese, has led to a social gap and
In 1980, after 15 years under the new regime, Indonesia s average
economic growth rate reached 10.7 percent per year. Indonesias inflation rate
decreased and considerable progress in the construction of infrastructure, such as roads
and airports, had been made. Although Indonesias economic growth had continued, it
had to pay a high price, as Leiserman noted:
"Taking into account also the widening urban-rural disparity, this
suggests a significant increase in overall consumption inequality in Indonesia between
1970 and 1976 that very likely reflects an even larger increase in income
To mask the capitalistic development model, the new order formulated
Indonesian national development as wholistic human development, which includes both
spiritual and material dimensions. The priorities of national development are economic
growth, national stability and social justice; but in practice, social justice has been
ignored. This capitalistic development, which was supported by IGGI, the International
Monetary Fund (IMF) and World Bank, has become the yoke of the Indonesian people because
the present development model has given benefits to only a number of elites, especially in
urban areas and among foreign capitalists.
On one hand, industrialization and development in Indonesia has
increased rapidly and has created new jobs for a number of people. On the other hand, it
has reduced traditional jobs. For instance, the production of the Indonesian batik sector
in 1966 was 510,000, and it declined to 100,000.
Since the investment of foreign capital in Indonesia, workers
rights to organize have been abolished. The Indonesian government has only recognized one
central organization, the All-Indonesian Labor Federation (FBSI, now SPSI), with 50,000
companies nationwide. There are only 7,000 local trade unions. In every labor dispute, the
authorities support the companies, and even many trade unions do not protect workers
rights, as in the case of Van Houten in Jakarta. Until now, independent trade unionism is
not recognized by the government, such as the union Serikat Buruh Sejahtera Indonesia or
SBSI (Indonesia Welfare Labor Union).
Indonesian peasants have also suffered from the development poiicy of
the government. To improve the Indonesian economy, the current regime believes that the
Green Revolution should be implemented in rural areas. New dams and irrigation channels
have been built, and chemical fertilizers and pesticides have been introduced to
Indonesian agriculture. In addition, new hybrid seeds have replaced local seed varieties.
On one hand, this has resulted in increased rice production; but on the other hand, only
rich farmers and the agricultural industries have benefited from the Green Revolution.
Poor farmers and landless peasants have become the victims of the Green Revolution insofar
as the adoption of modern techniques has adversely affected them for the following
Modern techniques produce wider commercialization and disrupt
traditional arrangements for sharing;
Modern techniques create new opportunities for the elites;
Only the rich gain from government credit and loans;
Irrigation only benefits the landowners; and
Most poor farmers in Java only have .30 hectares of land.
During the first decade of development from 1969 to 1979,
Indonesias economic growth and income increased rapidly. However, the benefits were
generally concentrated in the hands of the upper class. As Leiserson observed in 1980:
"For millions of people, the prospect of any early escape from
poverty is not bright; and for some, their economic position may even worsen."
III. From IGGI to CG1
When Suharto took power, Indonesias debt was about US$5
billion. Through IGGI, Indonesias debt has increased rapidly since 1967. Because of
the issue of human rights in Indonesia, the government terminated the role of IGGI chaired
by the Dutch government and formed the new Consultative Group for Indonesia (CGI) in which
the Dutch government is excluded. CGI is chaired directly by the World Bank.
IV. Indonesia is a Good Borrower
Presently Indonesia repays its debt regularly and on time.
Indonesia has never asked for rescheduling nor for reduction of its debt. This is because
Indonesias economy is supported by oil revenues.
Indonesia also has become the speaker of the Non-Aligned Movement (NAM)
on the debt issue. In solving the issue of international debt, Indonesia follows a
non-confrontational policy; it focuses on dialog.
V. Indonesias Debt
After accumulating foreign debts for two decades, Indonesia has
become an economic miracle. Most of the World Bank report now gives the Indonesian economy
a good evaluation.
For 1994, the World Bank has predicted that Indonesias economic
growth will be 6 percent to 8 percent if Indonesia takes several measures, such as
reducing its bureaucracy.
However, since 1982, the debt repayment of Indonesia has increased from
US$1.2 billion to US$10.6 billion in 1989. According to the recent World Bank report, the
debt of Indonesia will become US$100 billion, and the country will become the second
largest debtor nation.
The net resource transfer of Indonesia will increase as well. In 1991,
Indonesia amassed new debts of US$5.6 billion from CGI. However, Indonesia must pay
more than US$5 billion to the creditor countries. The debt service ratio of Indonesia has
now reached the range of 32 percent to 40 percent.
VI. The Cost of Foreign Debt
What is the cost and impact of debt in Indonesia on the life of
its people? In general, it oppresses Indonesians economically, socially, culturally and
politically as well as damages the ecology of the country. Its more specific effects are
de-. scribed in more detail below.
A. Debt and Environment
There is a close connection between debt and environmental destruction.
The more debt a country accrues, the more environmental destruction occurs. The
destruction of tropical forests results when governments have large debts, such as in
Indonesia, the Philippines and Brazil. The government has exploited the rainforests to
repay its debts to creditors. Moreover, the country has accumulated large debts to finance
projects which destroy the ecological balance, such as the construction of huge dams and
B. Debt and Social-Cultural Life
For many years, the World Bank and other creditors have financed
transmigration projects in Indonesia. The intention of the projects is to move people from
the islands of Java and Bali to other islands, such as Kalimantan, Sulawesi and Irian
Jaya. The transmigration budget for 1985 to 1989 was about US$3.5 billion. Transmigration
is meaningless though because the rate of population growth in Java is very high. The
impact on tribal peoples, however, has been catastrophic as transmigration projects have
crushed the traditional laws and cultural values of the indigenous people.
C. Debt and Political Rights
Foreign debt in Indonesia has resulted in the violation of human and
other political rights. Because of the demand of creditors for debt repayment, the
Indonesian government is eager to earn more hard currency. Export-oriented production is
thus encouraged on behalf of "economic competition." The government controls the
maximum wage of workers at only US$1.50 to US$1.60 in Jakarta and less than this in
central Java. The wages of Indonesian workers are the lowest among the countries belonging
to the Association of Southeast Asian Nations (ASEAN).
Because the minimum wage in Indonesia is very low, the Indonesian
government tries to prevent unrest by controlling the workers movement. For
instance, the Indonesian government does not grant workers their right to organize
VII. Debt Relief and Forgiveness
The debate between debt relief and debt forgiveness is taking
place among debtors and creditors. According to Eugene Rotberg, ex-treasurer of the World
Bank, "Forgiveness is a theological principle, not [a tenet of] finance."
Most of the creditors are not in favor of the theological approach
towards foreign debt. Debt though is not only a theological or financial matter but also a
matter of human life. Finance and economics must serve life. Debt has caused a threat to
life. Hundred of thousands of people in Asia, Africa and Latin America are dying because
of foreign debt.
Debt forgiveness is not a matter of charity and profit, but it is for
the future of our planet. Through colonialism, unjust world trade and debt mechanisms,
creditor countries have gained many benefits from debtor countries. It is time for
creditor countries to care and share life with others in Gods Creation.
Foreign debt is not the business of government, but rather it must be
the struggle of people. The people must take the initiative; they must hold forums to
discuss the debt problem. Debt forgiveness must give maximum benefits to the people, not
to civil and military bureaucracies. In this way, the victims of debt can organize and
liberate themselves from the yoke of debt.
(Ed note: The following article was presented at the African and Asian Forum
on Spirituality. Jubilee 1998, July 1994, Colombo, Sri Lanka.)