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 Indonesia’s 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 Indonesia’s 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 anti-Chinese feelings.

In 1980, after 15 years under the new regime, Indonesia’ s average economic growth rate reached 10.7 percent per year. Indonesia’s inflation rate decreased and considerable progress in the construction of infrastructure, such as roads and airports, had been made. Although Indonesia’s 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 inequality."

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 reasons:

  • 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, Indonesia’s 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, Indonesia’s debt was about US$5 billion. Through IGGI, Indonesia’s 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 Indonesia’s 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. Indonesia’s 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 Indonesia’s 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 transmigration programs.

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 worker’s movement. For instance, the Indonesian government does not grant workers their right to organize themselves.

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 God’s 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.)