Indonesianisation is the most crucial period of the Indonesian SOEs evolution. This is the earliest event of Indonesian SOEs evolution. From the path dependence study by Mahoney, he highlights the influence of earliest events as the initial condition that rules out the final outcome of the sequence (Mahoney, 2000). His study result is used as guidance for this thesis to examine the early period of the Indonesian SOEs.
The changes in socio-political circumstances during the initial period of Indonesianisation had particular consequences with the government choosing to centralise control. Following Indonesian independence in 1945, taking over from Dutch control of economic and political authority, under
pribumi, became crucial and demanding.5 Conflict between the two political powers, the new Republic of Indonesia and the Dutch Federation, occurred in the initial period of Indonesian independence, particularly when the Dutch put much effort into protecting their economic interests in Indonesia (Anderson, 1983; Dick, 1985; 2002). This continuance of Dutch domination in economic and political activities caused wide resentment from pribumi, which generated the Indonesianisasi
(Indonesianisation) programme as the main agenda for state administration (Sutter, 1959). Indonesianisation of political control began as the government pursued a centralist control policy under a nationalisation agenda. The establishment of Panitia Persiapan Kemerdekaan Indonesia
(PPKI/Committee for Indonesian Independence) began the initiative for an Indonesian Independent state in 1945. Later, PPKI also drafted the 1945 Constitution of Indonesia (Siahaan, 1996; Sutter, 1959), which emphasised the importance of the government in controlling the nation’s socio- economic activities and resources, particularly the resources and production vital for the state (Constitution 1945).
The crucial requirement for pribumi control of economic activities faced some obstacles. Political instability and lack of skills and resources were obstacles for the Indonesianisation programme. Limited pribumi participation in economic activities was prompted by previous Dutch policy to ban
pribumi from taking part in economic activities (Adams, 1996; Kroef 1954; 1955). This restriction on participating in economic activities developed into a restrictive cultural influence on Indonesian entrepreneurial growth and ambitions (Adams, 1996). This ensured that Indonesian economic activities during this period were dominated by Dutch, Chinese and Arabian merchants, while
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pribumi involvement was limited (Anderson, 1983; Kroef, 1954). This situation meant the Indonesianisation of the economy was not easily implemented. Nationalisation of resources and enterprises prevented the potential empowerment of former colonial powers and outside nations participating in economic activities. This was important during the initial period of Indonesian statehood. Therefore, pribumi and the state used enterprises to create jobs; this was seen as important for national economic development (Constitution 1945; Sutter, 1959).
The socio-political environment affected the emergence of centralised economic policy in Indonesia. Indonesia’s long colonial period had several implications, such as lack of skills and cultural influences banning pribumi participation in national economic activities (Higgins, 1958). These effects hindered the Indonesianisation of the economy. Consequently, centralising economic policy was crucial to mobilising pribumi economic activities. These were the reasons for state welfare leaders to emphasise both the importance of government in the provision of public utilities and services, and the importance of collective effort or a cooperative society (Higgins, 1958). In practice, centralisation of economic policy under the government occurred at various time during 1945 to 2010, and caused significant policy changes in relation to SOEs. The army’s centralised control of nationalised Dutch enterprises during nationalisation in 1958, for example, endangered national objectives while the country was still confronted with instability issues (Anderson, 1983).
From 1945 to 1948, there were rapid political changes caused by competition between political parties. This period was one of deep instability and political uncertainty, which hindered the government’s application of market orientation policies (Higgins, 1958; Sutter, 1959). Indonesia’s economic recovery became a crucial concern of the Indonesian government after the handover of sovereignty. The result of the Round Table Conference in The Hague in 1949 forced the Dutch government to transfer full sovereignty to the Indonesian government. The transfer also created the opportunity for Indonesian leaders to determine national objectives without intervention from the Dutch government. The extreme socio-economic condition became a national priority agenda; the government created a number of economic plans to solve the country’s socio-economic problems. In 1949, the Dutch government announced Indonesian sovereignty through the Round Table Meeting. The meeting had major effects on the Indonesian socio-political and economic situation. The government set the economic plan by focusing on socio-economic recovery. This began through economic management development, implementing the Rencana Pekerjaan Industri (Industrial Plan) in 1950 and Rencana Urgensi Perekonomian (RUP/Urgency Economic Plan) in 1951 (Bajpai, 1995). The Indonesian economy was the main project of the Benteng Program (Fortress programme), which was part of RUP (Dick, 2002). The Benteng Program emphasised industrial development as the vehicle for economic activities. The government implemented the Benteng Program by opening
certain categories of industries for Indonesian importers who had trade credits from Bank Negara Indonesia (State Bank Indonesia/BNI) (Dick, 2002).
The commencement of the Indonesianisation programme, the lack of private participation, and political instability were reasons for the government to control the socio-economic situation that might lead to potential conflicts of interest arising from independence. Therefore, the 1945 Constitution of Indonesia emphasised the importance of government in controlling the nation’s socio-economic activities and resources (Constitution 1945; Higgins, 1958). Two articles of the Constitution, Articles 33 and 34, underlined government control policies. Article 33 of the 1945 Constitution of Indonesia highlighted the importance of the state roles in the national economic activities as:
(1) The economy shall be organised as a common endeavour based upon the principle of family system (kekeluargaan).
(2) Production branches which are important for the state and which affect the livelihood of the people at large shall be controlled by the state.
(3) The land and water and the natural resources contained therein shall be controlled by the state and shall be used for the greatest prosperity of the people. The national economy shall be organised based on economic democracy with the principles of togetherness, efficiency with justice, sustainable and environmental perspective, independence, as well as by maintaining balance between progress and unity of the national economy. Further provisions concerning the implementation of this article shall be regulated in law.
(Source: Unofficial English translation, downloaded from the Indonesian State Secretariat’s website 29 September 2013)
Focusing exclusively on the article above, there were three important items in regard to Indonesian economic policies. The Constitution emphasised the importance of collective efforts, the control of natural resources and production vital to the state (Abeng, 2001; 2002; Constitution 1945; Ruru, 2006). These were references for the implementation of centralisation economic policy. In addition to Article 33, Article 34 was the main reference for government roles in the provision of public goods and services. The article highlighted this role as:
(1) Poor and neglected children shall be taken care of by the state.
(2) The state shall develop a social security system for the entire people and shall empower the weak and underprivileged people in accordance with human dignity.
(3)The state shall be responsible for the provision of adequate health service facilities and public service facilities. Further provisions concerning the implementation of this article shall be regulated in law.
This article underlines the importance of government duty in the provision of public utilities. Indonesianisation and the socio-political situation were the reasons behind these statements. These constitutional provisions were also a reference for the government to establish state enterprises and jobs, which were important, particularly for national economic improvement.
6.1.1 Structure and Objectives of the first SOEs
Pressure to implement Indonesianisation was a reason for the government to establish new state enterprises. Prior to the establishment of BNI as the first state enterprise, the government set up
Pusat Bank Indonesia (Indonesia Central Bank). The main duty of Pusat Bank Indonesia was to co- ordinate the government’s economic programme; including circulating Indonesian money and managing the foreign exchange (Sutter, 1959). In 1946, BNI replaced Pusat Bank Indonesia. The main aims of BNI were to facilitate economic activities purely under Indonesian authority, and to circulate the Oeang Republik Indonesia (ORI) as the official Indonesia currency (BNI 2008a; 2008b). As the only state bank owned by the Indonesian government at this time, BNI played multiple roles; such as monetary, debt and credit management (Hensley, 1964), including being the central bank. BNI operated as the central bank for the Indonesian government until 1949. As the Dutch government was still keen to control Indonesian economic activities, the Dutch government transferred De Javasche Bank (DJB) to act as the central bank of Indonesia. In 1953, the Indonesian government purchased DJB’s ownership, nationalised it, and commissioned it officially as the Indonesian central bank.
The requirement for the Indonesian government to control economic activities was important, particularly when the Dutch army blockaded inter-island trading to control the Indonesian trading system. This blockade compelled the government to establish two state trading enterprises: Bank and Trading Corporation (BTC) and Sumatra Banking and Trading Corporation, known as CTC. Both new state enterprises were established to resolve the inter-island trading blockade. In practice, the establishment process made their functions and objectives different. BTC was set up as part of BNI due to a policy issue. Consequently, BTC held multiple objectives, which were less likely to be commercial objectives. In contrast, CTC was set up by the government with support from Indonesian entrepreneurs; therefore, CTC was likely to be more commercially oriented than BTC (Sutter, 1959). Following the recognition of Indonesian sovereignty, the government implemented a market orientation policy. The government introduced the Benteng Program, which focused on improving national market activities through the role of pribumi. The government established NV Bank Industry Negara (BIN/State Industry Bank), which aimed to provide financial assistance for economic recovery and to manage state trusts for a number of government industries. BIN was operating on a
commercial basis when government regulated its financial separation (Sutter, 1959). The main function of BIN was to provide long-term credit for all projects and economic activities under the
Rencana Urgency Perekonomian (Economy Urgency Plan) and Benteng Program (Glassburner, 1962; Kanumoyoso, 2001). In practice, the role of BIN was not limited to supporting government economic activities. In addition to its roles as the financial supporter, organiser and/or sponsor for a number of private and government projects, BIN was also involved in company stock trading and taking over some private companies (Hensley, 1964; Siahaan, 1996). By 1960, BIN became the biggest state holding bank, controlling more than 40 companies in various industries (Hensley, 1964; Siahaan, 1996; Sutter, 1959).
6.1.2 Key Points Analysis from Indonesianisasi Period
Referring to Mahoney’s path institutional analysis, the earliest period of historical path is the most influence events that affect the future outcome. The earliest period of Indonesian SOEs evolution points out some factors that become foundation for the development of Indonesian SOEs. There are two driving factors for the emergence of Indonesianisation program: the conflict between the Indonesian and Dutch government to protect their interest and sovereignty in Indonesia, and the requirement to empower the pribumi involvement in socio-economic activities in Indonesia. These driving factors lead to the government control policy. Centralisation of economic policy is also aimed to prevent the conflict of interest over the resources and lack of pribumi involvement in socio- economic activities. These situations, later, turn into the background for the PPKI to set control policy under the government hand as stated in the 1945 Constitution of Indonesia. As the consequence of this framework, the structure and objectives of state enterprises during the Indonesianisation period were set for the socio-political purposes.