State Capitalism by Lalita Som;

Author:Lalita Som;
Language: eng
Format: epub
Publisher: OUP Premium
Published: 2022-06-15T00:00:00+00:00

SOEs and the misallocation of resources

The economic policies pursued by successive Indonesian governments since the early years of independence were shaped by (a) the interplay of major economic challenges faced at the time; and (b) the economic ideas of key, influential policy-makers, and economic nationalism. Widespread social discontent was a major underlying political issue that has plagued every Indonesian government. It arises from a persistently widening gap between the privileged rich and the numerous poor—specifically between visibly rich business tycoons and the indigenous (pribumi) majority. The State has had to play an essential role in helping the country to face this fundamental politico-economic challenge. Policies to promote the development of pribumi Indonesian entrepreneurship put SOEs at the centre of the divide, as a proxy for representing the interests of the majority pribumis (Thee, 2006). This strategy was not too different from what was followed in other countries at the time.

The New Order government took several measures to help pribumi businessmen advance faster. New foreign investment projects required an Indonesian partner in joint ventures. State-owned banks were required to extend credit only to domestic companies. Government contracts of up to Rp. 20 million were reserved for businessmen from the ‘economically weak groups in society’. While contracts up to Rp. 100 million were awarded by tendered bids, preferential treatment was extended to businessmen from the ‘economically weak groups in society’, if their tenders were up to 10% higher than the others (Daroesman, 1981).

This led to ethnic Chinese businessmen collaborating with pribumi businessmen, who held the required business licenses (Suryadinata, 2001) and fronted for them. State-owned banks favoured companies in which the majority share ownership was held by pribumi businessmen, while the ethnic Chinese managed and controlled actual operations. The State banks were resigned to these practices as otherwise too few companies were able to meet the minimum own capital requirements to qualify for these bank loans (Sadli, 1988) or to operate successfully enough to ensure that loans were repaid. Ethnic Chinese businessmen had long commercial experience, better access to capital, managerial, and technical skills, and networked with other Chinese businesses throughout Asia. Through collaboration with pribumi businessmen, they were able to move into various economic activities on a large scale. Although government-driven economic nationalism was aimed at reducing the economy’s dependence on ethnic Chinese conglomerates, the government’s affirmative action programme actually (and paradoxically) led to further economic concentration in Chinese hands.

Suharto’s government introduced other policies, like the ‘Foster Father scheme’. Under this scheme, large enterprises and SOEs (referred to as ‘Foster Fathers’) were urged to establish partnerships with cooperatives and small enterprises, largely owned by members of the economically weak groups in society (Thee, 2006).

The government often used SOEs to provide public goods and services. Frequent political interference in the pricing of such services and inadequate accountability of SOEs resulted in the inefficient delivery of goods and services, with profitable business units within SOEs cross-subsidizing public service delivery. The government usually provided no compensation or made only inadequate subsidy payments to meet

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