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State, Industry, and Business in Indonesia’s Transformation

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Southeast Asia beyond Crises and Traps

Part of the book series: Studies in Economic Transition ((SET))

Abstract

This chapter discusses the importance of institutional arrangements underpinning development strategies, by examining Indonesia’s institutional transformation involving the state, industry, and business during the last five decades. Indonesia’s experience demonstrates that, without institutional arrangements for designing and implementing development strategies, developing countries endowed with natural resources can easily ‘return to nature’ as producer-exporters of primary commodities, regardless of whether they are under authoritarianism or a democracy. Opportunities and challenges are two sides of the same coin. Natural-resource industries can be knowledge-intensive if they are accompanied with innovation in the upstream and in its connection to processing, manufacturing, branding, marketing, and R&D activities along value chains. The state must be effective in arranging institutions to formulate and consistently implement development strategies and in providing incentives for business agents to invest in higher-value-generating activities. Indonesia’s ups and downs in industrial development under inconsistent role of the state will provide implications for other emerging countries with natural resources.

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Notes

  1. 1.

    See, for example, Matsui and Kawamura, eds. (2005); Mietzner (2009); Crouch (2010); Honna (2013); Kawamura, ed. (2015); Aspinall, Mietzner, and Tomsa, eds. (2015).

  2. 2.

    The rise of major business agents, or business groups, in Indonesia was first discussed academically by Robison (1986), followed by Shin (1989) and Sato (1994). Subsequently, a variety of literature appeared on business groups under the Soeharto regime, including Claessens et al. (1999), Khanna and Yafeh (2007), and Matsumoto (2007), which look back critically at these groups. However, little of the literature deals with business groups in the post-Soeharto era. Their restructuring process was examined by Sato (2003, 2004a, 2004b) and Hanani (2006), but their responses after restructuring were, other than group-wise case studies, covered only in Chua (2008), which used little quantitative data. The exception is a recent work of Carney and Hamilton-Hart (2015).

  3. 3.

    In this chapter, I use the following sources of data on business groups in Indonesia: a database that I compiled from articles of association of limited liability companies (perseroan terbatas, PT) that were publicly announced in the supplements of official gazettes (Tambahan Berita Negara); a database on listed companies that I compiled from ECFIN (various years); a database on the 100 largest business groups that I compiled from CrishanteNova (2012, 2013); and articles in various local media.

  4. 4.

    These intensive reforms of political institutions took place from 1998 to 2004, which is consistent with the generally accepted view that democracy in Indonesia was established by 2004.

  5. 5.

    The five political laws are Law No. 1/1985 on the Change of Law No. 15/1969 on the General Elections; Law No. 2/1985 on the Structure and Status of the MPR (the People’s Consultative Assembly), DPR (the People’s Representative Council) and DPRD (the Regional People’s Representative Councils); Law No. 3/1985 on Political Parties and Golkar; Law No. 5/1985 on the Referendum, which required a national referendum for amending the 1945 Constitution; and Law No. 8/1985 on Social Organizations, which required all domestic organisations to accept Pancasila, Indonesia’s five founding principles, as their only organisational principle.

  6. 6.

    Manufactured exports here are defined as items in Standard International Trade Classification (SITC) 5–8, that is, chemicals and related products, manufactured goods classified chiefly by materials, machinery and transport equipment, and miscellaneous manufactured articles.

  7. 7.

    It is desirable, but difficult owing to lack of data, to examine the position of business groups in the corporate sector. Their position among listed companies is examined briefly here. The data of listed companies, however, may underestimate the positions of SOEs and foreign-affiliated companies throughout the period, because only limited SOEs are listed – including the giants (the oil company Pertamina and the electric power company PLN) – and because subsidiaries of leading foreign companies, especially Japanese ones, have less incentive to go public to procure capital in Indonesia. Figure 3.5 thus shows the changing trend in ownership shares rather than absolute figures.

  8. 8.

    These old faces include seemingly new business groups with new group names: those founded by former owner-managers of other groups, such as Triputra, Saratoga Capital, Trinugraha Tohir, and Persada Capital, all of which grew out of the Astra group; those founded by family members of former groups, such as Indika Energy by Subentra’s second generation, and Mitra Adi Perkasa (MAP) by the family of the wife of the founder of Gajah Tunggal; and those that started their business in the Soeharto era but were not recognised as one of the 220 business groups in 1996, such as Bosowa (cement), Sritex (synthetic textiles), Ramayana (retailing), and Musim Mas (palm oil).

  9. 9.

    Author’s interview with the CEO of PT AKR Corporindo, Jakarta, 17 March 2014.

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Authors and Affiliations

  1. Institute of Developing Economies, Chiba, Japan

    Yuri Sato

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  1. Yuri Sato
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  1. National Graduate Institute for Policy Studies, Tokyo, Japan

    Boo Teik Khoo

  2. National Graduate Institute for Policy Studies, Tokyo, Japan

    Keiichi Tsunekawa

  3. National Graduate Institute for Policy Studies, Tokyo, Japan

    Motoko Kawano

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Sato, Y. (2017). State, Industry, and Business in Indonesia’s Transformation. In: Khoo, B., Tsunekawa, K., Kawano, M. (eds) Southeast Asia beyond Crises and Traps. Studies in Economic Transition. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-55038-1_3

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  • DOI: https://doi.org/10.1007/978-3-319-55038-1_3

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