Facets of Indonesia's Economy: The Special Place of Co-Operatives
by H. E. MOHAMMAD HATTA, Vice-President of The Republic of Indonesia
1
ANYONE who attentively studies the development of Indonesia’s economy will be struck by the intense struggle going on between idealism and reality. This conflict can only be understood through some knowledge of the history that lies behind it.
During the days of colonial rule the Indonesian patriot dreamed of a prosperous Indonesia of the future, a land freed from the miseries of existence. In that free Indonesia — with nature so bountiful and the soil so rich — there would be no poverty. These ideals burned all the more strongly in our hearts because we saw the great contrast between the richness of our country and the poverty of its people. The Indonesian was poor in the midst of overflowing wealth. Those with money were the foreigners who ruled the country; they had authority, capital, and technical skill. Next to the Dutch, the best off were the Chinese, who were their chief helpers in business and administration, and formed, as it were, a middle class. The Indonesians were the most numerous and the poorest. Yet it was they who were the real producers in all fields. It was they who raised and prepared the rice, coffee, tea, sugar, quinine, rubber, copra, tapioca, tobacco, and various other commodities in demand on the world market, they who labored in factories and mines. Each year the profits of Indonesian trade and business ran into hundreds of millions of guilders, but the workers who made them possible barely received a “living wage.” Before World War II the average Indonesian worker could only hope to earn from twenty-five to thirtyfive guilder cents a day, roughly equal to fourteen to twenty American cents. And that was in good times! In bad times, because the economy was immediately affected by price changes on the world market, their plight could become even worse.
The building up of the national economy should, we Indonesians believed, be founded upon the strength of the whole population. The Indonesian people would remain poor and weak as long as they worked as individuals, each one just looking after himself. The economy must be based on the family principle of one helping the other. Through the principles of co-operation the energy of the large and weak population could be united until it became strong. Co-operation would strengthen the feeling of solidarity among indigenous Indonesians and train them to believe in themselves and in their capacities. Denmark was a classic example in Europe which showed that a people originally poor could become prosperous through co-operative organizations.
But the colonial capitalism which controlled the country was strong because it was well organized. It could not be changed by mere slogans. It. could not be fought by founding small Indonesian capitalist units which were sure to be knocked out even before they had started to function. The only local organizations which could stand up to Western capitalism were the co-operatives. But getting them started was an enormous undertaking because, although mutual assistance was an old tradition in the villages, our people were almost totally ignorant of the simplest economic ideas.
Nevertheless, when independence was proclaimed on August 17, 1945, many of us did have a clear idea regarding the new set-up of the national economy. We were certain it would not be able to prosper under a laissez-faire system. Government and people must share the task of reconstruction. The population must take the initiative to improve its lot. With the help of co-operatives, small and medium-sized economic ventures could be brought into being and strengthened. Where co-operatives could not do a given job, limited liability companies would be permitted. Large-scale industries would be undertaken by the government, if necessary with borrowed capital and management hired from abroad.
To achieve a prosperous standard of living for the people the government should see to it that each citizen could earn enough to enable him and his family to live in keeping with human dignity. This principle was later embodied in our Constitution, which sets forth the main points affecting economic reconstruction. There it is stated that “the economy would be set up as a joint endeavor based upon the family principle” — that is, cooperatives. And further, that: “Branches of production essential to the State and which dominate the life of most people shall be controlled by the State. The natural wealth of land and water shall be controlled by the State and utilized for the greatest prosperity of the people.” This is an emphatic statement of responsibility, but “control by the State” does not imply that the government itself, with all its bureaucratic trappings, is to act as sole entrepreneur. Governmental control will mainly be directed to determining which kinds of production shall be undertaken in what order to achieve the greatest over-all prosperity. In a situation such as ours initiative must be taken by the government, which later can decide what types of organization will best be able to carry on the diflerent phases of reconstruction.
This general plan found in 1945 and still finds basic agreement among all sectors of the national thinking; it is supported by nationalist groups, socialist groups, and religious groups such as the Muslims, the Catholies, and the Protestants. It is only the Communists who do not agree with it — as is evident from their opposition to the co-operative movement. That we can understand.
2
ONE major objective of our planning is to transform an export economy into a national economy. No longer will the main stress be put upon production for ihe world market as was the case in the colonial era. Now we will concentrate on creating domestic markets and awakening the buying capacity of the people. Exports, of course, cannot be neglected but their function will be different. From now on they will provide foreign exchange for the purchase of essential goods which have to be imported. Many simple things necessary for a better living standard, as well as the machines we will need to set up our own industries, will have to be acquired abroad until we are ready to manufacture them ourselves.
Therefore all the old export industries will be maintained and strengthened, whether they are in private hands or government-owned. Our principal exports are rubber, copra, palm oil, tea, sugar, coffee, quinine, tapioca, pepper, kerosene, tin, bauxite, various special plants such as rosella and ramie. The chief Indonesian forest products are wood, rattan, resinous gums, and turpentine. The more these export industries produce, the more we can import to speed our internal reconstruction. And further, we must give priority to capital goods over consumer goods — industrial plant before luxuries or even conveniences.
One of the big obstacles to our economic progress is the fact that the population is not evenly spread over the archipelago. The main concentration is Centered in Java. Two thirds of the eighty million inhabitants of Indonesia live on the island of Java whose entire area is only seven per cent of the total land area. Thus Java has an excess of population
— about 1,058 persons to the square mile — while there is a shortage in the other islands, which average only about fifty-two people to the square mile. Sixty-eight per cent of the outer islands is still covered by forest. Both these factors have lessened productivity and make it difficult to increase it in a rational manner. For the density of population in Java means that the amount of land worked by a typical peasant is too small hardly more than it half acre — to support him and his family. Accordingly, about fifteen million people must gradually be moved from Java to the outer islands. This transmigration has already begun and it is planned eventually to shift half a million people each year.
If each farmer has more land his purchasing power will increase, providing a domestic market for the products of large-scale industry. In the outer islands new means of livelihood will be encouraged as forest land is converted for cultivation. In these new areas each person should be able to work as much land as his capacity permits. Five acres may well become the minimum holding. When the new farmers set up co-operative societies, they will be able jointly to purchase farm machinery and use it in common. Transmigration and industrialization will go forward together. And with them will come more irrigation, more roads and other communications facilities, and power plants to supply electricity for industry. All these are interwoven problems, because construction of one kind necessitates construction of another. Transmigration and the opening of new land will not function smoothly if transportation and communications are inadequate, and if irrigation is not carried out to water the newly cleared land.
Because our land is so fertile and our forests so rich, we Indonesians are confident that our country can with the passage of time become self-supporting in food, clothing, and building materials. Great progress has already been made since Independence as new land has been prepared for rice paddy. In 1952 Indonesia had to import 759,000 tons of rice, but this year, barring bad floods or other catastrophes, she will be almost self-sufficient. And in future years she will have surplus rice which can be exchanged overseas for capital goods or semifinished articles needed for industry. This progress was achieved by the efforts of the population itself, the government supplying the necessary money, without contracting foreign loans.
During World War II, when the country was occupied by the Japanese, material for clothing could not be imported and millions of Indonesians were pract ically naked. Remembering t his suffering, we have given priority to building up our textile industry, and in this sector plans are being realized much faster than was originally thought possible. Typical is the new Batik Co-operative Society of Jogjakarta, set up to build a factory to weave cambrics for batiks, the skirts worn as the national dress of Indonesian women.
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INDONESIA’S natural resources give our country a huge economic potential. But in developing them according to a logical and effective plan, we face many difficult ies which are not so easily overcome. The three main obstacles are lack of capital, shortage of technical experts, and an unbalanced budget.
Capital formation is perhaps our greatest problem. We welcome investment from abroad, if it will benefit rather than exploit our people, but, unfortunately, not all the capital needed can be borrowed overseas. A portion must be domestic capital and that is what Indonesians do not. have. To protect our national interest we must insist that majority control of basic industries be in Indonesian hands, a condition which is not always attractive to the foreign investor, who usually prefers an undertaking which he can manage as he wishes. The farthest the government will go is to have mixed enterprises, half of the capital being the government’s and the other half that of foreign investors.
Our transmigration plan will cost, billions of rupiahs, funds which cannot be repaid in less than fifteen or twenty years because the repayment must come from revenues from the new prosperity created in the transmigration areas. Such a long-term investment has little appeal to foreign lenders. Therefore the program is still in low gear — smallscale transmigrations not exceeding fifty thousand persons a year — paid for out of the state budget. We cannot yet finance the giant bulldozers needed for road-making, felling trees, and leveling land. Heavy work like clearing forests, carving out plantations or paddy fields, and digging irrigation ditches — all of which should be done with machines— is still being performed manually with axes and spades. Houses, too, are erected in primitive fashion, even if they are superior to those the transmigrants left behind in Java. Because of these factors our “modern colonizing” is far behind schedule.
Our shortage of technical experts is also serious. To meet it we are sending more Indonesian students overseas, setting up as many trade schools as possible, and importing some help from abroad. Lack of technical advice keeps productivity and efficiency low in many fields of reconstruction. The fact that the volume of work in Indonesia can be increased by skilled guidance has been proved by the experience of certain foreign firms in their Indonesian factories.
Finally, there is the budget deficit. Many development projects which should really have been financed by loans were paid for out of current receipts. This put a big load on the national budget. The expenditures mounted each year, without any corresponding rise in income, and the deficit became progressively larger. In a rich country, where large segments of the population have savings to invest, such a deficit can be offset by domestic loans. In Indonesia this is impossible. In the end it was found necessary to meet the deficit by a loan from the central bank — Bank Indonesia — which simply means that the amount of money in circulation was increased. This led to an inflationary spiral which has become a most pressing problem.
Everyone in Indonesia knows that the shortage in government finance can only be overcome by increasing production. But this is something that can only be realized with time. Meanwhile, the only way to curb the inflation caused by the deficit is to borrow money from abroad on a long-term basis for three or four years consecutively, these loans being of both a productive and consumptive nature. The consumptive loans will be used to purchase goods abroad which the government will resell for cash to distributive traders’ organizations or cooperatives inside the country. This will reduce the amount of currency in circulation and the money withdrawn by the government from circulation can be applied to budget deficit. At the same time, with better control over distribution, efforts can be made to lower the price of goods.
I hope that this brief description is enough to afford a picture of the strength and weakness of the Indonesian economy. Its potential strength lies in its abounding natural resources — surpassed only by the United States and the U.S.S.R. —and the extent and fertility of the land. Producing 40% of the world’s rubber supply, Indonesia also provides 30% of the world’s pepper; 33% of its copra; 24% of its palm oil; 8% of its lea; 6% of its sisal fibers; 2% of its sugar; 2½% of its coffee; 6% of its tobacco; 1½% of its petroleum products; and 20% of its tin. In addition to Indonesia’s mineral wealth in crude oil and tin, there are also sizable deposits of coal, bauxite, manganese, copper, nickel, gold, and silver. This is the positive aspect of the picture; the weakness still to be overcome lies in the lack of capital, technical experts, and the state’s financial difficulties.
Indonesia’s creative power is growing. This is especially noticeable in the field of co-operatives, as evidenced by comparing the year 1930 with 1954. In 1939 there were 574 co-operatives with 52,261 members; in 1954, 9,614 co-operatives with 1,648,037 members. Working funds and reserves have risen proportionately. And the number is increasing every month. July 12th of every year is our national Co-operative Movement Day, with a week-long savings campaign and contest. The co-operative branch which saves the most during that week is given an award and national publicity. The figures show that the amount of money going into co-operative funds every year is most satisfying. The movement also maintains its own school to train future officers for co-operatives.
Compared with the capital Indonesia needs to reconstruct her economy, the funds held by cooperatives may seem insignificant, but when it is remembered that this is an effort by those of whom the majority are poor, the results demonstrate a strong desire to improve iheir lot through autoactivity. This spirit among the people encourages our confidence that the problems besetting Indonesia’s economy will ultimately be overcome.