History of Capitalist Development in Indonesia: Part Two - National Independence and the Old Order

The defeat of the PKI (Indonesian Communist Party) in the 1920s led to the handing over of the leadership of the national liberation struggle to the emerging national bourgeoisie which was tied hand and foot to imperialism. While the national bourgeoisie was inherently incapable of completing the task of national liberation, the Stalinist PKI in the 1950s adopted the incorrect two-stage theory, which was later to lead to the bloodiest counter-revolution in 1965.

National Independence

Practically since the physical annihilation of the PKI in 1927, the stage for the nationalist movement was dominated by the bourgeois-nationalist elements of the likes of Soekarno and Mohammad Hatta. The defeat of the PKI in 1927 and the following Great Depression – that hit Indonesia particularly hard because its economy was so dependent on international economy (while the population rose from some 61 million in 1930 to 71 million in 1940, national income fell from 3.5 billion guilder to 2 billion guilder[1]) – opened a period of semi-reaction in Indonesia, where the nationalist movement took a step back politically and organizationally. Some 13,000 arrests were made where thousands were consigned to the notorious concentration camp at Boven Digul, the Siberia of Indonesia.

It was not until the defeat of Dutch forces in Indonesia at the hands of Japan in 1942, marking the end of three-and-a-half centuries of Dutch colonization and the beginning of the three-and-a-half year Japanese occupation, that the Indonesian nationalist movement gained momentum. Although to be sure, the brand of nationalism that emerged was that of bourgeois nationalism that was strictly controlled by Japan within the Greater East Asia Co-Prosperity Sphere, with the slogan “Asia for the Asians”. The Japanese force took under their wing prominent Indonesian leaders, amongst them were Soekarno and Hatta, in order to gain support from the Indonesian masses for their war machine to help defend their conquered territories from the Allied forces. In the meantime, other leaders who showed pro-socialist leanings were ruthlessly crushed. Only Japanese-sanctioned organizations were allowed, such as Putera and Djawa Hokokai. These organizations were nothing but the instruments of Japanese compulsion and control.

Behind Japan’s promise to grant Indonesia independence was an attempt to control the nationalist movement, so that if Indonesia did gain its independence it would still be under their direct rule. The kind of nationalist leaders that were being groomed by the Japanese showed their true colour when the decisive moment came. Even after the surrender of Japan on August 15th 1945, Soekarno and Hatta were afraid to proclaim Indonesian independence without consulting the Japanese beforehand. They had to be forced by the militant youth, who objected that Indonesia should get their independence as a gift from Japan. Especially with the unconditional surrender of Japan, where by that time it meant that the Japanese armed forces in Indonesia were to act as the representative of the Allied forces that would transfer the colony back to the Dutch.

After much parleying and hesitation, on the morning of 17 August 1945, Soekarno proclaimed the independence of Indonesia, and thus began the new chapter of Indonesia’s independence struggle, fought on the military plane against the Allied forces and on the political plane between the reformists and the revolutionaries. The former, personified by Hatta and Sjahrir, were content to have Indonesia independent under the thumbs of imperialism, while the latter, personified by Tan Malaka and his united front Persatuan Perjuangan (United Struggle), demanded 100% independence. The revolutionaries fought valiantly against the Allied Powers and also against the nationalist leaders like Hatta who sought to capitulate to the imperialist powers and return all Dutch companies and plantations which practically meant subordinating Indonesia economically to the Dutch. These bourgeois nationalists sent their troops against the people's militias who were fighting to defend their newly-founded nation. Thousands of brave young fighters, who were deemed too revolutionary, were hunted down and killed by the government's army, including Tan Malaka in 1949.

On December 27, 1949, after many courageous battles, which claimed the lives of more than 200,000 Indonesians, the Dutch were forced to recognize Indonesian sovereignty. However, the nationalist leaders had sold out the whole of Indonesia by agreeing to return all Dutch companies, agricultural lands and mines and pay the sum of 4.3 billion Guilders (or the equivalent to US$10.1 billion in 2009) which was the cost of Dutch military aggression against Indonesia in the previous four years. This put the whole of the Indonesian economy under the thumb of the imperialists and the programme of 100% independence was betrayed.

The Old Order

The Indonesian economy in the 1950s was characterized as the “chronic dropout” by Benjamin Higgins, the author of the most influential book on Economics Development during that period. He concluded that “Indonesia must surely be accounted the number one failure among the major underdeveloped countries”.[2]

Sultan Hamengkubuwono IX in 1966 explained the situation as followed: “Any person who entertains the idea that Indonesian society is experiencing a favourable economic situation is guilty of lack of intensive study... If we fulfil all our [foreign debt] obligations, we have no foreign exchange left to spend for our routine needs... In 1965 prices in general rose by more than 500 percent... In the 1950s the state budget sustained deficits of 10 to 30 percent of receipts and in the 1960s it soared to more than 100 percent. In 1965, it even reached 300 percent.”[3]

The social condition was no better, with the contrast between rich and poor sharpening at that time despite the repeated announcement by the Soekarno government of a goal of a just and a prosperous society. This is highlighted by the following quote from an informed observer of Indonesia during the mid-1960s: “... the scale of conspicuous consumption in Djakarta seems to have grown... the sharp increase in the number of passenger cars, at a time when public transport is deteriorating seriously, gives some indication of the gap... every time there are new import-export provisions taken to halt the import of luxury goods, but somehow they always get in.”[4]

Table 3. Indicators of Indonesian Economic Development, 1960-1965[5]

  1960 1961 1962 1963 1964 1965
NDP (Rp Billion), 1960 Prices 391 407 403 396 407 430
Per capita income, % change -1.6 1.7 -3.0 -4.0 0.3 3.2
Budget deficit as % of expenditure 17 30 39 51 58 63
Money supply (M1), % increase 37 41 101 94 156 302
Inflation (CPI, % increase) 20 95 156 129 135 594

The above raw economic indicator during the period 1960-65 clearly shows that the Indonesian economy was declining in a catastrophic manner. Within five years, inflation rose from 20% to 600%, the budget deficit rose from 17% to 63%. The immediate and direct causes of this rising inflation, which for the workers and peasants meant a decline in their real wages, were not difficult to detect. The money supply began to rise very quickly from 40% in the early 1960s to 300% by 1965. This increase in the money supply was fed directly by the budget deficit, which the government dealt with by printing more money.

The main narrative that had been churned out by the Western capitalist powers was that Soekarno, like many other Third World leaders of his time, paid disproportionate attention to political issues at the expense of economic ones; that he politicized the country to the extreme and as a result diminished economic growth. However, this narrative doesn’t recognize the fact that political consolidation was an important step that had to be taken by this newly born Republic. The Allied Forces had sown great chaos in the Republic, economically and politically. The imperialist policy at that time was to break Indonesia up into smaller weaker states by promoting secessionist movements throughout the archipelago. Numerous rebellions, many sponsored and backed by the imperialists, broke out which threatened national unity, which not only had to be dealt with militarily but also politically. The military endeavour to fight the secessionists was one of the main factors that bankrupted the government.

The Soekarno government tried to balance between the two main forces: the communist forces and the army forces under the reactionary generals. Behind the Communists were the working class, poor peasants, the urban poor, and many left-wing intellectuals, artists, and nationalists. Behind the reactionary generals were the rich landowners, right-wing nationalists, and most importantly the imperialist forces. The halfway measures of the Soekarno government, i.e. wallowing in revolutionary phrases without completing the socialist revolution, doing away with capitalism altogether and implementing a planned economy under the democratic control of the workers, and on the other hand the refusal of the Indonesian Communist Party to take power because they were tied hand and foot to the national bourgeoisie (according to their two-stage theory), led to the defeat of the working class. In the class struggle, there is only one rule: one class has to win and the other has to lose. A situation of pitched class struggle, as it was in Indonesia during the late 1950s to mid-1960s, could not be maintained forever. One class had to give. The PKI’s insistence on putting the class struggle to one side by subordinating it to the national struggle led to their destruction. The PKI refsued to recognize the class struggle, but the class struggle recognized the PKI.

1965 and US imperialism

The G30S [the 1965 30th September Movement, in Indonesian Gerakan 30 September, abbreviated to G30S) was a counter-revolution that spelt a complete reversal in Indonesian and world politics. Here, the fourth largest nation with the largest Communist party after China and the Soviet Union, went from being a staunch anti-imperialist country to a quiet compliant partner of US imperialism. Before the coup, the US embassy had been forced to send home nearly all of its personnel and shut down consulates outside Jakarta because of militant PKI-led demonstrations. Workers were seizing plantations and oil wells owned by US companies, and Sukarno was threatening to nationalize them. The threat of Indonesia going communist was real and this event had the potential to turn the Southeast Asian region red as well.

A high level intelligence report prepared in early September 1965 argued that “Sukarno’s Indonesia already acts in important respects like a Communist state and is more openly hostile to the U.S. than most Communist nations.” The report also predicted that the Indonesian government would become completely dominated by the PKI within two or three years, and that “in the short term, Indonesia’s formal accession to communism would have a heavy impact on world politics. It would be seen as a major change in the international balance of political forces and would inject new life into the thesis that communism is the wave of the future.”[6]

Indonesia was considered to be the largest domino in Southeast Asia. In a 1965 speech, Richard Nixon justified the bombing of North Vietnam as a means to safeguard Indonesia’s “immense mineral potential”. Historian Dr. John Roosa asserted that the ground troops that started to arrive in Vietnam in March 1965 would be superfluous if the Communists won a victory in a much larger and more strategic country, Indonesia. A PKI takeover in Indonesia would render the US intervention in Vietnam futile[7]. Robert McNamara, the secretary of defense under President John F. Kennedy and Lyndon B. Johnson, has argued that the US should have downscaled its involvement in Vietnam after the annihilation of the PKI in Indonesia.[8] Once Indonesia, the major Southeast Asian domino had been secured safely, US policy makers should have realized that Vietnam was not as crucial as it had first seemed, argued McNamara. However, by that time, the war in Vietnam had acquired its own logic, divorced from the domino theory. The victory of the US in Vietnam, after the fall of PKI, was needed more to preserve the prestige of the US government and to avoid humiliation of losing a war than it to contain communism in Southeast Asia.

As the previous section has shown, Indonesia is of importance to world capitalism because of its abundance of natural resources. After the World War Two, the US assigned Indonesia to Japan’s economic sphere of influence; Indonesia’s oil, minerals, and plantation crop would fuel the industrialization of Japan. The main concern of the US was the security of Japan, whose cheap access to Indonesia’s vast resources it believed crucial to keep it safely in the US camp. This can be seen from the export statistics post-1965, where Japan become the main export destination of Indonesian products, from around 3-7% export share from 1958-1962 to around 50% in the 1970s and 80s.[9]

[To be continued...]


[1] Malcolm Caldwell and Ernst Utrecht, Indonesia, An Alternative History (Sydney: Alternative Publishing Co-operative Limited, 1979) 35.

[2] Benjamin Higgins, Economic Development (New York: W.W Norton, 1969)

[3] Sultan Hamengkubuwono IX, quoted in J. Panglaykim and H.W. Arndt, Survey of Recent Developments, Bulletin of Indonesian Economic Studies, 1966

[4] Castles, L. Socialism an Private Business: The Latest Phase, Bulletin of Indonesian Economic Studies, 1965, No. 1, pp. 13-45

[5] Hal Hill, The Indonesian Economy (Cambridge: Cambridge University Press, 2000) 3.

[6] “The Prospects for and Strategic Implications of a Communist Takeover in Indonesia”, September 1, 1965. Prepared by the CIA, National Security Agency, Defense Intelligence Agency, and the State Department’s intelligence section

[7] John Roosa, Pretext for Mass Murder: The September 30th Movement and Soeharto Coup D’Etat in Indonesia (Madison: The University of Wisconsin Press, 2006)

[8] Robert McNamara, In Retrospect: The Tragedy and Lessons of Vietnam, 1995.

[9] Kano 79, 92.