1. Background of Economic Policies in the New Order Era
When Soeharto came to power in the late 1960s, Indonesia’s economy was in dire condition. Inflation was soaring, foreign debt was high, and the government struggled to meet the basic needs of its people. To address this crisis, Soeharto’s government implemented economic policies focused on long-term development, macroeconomic stability, and increasing productivity in the agricultural and industrial sectors.
Soeharto enlisted the help of economists known as the “Berkeley Mafia” to design market-friendly policies that encouraged foreign investment. Through these measures, Indonesia successfully curbed inflation, increased food production, and attracted foreign capital needed to finance infrastructure development.
2. Tax Reforms During Soeharto’s Era
At the beginning of his administration, Indonesia’s taxation system was far from optimal. Tax revenues were low, and tax reporting was inefficient. Therefore, tax reform became a priority in Soeharto’s economic policies. Tax reforms began in the mid-1980s, aiming to increase state revenues, create a better investment climate, and improve efficiency in tax collection.
Tax Reform Steps:
Income Tax Law of 1984: One major reform occurred with the enactment of Law No. 7 of 1983 concerning Income Tax, which took effect in 1984. This law simplified the tax structure, reduced tax rates, and broadened the tax base to include more income types.
Value-Added Tax (VAT): Law No. 8 of 1983 on Value-Added Tax replaced the old sales tax system. VAT was designed to be more transparent, easier to monitor, and more consistent with international standards. Since its implementation, VAT has become one of the main sources of state revenue.
Improvement of Tax Administration: The New Order government also improved tax administration by introducing a self-assessment system, allowing taxpayers to calculate the amount of tax they owed, thereby increasing efficiency and compliance.
3. Economic Development Policies
Soeharto prioritized economic development. Three key sectors became the focus of his economic policies:
Agriculture and the Green Revolution: Under Soeharto’s leadership, Indonesia experienced a green revolution with significant increases in rice production. This program was supported by large investments in the agricultural sector, modern technology, and subsidies for fertilizers and seeds.
Industry: In the 1980s, the government shifted its focus from agriculture to the industrial sector. Through import substitution and export promotion policies, the government aimed to enhance the national industry’s ability to compete in international markets. The development of industrial zones such as Pulogadung in Jakarta and Batam was one strategic step.
Natural Resource Management: Revenues from oil and gas exports became the primary source of state revenue during the 1970s and early 1980s. The government used these revenues to finance large infrastructure projects, including highways, dams, and ports.
4. Impact of Economic and Tax Policies
The economic and tax policies implemented during Soeharto’s era had a significant impact on Indonesia’s economy.
Macroeconomic Stability: Stabilization policies successfully reduced inflation and created stable economic growth throughout the 1970s and 1980s. This stability created a conducive environment for foreign investment and domestic industrial development.
High Economic Growth: Indonesia recorded significant economic growth, with an average Gross Domestic Product (GDP) growth of about 7% per year during the 1970s until the early 1990s. Poverty levels also significantly declined during this era.
Dependence on Oil: Although Indonesia’s economic growth was impressive, its reliance on oil as the main source of state revenue was one of the weaknesses of Soeharto’s economic policies. When global oil prices fell in the mid-1980s, Indonesia experienced a decline in revenues and had to seek alternative sources of economic growth.
5. Challenges and Criticism
Despite the successes of Soeharto’s economic policies, there were criticisms that cannot be ignored. One major issue was the high level of corruption in government bureaucracy, which undermined state revenues from taxes and other sources. Additionally, the growth-centered development model often neglected the aspect of equitable welfare distribution, exacerbating inequality between regions.
Conclusion
Soeharto’s era marked a crucial period in Indonesia’s economic history, with tax and economic policies that laid the foundation for stable growth and improvements in the standard of living. The tax reforms implemented during this era, such as the introduction of VAT and improvements in tax administration, successfully increased state revenues and improved financial management efficiency. However, alongside these successes, there were also challenges, including the dependence on oil and issues of corruption within the bureaucracy. Soeharto’s economic legacy continues to impact Indonesia today, though several structural issues still require further solutions in the present.