Islam and Economic Development in New Order's Indonesia (1967-1998)

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E A S T - W E S T C E N T E R W O R K I N G P A P E R S
International Graduate Student Conference Series
No. 12, 2004
Islam and Economic Development
in New Order's Indonesia (1967-
1998)
Muhamad Ali
Muhamad Ali is a Ph.D. candidate in the Department of
History, University of Hawaii at Manoa. He is also an East-
West Center Degree Fellow. He can be reached at
muhamad@hawaii.edu.
This paper was presented at the 3rd East-West Center
International Graduate Student Conference, February 19-21,
2004 in Honolulu, Hawaii.
East-West Center Working Papers: International Graduate
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Islam and Economic Development in New Order’s Indonesia (1967-1998)
Muhamad Ali
Introduction
This paper examines the relationship between Islam and economic development in
Indonesia during the New Order era (1967-1998). It scrutinizes some of the ideas and
attitudes expressed by the New Order government and by some important Muslim
institutions and individuals toward the relationships between Islam and economic
development. It seeks to explain how President Soeharto who ruled from 1967 to 1998
attempted to accommodate the Muslim community to the ideology of economic development
and how some of the Muslim organizations and leaders responded to such efforts.
It suggests that Soeharto’s consistent attempt to introduce development ideology was
generally well received by the Muslims because many of the Muslim organizations and
leaders had understood that Islam is not an impediment to economic development. Both
national and local Islamic institutions carried out their own economic activities according to
their circumstances, or sought cooperation with other communities, or obtained the
government’s support. It suggests that the collaboration between the Muslims and the
Soeharto’s government during the New Order era seemed to have been motivated by both
religious and pragmatic considerations, as the Muslims seemed to see no contradiction
between material and spiritual needs. Based on some official documents and Muslim
writings concerning Islam and development, it hopefully contributes not only to an historical
understanding of Indonesian Muslims in their relations with developmental issues, but also
to a theoretical debate on the relationship between religion and development that has
attracted much attention from historians and social scientists such as Max Weber and
Maxime on the relationships between Islam and Capitalism.1 Many Indonesian Muslim
scholars have also joined the debate on this unresolved question of religion and economic
development.2

1 Max Weber, The Protestant Ethic and the Spirit of Capitalism (New York: 1958); Maxime Rodinson, Islam and
Capitalism, trans. Brian Pearce (New York: Pantheon Books, 1973).
2 For example, Aidit Ghazali, Development: An Islamic Perspective (Petaling Jaya: Pelanduk Publications, 1990);
Sri Mulyati et all, Islam and Development: A Politico-Religious Response (Montreal: Permika & Lembaga &
Penerjemah & Penulis Muslim Indonesia, 1997).
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Islam and the Concept of Development in Indonesia
Islam, like other religions, is a complex, multifaceted phenomenon. There has never been
one single history of Islam. There are multiple histories of Islam. Islam has many faces; it
has more common characteristics that can be seen since the Prophet Muhammad until
today, but it shows diversity. It is therefore helpful for Muslims and non-Muslims to
understand Islam and its relations with other aspects, such as development, in its context,
as interpreted and practiced by particular agencies in particular time and place. Indonesian
Muslims may have similar features as Saudi Muslims since they attempt to follow the Koran
and the Prophetic tradition, but they have shown striking differences as well, because they
interpreted the scriptures and the tradition differently according to their circumstances.
Indonesia is admittedly the largest Muslim nation in the world. Muslims are the majority part
of Indonesia’s population. Since its independence of 1945, Muslims has made up some 87
percent of Indonesia’s population, which ranged from 127 million in 1945 to 230 million in
2003. But Islam has not always been the same throughout its history in Indonesia as
elsewhere. To summarize the history of Islam in Indonesia, in pre-colonial era, Islam was
brought more significantly since the thirteenth century by the Arab, Indian and Chinese
traders and missionaries through trade, marriage, and missionary interactions. During the
pre-colonial time (from fifteenth to mid-seventeenth century), Indonesian archipelago
became part of Southeast Asia “Age of Commerce” in which international maritime trade
shaped the life of the communities especially in coastal areas, and where urbanization and
modernization took place before it entered the period of crisis when Europeans came to the
region and dominated the economic and political life.3
Development has been defined as ‘general improvement in the standard of living’.
Development implies a transformation of way of life from traditionalism to modernism.
Development is very connected with modernization.4 This close connection suggests that
development reflects Western paradigm on social transformation. Development and steps
toward higher modernity or from traditionalism to modernity became identical.5 From this

3 Anthony Reid, Southeast Asia in the Age of Commerce, vol 1 & 2 (New Haven and London: Yale University
Press, 1993). The criticism to Reid came from other scholars such as Victor Lieberman, Strange Parallels:
Southeast Asia in Global Context, c.800-1830 ( Cambridge: The Press Syndicate of the University of Cambridge,
2003).
4 Mansour Faqih, “Tinjauan Kritis terhadap Paradigma dan Teori Pembangunan”, in Masdar F.Mas’udi (ed),
Teologi Tanah (Jakarta: P3M, 1994), hal.38-9.
5 Mansour Faqih, Runtuhnya Teori Pembangunan dan Globalisasi (Yogyakarta: Pustaka Pelajar & Insist Press,
2001), hal.202-3.
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broad definition, we should examine how it was interpreted and applied in different countries
and institutions. For example, United Nations Educational Scientific and Cultural
Organization (UNESCO) defined development as an effort toward a complete human
progress. UNESCO states, “Development is meaningful only if man, who is both its
instrument and beneficiary, is also its justification and its end. It must be integrated and
harmonized; in other words, it must permit the full development of the human being on the
spiritual, moral, and material levels, thus ensuring the rights of man in society through
respect for the Universal Declaration of Human Rights.”6 In the Third World, development
was generally defined as a gradual movement toward modernity in the economic, military,
and political levels.7
In colonial era, the Dutch colonials attempted to integrate Indonesian economy into world
economy especially in Java. But this took place in the context of colonial exploitation and
forced labor which created anti-colonialism in the region as well as others.8 As Indonesia
gained independence in 1945, the leader of the newly-born nation, Soekarno struggled for
maintaining the independence already declared and for ensuring the political integrity within
ethnic and religious diversity, and sought international recognition. The key political term
during the period 1945-1950 was freedom (kebebasan) from foreign powers. However,
Muhammad Hatta, the then vice president, introduced the term development
(pembangunan) in 1948 when he became prime-minister, but it came to bear some narrow
meaning: rationalization of the army and government officials to improve production. From
1950 to 1966, the concept of democracy (demokrasi) replaced the concept of development
(pembangunan) and Soekarno created a Guided Democracy. Yet again Hatta still attempted
to popularize his concept of development. In 1951, Hatta argued for close connection
between culture and development and maintained that cultural development is a basis of
economic development, because without cultural development, economic development
would lose its direction. In 1958 in front of the Coordinative Board of Islamic Organization,
Jakarta, Hatta even more specifically talked about the relations between Islam and
development, suggesting that Islam is a source of value and motivation for development in

6 This is contained in the communication from the UNESCO’s Executive Board to the Intergovernmental
Preparatory Committee which was working in the program and strategy for the Second UN’s Development
Decade, September 1969, in Aidit Ghazali, Development: An Islamic Perspective, p.40.
7 Mansour Faqih, “Tinjauan Kritis”, p.40.
8 See for example, G.Roger Knight, Narratives of Colonialism: Sugar, Java, and the Dutch (Huntington: Nova
Science Publishers, Inc., 2000); Clifford Geertz, Agricultural Involution: The Processes of Ecological Change in
Indonesia (Berkeley, Los Angeles & London: University of California Press, 1963).
3

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the framework of creating a new society. But another political jargon during this period,
revolution (revolusi) for social transformation, was far more pervasive and became quickly a
predominant jargon within the political struggle. Therefore, the Soekarno’s government
focused more on political and diplomatic struggles, with few economic programs.
In the 1960s, the struggle of ideology among Muslims, communists and nationalists was so
intense that Soekarno attempted to combine nationalism, religion, and communism which
however came to a failure due to lack of support. Soekarno’s statement that religion is a
basic element of the nation and character-building failed to convince the religious groups to
collaborate with the communists. Communists, nationalists, Christians, and Muslims were so
divided in ideological and political lines that none emphasized the urgency of development.
During this period (1945-1966), Soekarno hardly promoted a specific economic
development. Consequently, since 1961, annual inflation reached 650 percent and was
uncontrolled until 1969.
Since 1966, the term ‘modernization’ emerged and replaced revolution for a short time. Yet
the term modernization became controversial because it was suspected as an adoption of
Westernization and secularization. The term development (pembangunan) then replaced the
term modernization. Pembangunan did not emerge in public until the New Order
government under Soeharto established its cabinet and made the Five Year Development
Plan since 1969.9 The emergence of military and technocratic regime responsible for the
new development planning and implementation, constituted as a response to political
instability in the previous era. Now with a strong military government (thus, a relatively
strong nationalism) and a group of economists and social scientists, Soeharto began to
promote development as its primary governmental duty and attempted to maintain its
hegemony until he stepped down in 1998.
The Order of Development
Ever since taking office in 1967, the New Order Government of President Soeharto was
determined to return to a constitutional life by upholding the 1945 Constitution in a strict
manner and by respecting Pancasila as the state philosophy and ideology. To emerge from
the political and economic legacy of Soekarno’s era, the new government set up to

9 M. Dawam Rahardjo,”Islam dan Pembangunan: Agenda Penelitian Sosial di Indonesia”, Saiful Muzani (ed.),
Pembangunan dan Kebangkitan Islam di Asia Tenggara (Jakarta: PT Pustaka LP3ES, 1993), pp.263-5.
4

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undertake the following priorities: to complete the restoration of order and security and to
establish political stability, to carry out economic rehabilitation, and to prepare a plan for
national development and execute it with the emphasis on economic development. With this
commitment, the Soeharto’s government succeeded to gain foreign supports in the form of a
consortium of creditor countries, called the Inter-Governmental Group on Indonesia (IGGI),
which included the United States, Canada, Australia, New Zealand, Japan, Britain, and a
number of Western Europe, under the chairman of the Netherlands.10 In order to establish a
just-and-equitably-prosperous society in a material and spiritual sense based on Pancasila,
the People’s Consultative Assembly of the Republic of Indonesia established the Guidelines
of State Policy in a systematic pattern of National Development. The New Order’s
government attempted to implement the Trilogy of Development: economic growth, even
economic distribution, and political stability (growth, equity, and stability).11
Based on the basic premise that the essence if National Development is the development of
the complete Indonesian human being in all aspects of life and the development of the entire
Indonesian society, the basis for the execution of National Development is therefore the
Pancasila (the state ideology, consisting of five principles) and the 1945 Constitution.12 The
New Order viewed the form of the state of Indonesia neither as a socialist nor as a capitalist.
In a speech in front of Islamic clerics and preachers, minister of home affairs, H. Amir
Machmud attempted to explain the guidelines of national development. Indonesian nation-
state was neither a religious state (theocracy, either Christian or Islamic state), nor a
capitalist, nor a socialist, but a Pancasila state. The state is based on Pancasila and the
1945 Constitution. In economic terms, as stipulated in the Constitution, Indonesian economy
shall be based on familial togetherness (kekeluargaan). The state shall control production
sectors that are vital to the state and for the benefit of the people. Land, water, and all
resources contained shall be controlled by the state and be employed for the well-being of
the people. The poor, orphans, and disadvantaged children will be taken care of by the
state. These are the main principles of the economic development. 13

10 Currently, the IGGI has been replaced by the Consultative Group for Indonesia (CGI) consisting of the former
members of IGGI (except the Netherlands) and five new creditors. See Kosky Zakaria et all (eds) Indonesia
1999: An Official Book, (Jakarta: Department of Information of the RI, 1999), pp.34.
11 Radius Prawiro, Indonesia’s Struggle for Economic Development: Pragmatism in Action (Kuala Lumpur;
Oxford University Press, 1998)
12 ibid., p. 61.
13 H. Amir Machmud, “Garis-garis Besar Haluan Negara”, Ulama dan Umara (Jakarta: Panitia Pekan Orientasi
Ulama/Khatib Seluruh Indonesia, 1978), pp.60-1.
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The New Order claimed to endorse an economic system of Pancasila, instead of capitalist or
socialist systems. The economics of Pancasila, according to Indonesian economist
Mubyarto, is inspired by the Pancasila values such as collective action based on
togetherness (kekeluargaan) and national solidarity. In other words, the Pancasila
economics is supposed to be concerned with more social justice, than capital accumulation
by the minority. Yet, despite taking distance from socialism and capitalism in ideological
terms, the New Order recruited neo-classic economists mostly graduating from American
universities, especially the University of California, Berkeley.14 To put development goals
into practice, Soeharto determined his economic development planners: Prof.Dr.Wijoyo
Nitisastro, Prof.Dr.Ali Wardhana, Prof.Dr.Sumitro, Dr.Radius Prawiro, Prof.Dr.Ir.Moch.Sadli,
Dr.Emil Salim, Dr. Frans Seda, and Prof.Dr.Subroto.15
The New Order claimed that its economic system was neither capitalism nor socialism.16
Instead, many of the officials and leaders liked to use the Pancasila economics. However,
for many, the New Order actually adopted a modified capitalist system, since its policies and
strategies were largely based on Western concepts and institutions.17 Indonesian
nationalism affected the ways in which the New Order viewed foreign concepts and
strategies. Besides, the government would regard Indonesia as neither a secular state nor
an Islamic state, and their economic system was not to subscribe to either path. In the early
period of the New Order (1960s and 1970s), in the absence of an Islamic economic system
and actual practices, the New Order was faced with only two alternatives: the socialist and
the capitalist, both being secular. The introduction of the economics of Pancasila should be
viewed within this context – especially when the government and society looked to their
national ideology believed to be a combination of different foreign and local ideologies under
the Pancasila.
Avoiding the perceived foreign ideologies of capitalism and socialism, Soeharto named his
cabinets instead with the Development Cabinet (Kabinet Pembangunan): 1968-73, 1973-78,

14 Mubyarto, Ekonomi Pancasila: Gagasan dan Kemungkinan (Jakarta: LP3ES, 1987), p.5; David Ransom, “The
Berkeley Mafia”, Ramparts, no.9 (1970).
15 ibid. p.262.
16 Dumairy, Perekonomian Indonesia (Jakarta: Penerbit Airlangga, 1997), p.35.
17 On eco