Its free-market reformers and its industrial planners backed rival roads to development. Both left out the one thing that would have made the difference, so it never mattered who won.
This is an excellent and thought-provoking essay. Stephen Brien succeeds in shifting the debate away from the familiar opposition between market-oriented reforms and state-led industrial policy, and toward a more fundamental question: what kinds of firms and behaviours the state actually rewards. His concept of a "governing orientation" is a particularly useful way of connecting macroeconomic performance, industrial outcomes, and political coalitions.
There are important points of convergence with my own work on Indonesia. I also argue that the country's developmental trajectory cannot be understood simply through the lens of policy choices or institutional design. The political foundations of growth matter, as do the interests and coalitions that shape state action. Stephen's emphasis on the inability—or unwillingness—of the New Order to discipline politically connected firms offers a powerful explanation for why Indonesia achieved remarkable growth and poverty reduction while failing to generate globally competitive national champions.
Where I would place a somewhat different emphasis is on the broader historical and social context of Indonesia's development. In my view, the weakness of domestic productive capabilities was not only a consequence of elite incentives and political settlements, but also of the way Indonesia was integrated into the global economy, the legacy of labour repression, and the limited development of institutions capable of fostering technological learning and innovation. The absence of effective firm-level discipline was certainly important, but it interacted with wider structural constraints.
Nevertheless, I believe Stephen's essay makes a significant contribution by bringing the discussion back to a crucial question that is often overlooked: not whether the state intervenes, but whether it can create incentives that reward productivity, learning, and technological upgrading rather than political proximity. It is a valuable contribution to the debate on why Indonesia's impressive developmental achievements stopped short of full industrial transformation.
Thanks for your generous comments. I agree that we are looking at an ecosystem with high causal density. My focus has been on the role of governing orientation in shaping Indonesia's trajectory (and those of other countries). Fully agree that there are many other confounding factors that need to be considered in a holistic assessment of the causes of a country's development. My next post will touch on a few of these. You are also correct to call them out, and I should be clearer in recognising other contributory factors.
Thus 'discilpining' firms, often presented as an innocently rational and technocratic act, in reality is a highly political one with grave, possibly fatal, consequences for the regime bold enough to attempt it. Safer to be satisfied with permanent middle income status!
I agree that 'disciplining' firms is a highly political move. When associated with clear rules and transparency, such conditionality can operate within a rule of law. However, too often, this is not the case. That said, if permanent middle-income status were the aim, there might well be better ways of achieving it than a form of inconsistent industrial policy.
Regimes are deeply conflicted: of course all Global South regimes aspire to high income status and rightly so. At the same time few are in the geopolitical or domestic position to pursue it without their political base uunravelling. Firms push back hard with much local and foreign support. Not an easy road
This is a sharp way to frame Indonesia’s development puzzle: not simply state vs market, but what the system actually rewards.
One point I would add is that this does not necessarily weaken the case for an active state. In fact, Indonesia’s current development agenda still needs a capable state: one that can coordinate industrial policy, infrastructure, skills, social protection, and investment. The harder question is what kind of discipline the state applies after it intervenes.
That question matters for labor as well. If firms are supported without a productivity test, and workers absorb adjustment through informality, short-hour work, or unstable platform work, then the system may preserve activity without upgrading capability.
So perhaps the lesson is not that the government should step back, but that state intervention needs clearer performance conditions. Support should lead to better firms, better jobs, and stronger worker capability, not only stable macro numbers or protected incumbents.
That seems like one place where Indonesia’s old development problem still echoes in the present.
This is an excellent and thought-provoking essay. Stephen Brien succeeds in shifting the debate away from the familiar opposition between market-oriented reforms and state-led industrial policy, and toward a more fundamental question: what kinds of firms and behaviours the state actually rewards. His concept of a "governing orientation" is a particularly useful way of connecting macroeconomic performance, industrial outcomes, and political coalitions.
There are important points of convergence with my own work on Indonesia. I also argue that the country's developmental trajectory cannot be understood simply through the lens of policy choices or institutional design. The political foundations of growth matter, as do the interests and coalitions that shape state action. Stephen's emphasis on the inability—or unwillingness—of the New Order to discipline politically connected firms offers a powerful explanation for why Indonesia achieved remarkable growth and poverty reduction while failing to generate globally competitive national champions.
Where I would place a somewhat different emphasis is on the broader historical and social context of Indonesia's development. In my view, the weakness of domestic productive capabilities was not only a consequence of elite incentives and political settlements, but also of the way Indonesia was integrated into the global economy, the legacy of labour repression, and the limited development of institutions capable of fostering technological learning and innovation. The absence of effective firm-level discipline was certainly important, but it interacted with wider structural constraints.
Nevertheless, I believe Stephen's essay makes a significant contribution by bringing the discussion back to a crucial question that is often overlooked: not whether the state intervenes, but whether it can create incentives that reward productivity, learning, and technological upgrading rather than political proximity. It is a valuable contribution to the debate on why Indonesia's impressive developmental achievements stopped short of full industrial transformation.
Thanks for your generous comments. I agree that we are looking at an ecosystem with high causal density. My focus has been on the role of governing orientation in shaping Indonesia's trajectory (and those of other countries). Fully agree that there are many other confounding factors that need to be considered in a holistic assessment of the causes of a country's development. My next post will touch on a few of these. You are also correct to call them out, and I should be clearer in recognising other contributory factors.
Thus 'discilpining' firms, often presented as an innocently rational and technocratic act, in reality is a highly political one with grave, possibly fatal, consequences for the regime bold enough to attempt it. Safer to be satisfied with permanent middle income status!
I agree that 'disciplining' firms is a highly political move. When associated with clear rules and transparency, such conditionality can operate within a rule of law. However, too often, this is not the case. That said, if permanent middle-income status were the aim, there might well be better ways of achieving it than a form of inconsistent industrial policy.
Regimes are deeply conflicted: of course all Global South regimes aspire to high income status and rightly so. At the same time few are in the geopolitical or domestic position to pursue it without their political base uunravelling. Firms push back hard with much local and foreign support. Not an easy road
Agree - a topic of focus for my posts on reform.
https://hiddenrules.substack.com/p/the-wall-nobody-has-tested
https://hiddenrules.substack.com/p/reform-windows-are-made-not-found
. . . with more on the way. This is the tough challenge.
This is a sharp way to frame Indonesia’s development puzzle: not simply state vs market, but what the system actually rewards.
One point I would add is that this does not necessarily weaken the case for an active state. In fact, Indonesia’s current development agenda still needs a capable state: one that can coordinate industrial policy, infrastructure, skills, social protection, and investment. The harder question is what kind of discipline the state applies after it intervenes.
That question matters for labor as well. If firms are supported without a productivity test, and workers absorb adjustment through informality, short-hour work, or unstable platform work, then the system may preserve activity without upgrading capability.
So perhaps the lesson is not that the government should step back, but that state intervention needs clearer performance conditions. Support should lead to better firms, better jobs, and stronger worker capability, not only stable macro numbers or protected incumbents.
That seems like one place where Indonesia’s old development problem still echoes in the present.
great post