Answers for Indonesia

Karl FitzgeraldInternational1 Comment

by Bryan Kavanagh, Director, Land Values Research Group and blogger extraordinaire.

President Suharto has been poorly counseled by the International Monetary Fund. Its economic prescriptions are pointless and wrong. He needs to take independent economic action if he is to avoid the social chaos erupting out of Indonesia’s financial turmoil. He could do worse than immerse himself in the history of his own ‘Spice Islands’, the wealth of which centuries ago attracted the Portuguese and the Dutch to the great chain stretching between Malaya and New Guinea.

The Indonesian financial crisis is the result of a phenomenal land boom that was a re-run of the West’s late-1980s boom period. It is little remembered that a very similar financial collapse was experienced by the ‘Dutch East Indies’ in the wake of the Napoleonic Wars, and that an amazing Englishman employed a successful technique to overcome it.

After being overrun by France in 1793, Holland was considered an enemy state by Britain, and the British fleet began to take over her scattered and valuable overseas settlements: Cape Colony, Ceylon, the East Indies and various West Indian islands. In 1795, a force from India captured Malacca, and later planned to completely destroy the port and transfer its inhabitants to Penang. This plan was abandoned on the advice of the soon-to-become towering figure of Stamford Raffles.

Raffles had entered the service of the East India Company in London as a clerk at the age of fourteen. His keen mind soon attracted the attention of the governors, and he was sent to a post in Penang. On the way out he learnt the Malay language, his mastery of which brought him both advancement in the Indian Service and a profound knowledge of and admiration for the Malay people.

The British had long been interested in Java, the most prized tropical island in the world, but they believed it to be too strongly held: Raffles had better information. He knew that neither the Dutch nor the French had really conquered Java and that the Javanese were unfriendly to both. The remaining Dutch residents and Chinese traders, too, had good cause to aid a power at war with France. Raffles advised the Governor-General of British India, Lord Minto, who accordingly decided to seize Java. This occurred without serious resistance on 4 August 1811. On his departure in October of the same year, Lord Minto appointed Raffles Lieutenant-Governor of Java and its dependencies, telling him: ‘While we are in Java let us do all the good we can.’ Raffles set about doing all the good he could until he left Java in March 1816. During his Lieutenant-Governorship the Javanese achieved amazingly high degrees of liberty and prosperity.

Raffles laid the foundations that made this possible by restoring the way of life which the Javanese themselves had enjoyed before the coming of the French and the Dutch. He found their finances in a state not dissimilar to Indonesia’s current sorry pass. Taxation and restrictions on trade were rampant. The list of devices adopted by the Dutch and the French in order to sustain their monopoly over Javanese trade included tolls, taxes and restrictions across every activity of Javanese life. There was a 15 per cent tax upon the production of rice, a poll-tax upon families, and market duties, or tolls, levied literally on every article produced by agriculture, manufacture or the petty arts (distinctly resembling Australia’s proposed Goods and Services Tax) and there were additional levies made by Egg Boards, Dried Fruit Boards and similar bodies. There was a tax upon the slaughter of buffaloes, which affected the price of food and restricted the breeding of animals. There was a charge upon the cost of transport of baggage and stores of every description and upon the feeding of travelers. There were obligations to render free labour service for public works and forced contribution to Government monopolies. Duties and charges on seaborn commerce amounted to forty-six per cent. Under the onslaught of these ferocious taxes whole districts had become depopulated. There was a drift from the land to the towns and villages, and production of real wealth was declining rapidly. Amongst the first acts of Raffles – with Lord Minto’s concurrence – was the immediate abolition of most of these imposts.

Raffles had looked to Javanese history for answers, and discovered how a prosperous and glorious past on the great island had been effectively destroyed by the folly of invaders, ignorant or uncaring of Javanese land laws. Under these laws, there was no room for land speculation and monopoly which Java was experiencing. Land might be held for use, provided ground rent in full was paid over to the governing authority. The Malays and Javanese both had put into practice for many centuries the principles espoused by the physiocrat economists of the eighteenth century as having enormous potential for forestalling revolutionary foment in France.

Average land rent was estimated at two-fifths of the yield. The cultivator had free disposal of the rest of his produce, which was rice in most cases. He could pay his dues in rice or money. If in money, payment was to the desa headman, and thence to the divisional office. If in rice, he had to convey it at his own expense to Residency headquarters.

Raffles proceeded by diplomacy to overcome opposition and to secure the cooperation and friendship of the established chiefs and rulers. When they learned that through his Land Settlement Memorandum he proposed to completely restore the ancient system of Java, one by one, they accepted his authority without further question. Accompanied by his wife, he travelled over the island for the purpose of establishing his government and appointing suitable Javanese to carry out the details of administration. He was available to all.

Raffles had believed that the re-introduction of the land-rent system would provide a surplus to cover expenditure. The revenue did increase, and more than covered the normal operations of Government, but it was inadequate to cover, in addition, two crippling burdens with which the administration was unfairly encumbered. First was the payment of the cost of the wars of occupation. Second was the “appalling handicap” of carrying out Lord Minto’s promise to redeem, at the rate of 20 per cent discount, the paper money still circulating from the Dutch period. Raffles hoped that the island would continue to be held after the war was over, but recognised that neither the East India Company nor the British Government would want this unless it was self-financing – inclusive of these extra impositions. Hence, he had an enormous amount of external pressure continually exerted upon his administration (of which President Suharto and his IMF advisors could currently take a salutary warning). Raffles’ evaluation was confirmed later, when it inevitably transpired that these extra demands could not be fully covered from the revenue. The directors of the East India Company then accused him of rendering the occupation of Java “a source of financial embarrassment to the British Government”! It had clearly been the extra demands on his Treasury that prevented him from carrying out his proposals to abolish the toll gates and to free internal trade fully.

Raffles had dreamed of making a new British empire of the islands centred on Java. However, soon after the re-introduction of the Javanese land-rent system, Napoleon fell and the Netherlands regained independence. At the convention of London in August 1814, Britain agreed to restore Java to the Netherlands. This eventually happened in August 1816, in the wake of Napoleon’s escape to Elba. Whilst the Dutch did continue with the principle of Raffles’ land policy, they began to re-institute many of the old interferences with trade and industry.

When Indonesia finally passed from Dutch control in the twentieth century, the rate of land tax had become only 7.5 per cent of the full annual rental value, and impositions upon trade again flourished.

Public Recognition

In England, Raffles’ outstanding achievements and abilities were recognised, and a knighthood conferred upon him by the King. Whilst in Europe he took the opportunity of calling on the King of the Netherlands to make intercessions in favour of his former Dutch colleagues in Batavia, as well as the Princes of Java. He was successful, because the Dutch authorities had already reported favourably on the merits of the Raffles administration. Raffles afterwards observed, however: “The King and his leading Minister seem to mean well, but they have too great a hankering after profit – and immediate profit – for any liberal system to thrive under them.” (This insight into Indonesia’s ongoing plunder has been confirmed many years later: by President Sukarno’s inability to be able to grant economic freedom to his peasants in the years following independence from the Dutch in 1949; and by President Suharto’s recent failure to curb the corruption and land speculation in the 1990s.

Land Rent System in Sumatra

Raffles returned to Indonesia in 1818, this time to the island of Sumatra, as Governor of Bencoolen. When he returned the East India Company was deriving its main income from slavery, gaming, and cockfighting farms, together with the enforced growing of a few tons of pepper. He wiped out these sources of income on principle almost immediately. He was later reprimanded for disposing of the slaves, referred to officially as “the property of the Company”. Raffles was a friend of Wilberforce, and, not content with dealing with the Company’s slaves in this fashion, he also acquired the Island of Nias, off the coast, for the express purpose of completely eradicating the slave trade in all its forms.

Following his successful policy in Java, Raffles repealed all restrictions and taxation upon trade and secured the revenue of Sumatra on ground rents. Owing to the under-development of the island of Sumatra, which for richness and production could not be compared with Java, he did not follow in detail the direct collection of the ground rents, but obtained them through the princes and chieftains similarly to feudal dues. The immediate result was an increased flow of trade which brought unexpected revenues to the Company, and the production of pepper, now produced for payment at market rates, increased many times. By the time this island was handed over to the Dutch, it too had virtually become a self-paying proposition, and the native inhabitants began to experience prosperity. The withdrawal of the blight of government interference and repeal of taxation upon trade, wages and industry, accompanied by the collection of ground rent for public revenue, were once again at the forefront of Raffles’ thinking. Of the ancient land revenue system, Raffles came to say: “I have the happiness to release several millions of my fellow creatures from a state of bondage and arbitrary oppression. The revenues of Government, instead of being wrung by the grasping hand of an unfeeling tax-farmer from the savings of industry, will now come into the treasuries of Government direct and in proportion to the actual capacity of the country.”

After his work in Sumatra, Raffles went on to establish Singapore on the same principles, as a free trade open port, and it is perhaps for this that he is best known in the English-speaking world. His Indonesian history does not seem to have loomed large in the minds of the neo-classical IMF economists currently advising President Suharto. It would be encouraging to believe that the Australian Minister for Foreign Affairs, Alexander Downer, might have reminded the President on his visit to Indonesia in January 1998 of the manner in which Sir Stamford Raffles had effectively handled the Dutch East Indies financial crisis almost two hundred years ago.

Answers for Indonesia is based upon the below mentioned work by the late Allan Hutchinson (Director of the Land Values Research Group) published in the Melbourne journal Progress in 1967.


Sir Stamford Raffles in Indonesia by AR Hutchinson
History of Java by Sir Stamford Raffles
Netherlands India by JS Furnival
A History of South East Asia by DGE Hall
Social Patterns in Jogjakarta by Selosoemardian

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