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The Netherlands and the development of the Indonesian economy 1648-2020

Indonesia has played a modest role in the world economy since the mid-20th century, and its importance has been considerably less than its size, resources, and geographic position would seem to warrant. The country is a major exporter of crude petroleum and natural gas. In addition, Indonesia is one of the world’s main suppliers of tea, coffee, cocao, palm oil, and rubber; it also produces a wide range of other commodities, such as sugar, tobacco, copra, and spices (e.g., cloves). 


Tea was intrduced by the Dutch in 1648. Initially, tea was used as the decorating plant in the Tijgersgracht compound of Batavia. Nearly a century later, in 1824 to be precise, this bushy tree was planted in Land’s Plantentuin Buitenzorg (now Bogor Botanical Garden) and exposed to the public. The seed was imported from China, possibly coinciding with the arrival of the first Chinese laborers in the Dutch East Indies for the newly developed mines.
When the Dutch introduced the Cultuurstelsel in 1830, the government had the local people plant tea on their hired land and bought it from them on harvesting. The booming commodity then encouraged the government to run its own plantation for almost thirty years.

The Indonesian public got to know the plant when it was planted around Bogor in 1826 and the following year in Garut – Limbangan. The tea plantation was extended to Cisurupan, Garut and Wanayasa, Purwakarta two years later.


Coffee was intrduced by the Dutch in 1696. Originally from Kaffa, a kingdom in medieval Ethiopia, coffee (Coffea arabica) was brought to Arabia, to be more specific, to the present day Yemen, where it was cultivated and exported through the port of Mocha. 
Starting in 1616 the Netherlands East India Company (VOC) bought their coffee there and took it to Batavia (present day Jakarta). Coffee soon became a valuable and very profitable trade commodity, and in 1696 the first seedlings were brought to Batavia for planting in Java.


Cocao was introduced by the Dutch in 1778. The transfer of cacoa to Asia was technically difficult. Beans lost their ability to germinate after less than two weeks, so that it was necessary to transport seedlings. These were difficult to keep alive on long and unpredictable sailing voyages, especially when water was rationed. The Spanish introduction of Mesoamerican Criollo seedlings into the Phillipines in the 1660’s was thus something of a triumph. An earlier Spanish introduction into northern Sulawesi in 1560 is almost certainly apocryphal, but the Dutch are to be said to have taken Venezulen seedlings to Ceylon in 1634, and from there to Java in 1650.

In 1806, cocoa expansion efforts began again in East Java and Central Java. Planting is done on the side field of coffee planting area.

In 1828 – Conrad van Hooten, a Dutch chemist, patented a technique for improving the digestion power of cocoa. His technique allowed the extraction of the fat from roasted and crushed cocoa beans. Alkaline salts were added to the resultant powder, in order to dissolve the powder in water. This came to be known as ‘Dutch cocoa’. The mass production of cheap chocolate, using the Dutch cocoa, was permitted after the technique was patented.

The development of cocoa plants in the Dutch East Indies, especially in Java runs rapidly. In 1938 there were 29 cocoa plantations with 13 plantations in West Java, 7 plantations in Central Java, and 9 plantations in East Java. The development is also encouraged by the widespread diseases of rust coffee leaves by Hemeleia vastatrix, causing the destruction of coffee plantation area in Java that forces them to plant cocoa instead.

Palm oil

Palm oil was intrduced by the Dutch in 1848. The first palm oil was imported to England in 1590, and by the early nineteenth century, a large market had developed for palm oil. Driving the increasingdemand for palm oil were changing standards in hygiene and the industrial revolution. Palm oil was used in products as varied as soap to tinplating. In the 1850s, the palm oil trade took off after the British government directly encouraged the trade of palm oil. The first oil palm trees were planted in the Bogor Botanical Gardens in Java in 1848, and a demonstration plantation was later established in Java. In 1875, seedlings were transferred from Java to Sumatra. These seedlings would become the foundation stock for future plantations in Indonesia and more broadly in Southeast Asia .

In contrast to West Africa, the early history of oil palm in Indonesia was as a plantation crop under the Dutch colonial administration. The first large scale plantation in Indonesia was established in Sumatra in 1911 by a Belgian firm. 

By 1925, 31,600 hectares of oil palm had been planted in Sumatra. By 1936, there was 75,000 hectares of oil palm plantations in Sumatra. Aided by scientific research and access to modern technologies including mills, plantations in Sumatra became significantly more productive than plantations in Africa. The benefits of these plantations during the colonial era were unevenly distributed, with unskilled workers receiving low wages for working on the plantations. Despite these limited benefits, Chinese and Javanese still migrated in large numbers to work on the plantations, spurring broader economic growth across the East coast of Sumatra.


Rubber was introduced by the Dutch in 1864, Initially, the rubber planted in Bogor Botanical Garden was a collection of plants and then developed into several regions in the Dutch East Indies as a commercial plantation.

At that time, The Dutch Government developed a rubber plant, because the coffee and tobacco market had declined. Brazil which was a major producer of coffee, reduced its production by 50%.

The location first used as a test of planting rubber was in Pamanukan and Ciasem, West Java. The type of rubberwhich was first planted were: species of Ficus Elastica. Then the type of rubber Hevea brasiliensis was grown in eastern Sumatra in 1902 and Java in 1906.

Rubber plantations required a very high financial investment, so the Dutch Colonial Government invited investors from other countries. The First Foreign Company which planted rubber and managed it commercially in the Dutch East Indies was Harrison and Crossfield Company (United Kingdom) which had established rubber plantations in Malaysia. After that other companies who had invested was Sociente Financiere des Caoutchous from Belgium in 1909, and a joint venture between the Netherlands-United States, Holland Amerikaanse Plantage Maatschappij in the year 1910-1911.

The Dutch Colonial Government was given full support to the development of rubber industry in the Dutch East Indies. The DEI Government facilitated the process of clearing land, provided manpower, infrastructure, processed technology to marketing. Land leased concessions in the long term agreement only taxed at 1-2% of the cost of cleared land and laborors were paid very low.

High rubber prices stimulated the public to start planting rubber. Consequently the production of rubber increased due to expansion of plantation areas. Consequently the market price dropped drastically. After this international law regarding rubber was created, namedly IRRA (International Rubber Regulation Agreement).

Oil and natural gas

Indonesia has a large, and in many cases unprospected, variety of mineral deposits. Mining, including the extraction of oil and natural gas, accounts for roughly one-tenth of the country’s GDP, and through exports and taxation it contributes substantially to foreign-exchange earnings and development. The mining industry employs only a tiny fraction of the workforce, however.

Fossil fuels, including petroleum, natural gas, and coal, constitute a major source of revenue. They are produced primarily in Sumatra and Kalimantan and from offshore sites in the Java and South China seas. 

Dutch Koninklijke Olie was foundedin 1890 in the Dutch East Indies, which would later merge with Shell. In the colony, the company learned how to make money from oil by searching for it, drilling it, storing it, transporting it, processing it and eventually selling it. To do this, geologists, managers and drilling crews had to be trained, kept healthy and housed . Drilling sites are often in remote areas and so the Koninklijke Olie , later the BPM (Shell), built entire villages, including prison and hospital around the oil treasures.

In the twentieth century, oil became a very important, if not the most important, raw material for the Dutch East Indies. The revenues from oil exports rose spectacularly: in 1900 they earned five million guilders, in 1914 137 million guilders – that is 20% of the total Dutch East Indies export of that year – and in 1920 more than 300 million guilders.

After indepndence of Indonesia, Shell's original well at Pangkalan Brandan was taken over by the Indonesian army. In 1957, Pangkalan Brandan became the main asset of the newly formed Indonesian oil company, Permina, the predecessor of Pertamina. In the 1950s, US oil giants Caltex (now Chevron) and Stanvac (now ExxonMobil) invested heavily in Indonesia, dropping the share of BPM to only 34% in 1957, compared to 46% for Caltex and 20% for Stanvac. Eventually, Shell pulled out of Indonesia in 1965 and would only re-enter (in distribution only) in the early 2000s.

Although refinery production since 1968 has been in the hands of the Indonesian government-owned petroleum company Pertamina, foreign oil companies operate under a production-sharing formula. Under this arrangement, the ownership of oil resources remains with the government of Indonesia, and the foreign companies act as contractors, supplying the necessary capital. Since the last decades of the 20th century, Indonesia has greatly expanded its production of coal, to become one of the world’s leading exporters. The sale of liquefied natural gas is also increasingly important.

Nearly all commodity production comes from large estates. Widespread exploration for deposits of oil and other minerals has resulted in a number of large-scale projects that have contributed substantially to general development funds.

Although Indonesia has remained a major importer of manufactured goods, high technology, and technical skills since the early 1970s, the country’s economic base has shifted from the primary sector to secondary and tertiary industries—manufacturing, trade, and services. Manufacturing surpassed agriculture in terms of contribution to gross domestic product (GDP) in the early 1990s and has continued to be the largest single component of the country’s economy. A significant portion of the national budget has continued to be allocated to agriculture, however; consequently, the country has remained self-sufficient in rice production since the mid-1980s.


During the early years of Indonesia’s independence, economic mismanagement and the subordination of development to political ideals under the “Guided Economy” policy of the country’s first president, Sukarno (1949–66), led to financial chaos and to a serious deterioration in the capital stock. With a major change of economic direction after Suharto assumed power in the mid-1960s, some measure of stability was regained, and the conditions for an orderly policy of rehabilitation and economic development were established by the The Inter-Governmental Group on Indonesia.

The Inter-Governmental Group on Indonesia (IGGI) was established in 1967 as an international consortium of official donors to coordinate the provision of foreign assistance to Indonesia. IGGI was the lead official grouping of donors to Indonesia from 1967 until early 1992 when it was abolished and replaced by the Consultative Group on Indonesia (CGI). For the 25 years up to 1992, IGGI was a key regional institution in Southeast Asia. It helped provide strong international support for Indonesia's economic recovery after the economic difficulties in Indonesia during the period of the Sukarno presidency in 1950s and 1960s.

The IGGI was the only international aid consortium which was not chaired by an international organisation, such as the World Bank, but by a partner country: the Netherlands. For decades the IGGI turned out to be the most successful aid consortium of all: since its beginning in 1967 and until the end in 1992, each year Indonesia was given more assistance than it requested. This was unheard of in the field of international development assistance. All countries for which international consortia or consultative groups had been established received annually less foreign aid than was required to meet the growth targets agreed by the partner countries themselves. Amongst the donor countries political motives prevailed: Indonesia was seen as a bastion against the threat of communism in Asia. In particular Western countries, but also Japan, fearing after Vietnam also other countries would fall into the grip of world communism, saw Indonesia the main bulwark against a process of countries being overturned like domino tiles.

Substantial expansion of the private sector has been evident since the mid-1990s. Prior to that time, growth generally had been confined to a rather small group of conglomerates, most benefiting from the government’s favour. Small business was slower to develop. The deregulation of the capital market in the early 1980s triggered spectacular growth in the stock exchange, but despite the increase in domestic investment, direct participation in the stock market remained limited to a very small group of investors.

Foreign direct investment spiked in the 1990s but rapidly receded in the aftermath of the Asian economic crisis sparked by the collapse of the Thai baht in 1997. The government subsequently inaugurated a four-year national development plan that helped return the economy to its precrisis strength. By 2003 the country was stable enough to allow the expiration of an economic reform program that had been sponsored by the International Monetary Fund (IMF). A new development strategy involving liberalization in some areas and limitation of foreign ownership in others has aimed to establish Indonesia as a fully self-sufficient (swasembada) country in the 21st century.

Since the Intergovernmental Group on Indonesia was formed, the Netherlands was one of the major donors. It is estimated that the Netherlands gave from 1967 to 2012 for 2.886.670.000 (Billion) US Dollars development aid to Indonesia.

In 2020 The Netherlands stopped development aid to Indonesia. Dutch Minister for Foreign Trade and Development Cooperation, said the relationship between the Netherlands and Indonesia - after 2020 - can be labeled "trade partners" only.

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