The author is the Executive Director and Lead Economist of Industrial Policy Lab Indonesia, a think tank focused on driving Indonesia’s reindustrialization agenda. He was previously an analyst at the International Monetary Fund (IMF) and holds an MS in Quantitative Economics from NYU Stern School of Business. This article reflects the author’s own analysis and views and does not necessarily represent those of The Reformist.
10 August 1995. Seven days before Indonesia’s independence commemoration day. In Bandung, thousands gazed at the sky as the N250 Gatotkaca readied for its maiden flight.
Across the archipelago, millions more watched on television, from government offices to roadside warungs, as TVRI broadcast the moment nationwide through the Palapa satellite network.
For many Indonesians, it was perhaps the closest thing to an Apollo moment. It was as if the country itself had just landed a person on the Moon. The N250 was, of course, no Saturn V. Yet, for a country at Indonesia’s then-level of income and technological development, the achievement felt like an income-adjusted equivalent.
Even reasonable skeptics of Indonesia’s aerospace ambitions could not easily dismiss what they had just witnessed: the country had successfully designed and flown its own commercial aircraft. Thanks to the then-Research and Technology Minister (later President) B. J. Habibie.
Taufiq Kiemas’ reaction was especially revealing. A prominent figure in the Indonesian Democratic Party (PDI) — and husband of party chair Megawati Sukarnoputri — Kiemas had frequently criticized the industrial policy projects associated with Habibie. Yet, Kiemas attended the N250’s maiden flight in person and reportedly wept as the aircraft lifted smoothly from the runway. It was a small but telling indication of how significant the N250 was as a symbol of both national pride and unity.
The N250 seemed to also embody the confidence of the era. As the aircraft gathered speed along the runway, Indonesia itself appeared poised for takeoff. The economy was growing at 8.2 percent in 1995, industrialization was rapidly proceeding, and the end of the Cold War had ushered in an extraordinary period of optimism about globalization and the prospects of emerging economies.
As capital poured into Southeast Asia and the region’s convergence with the industrialized world became durable, Indonesia was a prospective Asian Tiger, following South Korea, Taiwan, and Singapore as rapidly industrializing economies.
Indonesia was finally enjoying somewhat of a honeymoon period in its long arc of history.
Or so we thought. Just three years later, the honeymoon was over. The economy collapsed, the political order that had governed Indonesia for three decades fell, and the N250 program was dismantled before reaching commercial production.
The aircraft that had once represented Indonesia’s technological ascent was confined to a hangar. It would never fly again.
It all went downhill after the 1997 crisis
The 1997 Asian financial crisis did more than deprive the N250 of financing. Fundamentally, it radically transformed the political and institutional environment in which Indonesia’s aerospace program had been built.
As Indonesia turned to the International Monetary Fund (IMF) for emergency financing amounting to US$ 43 billion, continued support for aerospace company IPTN, which produced the N250, became part of a broader renegotiation of the country’s development model. The IMF-supported program required withdrawing budgetary and extrabudgetary support for the company and dismantling key fiscal mechanisms that had sustained it.
The conventional argument was that IPTN was expensive, Indonesia was still poor, and the resources devoted to aircraft development could have been better spent elsewhere. In a stronger version, Habibie’s aerospace ambitions were portrayed as an extravagance that helped push the country toward bankruptcy.
Yet, the claim that the N250 was expensive is rarely expressed relative to the size of the Indonesian economy. Development of the aircraft required roughly US$ 650 million. Spread over the development period from 1989 to 1998, this amounted to only about 0.03–0.04 percent of GDP per year. Of course, that didn’t establish the program as a good and effective industrial policy. But that estimate did make it difficult to prove that N250 was a significant macroeconomic burden whose cancellation was necessary to resolve the crisis. By comparison, the eventual fiscal cost of bank restructuring after the 1997 crisis approached 39 percent of GDP.
Dennis de Tray, the World Bank’s country director for Indonesia during the crisis, later acknowledged this distinction. Looking back on the 1998 reform package, he said that IPTN was “relatively unimportant in an economic sense,” suggesting that withdrawing support mattered primarily as a signal intended to restore investor confidence.
This thus begs the question: if IPTN was economically relatively unimportant, why was it targeted so explicitly? Part of the answer lies in the intellectual and political climate of the 1990s. Under the prevailing Washington Consensus, industrial policy like IPTN had become deeply unfashionable. Governments were increasingly expected to liberalize markets, reduce discretionary intervention, and let market signals discipline capital allocation.
A central presumption was that governments could not reliably “pick winners”: directed credit, infant-industry protection, subsidies, and support for targeted sectors were therefore treated with considerable suspicion.
IPTN represented a very different development philosophy, closer to the Hamiltonian state-involved industrialization strategies historically pursued by Japan and South Korea and, later, by China: the deliberate attempt by the state to build domestic technological and productive capabilities through subsidies and directed credit. IPTN therefore mattered beyond its immediate fiscal cost. It became a symbol of a broader development model that sat very uncomfortably with the dominant policy orthodoxy of the 1990s. In this sense, the dispute over IPTN was also a dispute over whether developing countries should retain the ability to conduct ambitious industrial policy at all.
To be fair, this skepticism had some basis in Indonesia’s own experience. Much of the country’s import-substitution drive in the 1970s and early 1980s produced protected industries that remained inefficient, lacked technological learning, and were weakly exposed to international competition.
Yet it is too crude to place IPTN in the same category. Unlike many earlier protected industries, IPTN did generate substantial technological learning and accumulated human capital. Its commercial performance was of course debatable, but the underlying capability-building process was real.
Many features of the New Order economy plainly required reform–it was long overdue. The more contentious question was whether to attempt a sweeping institutional restructuring in the middle of an exceptionally severe financial crisis.
Economists across the spectrum raised this concern, including Joseph Stiglitz and Martin Feldstein. Feldstein, the former chief economic advisor under the United States President Ronald Reagan, argued that many of the IMF’s structural reforms might be desirable in themselves, but warned against using the currency crisis to force fundamental institutional changes that were not necessary to resolve the immediate balance-of-payments problem. He described undertaking such reforms “in the midst of a currency crisis” as particularly poor timing.
The IMF’s own retrospective assessments — through its Independent Evaluation Office (IEO) — later echoed part of this criticism. Its post-crisis literature recorded concerns that Indonesia’s January 1998 program had become overloaded with structural conditions whose connection to the immediate foreign exchange crisis was often remote, and that the effort to signal reform could itself undermine confidence by making the program appear implausibly ambitious. IPTN became one of the most visible casualties of that effort to remake Indonesia.
Industrial policy revived, but not our potential
The rest, as we know, is history. IPTN survived the crisis as PT Dirgantara Indonesia, but only as a shell of its former self. Employment fell from roughly 16,000 at its peak to around 4,000 after successive restructurings, while the company never recovered the engineering depth or indigenous commercial aircraft development capability associated with the N250 era. Much of the technical talent accumulated over decades — including engineers trained at leading institutions abroad — was dispersed, with some later joining foreign firms such as Airbus, Boeing, and Embraer.
My father, Endri Rachman, was a former IPTN engineer. He earnestly shared his testimony with a journalist about why he chose to leave the country after IPTN’s restructuring:
“A series of meetings with him made one thing clear: Endri Rachman cannot fairly be called ‘unnationalistic,’ short on ‘national spirit,’ or, worse, a ‘traitor to the nation. Driven by determination, he tried to return to the homeland to build his own aircraft factory in Bandung, without the slightest help from the government. I repeat: without the slightest help from the government!”
The irony is that the policy logic behind Habibie’s experiment has since become remarkably conventional. What was once portrayed as an eccentric form of state-led development is now standard practice across much of the world: governments subsidize strategic industries, protect critical supply chains, and finance technological upgrading.
Industrial policy has returned to the center of economic policymaking. Even institutions once deeply skeptical of such interventions, including the World Bank, now treat industrial policy as a legitimate area of economic policy, albeit with renewed emphasis on discipline, competition, institutional design, and measurable performance. Indonesia itself has reentered this terrain through downstreaming, electric vehicles, and other strategic sectors.
From this perspective, Habibie’s central premise seems less anachronistic than it did in the 1990s. It was the right idea at the wrong time: His ideas reached their zenith during an era when the prevailing international policy consensus was moving decisively against state-led industrial development. And to be fair, the problem was also deeply institutional. Many of his projects were implemented through a highly centralized political system, with weak mechanisms for competition, accountability, private-sector participation, and exiting failure.
Today, Indonesia’s contemporary industrial policy remains preoccupied with capacity rather than capability. The focus is extensively on the headline numbers: how many smelters are built, how much investment is attracted, and how much output is produced.
Habibie’s industrial projects, for all their flaws, aimed at a deeper objective: accumulating engineering capability, human capital, and technological learning. Their execution was often imperfect, and their institutional architecture was vulnerable to the New Order’s political economy. Yet, the underlying objective was capability accumulation.
In that sense, the N250’s most consequential legacy may be what Indonesia forgot after its cancellation. Over the following three decades, industrial policy gradually returned, but much of the institutional knowledge associated with building indigenous technological capability did not. In its place, the Indonesian state has resorted to instruments such as local content requirements and export bans, non-fiscal measures that divert the cost of industrial policy from the state to the private sector; perhaps bound by the trauma of attempting anything as ambitious as the N250 program, for fear of being accused of bankrupting the state.
What disappeared with the last flight of the N250 was not just an aircraft program, but rather a particular conception of development. It is the idea that Indonesia could deliberately acquire the organizational and engineering capabilities required to design, integrate, and eventually master complex technologies. As the country now rediscovers industrial policy, the harder task is to recover that ambition without reproducing the same institutional weaknesses that undermined it 28 years ago.
