San José State University
Department of Economics
Thayer Watkins
Silicon Valley
& Tornado Alley

The Economic History of Indonesia During the Colonial Era


The Malay people have had an interesting but neglected history. The Malay people who constitute the majority of the peoples of what is now Indonesia are distributed through many other places in Southeast Asia, including what is now Malaysia and the Philippine Islands. Malays traveled across the Indian Ocean a millenium ago to eastern Africa on trading expeditions and settled the island of Madagascar. This is known from the nature of the language spoken in Madagascar. The language of Polynesia also reveal even more ancient linguistic ties to the Malays.

The historical origins of the Malays are lost in time but the survival of indigenous groups in the territory of the Malays indicate that that they were not the first in these areas and therefore migrated from elsewhere.

The original religion of the Malays was animism and some elements of animism survives even in modern times. Now the Malays of Indonesia and Malaysia are predominantly moslem but that was not always the case.

There are several hundred language-culture groups scattered throughout the islands of Indonesia. Probably they would not be part of one nation except for their conquest by the Dutch. Historically the political fragmentation of the Malays made them vulnerable to military and cultural conquest by outside forces.

At some distant time in the first few centuries of the common era (A.D.) teachers from India brought Hinduism to Indonesia and it survives in a few places such as the island of Bali. The spread of Hinduism is a bit of a puzzlement in that the high-caste (Brahman) priests are prohibited by their religion from crossing the Dark Sea. But clearly teachers of Hinduism of some sort did cross those dark seas. At a later time Buddhism came to Indonesia as evidenced by magnificent monuments such as Borobodur. Buddhism did not surplant Hinduism in Indonesia. Some kingdoms had Buddhist monarchs and others had Hindu monarchs. For more on the spread of Indian culture throughout Southeast Asia see the Indianization of Southeast Asia.


Islam came to Indonesia much later, about a millenium later, largely in the fourteenth century. This put the era of Islamization a couple of centuries or so before the time that the Portuguese and Dutch were setting up trading stations and conquering petty kingdoms. Preceding the the European contact in the 15th century the Ming Empire of China sent a large armada into the region in the early fifteenth century, but internal politics in China ended those contacts.

Centuries before the arrival of the Portuguese in the Indian Ocean in the late fifteenth century the islands of Indonesia were known and important to Europe as the source of spices.

The Portuguese

After Vascol da Gama's voyage to India the Portuguese started establishing forts and trading stations in the region of Indonesia to gain control of the trade in nutmeg, mace and cloves. An important center of the Portuguese presence in the island was at Melaka in the Malukka Island group midway between Borneo and New Guinea.

During the sixteenth century the muslim kingdoms displaced from the Malukkas tried to conquer the Portuguese outpost at Melaka but without success.

The Portuguese tried to convert the local populations to Christianity but without success except in the islands of Ambon and Timor.

The Spanish captured part of the region of the Malays and converted it so successfully that it is largely forgotten that it was Malay and Islamic. That region is now the Philippines. When the Spanish monarch Philip gained the Portuguese crown in 1580 the global war between the Dutch and the Spanish made the Portuguese settlements in Indonesia enemy outposts.

The Dutch

A Dutch fleet came to the Indonesia region in 1596. It visited several points around Java and secured a cargo of spices for its return to Europe. Other trading ventures followed. After about five years of free-for-all Dutch trading the various trading companies joined together to obtain a franchise for themselves. They secured a charter in 1602 from the Dutch legislature to create a company called Vereenigde Oostindische Compagnie (VOC), (United East Indian Company). This company was more like a state than a commercial venture. Its charter gave it the power to establish fortresses and wage war as well as trade in spices. Its status gave it the power to thwart any competition for the purchase of spices. By 1605 the company had captured the Portuguese enclase on Ambon Island.

The VOC was to be managed by a board of directors known as the Heeren Zeventien (Seventeen Gentlemen). Management of the VOC by the Heeren Zeventien in Amsterdam proved infeasible so the post of Governor-General was created in 1610 to give the VOC a chief-executive-officer operating on site in the islands. This proved to be an effective operating arrangement, in as much as the Governor-General had to be the Commanding General as well as the CEO of a trading company.

Under Governor-General Jan Pieterszoon Coen the VOC captured the port on the northwestern coast of Java, then known as Jayakarta, which became Batavia and later after independence was called Jakarta. Batavia became the capital of the VOC's domains.

VOC ruthlessly kept out non-VOC traders. When the nutmeg growers of the Banda Island group continued to trade with the British East India Company the VOC eliminated the the local Banda population and replaced them with slaves and servants of the VOC. The VOC used this strategy again in 1656 to gain control of the clove growing areas on the island of Ceram. The VOC arranged the overthrow of local rulers who traded with others besides VOC. To gain control of the pepper trade on Sumatra the VOC burned the regional capital of Palembang in 1659.

The VOC became immersed in Javanese politics which eventually led to political control of the islands in the archepelago by the VOC. First VOC was called upon to defend its client/allies in the internecine wars. In some cases the rulers who were beholding to VOC for protecting them from an external invasion or an internal revolt compensated VOC for its efforts by granting it a monopoly of some sort such as trade in rice, sugar, opium or textiles. In other cases VOC began to levy charges against the rulers and their subjects. In a word, VOC became a government.

In the eighteenth century there were three wars concerning succession in Java. In each VOC gained concessions for helping one faction emerge victorious.

(To be continued.)

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