The decline of the VOC, culminating in its bankruptcy in 1799, necessitated a reorganisation of colonial administration as the Dutch state took direct control. This transition saw the establishment of a more structured and bureaucratic colonial government aimed at improving efficiency and revenue collection. The increased state involvement was also driven by the need to maintain Dutch territorial sovereignty in the face of growing British influence in the region. The state's direct involvement meant a shift from the mercantile colonialism of the VOC to a more formalised imperial rule, characterised by direct governance from the Netherlands.

The Liberal Policy, introduced in the mid-19th century, marked a shift from a state-controlled economy to one driven by private enterprise. The influx of private investment led to the establishment of large plantations, mines, and the exploitation of oil, transforming the economic landscape. For the local population, this shift meant the intensification of labour demands, often under harsh conditions, as they worked on plantations and in mines owned by Dutch and other foreign capitalists. This change did not translate into significant economic benefits for the local people, as the profits were repatriated to the Netherlands or invested back into the enterprises.

Javanese elites played a complex role in the Dutch colonial system. Initially, many cooperated with the VOC, enjoying a degree of autonomy and benefiting economically through collaboration. However, with the introduction of the Culture System, their status changed dramatically. They were often coerced into becoming enforcers of the Dutch's exploitative agricultural policies, which eroded their traditional authority and legitimacy among the Javanese people. Their intermediary position became increasingly precarious, as they faced pressure from both the Dutch authorities to implement the Culture System and from the local population resisting it.

The main criticisms that led to the introduction of the Ethical Policy were centred around the exploitative nature of the Dutch colonial system, particularly under the Culture System. Critics pointed to the severe social and economic hardships faced by the indigenous population, including famine, poverty, and the undermining of traditional social structures. There was also growing disapproval from humanitarian and religious groups within the Netherlands, who argued that the Dutch had a moral responsibility to improve the living conditions of their colonial subjects. This moral pressure, combined with the practical need to pacify unrest and reform the colonial system, spurred the adoption of the Ethical Policy.

The VOC had a profound effect on the governance and local politics of the Dutch East Indies. Operating with sovereign powers, the VOC acted as a state within a state, creating a parallel governance structure that co-opted local rulers through a system of indirect rule. This led to the erosion of local political autonomy as the VOC's authority superseded traditional power structures. The company's focus on profit over governance often resulted in neglect of administrative duties, contributing to corruption and inefficiency. The VOC's administrative framework laid the foundations for the later colonial state, but its mercantile priorities often led to conflicts with local interests.