JANUARY/FEBRUARY 1998 · VOLUME 19 · NUMBERS 1 & 2
G L O B A L I Z A T I O N I N C R I S I S
FOR THE INDONESIAN PEOPLE, the bottom line of the country's financial crisis and new agreements with the International Monetary Fund (IMF) is simple: joblessness will shoot up, consumer prices will skyrocket and many of the economic gains of the past three decades will be wiped out.
For President Suharto, his family and his cronies, the story is more complex. While making some concessions to the belated effort of the IMF to crack down on rampant corruption and cronyism, Suharto clearly intends to maneuver to preserve the privileges claimed by his family and friends during more than 30 years of dictatorial rule. Perhaps even more crucially, the close-knit Indonesian elite has so firmly tightened their grasp over virtually all aspects of the Indonesian economy that it is difficult to foresee any scenario in which their economic empire is dismantled, even if the favoritism from which they have benefitted is eradicated.
Indonesian economic policy will now be set in the context of the 20-point agreement Suharto signed with the IMF in January as a condition for a $40 billion loan to rescue the ailing rupiah, Indonesia's currency.
The January agreement, which will be administered by the IMF, is a double-edged sword. On one hand, Suharto accepted the IMF's conditions to curtail some of his family and cronies' pet projects, such as his youngest son Tommy's so-called "national car" project and his favorite Technology Minister's $2 billion "national jet" project. On the other hand, Suharto has, without asking the approval of the Indonesian parliament -- as required under the 1945 Constitution -- agreed to force the majority of the Indonesian people to bear the brunt of the current financial crisis, by depriving them of the fuel and electricity subsidies which they have enjoyed during the last 30 years.
These austerity measures follow on the heels of a salary freeze for all government employees -- including the low-ranking soldiers without extra-budgetary incomes from acting as protectors or go-betweens for private companies -- which was announced in Suharto's 1998/1999 budget speech.
The January IMF agreement failed to achieve its purpose of calming market fears. The day after the deal was announced, the rupiah fell 8.2 percent, to 7,900 to the U.S. dollar.
Days later, Suharto accepted the ruling Golkar party's nomination for president. Demonstrating that his acquiescence to the IMF's 20-point program did not signal a break from the old way of doing business, Suharto stated that his running mate as vice president should be somebody with a deep understanding of technology. This was widely seen to be a reference to Baharuddin Jusuf Habibie, a German-educated aeronautical engineer who has been Suharto's longest serving minister. Habibie holds the lucrative portfolio of Minister of Research and Technology, which has put him in charge of the Technology Assessment and Application Body (BPPT) and made him director of 10 strategic industries, including the national aircraft industry, PT IPTN, the national steel industry, PT Krakatau Steel, and the Navy shipyard, PT PAL.
Habibie's likely nomination may sound like good news for some of the top U.S. aircraft factories and airlines, such as Boeing, Lockheed and the Miami-based Gulfstream International Airlines, which in 1994 bought four aircraft from IPTN for $140 million. The Minister's son, Ilham Akbar Habibie, who directed the Indonesia's national jet project, even did his apprenticeship with Boeing in Seattle in 1995.
But the currency markets viewed Habibie's anointment as a sign that cronyism was alive and well in Jakarta. The rupiah plummeted, crashing through the 10,000 to the U.S. dollar mark.
At this exchange level, noted Max Walsh, a business analyst in the Sydney Morning Herald, the per capita income of Indonesians in dollar terms had been reduced back to the same level it was when Suharto came to power 32 years ago.
The welfare of the Indonesian people does not seem to be the main interest of the ailing 76-year president, however. Suharto's central concern at this stage appears to be safeguarding his family's business empire, which he has built over nearly 50 years.
That goes a long way toward explaining his choice of a running mate and potential successor. Habibie and his family are close business partners of the Suharto family's huge business empires.
Habibie's two sons, Ilham Akbar Habibie and Thariq Kemal Habibie, are business partners of Suharto's middle and youngest sons Bambang Trihatmojo and Hutomo Mandalaputra ("Tommy"). Their joint ventures operate an industrial estate and an aircraft maintenance center for Tommy's Sempati Air on Habibie's free trade enclave on Batam Island, across from Singapore, and a huge integrated piggery/poultry farm/crocodile ranch/orchid farm on the nearby Bulan Island, which supplies 10 percent of Singapore's pork demand.
The Batam-based businesses are only a small part of the Habibie family's Timsco Group, which is directed by the minister's youngest brother, Suyatim Abdulrachman ("Timmy") Habibie. The Timsco Group also operates numerous chemical industry joint ventures with Bambang Trihatmojo's Bimantara Group on Java and Sumatra. Timsco was also supposed to be involved in one of the mega-projects cancelled by Suharto under IMF pressure, the Manggarai triple-decker integrated transport terminal in Jakarta, which was to be directed by Suharto's eldest daughter, Siti Hardiyanti Rukmana, also known as Tutut. Timsco is also involved in a telecommunications joint venture with Tutut, who serves as the agent for AT&T. This joint venture was formed following intercession by then-U.S. President George Bush, who called Suharto to urge him to award a government telecom project to AT&T rather than Japan's NEC.
These corrupt and nepotistic business patterns are par for the course in Indonesia. Indeed, it is not possible to understand the evolution of the Indonesian economy apart from the Suharto clique's decades-long hijacking of Indonesia's human and natural resources. The effort has led to a family fortune of at least $30 billion, according to an estimate by Northwestern University Professor Jeffrey Winters that is more than half a decade old.
THE RISE OF THE SUHARTO EMPIRE
Suharto first began to transform his politico-bureaucratic power into business deals in the early 1950s, as commander of the Diponegoro Division in Central Java. That is when he formed personal bonds with two young Sino-Indonesian businessmen who would accompany him on his rise to power: Liem Sioe Liong and Bob Hasan. In return for kickbacks to Suharto, they won contracts to supply whatever the Diponegoro commander needed for his soldiers, ranging from rice to uniforms to medicine. By the early 1960s, Suharto landed in Jakarta, as commander of the Army Reserve Command (Kostrad) in Jakarta. Here he set up an army foundation, the Darma Putera Kostrad Foundation, which would become his first business instrument after assuming Indonesia's presidency.
After leading the slaughter of between 500,000 to 2 million suspected Communists in 1965 and 1966, Suharto seized de facto presidential power, which was legitimatized by the MPR in 1967, and then unleashed his full business energies.
From the nation's top political perch, he sought to fulfill his business aspirations without restraint. His main business partner was his old friend, Liem Sioe Liong. Their first major money-makers were the giant Bogasari flour mills in Jakarta and Surabaya, set up in the 1971 to 1972 period to mill all U.S. PL-480 (U.S. foreign-aid donated) wheat. A potential competitor from Singapore was "kicked out" to Ujungpandang, and allocated the meager East Indonesian market by decree of the National Logistics Body (BULOG). The lucrative West Indonesian market, which consumes 80 percent of the flour market, became Bogasari's monopoly.
Having consolidated his presidential power, which under the Indonesian constitution guarantees control over the armed forces as their Supreme Commander, Suharto began to develop his civilian cards. In the mid-1970s, the Kostrad Foundation lost its lucrative stake in the Bogasari flour mills, as Suharto handed control over the foundation to his Kostrad successor. Meanwhile, Suharto and his wife began frantically to set up their own family-controlled foundations, where they lodged control over the flour mills.
After 32 years in power, the First Family now maintains a cozy relationship with U.S. multinationals, such as Freeport McMoRan and Mobil Oil, and controls at least 40 foundations which own stakes in numerous large companies, including the Bogasari flour mills, cement factories, fertilizer factories, toll roads, timber concessions and oil palm plantations. Many of these enterprises are owned in conjunction with Bob Hasan and Liem Sioe Liong.
The outgoing Hasan, who converted to Islam in his youth, speaks fluent Indonesian with a Jakarta accent, plays golf twice a week with the president, presides over several national sport associations and has set up several news media to defend his patron. He controls the Nusamba Group, which is another major money-maker for the Suharto foundations. His conversion to Islam has helped him gain acceptance by Indonesia's majority Muslims, who, especially in Suharto's first two decades of rule, were strongly suspicious of the Buddhist and Christian Chinese with whom Suharto maintained close relations.
Liem Sioe Liong is, in many ways, Hasan's opposite. A Buddhist, he still speaks with a heavy Chinese accent after migrating to Indonesia in 1938 at the age of 22. Liem's primary vehicle is the Salim Group, in which the Suharto family was first represented by Sudwikatmono, a step-brother of the president. Liem and the Suhartos are also linked through the Bank Central Asia (BCA). Suharto siblings Tutut and brother Sigit Harjojudanto control 32 percent of BCA's shares, while the Liem family controls 24 percent.
Long before the current financial crisis, in 1979, the Salim Group started moving offshore, forming the Hong Kong-based First Pacific Group, which established operations in Asia and Australia, in everything from real estate to telecommunications to instant noodles. In 1982, the First Pacific Group bought the twelfth largest bank in California, Hibernia Bank. In 1983, the First Pacific Group acquired a controlling stake in an old Dutch trading firm, Hagemeyer; First Pacific has recently announced plans to sell its Hagemeyer shares due to the Asian financial crisis.
GROWING THE FAMILY WEALTH
Having accumulated their initial capital from Salim and Nusamba, Suharto's six children began to form their own conglomerates. During this phase, Suharto père was always ready to give a push here and there, beginning with the eldest son, Sigit. Sigit's PT Bayu Air began its business by using Indonesian airforce planes to airlift cattle from the Suharto family Tapos ranch in Bogor, West Java, to Outer Island provinces. Bayu Air simply plastered its logo on top of those of the airforce. The first stock of Tapos cattle actually came from Queensland, Australia and was transported in late 1975 by Indonesian Navy ships, after they had dropped off the Indonesian troops that invaded East Timor. (PT Bayu gained some small notoriety in 1970s, when U.S. congressional hearings exposed that Lockheed had paid bribes to the Indonesian company.) The practice of using government properties to start their private business was continued by Tutut in the mid 1980s, when she set up her own television station, TPI, by using the TVRI studio in Jakarta, without paying full rent. Tommy, Suharto's youngest son, later followed in these well-trod footsteps. His private airline, Sempati Air, a joint venture with an Indonesian army foundation, has used a terminal at the new Sukarno-Hatta international airport near Jakarta, without fully paying airport rental fees, fuel costs or even the company's catering bills.
Since Suharto's children rushed into the business arena, most major state companies have been locked into joint ventures with the Suharto family private business conglomerates. These includes the state-owned oil company, Pertamina, and its subsidiaries, public works construction companies, state-owned pharmaceutical companies, state-owned telecommunication and satellite communication companies, and many of the military-owned companies directed by the technology minister, Dr. B.J. Habibie.
The IMF-Suharto agreement mandates the cancellation of many of the government-conferred monopolies to Suharto-linked companies that enriched the president's clique, but that is not likely to make a significant dent in the First Family's wealth. Thanks to their 30-year monopolies, the Suharto clan's companies dominate the domestic market, which, in its current free fall, is not going to be able to accommodate many new competitors. The IMF-Suharto agreement is like opening the doors of a mansion for guests to come in and stay, after all the rooms in the mansion are already fully occupied by clan members.
FUELING OVERSEAS EXPANSION
The international diversification of the Suharto-linked companies over the last 20 years [see "Dictators United," Multinational Monitor, September 1997] will also work to shield them from the effects of domestic anti-corruption reforms. Benefitting from their father's role in regional groupings such ASEAN and APEC and in the Non-Aligned Movement (NAM, an organization of the developing countries) and the Association of Islamic Countries, Bambang and Tutut's companies especially have expanded aggressively overseas. Tutut's 450 kilometers of toll roads, which are or will be operated by her companies and transferred to the host countries after 25 years, spread throughout Indonesia, Malaysia, the Philippines, China and Burma. Bambang's joint ventures in Manila and Sydney have built huge water projects and power plants in the Philippines, Indonesia and China. Linking up with the Sydney-based Canadian mining entrepreneur, Robert Friedland [see "The Mercenary Miner," Multinational Monitor, June 1997], Bambang has invested in gold mining in Vietnam, Burma and Khazakstan. Since the mid-1980s, the Suharto sons and their uncle, Sudwikatmono, have used the trade in crude oil and natural gas to fuel their international expansion. Earlier joint ventures with Ibnu Sutowo, the deposed, corrupt director of Indonesia's state-owned oil company, Pertamina, generated a huge trove of petro-dollars.
Bambang and Tommy have gone on to build natural gas fleets, serving the South Korean and Taiwanese markets respectively. Bambang's Singapore-based Osprey Maritime is rapidly becoming one of the largest oil tanker fleets in Asia, following its acquisition last year of the Monaco-registered transport company, Gotaas Larsen.
Suharto has also assisted his in-laws, especially those of Tutut, the Kowara family, and Titiek (Suharto's second daughter), the Djojohadikusumo family, in branching abroad. The Kowaras have developed their lucrative construction business in Brunei-Darussalam. A partly Kowara-owned conglomerate, the Medco Group, has also ventured into oil mining in Burma and Khazakstan.
Financed by their banking empire, which was protected by Titiek's brother-in-law, Central Bank governor Sudradjat Djiwandono, the Djojohadikusumo-Suharto companies have expanded their businesses in many more countries than the Kowaras. Their tentacles reach from a million-hectare timber concession in Cambodia, to cotton plantations in Uzbekistan, to a textile factory in Portugal in a joint venture with the German chemical giant Hoechst and the Indian-Indonesian conglomerate, the Texmaco Group, to unspecified businesses in Guinea Bissau in West Africa.
The combined assets of the Suhartos, Kowaras, and Djojohadikusumos make them the three richest families in Indonesia.
JOCKEYING FOR SUCCESSORSHIP
The Suharto-linked companies are now so tightly enmeshed in the Indonesian economy that it will be very difficult to extricate Indonesia from the Suharto web. There is very little prospect of the process beginning while Suharto or any designated successor rules the country and without the introduction of democracy, IMF programs to the contrary notwithstanding.
That is why it is especially disturbing that Washington -- by far the most important foreign player in Jakarta -- has done so little to facilitate a democratic transition (not to mention long-time official U.S. military, political and economic support for the Suharto dictatorship).
There are several potential candidates to succeed Suharto, the most popular among them being Megawati Sukarnoputri, the daughter of the man Suharto disposed -- with CIA support -- in 1966. But Washington has not openly supported a transition from Suharto to Megawati and other pro-democracy leaders, such as the jailed trade unionists, Mochtar Pakpahan and Ditaindah Sari, and the jailed party leaders, Budiman Sujatmiko and Sri Bintang Pamungkas.
Instead, U.S. officials have signalled that the United States might support candidates other than Suharto himself, but who would be favorable to the Suharto clan businesses, such as (Ret.) General Sudharmono, a former vice president who helped build up the ruling party. Sudharmono is also an old business partner of the Suharto family. His son-in-law, Bambang Permadi, holds the McDonald's franchise in Indonesia, and works closely with the Hero supermarket chain of Suharto's half-brother, Sudwikatmono.
Indeed, Bill Clinton's repeated phone calls to Suharto are viewed in Indonesia as demonstrating ongoing support for the aging patriarch. Indonesians have noted the contrast with a single 20-minute phone call to Megawati and conclude that, for all the talk of reform, Washington does not seriously want to challenge the status quo in Indonesia.