Reorganising Power in Indonesia

The Politics of Oligarchy in an Age of Markets

Vedi Hadiz, Richard Robison, Vedi R. Hadiz

• Publisher: Routledge
• Year: 2004
• eBook ISBN: 9781134320288
• Edition: 1
• Topic: History
• Subtopic: Asian History
• Index: History

Reorganising Power in Indonesia is a new and distinctive analysis of the dramatic fall of Soeharto, the last of the great Cold War capitalist dictators, and of the struggles that reshape power and wealth in Indonesia. The dramatic events of the past two decades are understood essentially in terms of the rise of a complex politico-business oligarchy and the ongoing reorganisation of its power through successive crises, colonising and expropriating new political and market institutions. With the collapse of authoritarian rule, the authors propose that the way was left open for this oligarchy to reconstitute its power within society and the institutions of newly democratic Indonesia.

Part I


HISTORICAL AND
THEORETICAL
FRAMEWORKS

INTRODUCTION

Economic crisis and the paradoxes of transition

This crisis consists precisely in the fact that the old is dying and the new cannot be born; in this interregnum a great variety of morbid symptoms appear.¹

In its broadest sense, this is a study of the vast and bitter struggles that accompany the spread of market capitalism and the forging of those economic and political regimes within which it is defined. These are processes widely regarded as steps in the inevitable and inexorable triumph of liberal markets, democracy and legal-rational forms of bureaucratic authority. Yet, the very protracted nature of such conflicts and the continuing difficulties that have faced liberal reform agendas throws into doubt the assumed structural relationships between markets and liberal political and social institutions. Indeed, the spread of market capitalism has been full of seeming paradoxes as rapid economic growth and deepening integration with global markets have appeared in important instances to consolidate systems of power that are profoundly authoritarian or highly predatory. Such developments have given rise to arguments that capitalism may survive and flourish within a range of different institutional frameworks and regimes. They open the very fundamental questions of how institutions are forged and transformed.

It is within the terms of these issues and questions that we set our study of the dramatic conflicts that have defined the rise of market capitalism in Indonesia during more than three decades under the rule of Soeharto and in the period after his fall from power. Here, the consolidation of authoritarian rule and its metamorphosis towards a hegemony of politico-business oligarchies took place in the context of deepening engagement with the global economy and as progressive, albeit selective, market reforms were enacted. Even destructive economic shocks and, most recently, the collapse of the Soeharto regime itself, have not dismantled a system of power focused around the private expropriation of public authority. These seeming paradoxes raise questions about the relationship between market reform and political power, about the significance of regime change and how global markets influence institutional change. Our exposition of the Indonesian case leads us into a direct collision with mainstream neo-liberal political economy

While the question of liberal convergence and the process of transition to market capitalism has for decades occupied a central place in debates across the ideological spectrum, the Asian economic crisis of 1997/1998 concentrated the issues. The crisis appeared to confirm the fatal flaws of economic regimes constructed around the intervention of the state, whether through strategic policy agendas or the allocation of rents. Here at last, it seemed, was the decisive ‘shock’, long heralded by neo-classical economists and institutional political economists, that would finally discredit coalitions of vested interests and convince governments of the costs of previous policies and the need for reform (Williamson and Haggard 1994: 562–564). The crisis appeared to cut the ground from under the feet of those who had proposed that state-led developmental regimes might constitute a sustainable model of modern industrial capitalism as an alternative to liberal markets (Johnson 1982; Zysman 1994; Amsden 1989; Wade 1990; Weiss 1998). For the time being it silenced those increasingly confident claims by Asian leaders of the functional superiority of ‘Asian Capitalism’ over what were regarded as decaying and self-destructive Western models of individualism, free markets and liberal democracies.²

The crisis forced important shifts in the policies and institutional arrangements across the region, most specifically in Indonesia, Thailand and South Korea, where beleaguered governments were forced to deliver unprecedented power into the hands of the IMF as they faced looming fiscal and debt crises. As entrenched political regimes began to fracture, those who dominated them soon found they could no longer rule in the same way (Cumings 1999; Moon and Sang 2000; Robison and Rosser 1998). Yet, everywhere the reformist prescriptions of the IMF and others were resisted and confronted even at the height of economic distress. More than five years down the line we find that changes have been more ambiguous and indecisive than first thought (Jayasuriya and Rosser 2001; Hewison 2001; Robison 2001; Gomez 2002; Wingfield 2002).

Without a theory of power, neo-classical economists had few answers to the question of why governments do not quickly embrace the natural efficiency of markets even in the face of a crisis that threatens the very fabric of economic life. Clearly change was not driven by any simple and abstracted logic of efficiency. Politics mattered and neo-liberal political economists, emerging initially in the 1960s and 1970s, grappled with the problem of explaining how. For them, the central political struggle was one to protect markets from politics and from the predatory raids of rent-seeking coalitions: to impose the neoliberal agenda as a public good that transcends vested interests. It was a struggle, at one level, to undermine the state, whose very existence was seen as dependent on the provision of rents. For others, the political problem was one of constructing a state able to insulate technocratic policy-makers from the predatory raids of distributional coalitions. It was nothing less than a political project aimed, ironically, at emptying the state of politics and creating what Jayasuriya has termed the regulatory state, a system of technocratic, authoritarian liberalism.³

In this study, by contrast, we argue that change is driven neither by rational individuals operating in a world of voluntary transactions nor by the efforts of wise technocrats to empty the state of politics and to neutralise those coalitions of vested self-interest that seek to capture it. Instead, the politics of change are, we propose, inextricably embedded in what Chaudhry has termed, ‘Wrenching social struggles [that] precede and shape the rules that govern markets’ (Chaudhry 1994: 4). The neo-liberal agenda, in this view, cannot be understood as an abstraction driven by a collection of technopols acting above vested interests, but as an agenda backed by shifting and fluid coalitions with a concrete interest in the configuration of power and the institutions that allocate it. What is at stake is nothing less than a social order. This is why entrenched interests and alliances normally seek to preserve those arrangements within which their hegemony is embedded even at the cost of deepening economic distress and capital flight. While reforms might appear to be technical policy changes based on calculations of efficiency, in reality they often strike at the very social and economic foundations of entrenched regimes. Thus, the significance of crises lies less in economic costs and lessons learnt by policy-makers about efficiency than in the extent to which they unravel the political cohesion of entrenched coalitions and give rise to new reformist alliances.

Nowhere are these dynamics more clearly illustrated than in the case of Indonesia, the specific focus of our study. Here, we argue, the politics of institutional change and markets must be seen in the context of such ‘wrenching social struggles’ between shifting coalitions of state power and social interest assembled around four main socio-political agendas. Thus, the rise of Soeharto constituted the decisive triumph of the ‘patrimonial administrative state’ over those contending agendas of social radicalism and the reactionary populism of a declining Muslim petty bourgeoisie in the 1960s.⁴ Economic life was to be decided within the framework of a highly centralised authoritarian state, and public authority was to be progressively expropriated for the private and institutional interests of its political rulers and their beneficiaries. Liberalism, as we shall discover, was never more than a slender reed, enjoying a highly ambiguous relationship with the prevailing paradigm of authoritarian rule and predatory power relations.

Thus, the central research question is to explain how those leagues of state and politico-business oligarchies that were its creators and beneficiaries have continued to preserve their ascendancy and the pervasive authority of a sometimes arbitrary and predatory state, despite periodic economic crises, deepening integration with global markets, the growth of a powerful capitalist class and even the unravelling of the political regime itself. It is, at the same time, a question of explaining why no powerful and politically cohesive coalition has been assembled behind the neo-liberal agenda.

Economic crisis, neo-liberalism and the
question of convergence

It is not surprising that there was an air of triumphalism within neo-liberal circles after the Asian economic crisis. It was seen as a vindication of the functional superiority of market capitalism and an ideological victory over the proponents of state-managed models of capitalism. Far from being the functionally superior models of capitalist development previously claimed by many Asian leaders, the sorts of interventionist regimes embodied in ‘Asian Capitalism’ were now revealed, in neo-liberal eyes, as economic systems outmoded in an age of global markets. Such regimes had, in this view, generated those rent-seeking coalitions of predatory officials and political cronies that gave rise inevitably to inflated asset values, excessive private sector borrowing, overextended banking systems, overvalued currencies and deteriorating current accounts (Camdessus 1997: 5).

Long regarded by the World Bank and other neo-liberal economists as a model of responsible macro-economic management, Indonesia was to experience the most destructive economic collapse. A political regime seemingly invulnerable until the very last moment was to unravel more dramatically than any other.⁵ An economy that had enjoyed decades of growth now faced the humiliation of economic decline and was forced to submit to sweeping programmes of policy and institutional reform imposed by the IMF. Indonesia was plunged into a destructive spiral of public debt that was to consume over 30 per cent of its routine budget outlays by 2000 and 2001, and into a crisis of private debt that paralysed its banking and financial institutions. Spreading quickly into the very heart of Indonesia's commercial world, it engulfed those major business groups and politico-business families that had enjoyed over a decade of unchecked expansion into booming and newly deregulated sectors of the economy. Highly exposed to short-term and largely unhedged loans, they were confronted by a debt crisis of massive proportions and by early 1998 most had defaulted on their loans (World Bank 1998b: 1.9, 2.3).

This was much more than a financial or economic crisis. What distinguished Indonesia from other countries in the region was the extent to which it unravelled the very institutions of state power underpinning the Soeharto regime. Unable to stem the economic collapse and deal with its deepening social effects or to maintain intact the institutional underpinning of his political and economic power, Soeharto was cornered for the first time in over three decades of rule. Attempts by elements in the military and the government to divert rising social tensions into the channels of racial and religious xenophobia did not prevent domestic dissent focusing increasingly upon Soeharto, his family and cronies. As violence erupted on the streets of Jakarta and across the country, Indonesia's President of over three decades was deserted by his own apparatchiks and forced from office. Ironically, the very architect of the regime now became the major obstacle to the survival of those coalitions of power and interests nurtured within its structures. The crisis had claimed its most important political victim. The last of the Cold War capitalist dictatorships had come to an end.

Within the IMF and amongst the inner sanctums of neo-liberal orthodoxy, there was little doubt that Asia's economies, including that of Indonesia, had fallen under the weight of their own inefficiency and dysfunction, the consequence of state intervention in the free operation of markets and the inevitable widespread cronyism that resulted (Frankel 1998; Wolf 1998a). It was the inherent structural faults of these economies, their refusal to adhere to the disciplines of global markets, that brought the hedge funds down on their heads. IMF Managing Director, Michel Camdessus, argued that, ‘it would be a mistake to blame hedge funds or other market participants for the turmoil in Asia’. This was, he proposed, ‘only a symptom of more serious underlying problems which are now being addressed in many countries (cited in Asian Wall Street Journal(hereafter AWSJ) 3 December 1997: 1). The crisis was regarded as a lesson for Asia's policy-makers and a ‘blessing in disguise’ that paved the way for better policy choices (AWSJ13 November 1997: 1).

Many Western analysts were now to reassert the proposition that Asian economies were caught in an inexorable historical convergence towards Western liberal political and economic institutions (Dale 1998). Among those arguing the convergence thesis, America's Federal Reserve Chairman, Alan Greenspan was to explain the process in functional terms. The effective operation of free markets, he proposed, required rule of law that placed limits on arbitrary state action and a system of governance where transparency and public disclosure of information would enable prices and risks to be assessed on true value rather than some value based on ‘moral hazard’ (cited in Hamilton 1999: 47). The crisis provided a reminder that long-term growth in an era of globalisation required Asian economies and their governments to ‘abandon their bad habits’ and to allow market signals to set prices (Economist11 March 1998). It was a convergence that would be enforced by an anonymous and leaderless herd of investors, financiers and currency dealers now operating in a global arena and able to come and go at will. Accepting the rules of these new global markets was not a choice (Friedman 1997). As Camdessus declared, ‘Countries cannot compete for the blessings of global capital markets and refuse their disciplines. Hence the importance of pursuing policies that give markets confidence’ (cited in Saludo and Shameen 1997).

Initially, there were good grounds for believing that a fundamental convergence was underway in Indonesia. Suddenly, the IMF was able to dictate the details of policy and institutional reform in letters of intent jointly agreed with the Indonesian government. Indonesia's corporate moguls and political families were forced to hand over billions of dollars to cover their vast banking debts while far ranging monopolies and concessions channelled into private hands by the state were cancelled. Attempts were made to break open the opaque and unaccountable organisations through which contracts and licences were channeled by the state. In the political sphere, highly centralised authoritarian rule and ideological control gave way to a vigorous and uncertain new democracy. New political interests and players, some of them from the very margins of the old regime, now jostled for power and influence within the volatile arenas of parliament, parties and elections.

Yet, the neo-liberal expectation that Asia's economies would be driven towards market capitalism in a telos of efficiency where power and conflict play no role was to be quickly disappointed. There has been no frictionless process of transformation driven by the lessons of the crisis. As we shall see, the reform agenda in Indonesia has been imposed on a reluctant but beleaguered government only after much muscle flexing by the IMF. Even so, attempts to close insolvent banks and force powerful business groups to restructure their debts and surrender assets to cover the costs of recapitalisation have met with fierce resistance. Few of the major corruptors of the old regime have been brought to court and successfully prosecuted. Attempts to dismantle the system of state controlled rents underpinning Indonesia's corporate moguls and to reform strategic gatekeeping institutions have floundered as new political rulers found that the need to control patronage and secure off-budget was central to success in the new system of parliamentary power.

In the realm of politics too, the opening of the political system and the rise of parliament is signalling the emergence of a form of democracy quite different from that contemplated by liberals. As we shall see in later chapters, President Wahid, Indonesia's first elected President under the new democratic regime, found himself confronted with the sullen, resentful military and the bureaucratic remnants of the old regime who remain entrenched in the state apparatus. He was to be drawn inexorably into the vicious world of money politics and into a conflict with a parliament where individuals and factions jostle for influence and power under ...

Table of contents

• Cover
• Reorganising Power in Indonesia
• Full Title
• Copyright
• Contents
• Series Editors Preface
• Preface
• Acknowledgements
• Abbreviations and Glossary
• Part I Historical and Theoretical Frameworks
• Part II The Triumph of Oligarchy 1982–1997
• Part III The Oligarchy in Crisis 1997–1998
• Part IV Oligarchy Reconstituted
• References
• Index