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The Choice Facing Suharto

Last week, Indonesia's President Suharto agreed to a number of reforms, which, if he actually carries them through, will be a major step in transforming Indonesia's economy from crony capitalism to sustainable capitalism. These steps were part and parcel of the IMF bailout package that will hopefully halt the dramatic slide of the Indonesian economy back into a third-world abyss. There is a full-scale currency crisis under way, with all its concomitant features: a dearth of actual hard currency, soaring inflation, and the social unrest that understandably accompanies the fear of being unable to buy rice tomorrow.

The rupiah has lost over 83 percent of its value in the last seven months alone, and the domestic market is having extreme difficulty adapting to the devaluation. The current exchange rate hit 14,550 to the dollar on January 22. Bills of 10,000 rupiah (less than US$1) are common, bills of 20,000 (less than $2) are rare, and bills of 50,000 (less than $5) exist, but they might as well not, since hardly anybody ever sees one. Changing a US$100 bill in Indonesia gets you a six-inch-thick stack of 10,000 and 5,000 rupiah bills, underscoring the seriousness of the recent inflation. The government is (wisely) not printing larger bills, for fear of sparking hyperinflation.

Even if the average Indonesian can escape the rising tide of unemployment, the inflation has made salaries increasingly worthless. One Indonesian I interviewed told me that even with his steady job, he didn't know if he could feed his family from month to month. One taxi driver said that although sometimes he made "OK" money driving his cab, some weeks would go by without earning a dime. There have been numerous demonstrations in Jakarta, with sporadic violence breaking out, although it has been muted to date. The armed forces have issued a warning that election-time violence is possible, and despite the army's tendency to overestimate security concerns for its own interest, this warning should not be ignored.

Obviously, the problem must be addressed, and the IMF bailout provides both a short-term solution in the form of quick cash, and a long-term solution in the form of wholesale reform of the economy. The immediate cash payments will allow Indonesia to repay some of its more pressing short-term loans. But far more important will be the long-term reforms and liberalizations in many industries, including banking and several important agricultural products. Already, liberalization of the financial industry is having effects, as a January 20 announcement of a major merger of five mid-sized banks demonstrates.

The agricultural deregulations will include sugar, honey, the crucially important rice market, and one market that is near and dear to Suharto's family, cloves. As I mentioned in a September 1997 article, Suharto's six children and their spouses control companies in a wide array of industries including electricity, toll roads, banking, telecommunications, newspapers, shipping, banking, and cloves. Currently, Suharto's son Hutomo Mandala Putra ("Tommy") has a government-enforced monopoly on the cloves market, and since cloves are a major ingredient in the sweet-smelling cigarettes that are very popular in Indonesia, this lucrative market has produced a fortune for the Suharto clan.

Another blow to Tommy is the IMF-requested official abandonment of the production of an Indonesian line of automobiles called the Timor. The problems with this pursuit are too many to mention, but one should suffice. The name of the automobile may sound reasonable to Indonesians. But since "Timor" is also the name of an island that Indonesia's military currently occupies, much to the chagrin of many other nations, the car would face immediate problems in the export stage of production. Indonesia's most promising export market, Australia, is the most vocal critic of Indonesia's occupation of East Timor. For a rough idea of the Australian market reaction to importing the Timor, imagine the American reaction if Japan tried to export a car called the "Midway."

In an editorial last week, The Australian voiced the problem, and part of the solution, succinctly: "The IMF must deal with the debilitating effects of cronyism if international credibility for some Asian economies is to be restored." Indonesia's international credibility is low because of the extensive and corrupt business holdings of Suharto's children, including Suharto's oldest daughter, Siti Hardiyanti Rukmana ("Tutut"), who has expressed political aspirations as well. The average Indonesian has a great distaste for the corruption and "crony capitalism" of the First Family. As one man told me, "I like Suharto. He is great. His family is the problem." The IMF recognizes the problem, and its requirements are cutting to the heart of the familial ties in agriculture, banking, and several other vital areas.

Will Suharto last long enough to make the necessary changes? The Economist argues that Suharto cannot institute fundamental reform of the system without undermining his own position, and has issued a call for him to step aside after his current term expires in March. Suharto has no such intention, and on January 20 announced his intention to run for a seventh five-year term. He is assured of victory, since the only vote that will take place is in the Parliament, where his Golkar party dominates, and the only drama will be his selection of a vice-presidential candidate. Because of his age, that selection is actually important this time. Possible candidates include current vice-president Try Sutrisno, a former commander of Indonesia's army who is fiercely loyal to Suharto, and Bacharuddin Jusuf Habibe, the brilliant if quixotic Science Minister who was wholeheartedly in support of Tommy's Timor car project.

The leading opposition candidate is Megawati Sukarnoputri, daughter of Sukarno, who ruled Indonesia before being overthrown by Suharto in 1966. She announced on January 10 that she was willing to stand for president -- a bold comment considering the last time she made it she was jailed for her troubles. But she has more trouble than just a hostile ruling party. In what could be a promising coalition, she recently aligned herself with Amien Rais and Abdurrahman Wahid, leaders of this Muslim nation's two largest Muslim organizations. But Wahid has reportedly suffered a stroke, and is unlikely to be able to lead his party over the next two months leading up to the election.

None of the above opposition candidates have a chance of winning an election, which they know all too well. Furthermore, none of them are particularly qualified to govern, and this fact they may or may not know. Although growth of democracy greatly assists growth of an economy, Indonesia may not now be able to take the chance of an unqualified or weak president. Sumitro, a retired army general, was quoted as saying, "Personally, I had wanted Suharto to step down 15 years ago. But for the time being, when we are in a difficult situation, we need a tough and calm leader. There is no replacement for Mr. Suharto."

Can Suharto force his nation, and his family, to swallow the IMF's bitter medicine? Already, Suharto has stood up to his own children, pushing through one particular piece of financial reform that cost of one his sons millions of dollars. But doubts remain. There is a great deal of ground to be covered, and the minor protests in the capital could turn ugly overnight. The last time there was a transition of power in Indonesia, the army killed thousands of protestors and political dissidents, and President Sukarno, in his last, desperate days, brought the nation to the brink of war with neighboring Singapore and Malaysia. This time, war does not seem likely, but riots, and their violent repression, are certainly not out of the question.

Even if Suharto can resist the mounting opposition to the system of crony capitalism associated with his family, and even if he can get through the next elections unscathed, he is growing old quickly. The financial market's panicky reaction to rumors of his death a month ago are a good -- and frightening -- indication of Suharto's position as the last man standing between Indonesia and the abyss. He is the only Indonesian strong enough to pull the nation out of its current crisis, and he and his family are the ones who would be most harmed by the reforms which are necessary to do so. For the sake of Asia's economies, if not the world, Suharto needs to choose his nation over his family.

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