INDONESIA: How the IMF feeds graft and corruption

May 31, 2000

The Seattle and Washington protests against the International Monetary Fund (IMF) and World Bank (WB) have forced their chiefs into damage control. But despite all the PR bunk about the IMF and WB's "non-interference" in national economies, and their "pro-development" and "anti-poverty" agendas, the impact of their interference in the Third World is hard to hide.

Indonesia is perhaps one of the most devastating examples. For more than 30 years, the IMF and the WB helped to prop up — economically and politically — General Suharto's rule. It was only when the country was on the brink of economic collapse and a growing mass movement was about to shaft the dictator that the IMF suspended operations — and then only temporarily.

What has been the impact of the IMF and WB in Indonesia?

The IMF was set up in the wake of World War II as a distinctly anticommunist institution. Its purpose was to supervise the capitalist reconstruction of Europe and, from the outset, it established the right to intervene directly into other countries' economies.

The IMF protests that it does not interfere in countries' economic decisions, but reality shows otherwise. Its board, made up of government financial advisers from capitalist nations, makes decisions about borrowing countries' macro- and micro-economic policies, down the smallest detail, as all loan agreements reveal.

The IMF is an inherently undemocratic institution. Its one dollar-one vote decision-making system gives the United States, which has 20% of the votes, the biggest say in lending policy. Of 182 member countries, the nine most industrialised wield 56% of the votes within the IMF's group of 24 administrators.

The WB works closely with the IMF, receiving advice on how much to lend and on loan conditions. It works in a similarly undemocratic manner, with the richest imperialist countries having the biggest say. Both institutions appoint country managers, but neither they nor the institutions themselves are answerable to the countries that are placed under structural adjustment programs (SAPs).

SAPs, responsible for the de-development of Latin America and Africa, set out in considerable detail the neo-liberal austerity program that the borrowing government has to implement. For instance, in return for relatively low-interest, long-term loans, the Indonesian government has pledged to slash the social budget, privatise state assets, recapitalise insolvent banks, reduce tariffs, maintain low wages and continue the export-oriented character of the Indonesian economy.

Contrary to the "growth miracles" and "export booms" that are supposed to have happened in Latin America and elsewhere, such austerity programs have brought greater poverty, more disease and less development. As Cuba's President Fidel Castro put it at the Group of 77 meeting in Havana on April 12: "After World War II, Latin America had no debt, but today we owe almost US$1 trillion. This is the highest per capita debt in the world. Also the difference between the rich and the poor in the region is the greatest world-wide."

IMF in Indonesia

From 1945 to the 1960s, the nationalist Sukarno government had rejected WB and IMF interference. This resulted in an economic blockade which, together with the collapse of the rubber export industry and the resulting economic and political crisis, forced a change of policy.

Indonesia joined the IMF in 1967, shortly after Suharto seized power in a bloody coup. Suharto looked to the WB and the IMF to assist in the stabilisation of capitalism in Indonesia.

The WB started lending money to the Suharto regime in 1967 and to date it has lent US$25 billion. For some 30 years, right up until the economic crisis hit in mid-1997, the IMF and WB helped the Suharto regime to transform the economy from a people-oriented to an export-oriented one.

The small producer sector was all but destroyed and the country became dependent on importing rice and other basic commodities. Yet, under Suharto, Indonesia was considered a model of development success and the dictator was lauded as the "modern" leader.

Selective economic data was highlighted in the regular country reports, along with unusually optimistic growth reports. Meanwhile, a blind eye was turned to the generals' rampant corruption, cronyism and nepotism.

Even in 1998, after the onset of the economic crisis, the WB predicted that the Indonesian economy would become the fifth largest in the world by 2020. In 1998, the country's economic output contracted by some 16%, the largest single year collapse recorded anywhere in the world. Tens of millions of workers were sacked, tens of millions more were forced into poverty and now, two years later, there are still no signs of real growth.

Time magazine last year estimated Suharto's wealth at US$15 billion. But this estimate is conservative given that the assets of the extended Suharto clan are not taken into account. According to researcher Dr George Aditjondro, the figure is closer to US$100 billion — half of Indonesia's current public and private debt of US$200 billion — and more than the private debt of US$65 billion.

How on earth could one man and his extended family have stolen so much over so many years if not for the help of close friends such as the IMF and WB?

When it became clear in 1998 that the economic "contagion" was going to spread from Thailand to the rest of Asia and beyond, and that the Indonesian economy was already in ruins (some 50% of businesses were on the verge of bankruptcy), the IMF temporarily suspended its program with Indonesia. The previous January, Jakarta had signed a US$43 billion "rescue" package designed to protect the corrupt government.

As one senior IMF bureaucrat put it: "The grim reality of zero growth, 20% inflation and the fact that fuel subsidies are going to be removed will be hard for local people to swallow. But the foreign investors will be relieved."

As it turned out, the Indonesian people did not swallow it. The 17% fuel price rise, the result of a subsidy cut, sparked the mass demonstrations across Indonesia which only ended when Suharto stepped down on May 21. A new arrangement with the IMF was brokered the following August.


Reports from the independent Indonesia Corruption Watch (ICW) group, which is investigating the extent of Suharto's corruption and cronyism, and the WB and IMF's complicity, indicate that some 20-30% of all development aid was siphoned off by Suharto and his cronies. The fact that loans for specific projects were given directly to the central government, which doled out contracts on the basis of political connections, facilitated the corruption.

One example from ICW is illustrative. A WB loan of US$255 million was promoted as a sub-district development program to improve the living standards of 20,000 villages. But apart from the application of some fresh paint and a few streets cleaned up, the benefits went to the paint brush suppliers who, in most villages, were relatives of government officials. With a 25% mark-up, the suppliers made a tidy sum.

ICW says WB officials knew of such problems for years but until the economy collapsed, they reasoned that the benefits greatly outweighed the graft.

The IMF is now leading another US$45 billion "rescue package". The first tranche (US$349 million) of a three-year US$5 billion loan was delivered in February. The second tranche (US$400 million) was delayed from April to early June as concerns mount about the ability of the Abdurrahman Wahid-Megawati Sukarnoputri government to restructure corporate debt and clean up the notoriously corrupt banking sector and court system.

To date, the Wahid government has lost a string of court cases against business people tied to the former regime. One prominent case was against Marimutu Srinivasan of Texmaco, a textile manufacturing company, who refused to repay debts to the state.

In another, prosecutors lost their case against Djoko Chandra, a fundraiser for the former ruling party, Golkar, despite evidence that Chandra had illegally channelled US$80 million away from the insolvent Bank Bali. This was followed by a court victory for former Bank Bali owner Rudi Ramli, who regained control of his bank from the government despite admitting that he made the payment to Chandra.

Given the Suharto legacy and political enmities within the Wahid cabinet, it's hardly surprising that progress on eliminating corruption has been negligible. Not that Wahid should be let off the hook; he is as mixed up in nepotism and cronyism as the leadeers of the rest of the five major governmental parties. Wahid's recent sackings of two leading economic ministers, one from the Indonesian Democratic Party of Struggle (PDI-P) and the other from Golkar, was seen as an attempt to stifle accusations about his own cronyism.

Whatever the reasons behind the economic ministry reshuffle, it's clear that the government is pursuing the same neo-liberal economic program as its predecessors. However, Wahid is attempting to mask this by whipping up nationalist sentiment and focusing on "national unity" and "reconciliation".

Against the advice of the US, Wahid attended the G-77 meeting in Havana in April and spoke of the need for greater South-South collaboration. He is also courting governments belonging to the Gulf Cooperation Council (Brunei, Iran, Malaysia, Singapore and Yemen).

But in return for IMF support, and in response to growing pressure at home, Wahid has to at least be seen to be trying to put things in order. The investigation into Suharto's foundations, the trial of lower-ranking officers in Aceh, the investigation of the military's role in East Timor last year, and other human rights inquiries such as the military's attack on the PDI offices in 1996, serve to shift the focus away from the persistent economic problems.

Whether the generals and cronies end up being bought to justice will largely depend on the pro-democracy movement and their international solidarity supporters.

People's opposition

The latest IMF austerity program — which will double the Indonesian people's cost of living — comes on top of the economic crisis bought on by 32 years of corruption, cronyism and nepotism. Already, the United Nations estimates that one-third of all Indonesian children are malnourished, TB is on the rise, as are other curable diseases, and these statistics look set to worsen.

Since coming to power, Wahid has cut subsidies to essentials including rice, electricity, fertiliser and cigarettes. Phone and postal rates will rise in June, to be followed by a fuel price hike. Education fees have risen by 300% (even before the economic crisis, 80% of the population had received less than six years of schooling).

The lion's share of the IMF loan is being spent on propping up insolvent banks. A fire sale of state assets is also planned; bankrupt state enterprises will be sold off for a song to one or other government crony and, with the help of the IMF and WB, be made into profitable enterprises.

But the government faces a struggle to get its anti-people program implemented. While the five main governmental parties (National Awakening Party, Star and Crescent Party, National Mandate Party, PDI-P and Golkar) agree with the neo-liberal program, they are squabbling about proceeds and timing while also trying to insure themselves against the inevitable political fall-out.

The People's Democratic Party (PRD) is the only party to lead an opposition movement to Wahid-IMF rule. A young party which has no parliamentary resources, the PRD has nevertheless made national headlines with its extra-parliamentary campaigning against the subsidy cuts and for its alternative people-friendly economic policy.

The party launched its opposition program on February 21 and has been organising with workers and students against the price rises. Its chairperson, Budiman Sudjatmiko, has received national coverage for the party's alternative economic program, which includes: cancelling the debt (now equal to some 93% of gross domestic product), nationalising Suharto's assets, cutting the military budget, increased funding for social programs, cleaning up corruption without privatising state assets, and no funds for insolvent banks.

Together with students from the Indonesian National Student League for Democracy (LMND) and workers from the Indonesian National Front for Labour Struggle (FNPBI), the PRD has been the main organiser of "the parliament of the streets" — on April 1, when some prices went up, and on May Day. Their actions forced the government to delay the fuel rise.

These are the people on the front line of the struggle against the IMF and WB. Their livelihoods, and those of 210 million others, depend on their ability to develop and strengthen the pro-democracy movement.

We have reason to be optimistic. During the 1990s, a mass movement strong enough to overthrow the Suharto dictatorship politicised the whole of Indonesian society, preparing the way for the bigger and more radical struggle that is now needed.

Our assistance to the forces on the front line of the anti-IMF campaign is critical. The Seattle and Washington protests alerted the world, once again, to the barbarity of the IMF and WB. Just as importantly, they highlighted the failure of the private-profit system to meet people's basic needs.

We should take up Fidel Castro's call to replace the IMF. He said: "A financial system that forcibly immobilises such enormous resources, badly needed by the countries to protect themselves from the instability caused by that very system, should be removed. The IMF is emblematic of the existing monetary system.

"Of crucial importance is for the Third World to work for the removal of this sinister institution [the IMF], and the philosophy it sustains, and replace it with an international financial regulating body that operates on a democratic basis, and in which no one country has the right of veto. An institution that would not just defend the wealthy creditors and impose interfering conditions, but would allow the regulation of financial markets to arrest unrestrained speculation."

Here in Australia, the campaign has to force the Coalition government to turn its $1 billion contribution to the IMF's Indonesian rescue package into a grant. The Australian government representative on the IMF board should be pressured to oppose the imposition of any austerity, deregulation or privatisation measures as conditions for grants or loans from the IMF.

The Australian government should also increase its humanitarian aid package to Indonesia, sever military ties with Indonesia and pressure the United Nations to conduct an international war crimes tribunal to try the generals responsible for last year's carnage in East Timor.


[This article is based on a talk presented to the Sydney University Action in Solidarity with Indonesia and East Timor club. Pip Hinman is the national secretary of ASIET.]

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