IMF and WB: the destruction of Indonesia’s sovereignty

18 October 2004 by Eric Toussaint


After the Second World War, Southeastern and East Asia played two major roles. This region supplied raw materials to Western societies. Moreover it was a flashpoint for confrontations between contending Cold War interests.
On 27 December 1949, transfer of sovereignty was signed. Indonesia became a Republic and Sukarno was elected President.

The colonial legacy weighed heavily on Indonesia. It had to reimburse a substantial colonial debt and the Netherlands “bequeathed” it - a production structure essentially based on export crops. This made it dependent on the vagaries of international economic trade.
Until 1963, Sukarno played the two Cold War blocs against each other but he was explicitly asked to choose sides. The United States decided to act through the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
. However, both for reasons of western foreign policy decisions and Sukarno’s own domestic policies, he left the IMF and the WB World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

and decided to take charge of his country on his own terms. After the coup d’état on 30 September 1965 re-established relations, Suharto aligned his policies on US interests. Despite obvious convergence, the United States did not want to grant him new loans directly and decided, as in 1963, to entrust administration of their interests in the IMF, where all aid would be subject to implementation of IMF policies. Suharto joined the IMF in February 1967.

Without any qualms about the undemocratic and authoritarian nature of the new Indonesian government, western countries provided it massive support. This despite its corruption, the aggression against one of its neighbours (annexation of East Timor), its migratory plans that were subject to so much criticism in terms of human rights and environmental violations.
The 1998 Asian crisis weakened the regime and Suharto had to step down in May 1998.

The Bretton Woods institutions choices were guided by political and geostrategical factors. Their financial support enabled Suharto to carry out policies flaunting human rights.

A. CONTEXT

1. A key player on the Asian chessboard

The Indonesian archipelago has an astonishing array of geographical and economic assets. Indonesia is made up of some 13,677 islands, and forms an arc between continental Asia and Australia. It controls the seaways between East Africa, the Middle East and India on its Indian Ocean side. On its Pacific Ocean side, it stands between China, Japan and western North America. Indonesia’s tropical forest is the second largest in the world, after the Amazon’s. The archipelago has a wealth of agricultural products (rice, rubber, coffee, cacao, soy, palm oil, tea sugar and bananas) and natural resources (natural gas, tin, bauxite, nickel, copper). Moreover, it has petroleum deposits that have long been coveted by many [1]. Some islands are very densely populated; their people are an important reserve of cheap labour for western firms.

After the Second World War, Southeast Asia was fulfilling two main roles. Firstly, it supplied raw materials to Western societies. Secondly, alongside East Asia (China and Korea) this region was a (privileged location) where cold war interests clashed. Indeed, according to Noam Chomsky’s 1948 article in Le Monde diplomatique [2], Georges Kennan, the US strategist who popularised the containment strategy, sees in “the Indonesian problem (...) the most crucial question right now in the (US) fight against the Kremlin”. Chomsky adds: “and George Kennan warneed that a ’Communist’ Indonesia would be a source of ’infection’ liable to spread westwards and attack all South Asia”. (Our translation)

Thus, as it emerged from the Second World War, in the shadow of the cold war and international competition, Indonesia became a political and economic issue for the major powers. Rallying Indonesia to one of their ideological camps could have a fundamental impact on the international order.

2. The thousand-profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. colony

Indonesia was famed for its spices as early as the 16th Century. The Portuguese marketed the cloves and nutmeg produced in the Moluccas. Profits were high, and the Dutch took over the island by fire and sword. They ruled it from 1605. Since then, almost all the Indonesian islands, explored little by little became the preserve of the Netherlands. Commercial exchanges took root and the Dutch brought in new plants such as the coffee tree, indigo, sugar cane...

During the Second World War, the Japanese invaded the Indonesian islands, after the attack on Pearl Harbor. This period saw the growth of a major movement for Indonesian independence. Three days after the Japanese surrender, Sukarno [3] and Mohamed Hatta, backed by the rebellious youth, proclaimed Indonesian independence, on 17 August 1945. But, at the end of the war, the allies occupied the archipelago and waited for the Dutch to return. The former colonial masters found themselves in a difficult position as the clamour for independence grew. They had military control over the archipelago but were politically outside within and without. The major powers did not back them more because this instability was a strategic threat to the region but also because they too coveted the wealth of Indonesia. Colonial rule drew to a close.

A controversial episode in the World Bank’s history occurred in 1947. It granted a 195-million-dollar loan to the Netherlands while the Dutch government was conducting an offensive against Indonesian nationalists. This was the second loan the World granted in its history. Two weeks before approval of this loan, the Netherlands launched their offensive. Over the two following years, there were as many as 145 000 Dutch occupation troops (it was a large-scale operation, and hard to keep silent). Although the UN declared a cease-fire in 1948, the Dutch launched several land and air attacks. There was a hue and cry at the UN and in the United States, harshly criticising Dutch policy in Indonesia and Bank involvement. The latter responded that the loan had been granted to the Dutch government for spending to be made in the Netherlands. The critics shot back that since money was fungible, the Dutch government could use the Bank loan in support of its military effort in Indonesia. [4]

The United States realised that the aid they were granting to the Netherlands (400 million dollars) through the Marshall Plan Marshall Plan A programme of economic reconstruction proposed in 1947 by the US State Secretary, George C. Marshall. With a budget of 12.5 billion dollars (more than 80 billion dollars in current terms) composed of donations and long-term loans, the Marshall Plan enabled 16 countries (notably France, the UK, Italy and the Scandinavian countries) to finance their reconstruction after the Second World War. (400 million dollars) went indirectly in support of the military and police intervention in Indonesia. When they did, they got the UN to host talks at The Hague, in August 1949, and sovereignty transfer was signed on 27 December. Indonesia became a Republic and Sukarno was elected President. It became the 60th country to sign the United Nations Charter.

But the legacy of colonialism weighed heavily on Indonesia. The new nation had to repay a significant colonial debt. Moreover, the Netherlands had “bequeathed a production structure essentially based on export crops, making it dependent on the elastic course of the international economy. Moreover, most wealth created was still in the hands of Dutch firms. Finally, Indonesia took its first steps as a society scarred by colonial rule. This left it with a high illiteracy rate and only 1,200 physicians and 120 engineers for a population of 80 million inhabitants.

B. IFI: suspicions of President Sukarno and support to the dictator Suharto

1. The Sukarno era: affirming independence

Sukarno was a member of the non-aligned movement, which came on to the scene in Indonesia, during the 1955 Bandung Conference. Sukarno, Tito and Nehru were leaders who expressed Third-World hopes against the old colonial system of rule. During this gathering, Sukarno made a famous speech on the Conference’s aims. Here are a few excerpts [5]: “The fact that leaders of Asian and African peoples can meet in one of their own countries to debate and reflect on their common issues is a new historical beginning (...). No people can feel free as long as part of their homeland is unfree. Like peace, freedom is indivisible.”. (our translation). We are often told “Colonialism is dead.” Let us not be deceived or even soothed by that. I say to you, colonialism is not yet dead. How can we say it is dead, so long as vast areas of Asia and Africa are unfree.

(...) Colonialism has also its modern dress, in the form of economic control, intellectual control, actual physical control by a small but alien community within a nation. It is a skilful and determined enemy, and it appears in many guises. It does not give up its loot easily. Wherever, whenever and however it appears, colonialism is an evil thing, and one which must be eradicated from the earth. (...).

Sukarno spoke for an anti-imperialist outlook in terms of foreign policy. To complete his country’s unity, he stressed the return of New Guinea (Irian Jaya), which remained in Dutch hands. In 1956, he disavowed the colonial debt and in 1957 he nationalised Dutch firms.

Sukarno’s policy, inside and outside his country, was centred on a philosophy of equilibrium/balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. . Indonesia is a land with an immense variety of cultures and Sukarno attempted to keep the different factions in his country in balance, with the personal objective of remaining in power alone. In 1955, the first elections were organised. The President’s party (PNI) received 25% of the votes and the PKI, the Communist party, 16.4%. Two years later, regional elections took place and the PKI affirmed its strongholds, which disturbed foreign powers immersed in the ideological struggle. The PKI’s legitimacy was based on landless peasants, urban and oilfield workers and plantation workers and white-collar staff. By its own estimates, the party numbered 3 million members and 20 million sympathisers. To ensure his power, Sukarno worked with the Communists who could live with his populism. It must be emphasised that Sukarno was no communist, but a nationalist and he needed the PKI to establish his legitimacy in Indonesia.

On the international scene, Sukarno deftly played the Cold War blocs against each other. But tensions were rising. The United States had a dim view of the massive Soviet aid to Indonesia, thinking the latter could be won over to a pro-Communist stance. Hence, they backed internal rebellions that sought to destabilise Sukarno, who spoke out against this support at the UN. Until 1963, Sukarno succeeded in playing the two blocs against each other but they called on him to choose sides. The United States decided to act through the IMF. An IMF delegation toured Indonesia in 1962 and proposed financial aid conditional on close co-operation with the Fund. In March 1963, the United States provided a 17 million-dollar loan, and two months later, the Indonesian government announced a series of new economic measures (devaluation Devaluation A lowering of the exchange rate of one currency as regards others. of the rupee, austerity budget, suspension of subsidies...) in conformity to IMF policy. The next month, the OECD OECD
Organisation for Economic Co-operation and Development
OECD: the Organisation for Economic Co-operation and Development, created in 1960. It includes the major industrialized countries and has 34 members as of January 2016.

http://www.oecd.org/about/membersandpartners/
members met to agree upon a fund mobilisation accord. The United States proposed to contribute to it, alongside the IMF and the WB, to the tune of half of the 400 million dollars foreseen. In August, under a US initiative, Indonesia signed a stand-by arrangement”, enabling it to receive a 50 million dollar loan.

But this all changed in September 1963 when the British proclaimed the Malaysian Federation without consultation. Sukarno saw this as a manoeuvre by the English, of the “imperialist” forces. In a fit of anger, Sukarno nationalised British firms. This meant cancellation of the agreements with the IMF. Despite its demands, the UN agreed to creation of Malaysia and Sukarno, who failed to win his case, slammed the door on the UN in 1965.

The economic situation was disastrous. The many loans contracted to the West and the USSR were wasted on consumer goods, prestigious projects and arms. Although Sukarno defended the Indonesian people’s rights, he had not succeeded in making his country an economic success. His economy, dependent on the outside, had to face the collapse of the price of raw materials (the price of rubber slumped dramatically) and his excessive public spending policies played a part in feeding inflation Inflation The cumulated rise of prices as a whole (e.g. a rise in the price of petroleum, eventually leading to a rise in salaries, then to the rise of other prices, etc.). Inflation implies a fall in the value of money since, as time goes by, larger sums are required to purchase particular items. This is the reason why corporate-driven policies seek to keep inflation down. which reached a 600% yearly rate at the end of his power. This was the culmination of the Cold War, and Sukarno attracted Washington’s ire by nationalising all foreign private firms (except the petroleum industry). He left the IMF and the WB in August 1965 and decided to take charge of the country independently.

2. The 30 September 1965 coup d’état

On 30 September 1965, General Suharto launched massive repression against the left-wing parties. He chose the PKI as his prime target, accusing it of fomenting a Communist putsch. Suharto succeeded in taking control with the army and physically destroyed the PKI. Between 500.000 and 1 million civilians were assassinated merely for belonging to the PKI or sympathising with it. He progressively sidelined Sukarno. In March 1966, Suharto finally succeeded in having Sukarno officially hand over his powers. Six days after the turnover, the United States government announced that it was opening up a line of credit for Indonesia, amounting to 8.2 million dollars, for the latter to purchase US rice. [6] On 13 April 1966, Indonesia rejoined the World Bank. [7]

In 1966, Lyndon B. Johnson, the US president, crossed the ocean to visit his troops in Vietnam. In one of his speeches, he praised the Indonesian Model. [8]

3. The Suharto era: The “New Order”

Suharto’s power made regular use of terror and physical elimination of rivals. As well as the Communists, PNI members were targeted. So were Muslims in Java, Hindus in Bali, Christians in North Sulawesi. Suharto was re-elected every five years by a parliamentary institution (People’s Consultative Assembly) made up of 1000 members. The President directly chose 600; 400 were elected. Before each election, all candidates were subject to review by military intelligence, then personally approved by the President of the Republic.

Suharto aligned his policies directly on the United States. But despite the obvious convergence, the United States did not wish to grant new loans directly to the Suharto regime. They decided, as they had done in 1963 under other circumstances, to entrust administration of their interests in the IMF. The latter’s assistance would be subject to application of the policies it recommended. At the close of the summer of 1966, an IMF mission studied a new stabilisation programme and the government [9] rapidly implemented the IMF’s macroeconomic conditions. Indonesia officially returned to the IMF fold in February 1967. The western countries were swift to respond. Firstly, they granted 174 million dollars in aid in order to bale out the Indonesian crisis. Then, they proceeded to reorganise the debt. By the end of 1966 534 million dollars had to be reimbursed for debt service Debt service The sum of the interests and the amortization of the capital borrowed. (interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. , principal and back payments). This amounted to 69% of estimated export profits. [10] Without a new payment schedule, debt service would have cancelled out the impact of foreign aid. In December 1966, following a Club of Paris meeting, the western creditor nations accepted a moratorium [11] until 1971, on reimbursement of the principal and the long-term debt interests contracted before 1966. Without IMF support and without US pressure on the members of the Club of Paris, this reorganisation would not have taken place.

But the effects of a moratorium are merely temporary and, in 1971, repayments had to resume. From then, creditors signed the most favourable agreement ever granted. [12] Debts prior to 1966 (contracted under Sukarno) had to be repaid in 30 annuities over a period from 1970 and 1999. This reorganisation was followed by devaluation and a reform of exchange rates that made Indonesia the country with the freest exchange rate.

C. WB, IMF and United States first support, then abandon the Suharto regime

1. Corruption

According to the Transparency International [13] 2004 Report on Corruption, Mohamed Suharto was the most corrupt leader in the world. He misappropriated from 15 to 35 billion dollars between 1967 and 1998. This was far ahead of Ferdinand Marcos (Philippines: between 5 and 10 billion $US) and Mobutu (Zaire, 5 billion dollars). According to a World Bank report [14], between 20% and 30% of the budgets linked to development funds were embezzled and Bank loans are clearly involved. For example, the development budget that included headings such as “development infrastructures” financed the redecoration of government buildings or buying official vehicles, and not to the improvement of public welfare.
The World Bank is one of the country’s largest creditors. In 2002, the Indonesian debt to the institution came to more than 11 billion dollars out of a total of 75 billion dollars in public foreign debt.

Yet officially, the Bank does not own up to involvement in these misappropriations. It provides a litany of rational reasons to waive any responsibility for shoring up an odious regime. In fact, the October 1998 Operational Overview admits that “many of our own staff (particularly headquarters task managers) are viewed as ignorant or uncaring (as in ’they don’t really want to know’) of local practices and thus subject to being misled or deceived rather easily...” [15]

From the outset, World Bank relations with Indonesia were special in nature. The first visit by the new World Bank president, Robert McNamara, was to Indonesia. According to the official book on the World Bank’s first 50 years, “He [Robert McNamara] and the President Suharto admired each other, and the Bank president on the spot adopted unique modalities for a country program. On June 15 [1968] he told a press conference: “This is the first time that the World Bank has established this sort of a Resident Mission in a developing area... [Y]our problem in Indonesia demands a unique solution and a greater concentration of effort than we have applied anywhere else in the world”. [16]
Quoting the book again: “As for Indonesian corruption in general, the Bank clearly had this issue in view from the beginning of its (1968) renewed relationship with the country. But the relevant documents convey little sense that the phenomenon had to or could be fully eradicated (...) McNamara explained that ’it was also necessary to maintain the emphasis on reducing corruption. Outside Indonesia, this was much talked about and the world had the impression, rightly or wrongly, that it was greater in Indonesia than in any but perhaps one other country... It was like a cancer eating away at the society” [17]. And further along, according to McNamara,“Indonesia was the presidentially designated jewel in the Bank’s operational crown”. [18] It couldn’t be any clearer.

The Bank built up and maintained the vision of an Indonesian miracle, although it was fully aware of the Suharto regime’s fraudulent practices. Many internal Bank reports attested to this. Despite their awareness of the situation, there was no reduction in loans. On the contrary, they even underwent a constant increase.

Jeffrey Winters, Associate Professor of Political Economy at Northwestern University, insisted on the illegal nature of this Indonesian debt and saw it as a criminal debt with which international financial institutions were complicit. As he said, “It could have taken [the World Bank] a variety of measures, including intensifying the supervision of its projects, thereby reducing the levels of corruption in its own operations, even if it could not stop the rampant corruption across the government. It could have threatened to gradually reduce its lending to Indonesia over a period of years if the leakage of Bank project funds was not progressively curtailed. It could have halted lending completely on the grounds that continued lending under circumstances of persistently high levels of theft violated the Bank’s fiduciary mandate contained in its charter” [19]

Here we have a precise case of World Bank officials’ support for a regime that was known for its pattern of fraud. The Bretton Woods institutions were aware of the regimes’ massive graft and the deep level of its corruption. The analyses presented above lead us to affirm that interests of a political and geostrategical order lay behind this tolerance and complicity.

2. IFI Support to many forms of oppression

East Timor

In 1975, after the collapse of the Salazar regime, the Portuguese colonial administration and army, still occupying the island of Timor, decided to disengage from their colony. The Revolutionary Front of Independent West Timor, which had been waging an armed struggle against the Portuguese occupation, declared independence of the territory. [20] But one month later, Indonesian military forces invaded the island and, in 1976, the Indonesian government proclaimed East Timor its 27th province. The United Nations condemned this annexation and still viewed Portugal as the official territorial administrator. However, certain States, including the US, gave de facto recognition to this annexation. They had every interest in having oil reserves fall into the hands of a “friendly” dictator rather than Portugal’s or an independent Timor’s.

Violent combats ensued and the Indonesian army inflicted 100.000 victims among a population of some 750.000. Repression was a leitmotiv on the island and massacres were the means of thwarting any attempt at protest. For example, on 12 November 1991, the army opened fire on a peaceful march of Santa Cruz cemetery. This demonstration brought together Timorese attending the funeral of a young man killed by a pro-Indonesian paramilitary group. According to Amnesty International: ). “Approximately 270 civilians were killed in this massacre and its aftermath. Most of the victims were shot as they were attempting to flee. Others were beaten and stabbed. According to some testimony, dozens of people, including eyewitnesses of the massacre, were killed during the following weeks. Some of them were finished off in a military hospital where they were receiving care.” (our translation). [21]

In 1992, the UN Human Rights sub-commission condemned Indonesia for its “policy of repression in East Timor”.

Did these massacres dissuade the World Bank from lending to a country whose government was overtly carrying out very harsh repression against any opposition movements? Did the WB use its loans to ensure respect for human rights in Indonesia? The graph below indicates an increase in World Bank loan grants to the Indonesian government during the occupation of East Timor.

The transmigration project

The transmigration project, implemented under the Suharto regime and financially and politically supported by the World Bank, was not a new idea. In fact, the old Dutch colonial masters and the newly independent government had played a part in the migration of many Javanese. This project aimed to displace millions of poor Indonesians from the densely populated central islands (Java - the most densely populated area on earth -, Lombok, Bali and Madura) towards the less densely populated outer islands (Borneo, New Guinea and Sumatra). The official motives were as follows:

- Relieve pressure on the island of Java where many peasants were landless;
- Reduce poverty by enabling displaced persons to cultivate new lands on the outer islands and ensure them an adequate basic infrastructure, contributing to the economic development of the islands in question;
- Promote a more balanced national and regional population distribution.

The World Bank lent 630 million dollars to fund the project between 1976 and 1986 but approximately 130 million dollars would be cancelled. This reduced the Bank contribution to 500 million dollars. The Bank contribution was not limited to financial support alone. It also provided political support, attracting tens of millions of dollars in further support to the project (aid from the Dutch, German, US governments; from the Asian Development Bank, from the United Nations Programme for Development and the World Food Programme). According to Bruce Rich, in 1983, the Bank lent 734 million dollars more (loans to agriculture) to fund settlers.

According to Rich, between 1976 and 1986, 3.5 million people were displaced and 3.5 million others left on their own accord, motivated by government propaganda and advertising. WB loans made it possible to re-settle 71,000 families. 335,000 people were re-settled in Sumatra and Kalimatan. They also funded planning and selection of 400.000 families, or at least 2 million people. Thus, the Bank played a key role in this project. However, its impact was negative and irreversible. Human rights and environmentalist NGOs [22] revealed the covert motivations underlying this massive population displacement project.

Their main criticisms were as follows:

- Families were displaced according to a geopolitical objective. Ninety percent of Indonesia’s surface area is inhabited by non-Javanese. This creates an unstable political situation. Thus, this project was a national security priority and enabled the government to control indigenous peoples of the outer islands through forced integration.

- The transmigration project violated ground property rights of the indigenous peoples and forest dwellers. Transmigratory sites were established on indigenous peoples’ lands without their consent or compensation and the latter had to change their ways of life. The implementation of the project led to many acts of resistance, leading to violent situations and human rights abuse.

- The average cost of displacing a family was 7000 dollars, according to World Bank estimates [23] (in the mid 1990s. That amounts to 13 times the annual income of most families in the inner islands. This project seems most unprofitable and contributes to a considerable increase in foreign debt and poverty. In fact, according to a 1986 World Bank study, 50% of the displaced families were living below the poverty line and 20% below the subsistence level. Other studies proved that 80% of the project sites proved a failure in terms of improving people’s living conditions.

- The project was a failure in that it did not contribute to the improvement of poor people’s lives in the inner islands. It left the transmigrants in a worse situation than before due to an utterly unfit planning and preparation of sites, a limited access to markets and neglect of land and water ownership. The latter are essential to develop a farming economy. Indeed, according to Rich, the land set aside for the migrants was among the poorest soil on earth.

- Nor did this solve Java’s population density problems, on the contrary.

- Indonesia’s outer islands are home to ten per cent of the tropical forests still standing on earth and the transmigration programme has been a very important source of institutional pressure on these islands’ environment. In fact, the project played a part in serious damage to the outer islands’ environment through massive forest destruction. This project was proven to be the main cause of the country’s deforestation, estimated at 1.2 million hectares per annum in 1991. [24]

The World Bank denies all these allegations. In 1994, it decided to carry out an internal review [25] of the projects it had funded, in order to determine any possible responsibilities.

In this report, the World Bank admits that the Sumatra project had “negative and probably irreversible effects” (check English original) on the Kubu people. The Kubu are a nomadic people whose survival depends on the cultivation of fallow lands, hunting and forest gatherings. The audit states that “although the Kubus’ presence in the project zones was known since the planning phase, little effort was made to avoid problems” (our translation).

3. The 1997-1998 Southeast Asian Crisis

The 1997 Southeast Asian crisis (see chapter on this crisis) hit Indonesia hard and surprised the country with its violent nature. In less than one year, foreign capital left the country, the rupee lost more than 80% of its value and mass unemployment appeared. According to a study by the HCCI’s A. Giraud [26], “at the end of 1998, 50% of the population was living beneath the poverty line, estimated at $0.55 daily in cities and $0.40 in the countryside.” (Our translation).

The causes lie on the one hand with the Indonesian economy, based on endemic corruption, collusion between the government, the banks and private conglomerates and massive influxes of foreign capital allowing these to regulate the balance of payments Balance of payments A country’s balance of current payments is the result of its commercial transactions (i.e. imported and exported goods and services) and its financial exchanges with foreign countries. The balance of payments is a measure of the financial position of a country vis-à-vis the rest of the world. A country with a surplus in its current payments is a lending country for the rest of the world. On the other hand, if a country’s balance is in the red, that country will have to turn to the international lenders to meet its funding needs. . And on the other, on IMF policies. The untrammelled opening to foreign capital these prescribed played a part in feverish property and stock market speculation.

The IMF imposed “strong medicine” to solve the 1997 crisis. Once again it failed, extending and deepening the crisis. J. Stiglitz is very clear on this: “Economic policy must aim to minimise the gravity and length of economic crises as much as possible. Unfortunately that was neither the intention nor the outcome of IMF prescriptions”. [27] (our translation) The people, hard-hit by the impact of these measures began to launch protests. On 5 May 1998, as foreseen by agreements signed with the IMF, Suharto eliminated subsidies on basic goods, increasing the price of kerosene, electricity and gasoline by 70%. This stepped up the huge popular mobilisation that had begun several months earlier. Fifteen days later, Suharto stepped down after 32 years heading a dictatorial regime. The United States government intervened directly, having US Secretary of State Madeleine Albright request his resignation to open the way to a “democratic transition”.

By imposing draconian conditions for any aid to Suharto, the IMF encouraged the dictator to implement very unpopular economic measures. These measures consolidated the very broad opposition movement that finally got the dictator to leave power. Washington certainly thought Suharto had done enough to defend US interests. With the Cold War over for ten years, it was time to turn the page.

D. INDONESIA’S DEBT TODAY

If we study what has become of Indonesia’s public foreign debt, its distribution among creditors shows a relatively small private portion. This is largely due to the fact that the inflow of IMF and industrialised nations capital to reimburse private creditors as a priority converted a share Share A unit of ownership interest in a corporation or financial asset, representing one part of the total capital stock. Its owner (a shareholder) is entitled to receive an equal distribution of any profits distributed (a dividend) and to attend shareholder meetings. of the debts owed to the private sector to multilateral and bilateral debts, heretofore the great majority.

The Indonesian debt increased, mainly for two reasons. Firstly, the IMF’s rescue plan seemed to bring capital to Indonesia, but this capital immediately left the country as repayment of debts to foreign creditors. In the meantime, people in Indonesia underwent the consequences in the form of drastic budgetary restrictions and repaid these debts that had not benefited them in any way. According to the IMF 1998 Annual Report, IMF, WB, BAD and western government commitments totalled 50 billion dollars.

Second reason, the Letter of Intent called for reorganisation of the banking sector by reducing the number of institutions. This measure, combined with a tight money policy (high interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
) would entail the collapse of the banking sector. The Meltzer Commission’s report to the United States Congress stated very clearly: “Cutting government expenditure, raising taxes, raising interest rates and closing banks aggravated the crises.” [28] After a rise in interest rates, firms that had to repay their debts and lacked liquid assets (during the crisis period) had to refinance their loans, but at an exorbitant rate. Their liquidity Liquidity The facility with which a financial instrument can be bought or sold without a significant change in price. crisis very quickly became a solvency crisis and they went bankrupt. This meant a bad debt for commercial banks. Panic ensued among holders of accounts who lost confidence in their financial institutions and preferred to draw out their money. The IMF advised the government to recapitalise the sector by issuing bonds, at a high interest rate, to acquire shares in banks in difficulty and guarantee dubious debts. This issue only increased the country’s internal debt, null circa 1998. The government spent 430 million rupees (5 billion dollars) on recapitalising the banking system. In addition to repaying that sum, it had to reimburse 600 billion rupees (70 billion dollars) more, as interest.

These measures made the country’s debt situation still worse. The largest share of government budgets is set aside for reimbursing the debt. Between 1999 and 2000, 50% and 40% respectively were spent on debt service. In 2004, the share is close to 28% and this situation is expected to continue.

Continued bloodletting of capital

The 1997-1998 crisis brought in capital in the short term. But since then, repayment has weighed heavily on the Indonesian budget. This is why the net transfer of the debt, i.e. the difference between new loans and total repayments over one year, became (weakly) positive in 1998, before falling deeply into the red since then.

Conclusion

In short, the historical, political and economic analysis we have provided in this case study shows that the 1965 military coup deprived the Indonesian people of the opportunity to determine their own future. And yet, with the 1955 Bandung Conference, Indonesia had begun to play a dynamic role in what was to become the non-aligned movement. The threat of seeing one of the most populous countries on earth play a role in establishing a new world order led the United States and the Bretton Woods institutions to actively support the Suharto dictatorship.

These institutions’ choices were guided by political and geostrategical factors. Their financial support enabled Suharto to implement many policies detrimental to human rights.

They were complicit in these policies. Later on, starting from the 1997 crisis, IMF-imposed measures only made the economic situation more dire and led to a sharp increase in the internal and external public debt. In the balance, the impact of IMF and World Bank intervention in Indonesia is largely negative. In consequence, the liens that they hold on this country should be cancelled outright.



Translation: Marie Lagatta.

Footnotes

[1At the dawn of the 20th Century, a Dutch monopoly, Royal Dutch held control over Indonesian oil and supplied most of the Asian market. The United States, who had seized control over the Philippines in 1898, began to take an interest in Indonesia and tried to penetrate its market. Clashing with the Dutch monopoly, the Standard Oil Company launched a price war with its competitor and quickly got it into financial difficulty. The Dutch firm was finally rescued by a merger of Royal Dutch with the British firm Shell, in 1907. However, US pressure was so great that the British and Dutch accepted Rockefeller opening a subsidiary in Indonesia in 1912, which began to pump oil the same year. Then, the First World War broke up European interests in Indonesia, enabling US firms to penetrate the rubber market. In 1914, Goodyear and Rubber had already built a plant in Sumatra, and the US firm, acting through its “Holland-Amerika Plantege Mij” branch, acquired 80.000 acres for rubber production. This firm took control over the largest rubber plantation in the world under a single ownership. Such hard-nosed US business tactics were proof of how much importance they placed on these islands.

[2CHOMSKY, Noam, L’Indonésie, atout maître du jeu américain, June 1998, pages 1 and 8.

[3Sukarno was one of the founders of the independence movement. In 1927, Sukarno, an engineer, founded the Perserikatan Nasional di Indonesia (PNI). Other groups joined his to form the PNI whose slogan was “One nation, one people, one language”. He was arrested in 1929 and his PNI movement was outlawed. Since the courts were unable to prove any charges against Sukarno, he was freed after one year in custody but afterwards, the governor used his powers of exception and exiled Sukarno to the outer islands. He was freed by the Japanese.

[4This controversy is summarised in Rich, Bruce. 1994. Mortgaging the earth, p. 69-70. Rich provides many details including an account of the debate at the United States Congress.

[5from Africa-Asia Speaks from Bandong, (Djakarta, Indonesian Ministry of Foreign Affairs, 1955), 19-29

[6Payer, Cheryl. 1974. The Debt Trap : The International Monetary Fund and the Third World, p. 75-90

[7Kapur, Devesh, Lewis, John P., Webb, Richard. 1997. The World Bank, Its First Half Century, Volume 1: History, Brookings Institution Press, Washington, D.C., p. 1222.

[8ARTE, Les mercredis de l’histoire : Massacre en Indonésie, Australie, France, Thirteen WNET New York, Arte France,YLE TV2 Documentaires, Australian Film Finance Corporation, Hilton Cordell/Vagabond films production, BFC Productions, c.2001

[9Creation of an exchange market, anti-inflation measures, balanced budgets, limiting public expenditure to 10% of GNP, tax system improvements, end to subsidies, re-establishing a climate friendly to foreign investment by allowing profits to be taken out of the country...

[10Payer, Cheryl. 1974. Ibid., p.80

[11More than half of the Indonesian debt was contracted with the USSR, and by granting a moratorium on their debt, Western creditors were underwriting reimbursement of the Soviet debt. In order to avoid any capital outflow to the USSR, they granted this favoured status on condition that the Soviets do the same. The latter agreed, as they feared they would not be repaid at all in the event of a refusal on their part.

[12This new contract included the most favoured nation clause, meaning the Soviet debt would be repaid at a faster rate.

[14World Bank, “Summary of RSI Staff Views Regarding the Problem of ‘Leakage’ from the World Bank Project Budget” August 1997.

[15ABID ASLAM, World Bank’s Guilt on Indonesia Corruption, WASHINGTON, 14/02/1999, Inter Press Service (http://www.50years.org/press/ips021...):”many of our own staff (particularly headquarters task managers) are viewed as ignorant or uncaring (as in ’they don’t really want to know’) of local practices and thus subject to being misled or deceived rather easily...”

[16"He [Robert McNamara] and the President Suharto admired each other, and the Bank president on the spot adopted unique modalities for a country program. On June 15 [1968] he told a press conference: “This is the first time that the World Bank has established this sort of a Resident Mission in a developing area... [Y]our problem in Indonesia demands a unique solution and a greater concentration of effort than we have applied anywhere else in the world”, Kapur, Devesh, Lewis, John P., Webb, Richard. 1997. The World Bank, Its First Half Century, Volume 1: History, Brookings Institution Press, Washington, D.C. p. 469

[17Id., p. 492, “As for Indonesian corruption in general, the Bank clearly had this issue in view from the beginning of its (1968) renewed relationship with the country. But the relevant documents convey little sense that the phenomenon had to or could be fully eradicated (...) McNamara explained that ’it was also necessary to maintain the emphasis on reducing corruption. Outside Indonesia, this was much talked about and the world had the impression, rightly or wrongly, that it was greater in Indonesia than in any but perhaps one other country... It was like a cancer eating away at the society”.

[18Ibid. p. 493, “Indonesia was the presidentially designated jewel in the Bank’s operational crown”.

[19It could have taken [the World Bank] a variety of measures, including intensifying the supervision of its projects, thereby reducing the levels of corruption in its own operations, even if it could not stop the rampant corruption across the government. It could have threatened to gradually reduce its lending to Indonesia over a period of years if the leakage of Bank project funds was not progressively curtailed. It could have halted lending completely on the grounds that continued lending under circumstances of persistently high levels of theft violated the Bank’s fiduciary mandate contained in its charter” in Jeffrey A. Winters, “Criminal Debt in the Indonesian Context”, Center for International and Comparative Studies, Northwestern University, July 3, 2000 (Updated for the INFID Seminar on Indonesia’s Foreign Debt).

[20Amnesty International, Indonesia and East Timor, September 1994.

[21Amnesty International Report, published in 1994, on human rights violations in Indonesia, p. 66.

[22Walhi, Watch! Indonesia, OXFAM, IMBAS, Asienhaus (Germany), BIC, CIFOR, WRI

[23World Bank, Indonesia Transmigration Sector Review, p.41, in RICH

[24M. ADRIANA SRI ADHIATI, ARMIN BOBSIEN, Indonesia’s Transmigration Programme - An Update, A report prepared for Down To Earth, July 2001

[25’Indonesia Transmigration Program: a review of five Bank-supported projects’ April 26, 1994 ; ’Impact Evaluation Report : Transmigration I, Transmigration II, Transmigration III’ March 22, 1994

[27Stiglitz, Joseph E. 2002, La Grande désillusion, p. 165.

[28Meltzer Commission Report, Washington, March 2000, p. 23. Can be viewed at : http://www.house.gov/jec/imf/meltzer.htm Furthermore, at the call of the Indonesian coalition of anti-debt movements (Koalisi Anti Utang), many events on this topic are held regularly in Indonesia. Koalisi Anti Utang considers the IMF has had a role in the bankruptcy of many firms, the destruction of the banking system, rising unemployment, the origin of domestic debt and the rise in foreign debt. Details are found on the coalition’s website: http://www.kau.or.id.

cadtm.org
Eric Toussaint

is a historian and political scientist who completed his Ph.D. at the universities of Paris VIII and Liège, is the spokesperson of the CADTM International, and sits on the Scientific Council of ATTAC France.
He is the author of Bankocracy (2015); The Life and Crimes of an Exemplary Man (2014); Glance in the Rear View Mirror. Neoliberal Ideology From its Origins to the Present, Haymarket books, Chicago, 2012 (see here), etc.
See his bibliography: https://en.wikipedia.org/wiki/%C3%89ric_Toussaint
He co-authored World debt figures 2015 with Pierre Gottiniaux, Daniel Munevar and Antonio Sanabria (2015); and with Damien Millet Debt, the IMF, and the World Bank: Sixty Questions, Sixty Answers, Monthly Review Books, New York, 2010. Since the 4th April 2015 he is the scientific coordinator of the Greek Truth Commission on Public Debt.

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