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Indonesia-Participation in the Economy

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The military has never been as dominant in the economic sphere as it has been in the political. Total military expenditures as a percentage of gross national product (GNP--see Glossary) declined steadily since the 1960s, with the military share of the budget declining from 29 percent in 1970 to less than 4 percent in 1990. Nevertheless, because of historical circumstances, economic necessity, and some doctrinal predisposition, the armed forces retained considerable influence in the workings of the national economy, an influence that some critics charged was too pervasive and sometimes detrimental. By the early 1990s, however, the military had withdrawn from much of the economic policy decision-making arena, leaving that role to an ever-expanding core of Western-trained economists and managers who, the military recognized, were far better educated and able to function in this vital sector.

The armed forces' economic role had its beginnings early on in the National Revolution period (1945-49). That role was stepped up in 1957 when military personnel were assigned managerial or advisory positions in Dutch enterprises and agricultural estates nationalized by the government. This involvement in commercial enterprises projected the military, especially the army, into a new sphere of activity through which it acquired entrepreneurial expertise, a vast patronage, and a source of personal enrichment for many. The military's role in national economic life greatly expanded under conditions of a rapidly deteriorating economy during the Sukarno era in the 1960s, when the services, like many other government departments, were caught in a tightening fiscal squeeze between inflationary costs and depreciating budgets. Nominal military pay, for example, depreciated to a point well below subsistence level for privates and generals alike; commodities and other tangible emoluments were what counted. Left largely to their own devices to find support, local military units secured their needs by operating business enterprises, levying unofficial "taxes," smuggling, and other methods suggested by their own resourcefulness and available opportunities. At the central command level, the preferred procedure was to divert to military use funds from state corporations in which military officers held controlling positions. As military officers were withdrawn from the economic policy and management sector, however, their ability to directly siphon unbudgeted funds to support military requirements diminished. Nonetheless, this extrabudgetary funding process remained in place, particularly for capital expenditures, even though the transfer of funds from state enterprises was largely a civilian policy arena. In the early 1990s, such extrabudgetary resources apparently still accounted for substantial portions of the annual fiscal needs of the armed forces (see Defense Spending and Defense Industry , this ch.).

The armed forces also influenced the economic policies of the Suharto regime through their ties with its most important economic technocrats. In late 1962, the curriculum at the Army Command and Staff School was broadened to include lectures on a wide range of nonmilitary subjects. In 1965 some of these lectures were presented by a group of economists trained at the University of California at Berkeley (see Role of Government , ch. 3). It was to these technocrats that Suharto turned when seeking economic guidelines for the New Order and when setting up and running his government. The armed forces strongly supported their programs over the years, and these economists continued to play an important educational role at the service staff colleges and the National Defense Institute (Lemhanas). Many believe the military-technocrat alliance provided one foundation of the Suharto regime. By the early 1990s, in fact, the so-called "Berkeley Mafia," continuously augmented as successive generations of bright youths sought training in the United States, had directed Indonesia's economy for more than thirty years.

Although not the only state institution to engage in commercial enterprise in order to generate extrabudgetary income, the armed forces certainly were the most energetic and successful. Commercial activities under the various territorial commands commonly included the use of military trucks to transport passengers and freight for hire. Military-owned companies operated in the open market, much as any private company. For example, the Dharma Putra Foundation, a holding company connected with the Army Strategic Reserve Command (Kostrad), included a film company, an airline, and the Volkswagen assembly franchise. Another company operating under the sponsorship of the Department of Defense and Security (Hankam) controlled affiliates involved in logging, trade, industry, and textiles. In late 1980, a report issued by the provincial assembly in Timor Timur, whose members were appointed by the central government, charged that an enterprise controlled by the local army command had developed a forced monopoly on the province's main export commodities, coffee and sandalwood, and was reaping profits at the expense of local producers. The army's umbrella organization, Kartika Eka Bhakti Foundation (YKEB), continued to manage army cooperatives and business concerns into the 1990s.

Another kind of military enterprise was the service-owned factory, which had as its primary purpose the production of ordnance and equipment for the armed forces. By the mid-1980s, however, such major concerns as the navy's P.T. PAL shipyard in Surabaya (Jawa Timur Province), and the army's munitions factories had been turned over to the civilian government and were being managed as state enterprises. In a category by itself was the state-owned National Oil and Natural Gas Mining Company (Pertamina) established in 1968 with the union of several state enterprises. Under the managing directorship of army General Ibnu Sutowo from the late 1950s until 1976, when he was eased out of office following the spectacular near-collapse of the company, Pertamina became a commercial colossus and Sutowo himself one of Indonesia's richest and most powerful men. Since Sutowo departed in 1976, Pertamina has been directed by more professional management and has divested itself of many of its non-petroleum sector enterprises. It still retained its dominant position in the nation's oil and gas sector in the early 1990s (see Petroleum, Liquefied Natural Gas, and Coal , ch. 3).

Although they could not be singled out from other actors in the national economy, the armed forces of the 1990s continued to face the problem of coping with a legacy of corruption. The government recognized the special military aspect of this national problem and made repeated calls for military officers to act with special care in their business dealings and to avoid the appearance of nepotism when engaged in civilian duties. The military condemned excessive corruption and retired a number of senior officers for unacceptably blatant corruption. The military in the early 1990s was viewed by Indonesian society as being generally less corrupt than other sectors of the government. Nonetheless, the low salaries of military personnel required "constructive employment" to make ends meet, and there continued to be an acceptance of what Western societies consider corruption, as long as it was within "acceptable limits."

Data as of November 1992

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