Neoliberal Case Study: Indonesia

Is Indonesia’s neoliberal free trade policy today achieving broadly shared prosperity? If it is, then we should see economic and human health outcomes that result in the broad creation and broad distribution of wealth and health for the majority of the Indonesian people. This would be considered a “democratic free-trade outcome.” If, instead, we find that Indonesia’s economy concentrates income and wealth into a small minority of the population (as Neoliberalism does in all countries), then we can reasonably conclude that Indonesia’s free trade policy today is not the result of free and fair democracy. In such case, this would be considered an “undemocratic free-trade outcome.” This article is intended to determine which of these two outcomes has occurred.

History of Indonesia’s Economy

The Southeast Asian Country of Indonesia is the fourth most populous country on Earth—approaching 265 million people within a relatively small total landmass. The country is comprised of over 17 thousand islands with a diverse ethnic population that speaks several hundred languages. Over half the population resides on a single island—the Island of Java.^[1] The country is located at the intersection of the Pacific Ocean and Indian Ocean, which is a natural strategic geographic location for a country engaged in international trade. The country is rich in natural resources, including coal, petroleum products (crude oil and natural gas), gold, copper, tin, palm oil, rubber, timber, various agricultural products, and other minerals.

Since the 7^th Century, the collection of islands known as Indonesia today has been a busy nexus of international trade between the tribes and villages in Southeast Asia and the indigenous and foreign empires that dominated China and India. Islamic merchants exported their religion from the Middle East to Indonesia around the 13^th Century, which has been the most influential religion in Indonesia ever since.^[2]

European and Japanese colonists had a dominant influence on the culture, traditions, trade activities, and economic conditions in Indonesia for over 500 hundred years. Between the early 17^th Century until the end of the 18^th Century, the Dutch East Indies Company and the Government of The Netherlands dominated Indonesian life, politics, and commerce.^[3] During World War II, Indonesia suffered brutal economic, social, and political oppression from the Japanese occupation.^[4] During the World War II years, Indonesia’s first president, Ahmed Sukarno, led the country through a period of political turbulence and revolution. Then in 1945, Sukarno formally declared Indonesia’s independence as a sovereign nation.

By the late 1950s, the American and British governments were worried that Sukarno’s nationalistic tendencies were a threat to Western economic power and political influence in Southeast Asia. Additionally, as an avowed anti-colonial, freedom-fighting nationalist, Sukarno was ideologically sympathetic to the Communist Party of Indonesia (PKI), which received financial and military support from the Soviet Union and China to resist the intervention of Western powers.^[5] From Sukarno’s perspective, Western powers were already seeking to undermine the indigenous political systems and economies in China, Vietnam, the proto-Malaysian state, and the Korean Peninsula, in addition to U.S. domination of the post-war rebuilding of Japan.

Surrounded by American and British soldiers in neighboring countries and under relentless pressure from Western corporations to extract Indonesia’s natural resources, Sukarno believed his country was on the verge of suffering from another round of Western imperialism. Thus, Sukarno took a strong position against the intervention of the West in the domestic affairs of his country.

However, Sukarno was not a Communist. In fact, in a 1957 BBC interview, he explicitly said:

I’m not a communist, not at all satellite of any other “-ism” in the world. I’m just pro-Indonesia. I’ll fight and work and sacrifice myself for this Indonesian people, this Indonesian fatherland of mine.

Sukarno also famously said:

Americans are under the impression they’re saying to use, ‘Here poor, dear, poverty stricken brother…have some money…here poor little underdeveloped Indonesia, we are going to give you aid because we love Indonesia.’ This is hypocrisy. America tolerates underdeveloped Asian countries for two reasons. One, we’re a good market. We pay back with interest. And two, she worries we’ll turn communist. She tries to buy our loyalties. She gives bounty and plenty only because she’s afraid. Then if we don’t act the way she wants, she yanks back her credit and warns, ‘No more unless you behave yourself!’ Manual Quezon of the Philippines once said, ‘It is better to go to hell without America than to go to heaven with her!’^[6]

Like many other political leaders on Earth during the Cold War Era, Sukarno believed he was caught between two superpowers and he tried to maintain a policy of non-alignment, but his hand was forced when the American CIA and British MI6 intelligence agencies started actively manipulating public sentiment inside Indonesia and around the world, funding political opposition groups, and deliberately sabotaging the Sukarno regime.^[7]

The sabotage came in the form of numerous U.S.- and British Government-backed political coup attempts, CIA-produced propaganda campaigns portraying Sukarno as a sex-crazed porn star (particularly shameful in a nation of Muslims), Western boycotts of Indonesian products, and widespread refusal of Western-controlled financial institutions to lend money to the Indonesian Government and private sector corporations on reasonable terms.^[8] This coordinated assault on Indonesia’s economy and its political system, combined with Sukarno’s prodigal spending and willful ignorance of sound economic policy, inevitably resulted in a rapid decay of the Indonesian economy and its infrastructure, leading to hyper-inflation of 500-1,000% per year. This caused Sukarno’s political popularity to plummet.

As Western powers tightened the political and economic noose around Sukarno’s neck, and as Sukarno escalated his anti-imperialist rhetoric, Indonesia grew increasingly dependent upon Soviet and Chinese financial aid. This magnified Western fears of the so-called Domino Theory, which, ironically, became a self-fulfilling prophecy due to the West’s hostility to Sukarno’s rational desire for Indonesia to remain non-aligned, as India had successfully done throughout the Cold War years. Sukarno himself did not want Communism or “any other ism” in Indonesia; he simply wanted his country to be free from all forms of foreign economic oppression and political intervention.

On September 30^th, 1965, six Indonesian Army generals were murdered. The group allegedly responsible for their murders was named the “30 September Movement,” which was a radical left-wing political group that was sympathetic to Sukarno. According to the official story distributed in Western news media, the group claimed the six generals were plotting to kill Sukarno; therefore, the group supposedly killed the generals first to protect Sukarno. This alleged coup attempt was subsequently proven by later investigations to be a staged false-flag attack that was orchestrated by American and British intelligence officials in collusion with a senior Indonesian Army official and future Indonesian president, General Suharto.^[9] The purpose of the fraudulent coup was to give the Army a pretext to eliminate the PKI and destroy Sukarno’s political and financial support base, with the ultimate goal of replacing Sukarno with Suharto.

As planned, General Suharto, with direct logistical, financial, military, and intelligence support from the U.S. and British Governments, led the Indonesian Army in hunting down and murdering between 500,000 to 1 million Sukarno supporters (so-called “communists”) in the Indonesian Holocaust. Nearly 1 million more were systematically tortured and sent to concentration camps, which operated for decades. This holocaust ended the lives of scholars, members of the clergy, students, scientists, politicians, and anybody who publicly supported Sukarno’s philosophy of non-alignment. Countless more millions were threatened, intimidated, and driven into hiding. These events were the culmination of a plan to “liquidate President Sukarno” that U.S. President Kennedy and British Prime Minister McMillian conceived in 1962.^[10] [11]

The gambit was a success, assuming “success” is defined as the consolidation of economic and political power in the hands of a Western puppet, the hijacking of the Indonesian political system, the destruction of the Indonesian economy, and the extermination, torture, and oppression of millions of humans. In March 1966, Suharto granted himself dictatorial military powers. Thereafter, the PKI was immediately abolished, the Indonesian Government, Parliament, and Military were all purged of pro-Sukarno supporters and replaced with pro-Western officials who supported Suharto’s new brutal regime.

The New Order

Suharto’s policy agenda was labeled “The New Order” and consisted of sweeping reforms to privatize all Indonesian industries, make the Indonesian economy more accessible to foreign importers, and impose more fiscal discipline on government spending. Before Suharto’s policies could have possibly achieved any real economic growth, in less than a year after Sukarno was replaced—as if by magic—inflation rapidly dropped and foreign investment capital started flowing into the country again. By late 1970, inflation was in single digits. Naturally, Suharto’s more corporate-friendly economic policies satisfied Western governments. The economic gods were smiling upon Indonesia again.

While former President Sukarno was under house arrest for the rest of his life until he died in 1970, new President Suharto was left alone to plunder his country and siphon off $15-35 billion into his family’s own private bank accounts.^[12] He also mandated that all civil servants vote for his Golkar Party, which created a veneer of democratic legitimacy and ensured his perpetual dominance of the Indonesian political system for over 30 years until 1998. In the meantime, the concentration camps, political repression, and politically-motivated murders continued for decades.

General-turned-President Suharto’s New Order regime was guided by a new group of economic advisors, widely known as “the Berkeley Mafia.” Often compared to Milton Friedman’s “Chicago Boys” in Chile, the Berkeley Mafia was a group of economists who went to school at the American University of California at Berkeley. These economists were educated in economic liberalism, they were philosophically libertarian, and they were strong advocates of trade liberalization, industrial deregulation, privatization, and other laissez faire economic policies. Under the tutelage of the Berkeley Mafia, Indonesia’s economy grew at over a 6% average annual rate.

Largely driven by oil exports in the early years of Suharto’s regime, Indonesia’s per-capita GDP grew 545% between 1970 to 1980. The oil revenue enabled the country to prosper and the overall standard of living to rise, but the crude-oil-based prosperity masked significant structural and institutional problems within the economy.^[13] Corrupt institutions, waste and abuse of natural resources, cronyism between industry and government, unsustainable government debt, the highest level of corruption of any country according to Transparency International—these were significant obstacles to the Indonesian economy reaching its full potential. For all these reasons, as the chart below illustrates, the Indonesian economic growth miracle did not really take root until the 2003-2004 period, long after Suharto and his Berkeley Mafia implemented their trade liberalization policies.

Indonesia’s Modern Economy

Indonesia was the most severely damaged country during the financial crisis that ravaged Southeast Asia between 1997 and 1998. The Indonesian economy, in terms of real GDP, contracted by over 13% while the annualized inflation rate jumped to over 70% for a short time, then fell back down to single digits within a year. The Indonesian currency—the Rupiah—suffered a severe devaluation, which decimated creditors throughout Indonesia and around the world. The political and economic chaos of the Asian Contagion, combined with the grotesque corruption of the Suharto regime and widespread political protests, resulted in Suharto being forced out of power in 1998.

As part of a comprehensive support package from the International Monetary Fund (IMF) in the aftermath of the crisis, the Indonesian Government was forced to implement many economic and political reforms to stabilize its economy. These reforms included higher capital-to-debt ratios for banks, more fiscal discipline in the government, a crackdown on institutional corruption, more effective oversight of national government elections, adoption of international financial accounting standards (GAAP, in particular), higher quality corporate governance practices, more reliable contract enforcement laws, stricter financial regulations, and a host of other reforms.^[14] Although some of the IMF reforms likely prolonged Indonesia’s suffering due to austerity measures that unnecessarily choked economic growth in the early 2000s, the long-run result has been generally positive at the national level. However, this national-level success has not translated into broadly shared prosperity throughout the Indonesian population.

The economic and institutional reforms, an ostensibly free and fair presidential election in 2004, more attractive conditions for foreign direct investment, improved communications and transportation infrastructure, China’s membership in the WTO in late-2001 (becoming Indonesia’s second-largest export market), substantial economic structural diversification into textile manufacturing and other non-extractive industries, favorable demographic trends, and the general trend toward trade liberalization around the world since 2000, have dramatically improved the performance and near- to medium-term prospects of the Indonesian economy. As a result, Indonesia’s sovereign debt rating has improved to “Investment Grade” according to all three of the major sovereign bond rating agencies (Standard & Poor’s, Moody’s, and Fitch).

Human Health & Welfare Outcomes

Since the late 1990s and early 2000s reforms, Indonesia’s economy has delivered strong performance, but it still suffers periodically from instability and volatility due to its substantial dependence on petroleum product exports, which rise and fall with geopolitical events and the corresponding volatile price of crude oil. Nevertheless, in 2012, Indonesia moved past India to become the second-fastest-growing G20 economy—a distinction Indonesia maintained for several years until India’s economic growth accelerated to become the second-fastest growing G20 economy in recent years.^[15]

After a spike into the low-double-digits in the mid-2000s, Indonesia’s unemployment rate has remained stable at around 6% in recent years. The official poverty rate in Indonesia has decreased by about 38% since 2000 and now hovers around 11% of the total population, based on available World Bank data.^[16] However, this relatively low headline poverty rate masks much deeper concerns: At least 30% of the entire Indonesian population is living just barely above the official World Bank “poverty line” of $1.90 USD per day (on a PPP basis). Among other country-specific reasons, the validity of this official poverty line is questionable given the vast disparity in economic conditions and the tremendous dynamism and diversity of prices of essential goods and services between national economies. Although useful, Power Purchasing Parity (PPP) calculations cannot take all these complex socioeconomic nuances into account.

Additionally, the per-capita GDP metric used to compute the PPP-based poverty levels for each country is a grossly inadequate measure of the true financial health of a population, particularly when wealth concentration is high or increasing. This is because per-capita GDP severely overstates the true distribution of income and wealth as it measures the average income rather than the median income and wealth of the population. For example, if an economist measures the average wealth of a group of ten people that includes Bill Gates and nine other homeless people, the per-capita wealth of this population is about $87 billion in 2017.

In contrast, the median wealth of this 10-person population would be close to $0, resulting in a comical $87 billion discrepancy between these two measures of the population’s prosperity. As income and wealth concentration increases, the average income and wealth of the population statistically increases, too, but this distorts the true economic condition of the population. In other words, it produces a statistical lie, which has many socioeconomic and political implications beyond the scope of this article (but covered in various ways in many of my other articles).

Given that approximately 30% of the Indonesian population lives just barely above the official poverty line, the reality for the Indonesian people is that between 30-50% or more of the entire population is barely surviving. ^[17] And their situation will inevitably get worse as traditional agrarian lifestyles are destroyed, industries are consolidated and eliminated by artificial intelligence, and Capitalism is destroyed by the way globalization is misconfigured today. Additionally, Indonesia’s job growth rate is slower than the population growth rate due to changing macroeconomic conditions. And Indonesia’s healthcare system performs poorly in important healthcare measures such as infant and maternal mortality, when compared to other countries within the same per-capital GDP range.

Finally, wealth concentration into a small segment of Indonesian society is a problem. (This is the case in most countries today.) Over 50% of Indonesia’s total wealth is owned by 1% of the population.^[18] This further amplifies the distortions of any per-capita GDP-based income and wealth distribution or quality of life analysis. And given the still-lingering institutional cronyism and systemic bias in favor of large, multinational corporations in Indonesia’s politically dominant natural resource extraction industries, this trend of increased wealth concentration is likely to continue. None of these trends bode well for the long-term future of Indonesia’s political and economic stability.

From this perspective, outside the usual Wall Street cheerleaders that want to pour their fickle hot money into the Indonesian economy, there is much less reason to applaud the economic performance of the Indonesian Government in recent years.

Conclusion

Indonesia’s economy has benefited significantly from trade liberalization, as predicted by David Ricardo’s Theory of Comparative Advantage. Trade flows between Indonesia, Japan, China, the United States, and several other countries have followed the patterns of import and export trading behavior, based predominantly upon their respective levels of factor abundance, that the Heckscher–Ohlin Model predicts. Specific industries that produce goods most intensive in Indonesia’s most abundant resources have been winners (particularly low-skilled labor and natural resource extraction industries) as predicted by the Stolper-Samuelson Model.

Although these benefits from international trade are meaningful, the long-run future of Indonesia’s economy and social stability depend upon more sustainable domestic policies. In particular, social and economic stability depend on domestic economic policies that ensure the broad creation and broad distribution of wealth and political power. Broadly shared prosperity and political power are essential to achieving sustainable, national prosperity and democratic stability.

Revisiting my original question, “Is Indonesia’s free trade policy today achieving broadly shared prosperity?” The answer is unambiguously, “no.”  This would not be the outcome in any country that is truly governed with high institutional integrity. Specifically, no healthy democracy would ever allow a nation’s corporate governance, tax, and trade policies to collectively result in such high levels of real poverty and such high concentrations of income and wealth in the hands of such a small number of people. Thus, we can reasonably conclude that the collective trade and economic policies implemented by the Indonesian Government have resulted in an undemocratic free-trade outcome.

---

Notes:
[1] Ricklefs, M. C. (1993). A history of modern Indonesia since c. 1300. Stanford (Ca.: Stanford University Press.
[2] Ibid.
[3] The Dutch East India Company | european-heritage.org. (n.d.). Retrieved from http://european-heritage.org/netherlands/alkmaar/dutch-east-india-company
[4] Moor, J. D. (2005). The Collapse of a Colonial Society: The Dutch in Indonesia during the Second World War (review). The Journal of Military History, 69(2), 593-595. doi:10.1353/jmh.2005.0116
[5] Lashmar, Paul, and James Oliver. Britain’s Secret Propaganda War. Stroud, Gloucestershire: Sutton Pub Ltd, 1999.
[6] Sukarno. Sukarno: An Autobiography. Translated by Cindy Adams. Bobbs-Merrill, 1965.
[7] “Still Uninvestigated After 50 Years: Did the U.S. Help Incite the 1965 Indonesia Massacre? | Global Research – Centre for Research on Globalization.” Accessed April 29, 2017. http://www.globalresearch.ca/still-uninvestigated-after-50-years-did-the-u-s-help-incite-the-1965-indonesia-massacre/5467309.
[8] Blum, William. Killing Hope: U.S. Military and C.I.A. Interventions Since World War II–Updated Through 2003. Updated edition. Monroe (Me.): Common Courage Press, 2008.
[9] “Still Uninvestigated After 50 Years: Did the U.S. Help Incite the 1965 Indonesia Massacre? | Global Research – Centre for Research on Globalization.” Accessed April 29, 2017. http://www.globalresearch.ca/still-uninvestigated-after-50-years-did-the-u-s-help-incite-the-1965-indonesia-massacre/5467309.
[10] Oppenheimer, Joshua. “Suharto’s Purge, Indonesia’s Silence.” The New York Times, September 29, 2015. https://www.nytimes.com/2015/09/30/opinion/suhartos-purge-indonesias-silence.html.
[11] They knew very well that the “hit lists” they were giving the Indonesian Army were being used to murder every person on those lists. So there is no question that officials at the highest levels of the U.S. and British Governments were aware of their own complicity in the holocaust.
[12] BBC NEWS | Business | Suharto tops corruption rankings. (n.d.). Retrieved from http://news.bbc.co.uk/2/hi/3567745.stm
[13] World Bank. (2003, October 20). Combating Corruption in Indonesia Enhancing Accountability for Development. Retrieved from http://siteresources.worldbank.org/INTINDONESIA/Resources/Publication/03-Publication/Combating+Corruption+in+Indonesia-Oct15.pdf
[14] IMF Survey: Indonesia’s Choice of Policy Mix Critical to Ongoing Growth. (2009). Retrieved from http://www.imf.org/external/pubs/ft/survey/so/2009/car072809b.htm
[15] “IMF World Economic Outlook (WEO), October 2016: Subdued Demand: Symptoms and Remedies.” Accessed April 29, 2017. http://www.imf.org/external/pubs/ft/weo/2016/02/.
[16] World Bank Indonesia Overview. (2017). Retrieved from http://www.worldbank.org/en/country/indonesia/overview
[17] Indonesia’s poverty line: To make a million people unpoor | The Economist. (2011, August). Retrieved from http://www.economist.com/blogs/banyan/2011/08/indonesias-poverty-line
[18] The Global Wealth Report 2016 – Credit Suisse. (2016). Retrieved from https://www.credit-suisse.com/us/en/team/research/research-institute/news-and-videos/articles/news-and-expertise/2016/11/en/the-global-wealth-report-2016.html

---