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INDONESIA

A STUDY IN NEPOTISM

 

Indonesia

 

Prosperity, historically definable in national or regional terms, has taken on a more global definition.  Not too many years ago, it was enough to be “relatively” prosperous; your prosperity was measured against that of your neighbors, and as long as the guy next door didn’t have a better car or a bigger house, you might have felt comfortable.  Prosperity can be fleeting, though, if its foundations are not set in stone.  In order to maintain their station, people must analyze the frailties of their own system and correct its weaknesses, or it will fail and they will fall behind their neighbors. 

Yet, it isn’t always failure that breeds unrest.  A bizarre example of how prosperity caused riots, death, burning and looting is illustrated by recent events in Indonesia, the world’s largest Muslim State and the fourth most populated country on earth, with 210 million people, 13,700 islands, 350 dialects and hundreds of ethnic groups.  President Suharto, who was in office for 32 years, brought 7% annual economic growth to Indonesia, controlled inflation, dropping it from 600% when he assumed office to 6.5% several years ago when he was asked to leave office.  He also increased per capita income from $70 to $1,300. ([1])  

He set a global model for family planning and insisted on his constituents getting a full education.  For these and other innovations, he became the darling of both the World Bank and the International Monetary Fund, both of which assisted him in opening Indonesia to foreign investment at the urging of his cadre of American educated economic advisors.  Most of his advisory team went to school or taught at Berkley, and became known as the Berkley Mafia.  Suharto was literally brought up by a dukin, a spiritual leader who is one-half faith healer and one-half fortuneteller.  In Indonesia, this is not such a bad thing, and it is rumored that he still consults these folks on a regular basis to augment his wahyu.  However, this may have been his problem. ([2]) 

While in office he made great strides at eliminating poverty in Indonesia and was able to unite an extremely diverse ethnic population into a cohesive force.   Indonesia, under Suharto, had become a global example of how free markets can create jobs as well as infrastructure: “Indonesia has made remarkably steady and huge progress,” says Ben Fisher of the World Bank and formerly a member of Suharto’s cheering section. Retrospectively, Fisher was wrong as rain.  

Moreover, there was a lot more to Suharto than met the eye. He was a tough enemy as exemplified by the fact that after he took office in 1965, a coup was attempted against him by a number of his adversaries including the Indonesian Communist Party. In order to properly punish them for their indiscretions against him, Suharto had them locked up in the starkest of prison conditions for the next 24 years Interspersed with a bread and water diet along with occasionally some random tortured.  When he determined that he had gotten all the satisfaction he could out of these helpless souls, he had them executed at the end of Ramadan.  However, in case Suharto ever tires of the endless torture, he can always drag a few more of these hapless souls out of his prison and execute a few more.  However, they are now elderly people and he may not get the same satisfaction that he did when they were younger.  

Nevertheless, torture aside, Suharto gave the term “crony capitalism” new meaning.  With the exception of Fidel Castro, he had administrated a government longer than any other leader in the world today.  His popularly elected parliament has never rejected government proposed legislation, and equally amazing, until 1997 the parliament never proposed any legislation of its own.  

Yet, the people were prosperous by almost any standard, and unemployment until recently has been at a minimum.  The government had provided their people with an infrastructure that includes all of the social amenities.  The populous had become educated, but ultimately came to the startling conclusion that their ability to succeed had been limited by the cliquish power structure comprised of the Indonesian military and indigenous ethnic Chinese.  People began to suspect that there was a conspiracy against them, and started to question whether elections were really open enough.  The cry also rose to a crescendo from the people that, although they were reasonably prosperous, their government was not representative.   

The Chinese population of Indonesia is only 8 million - four percent of the more than 200 million population of this island country, yet this minority is estimated to control as much as 70 percent of the nation’s wealth.  The Chinese, even those who are native born Indonesians, are exempt from military service and are not allowed to be active in the government, which results in resentment among the Muslim majority.  Whenever something seems to go wrong in the country, the Chinese are automatically picked out as having had something to do with it, and more often than not, become a target for rioting crowds.  Once the rioting starts, history has shown that things go from bad to worse.  When the Chinese called for police help and rioters were arrested, the callers were imprisoned.  In one case, the jail term was “three and a half years for expressing hatred against Islam.”[3]  The Chinese are not in a good spot, but the money is good, and until recently, that was a tremendous inducement for them to put up with being a hated minority in the population. 

In spite of leading the better life, people didn’t like the fact that Suharto ruled like a monarch, rather than an elected president.  He acquired what he wanted, when he wanted it and from whom he wanted it.  This got a little onerous after a while, and some his constituents determined that they had enough.  Take the case of the Cimacan Golf Club, which was erected on land purchased from the farmers who lived in around the property.  In 1989, the land was deeded to P. T. Bandugn Asri Mulya, one of Suharto’s close associates, for the princely sum of two cents per square meter, or a whopping $634.   

Now, we are talking about land that had supported scores of families for the previous 30 years.  Well, the farmers got their revenge by taking over the golf club by force and then planting the despised cassava plant on the greens, spelling out sayings like “reform” or “We are taking what is ours” in cassava.  Members became incensed over the attitude the natives were showing and demanded police action to restore the facility to its pre-cassava brilliance.  The police, who were also residents of the neighborhood, were well aware of the Government’s land grab and told the club’s members to take a hike.   

Suharto’s wife, Madame Tien, who died a short time ago in what some say was a shootout between two of her sons, was a strong believer in the adage that charity begins at home.  She made sure that her husband cut the children in on all of the richest deals negotiated in the country.  In her own quiet way, she was extremely aggressive, to the degree that she became known as Madam Tien Percent.[4]  In spite of her greed, she did it with panache, so that when the pie was divided up, it was done in unobtrusively.   

When she died, her brood thought that they could do even better than mom had done, and they immediately upped the ante in their negotiations (shakedown) with those craving to do business in Indonesia.  Their aggressiveness tainted with large doses of innate greed, made the family look like two-bit politicians or a sideshow at a circus.  This was not what the Indonesians thought their President ought to be showing to the world, and they became extremely discontented.  The nation had come to believe that Suharto’s wahyu had gone into free fall since his wife's death and that as a leader, he just may have made himself replaceable.    

The theory of free markets is based on the fact that those who are best equipped to compete should have substantial input into shaping a country's economic destiny.  Not surprisingly, in Indonesia, this cadre’ turned out to be primarily comprised of confidants of the President.  The top of the pyramid in Indonesia, as in almost all other countries, has room for very few.

Among the anointed were Suharto’s three sons, but more particularly, his second son, Bambang Trihatmodjo.  Daddy gave the boy’s company, Bimantara, a license that granted it a full partnership with PT Indosat, the state-owned international telephone carrier.  Equipped with that ownership, Bimantara requested bids for 25% of their stake in the enterprise.  When Deutsche Telekom paid Bimantara $600 million, the lad became so overwhelmed with joy at his business acumen that tears came to his eyes.  Suharto himself exalted in his son's business acumen. 

We find it refreshing that Bambang could get so excited over a paltry couple of hundred million, when he is in fact, partners with Hyatt Hotels in everything they own in the country, which is substantial to say the least.  You could start to realize what a great deal the lad made when the people finally had enough of the Suharto family’s crony capitalism and graft and began burning everything insight.  A full revolt against the government had broken out, and yet the first place the army went to protect was the Grand Hyatt Hotel in downtown Jakarta, where they formed a barrier between the raging mob and the hotel.  The lad also has an important interest in Hughes’ operations; he gets a piece of everything they collect on their exclusive satellite network.   

However, daddy Suharto really loved his little girl.  Suharto bequeathed to his daughter, Siti Hardianti Rukmana, Chairperson of the ruling Golkar party, was all of the toll roads in the country.  Siti has extracted substantial fees from motorists for using her roads.  She was also first in line for the contract to build a 59-mile long bridge, slated to be the world’s longest, linking the island of Sumatra and Malaysia.  Sadly, this project was shelved on a permanent basis when Suharto gave up the Presidency.  Nevertheless, we should not to worry about Siti’s well being, since she also has a substantial interest in all of Lucent’s and General Electric’s operations in Indonesia, which brings her enough to keep her in pin money.  

Siti's wealth has been estimated to be in the billions of dollars, so it is illustrative of her chauvinistic nature that during the country's recent currency crises she signaled a strong vote of confidence in the Indonesian currency by offering to buy all of $50,000 in Rupiahs, while at the same time selling dollars.  This public relations farce, which seemed to be intended as a gesture of good faith, totally backfired, and rebellious college students asked for her head.  

Bambang’s brother, Hutomo “Tommy” Mandal Putra, works behind five heavily guarded doors, the last with a combination lock.  He was overjoyed when he won the country’s new National Car Project (named “Timor”) in partnership with Kia (the South Korean Motor Car Company now in tatters).[5]  Tommy, possibly because he is always seen amongst armed guards, is viewed as being a particularly pathetic hands on manager.[6]  In spite of his lack of management ability, Tommy was able to secure a $690 million lending package from a 16-bank consortium to build an assembly plant near Jakarta for his ill-conceived National Car Project.[7]  The state-owned banks joined the group without a whimper, but the 12 private lenders who rounded out the coalition preferred the obscurity of not being mentioned in the same breath as the scheme.  They had to be individually reminded in no uncertain terms by Tommy’s father, the President, that, “the car was an important national project,” before they reluctantly committed to it’s funding.  Of course, as other events occurred, this money went down the drain. 

One of the reasons for such reluctance could be the fact that while the most optimistic insiders projected annual sales of only 40,000 vehicles, the plant will have a capacity to produce 70,000 cars.  Additional problems for all concerned have been protests by the World Trade Organization, the United States, the European Union and Japan over all facets of the government’s handling of the matter.  On the other hand, the Indonesian Finance Ministry ordered that every government agency add the Timor to their car fleets and simultaneously exempted the company from duties on Korean parts and from paying taxes of any kind. 

These benefits were estimated at several thousand dollars a car, and with this kind of advantage, you would think the project would be successful.  Think of a country with 200 million people and every major car manufacturer in the world trying to set up facilities in the country to tap into this market, and lo and behold, the President’s son steps into the sweetest deal of the century by being so smart.  Well not exactly, Bunkie. 

Kia motors tanked; down the drain, as they say,  and in a year and a half, Tommy’s factory has produced only 41,000 Timor cars and sold 26,000, most of them to very friendly government offices.  Then, the IMF came along and made Daddy issue the following order: “effective immediately, all special tax, customs and credit privileges for the national car project will be revoked.”  The World Trade Organization has stated that, “the support being given by Indonesia to its fledgling “national car” was discriminatory and breached rules outlawing investment measures conditioned on domestic content.”  Now that we can kiss the Timor a fond goodbye, what is daddy going to say to all of those bankers whose heads he put a gun to made them cough up 700 big ones.  Maybe Tommy is going to need door-lock number six, but he had better locate it on Mars.  With deals like this one, we are surprised the entire Suharto family has not already fled the country. 

Tommy, like his other siblings, probably should have gone into some other line of work, because business is not always fun.  As Tommy always says, what is life really about?  Tommy was barely shaving when he established the Humpuss Group with older brother Sigit.  The kid was prepubescent and already making important decisions, like which actress to date tonight or at which nightclub to spend his unlimited allowance.  In any event, he prevailed upon Daddy Suharto to give him the monopoly on cloves, which in Indonesia are mixed with cigarettes and 90% of the population find this is an unbeatable combination.  Sounds like a winner; well, not yet Bunkie.  The first move the kid made when he got the monopoly was to raise prices.  His brothers and sisters applauded his business acumen and indicated that he was a chip off the old block.  

Even without being an economist, one can well imagine what happened next.  With cloves selling at a high price, farmers converted their crops to cloves to get in on the action, thus creating what amounted to an economic black hole.  Production increased while prices rose, and then when the economy started rolling downhill, consumption dropped.  Adam Smith would have been proud of young Tommy.  “But wait, this can’t go on forever,” said Tommy’s advisors, “what are we going to do with the excess cloves?”  Tommy’s advisors asked.  Tommy, still in control, said let’s burn half the crop and give those farmers a subsidy.  Bravo, said the siblings and the crop was destroyed.  $370 million later, the IMF has called for end to this uniquely unproductive monopoly.  

This may have been the first time that anyone in known universe has owned the great majority of something that everyone wanted and didn’t have a clue on how to profit from it.  Well, it didn't really matter as long as Daddy was running the country.  Well, sonny, Daddy isn't running the country any longer, and Tommy increased his staff of bodyguards substantially. One wonders what he might worried about.  

Just like many of us, Tommy really loves fast cars, but just like many of us, there aren’t a lot of places to race them, especially in downtown Jakarta where Tommy lives.  Lucky for Tommy though, he had a spare square mile of property near downtown on which he could squeeze in a two-mile international-standard Grand Prix racing track.  Having done that in record time and at the minimal cost of, give or take, $50 million, Tommy now became concerned that there were no racing cars in the country.  Noting that the fabled Italian, Lamborghini Company was for sale at bargain basement prices, Tommy hypothesized that this was the ticket that would assure a full race card.  

Once coming up his brilliant conclusion he plunked down $40 million to buy Lamborghini, a company that had been losing money since it opened.  The cars manufactured by Lamborghini sell for about $200 thousand per copy.  Now, that’s all right maybe for Italy, Germany, France or the rest of Europe where the average wage is over $20,000, but for Indonesia at a little better than $1,000, people in the know considered this deal a little iffy.  As of this date, we are unaware of any Lamborghinis being sold in Indonesia nor does Tommy’s track get any use other than by a family of homing pigeons.  Tommy indicates that this is not the criteria by which the deal should be judged, rather, it should be judged on how fast the car goes around his track, and to that we have to say, “right on Tommy!”   

Talk about conspicuous consumption, Indonesia is a country where people on the outlying islands suffer from malnutrition because they can’t afford the right food, or sometimes, any food at all, and there is Tommy being shown in all the leading Indonesian newspapers riding around that silly track in his Lamborghini with no one to race with because first they don't have the money for the cars  and second they couldn't even afford the gasoline.  Tommy was betting big that Daddy would never leave office.  Tough luck, Tommy.   

Tommy also owns the country’s largest airline, and sadly for him, it is already in default on lease payments to creditors.  Those lease payments are made in hard currency and have effectively tripled since the Rupiah’s recent devaluation, and at the same time Tommy doesn’t have an awful lot cash flow between cloves, the racetrack, Timor and the airline.  Wrong, Bunkie, because you forgot Tommy owns the Four Seasons in Bali which charges at least $650 a night and go skyward from there just to spend one night at the place.  On the other hand, it is a value because each room has its own private swimming pool.  Tommy certainly gets cash flow from there.  

Wrong again, Bunkie, because you don’t remember the terrible smog created by all those fires that were started all over Indonesia when the farmers played “Amazon Jungle” in a race to be first to clear the land.  Well, you can imagine that if those fires were bad enough to kill off the tourist industry in Malaysia, thousands of miles away, it didn’t do a lot of good for Bali, which is right next-door.  Tommy had already planned the largest and most costly wedding in the history of Indonesia before things started to go bad.  Tommy invited 3,500 of his closest friends and rented an entire theme park for the formalities.  When things went bad, he did what he does best: he stiffed the vendors.  

You can readily believe that Tommy was not overjoyed when the IMF told Daddy that he had to reign in his troops.  Tommy gave possibly his only press conference and said, “We give our best to the nation, if we were only thinking of ourselves and our family, we wouldn’t still be involved in business.  But because we see ourselves as children of the nation, who give added value to Indonesia, we continue to be involved in business.”  Well, there we thought that the only thing Tommy couldn’t do right was run a business.  Instead of public speaking, Tommy, keep your day job.   

The President’s eldest grandson, Ari Haryo Wilbowo Sigiit Harjojudanto, now 30 years old and overwhelmed by the largesse awarded his aunts and uncles, embarked on his own mission in business, “how to succeed without really trying,” by asking grandpa for a concession that would make him sole supplier of shoes for all children of school age in Indonesia.  He also told Suharto that in keeping with the family tradition, the shoes would be sold to these tikes at a substantial markup, which would be shared with grandpa.  Touched by the lad’s offer and impressed with his entrepreneurial insight and his previous success in a snakeskin trading business, Suharto saw no problem with forcing Indonesia to become a one-style shoe country.  Grandpa indicated that it was a capital idea, but cooler heads prevailed when the currency and stock market collapsed.  Suharto’s progeny was requested to go back to the drawing board permanently.  

But the boy wasn’t done yet.  Known in the family as being a stickler for detail, he noted that there was a strange characteristic of Indonesian bird nests: they were relished by the residents of Hong Kong as a delicacy.  An industrious group of Indonesian entrepreneurs of Chinese origin started to retrieve the nests, and before you could blink an eye, believe it or not, it had become a nine-figure business.  Indonesians, who though the place where birds make their homes was not fit food for a good Muslim, paid little attention to the cottage industry.  

Not so first grandson.  Grandpa generously gave first grandson the rights to all of the nation’s edible nests to encourage the lad.  Ari’s cartel, “Mr. Ari’s Birds Nest Association,” became the gatekeeper for taxes for exporters of these luxury items, which sold for as much as $600 per pound.  Now, Ari wasn’t all that aware of why the birds build their saliva nests where they do, but it is highly technical and requires the just the right blend of feces, stench, dankness and humidity in areas devoid of light.  Nest cultivators say that a cow’s head buried under the nests also hastens the “swiftlets” nest building process. We are talking about a high-tech enterprise here, and where Ari thought that anyone could step into the slot, it just was not the case.  Just one of those tactical errors we can chalk it up to youth.   

Almost uniformly, people determined that Ari’s association was illegal and would not pay the penalties initiated by the association.  Before too long, "Bird’s Nests" became the prime contraband export of Indonesia with literally everyone skirting the fees, while simultaneously waging a legal battle in court questioning the Association’s legal status.  Poor Ari; in a land where Suharto offspring never even lose a round, first grandson lost the war.  As the overzealous youth is loath to point out, “You should see those bird-nest farmers, they drive Mercedes-Benzes.”  Ever the patriot, Ari added, “We did this for the government; our studies showed Indonesia was losing 800 billion Rupiah ([8]) a year in taxes.”  You have got to love a kid like this, always thinking of his country first.  Young Ari's foray into bird droppings ended when no one would pay any taxes at all and Ari's people decided against running through the jungle to collect the nests instead the taxes. The desire for eating bird’s nests, while somewhat bizarre by western standards is not the only strange epicurean delight that fascinates the Indonesian palate. Bats too are a delicacy here, they are three inches long, look like small rats and taste like beef jerky. ([9])   

Undaunted, Ari bounced back in typical family tradition and soon established cartels controlling beer and tropical-wood and was even awarded the rights to build an adjunct to Jakarta’s water supply which would sell the precious commodity at a rate 25% higher than people were currently paying.  This action was not geared to engender a warm and fuzzy feeling from the general populous for this precocious lad.  Just envision the local laborer working his normal 14-hour shift in downtown Jakarta, then coming home and getting his water bill, knowing from whence the increase had come. 

Other enterprises that were on the lad’s drawing board before Grandpa's retirement were modeling and music academies, all carrying Ari’s proprietary “Sexy” label.  Also ready to roll was his chain of Sexy restaurants, his Sexy beverages and his Sexy clothes, a can’t miss deal because of the name of the designer involved, none other than Ari Haryo Wilbowo Sigit Harjojudanto himself.  In the land where most have only one name, the lad has been five times blessed.  

His beer concession on Bali also became the exclusive government agent for selling the required revenue stamps that must accompany the purchase of beer for resale.  Ari, ever the business man, marked up the tax stamp to three times its face value, enraging almost everyone on the Island, including some of his relatives who owned the hotels where the beverages were sold.  This action required Suharto himself to step into what had became a family war, and the concession was voided on the spot.  As many in the family later remarked, this was not Ari’s shining hour. 

Ari was not to be denied.  Growing on Sumatra and Irian Jaya is a resinous black root called gaharu that matures in tropical Indonesian forests.  This stuff when sold by the pound goes for almost as much as a good birds nest.  People in the Mideast are almost cult-like in their ravenous demand for the product as a critical ingredient in incense.  Ari saw an opportunity in the gaharu trade because it was first grown, then shipped to Jakarta to middlemen and after that transshipped to the Mideast.  He first was able to tie up the marketing rights in Jakarta, which certainly did not ingratiate him to those people he had just put out of business.  He next had Grandpa assign him the exclusive collecting and marketing rights for the product in the states of Sumatra and Irian Jaya, the only places where gaharu is cultivated.   Moreover, his very low bid surprisingly turned out to be the only one returned when requests were made for tenders.  You can image that the lad is not on anyone’s Christmas list from these regions, but so far so good, and the kid may just hit a home run on this one.  Couldn’t you just see this boy as President of the country.   

Fortunately, in Indonesia charity does not end with close blood relatives.  Until the IMF stepped in, Suharto’s cousin and foster brother was in the midst of building the world’s tallest structure, a 1,841-foot tower costing almost $600 million, aptly named the Jakarta Tower.  The “Tower” would be slightly taller than Toronto’s CN Tower, but would also be totally lacking in economic viability.  Considering that Indonesia’s economy was in chaos, their currency was in free fall and their markets were in collapse, most of these projects hardly seem to be the types of things the International Monetary Fund would like to see their money invested in.    

Suharto’s brother-in-law, Ibnu Hartomom, was in the best business of all.  According to the newspaper Republika,  it seems that he issued “$3 billion worth of promissory notes in the name of the Indonesian Government.”  Apparently, these were zero coupon notes carrying interest, and today the notes are worth $4.5 billion.  It seems that at that time, Hartomo was deputy head of the National Security and Defense Council and in spite of being in the government, he was not allowed to step on the toes of the Finance Ministry, which already owned the exclusive right to issue these kinds of securities.  Moreover, as surprising as it may seem, now that these notes are maturing the lenders want to get paid.   However, there no longer is any money to meet these obligation, and Attorney-General Andi Muhammad Ghalib announced the only thing he could.  “The notes are illegal,” he said.

 



[1] Astonishingly. At this point the rupah was. 10,000 to the dollar, the average wage  had reverted to $305 in early January of 1998.

[2] Devine mandate of the gods.

[3] New York Times, Monday February 2, 1998.

[4] In Dutch, which is the derivation of the Indonesian language, Tien means ten.

[5] Unfortunately for Tommy, on October 23, 1997, Kia Motors was taken over by the Korean Government because they were so hopelessly in debt that it had become obvious that their enormous overdue bills would never be paid as long as the current inept management continued in place. The goal was to put an affordable car on the streets for the middle class, and Tommy was given preferential luxury-tax and duty breaks to import sedans manufacture red by KIA Motors corporation in South Korea. The price was $15,000 each, double what his venture , Kia-Timor Motor, purchases them for and more than 10 times the average per capital income of $1,300.

[6] Daddy indicated that he would cancel their charters unless they lent the money.

[7] On April 15, 1998, Kia Motors, once the second largest auto builder in Korea was reluctantly put into receivership by the government.

[8] About $90 million at current exchange rates.

[9] Ray’s List of Weird and Disgusting Foods, Carl A. Pforzheimer.

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