Business Relations in Democratizing Indonesia

Ignatius Ismanto

University of Pelita Harapan, Karawaci-Tangerang

Keywords: Government, Business Relations and Inequality

Abstract:

The economic crisis in 1997 is regarded as a blessing in disguise. The Liberal economists believe

that the crisis is a momentum in promoting market-oriented economic policy, as a necessary

basis for the economic recovery. The economic crisis, therefore, has revamped dirigisme

economy that had been grown quite strong in a long period of time. A series of economic

liberalization (trade and investment) has been adopted, and caused a deepening economic

integration of Indonesia into the wider economic system (regional and global). One thing that is

important to note that the economic crisis has also brought a widespread impact on political

changes. Since 1998 Indonesia has undergone a dramatic political changes. However, the

political change has been increasingly characterized by the tendency of the rise of oligarchy

(Robison & Vedi R. Hadiz, 2004). Access to political power beomes an important issue in

business relations. Ironically, the political changes are not supported by improving transparency

in economic policy. Rent-seeking activities have increasingly institutionalized amidst the

changing Indonesia's economy. In fact, rent-seeking activities has become increasingly

vulnerable to abuse of power practices. Widespread corruption will increasingly worsen the

problems of economic inequality in the midst of economic and political changes in Indonesia.

1 INTRODUCTION

Before the economic crisis in 1997, Indonesia

experienced a relatively high and continuous

economic growth that lasted for quite a while. This

growth followed by a significant capital

accumulation and the increasing strength of national

capital within a short period of time. Despite of this

rosy picture, substantial economic growth was not

the panacea to overcome the challenges of poverty

and economic disparity. The birth of big national

businessmen was made possible by the role and

support provided by the government economic

intervention. Economic dirigisme opened the

opportunity for the rent-seeking activities.

Relationships between businesses and the state

power holders, or authorities who distribute ‘rent’,

became an important factor for capital development.

Dramatic economic progress that followed

Indonesian capitalism resurgence was made possible

by political stability and lasting authoritarian regime.

1997 economic crisis brought wide impact to the

economic and political landscape. The crisis pushed

economic liberalization and deepen economic

integration of Indonesia into the global economic

system. The economic changes further demanded

transparency in economic management, including

the curbing of rent seeking activities. Furthermore,

political changes in 1998 ended the New Order

authoritarian regime and galvanized democratization

process. Nonetheless, the dramatic political changes

did not trigger significant departure toward

economic transparency. Rent seeking activities

spreads out of control. In the new Indonesian

economic system, the rent seeking activities create

opportunities for authorities who abuse power. This

article analyses: (i) why rent seeking activities that

become the signature of business relations has

remained in the midst of political changes since

1998, (ii) the challenges for economic development

from rent seeking activities, especially in fighting

social-economic inequality.

2 LITERATURE REVIEW

Busiess and goverment relation has been

special topic in Indonesian politics following the

Ismanto, I.

Business Relations in Democratizing Indonesia.

DOI: 10.5220/0009930614891495

In Proceedings of the 1st International Conference on Recent Innovations (ICRI 2018), pages 1489-1495

ISBN: 978-989-758-458-9

1489

country’s changing economy. Many scholars

examine on the development of capital by

emphasizing different questions, such as: why and

how is the role of the government in facilitating the

process of accumulation, how is the characteristics

of busiess and politics relations, how economic and

political change affects the relation of business and

government, why the development of capital is so

vulnarable to corruption for the country in

promoting democracy. They also develop differnt

approaches in analyzing the changing of polics and

economy in Indonesia. There are two different

approaches: the modernization-functional approach

and structural-Marxism approach. Modernization-

functional approach assumes that development of

economy is a pivotal instrument in promoting

democracy. Conversely, structural-Marxism

approach is pessimistic that integration of

Indonesia’s economy into the global economy

(development of economy) would bring to

democracy.

Most important issue of those studies examine

the important role of the government (state) in the

development of capital. The state played significant

role to the emerge of big companies in Indonesia

(Robinson, 2008; MacIntyre, 1994). Another

interesting issue of these studies also highligt that

rent-seeking activities is important aspect to the

development of capital. Rent seeking is not only the

characteristics of the development of capital in

Indonesia. Rent seeking is also important aspect of

the development capital in most industrializing

economy of East Asia. Rent seeking is adopted to

promoting and protecting infant industries. Rent

seeking, therefore, should be temporary along with

the advanced of the economy. Jomo and Sundaram

(2000) explained that rent seeking can be legal and

illegal prectices.

Why state played dominant role in the

development of economy and capital? According to

modernization-functional approach, developing

countries are ‘under-develop society’ in social,

economy and politics. The under-development of

developing countries roots as internal problems.

States in most developing countries should play as

an “agent of social change” or as an “agent of

development”. States in developing countries are

also responsible to devepment of nation-building.

The development of economy is a necessary

condition or prerequisite to development of

democracy. Conversely, structural-Marxism

approach has different asumption in understanding

the under-development of developing countries or

theThird World countres. Under-development roots

as external problems. What does it mean with

external problem? The external problem in this case

relates to globlal system that is conflictual and

exploitative. The under-development of developing

countries was caused by their historiacal experience,

colonialism. Colonialsm was responsible to the

under-development of developing countries. The

development of economy that promoting integration

of deveping economy in global would only bring the

Third World into “under-development”. Why state

plays dominant role in development of economy

according to structural-Marxism has different

argument with Modernization-functional one.

According to Structural-Marxism, state played a

significant role in the development of economy

because state is the only dominant social forces in

the society. Hamzah Alawi promotes the concept of

‘autonomous state’ in describing states of

developing countries in post colonialism. Robinson,

the proponent of Structural-Marxism, explaines the

dominant state of Indonesia by examining the

origine the New Order state. According to Robinson

(1985, p: 300-3006), state was the only dominant

social forces in the society because of (i) weakness

of social classes, most imprtantly the absent of a

powerfull national bourgeoisie, (ii) the failure of the

state in promoting import substitution

industrialization, and the failure of social revolusion.

All of those factors left the state the only social

dominant in Indonesian society. The role of state

become so important in the economy following the

increasing financail capacity, especially in 1970s

and 1980s.. But, the economic crisis, both in mid of

1980 and 1997, weakened the role of the state in the

economy.

The development of economy sponsored by state

has encourgaed the accumulation of capital and the

emerge of big businesss. As Robinson (in Robinson,

1985, p: 323) stated that “those business groups

which have florished in Indonesia have so far

benefited greatly from access to licenses, import

monopolies, construction and supply contracts,

credit, distributionships, and forestry concessions

allocated by power center within the state

apparaturs. In this case, the state plays important

role in distributing ‘rent’, by providing licenses,

monopolies and concessions. Rent seeking, thefore,

was strong characteristics in the development of

capital. Anoter important aspect on the development

of capital is how to get access of power to state

apparatus. In this case, political link is important

element in the relation of business and politics.

Therefore, patrimonialism is strong characteristics of

the development of capital in Indonesia.

How patrimonialism works in the development

of capital? Robinson (1985, p: 123) argued that “the

relationship between state and capital is, to a

signifiacnt degree, a relationship between specific

power groups and specifics companies where in the

success or failure of individual companies is heavily

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dependent upon access to political patronage”. How

patrimonislism will survive along with the

Indonesia’s liberalizing its economyin imprtant issue

of demcracy. Modernization functionalist argues that

patrimonialism can be a serious challange of

Indonesia in promoting its liberalizing economy.

The country’s changing in the economy needs

substantial changes in politics. How to promote

transparacy of the economy is pivotal agenda of

democratization (MacIntyre, 1994a). Conversely,

the structural-Marxism approach is pessimistic on

the idea of economic liberalization. The basic idea is

that globalization is process development of

capitalism. The global economy that was

characterized by global capitalism, eccording to

structuralis-Marxsm, is exploitative. Therefore,

economic liberalization that encouraged Indonesian

economy into global economy would be perrish.

Chalmers (1994, 1996) provided interesting

analysis. The adoption of liberalizing economic

policy as a response to economic crisis hit in 1980s

and 1990s has encouraged internalization of capital.

What is political implication of internalization of

capital?. Internationalization of capital has provided

an opportunity for national companies to build

international link with international capital. National

companies that are able to built a global networking

with international capital are more concern on the

important of transparancy in the economy. They

support liberalizing economy as important agende in

promoting democracy. Conversely, national

companies that failed to have international link with

global company seek protectionism. They refused to

the idea of economic liberalization. The

globalization of economy is serious threat to their

economic interest. They promote economic

protectionism as a response to the economic

globalization.

Issue of democratization in Indonesia following

the country’s changing economy gives concern on

pro and cons of econmic liberalization. Crisis of

economy in 1997 has brought a widespread

implication for the democratization. Indonesia has

experienced a dramatic change in politics. But, such

a dramatic change in politics has not brought a

substantial democracy. Political parties and

parliament have played pivotal role in politics. The

institutions are the locus of power struggle. Whose

intersts are they representing -people or capital is a

debatable issue. Mitzner (2013) states that most of

political parties have substantial problem in

financing their own, internal activities. Lack of

party’s financial capability, fierce of political

competition for power and high cost of power

struggle have encouraged capitalists entering to

politics. Political reform has provided ‘the old

capalist’ to influence the process of consolidated

democracy. Who are the old capitalist, and why they

are interesting entering into politcs? The old

capitalists are the rich people who were born during

authoritarian regime. They benefited from

protectionism provided by state apparatus. They are

interesting in politics to secure its economic

interests. The dramatic political change has

generated oligarchy in Indonesia’s politics (Robison

and Hadiz, 2004). Oligarchy does not only

undermine the problem of social equity, but also

weaken democratization.

3 AUTHORITARIANISM,

CAPITALISM AND

DEMOCRACY

Richard Robinson adopts the concept of “state

capitalism” in depicting economic revival in

Indonesia. Often used to provide economic situation

in some Eastern Asian countries along with their

economic changes. What is the meaning of state

capitalism? In general, state capitalism means

economic orchestrated by the states’ huge role and

intervention. The idea to build state capitalism has

flourished since the beginning of independence.

Nationalization of foreign businesses in 1950’s, for

instance, strengthened the state capitalism idea.

Even so, during Soekarno’s regime, state capitalism

went through difficulties (read: bankruptcy),

especially caused by the limitation of state finances.

The change of regime from Soekarno to Soeharto

did not eliminates the state capitalism idea. The very

revival of it during Soeharto New Order regime was

caused possibly by the stronger state financial

capacity, especially obtained through oil and gas

production since 1970’s to the mid 80’s.

State capitalism revival, thus, was distinct from

the revival of capitalism in the Western Europe in

the mid centuries. European capitalism developed

along with the pressure to limit government role and

intervention in economic activities. On the contrary,

state capitalism revival in Indonesia, was allowed in

line with the increase of government role and

intervention in the economic development. (Hiareij,

2006) explained the government role and

intervention in capitalism building not only in (i)

investment financing, especially toward sectors or

industries considered as strategic by the state, but

also in (ii) pushing the growth of national capital

strength. In the third world, countries tend to play an

important role in developing their economy. State as

the agent of development. Industries that are

considered strategic received economic support by

the state. Furthermore, state also plays a dominant

Business Relations in Democratizing Indonesia

1491

role in pushing for social changes. State dominant

role is often linked with the feature of post-colonial

third world states. Long colonial history in Indonesia

did not produce strong capital ownership such as

land owners or big traders. Colonialism only left

small farmers and traders. Big companies that

become the source of economic strength are

controlled by foreign power. Post-colonial sate, thus,

became the only dominant social power.

One of an interesting aspect from the capitalist

system that has not yet developed is the

characteristically relative autonomy of state. The

meaning of autonomic state here is a country with

ability to formulate and materialize its national

interest without facing meaningful challenges from

developing social forces in the society. State’s

dominant role and intervention in economic

development is strongly influenced by the social

context. Even so, state autonomy is not a static

concept. State autonomy seems like an authoritarian

state. Capitalistic economic development in some

East Asian countries is characterized by the

existence of authoritarian regime. Why the

authoritarian regime tends to follow state capitalistic

development? First is to ensure foreign investment

that is needed for country to finance strategic sectors

and industries. Second, the authoritarian regime

existence is necessary to prevent social revolutions,

a potential caused by the difficult choice between

growth and economic disparity. Yet, the

authoritarian regime only last temporarily. The

transition from the authoritarian regime towards

democracy is believed to occur along with the

economic advancement where growth has been

followed by the lessening of economic disparity.

4 RENT SEEKING ACTIVITIES

During the Soeharto New Order regime,

Indonesia experienced impressive economic shift. It

marked by relative high growth, average on 6 – 7%

per year, maintained for a long period of time. The

World Bank (1993) positioned Indonesia as one of a

country in the East Asia region to experience

economic miracle. The understanding of the

economic miracle is the phenomenon where

economic growth is followed by the improvement of

socio-economic inequality. Yet, why is the

miraculous economic development was not

immediately followed by political change toward

democratization? The wave of democratization did

occur in the mid of 1980’s in the form of pressure to

push for economic management transparency along

with the economic difficulty faced by Indonesia. But

it was a wave easily shut. The economic growth and

advancement served as the source of legitimacy for

the continual of the authoritarian regime. The idea

that the present of an authoritarian regime that was

thought to last temporarily, only persist to remain for

a long period of time. Economic crisis in 1997 was a

determining factor to end the New Order Soeharto

regime. The crisis weakened the legitimacy for the

very regime to push the rising of social powers to

end it. It raises the question why economic

advancement in Indonesia was unable to promote

democratization process?

Relative high economic development sustained

for a relative long period has been followed by a

substantial capital accumulation process. In a short

period of time, the economic development has

enabled the birth of national capital power. Big

national businesses (similar to Keiretzu in Japan or

Choebol in South Korea) was most likely caused by

government intervention. And the birth of big capital

power in the 1970 – 1980s reminds the phenomenal

birth of businesses during the Benteng Program in

the 1950s. Pushing for the growth of national capital

power has been a growing obsession since

Indonesian independence. The idea to end foreign

power dominion in national economy through

building strong national capital is the feature of

economic nationalistic sentiment. It is only possible

that the anti-foreign domination in national economy

and political interest to protect national economy

remains vulnerable for exploitation in the midst of

globalization era today. Supported by state’s

financial ability, especially motivated by the

overabundance of oil in the 1970 – 80s, New Order

government has the ability to allocate big funding to

finance projects or industries considered has

strategic importance. The development of state

financial ability also re-strengthen the state

economic role and intervention. The national capital

power came from a series of economic policy that

meant to protect new sectors and industries.

Capital growth in Indonesia is often linked to the

strengthening of rent seeking activities. What is rent

seeking activities? How does rent seeking encourage

the capital accumulation process? “Rent” in this

understanding can be seen as income gained by

someone, in which the income is considered beyond

appropriateness. In relation to that, “rent” is a

tempting income and thus everyone desire to gain or

keep it. The effort to fight for or maintain the rent is

called rent seeking activities. (Khan & Kwame,

2000) identifies rent sources: (i) new innovation, (ii)

economic protection policy to protect newly

developing industries, (iii) illegal practices such as:

drug transactions, money laundering, to human

trafficking. With this understanding, rent seeking

activities can both be legal or illegal. New

innovation, for instance, is a legal rent source. An

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interesting part of the rent sources in this article is

related to protection policy given by the government

to protect new industries. Import license issued by

the government can also be a lucrative income

source for the license holder. Yet, the awarding of

license always requires transparent economic

management support. Economic protection can only

be correct if the purpose is to protect newly

developed industries. Economic protection for

developed sectors or industries only will

discriminate other economic practitioners, promotes

moral hazard that costly to the general public. With

that, providing protection requires the consideration

of the level of maturity in the industry. From the

political dimension, the issuance of licenses can

promote moral hazard. Many regulations, including

giving licenses without support of political

transparency involves a high risk of abuse of power.

Rent seeking activities will be able to stay in a

long period of time, especially in protectionist

economic situation. The irony is, the rent seeking

activities tend to institutionalized in the midst of

Indonesian economic changes that is becoming more

open. In a more liberalized economy, many

regulations and protections given by the government

– that allows for space for rent seeking activities is

opening opportunities for corruption. Even since

political reformation n 1998, rent seeking activities

is still rampant. Many corruption cases related to

rent seeking activities has been a part of Indonesian

political development. To the rent seekers (read:

businessmen) having political connection with state

bureaucrats is an important aspect. State (through its

bureaucrats) has the power to distribute ‘rent.’

Government officers has the authority to set

regulations, to allocate subsidies and provides

monopoly facilities, such as: export license, import

license to business people. Relations between

businessmen and authorities often is seen as patron-

client relations. In this pattern of patron-client,

patron is seen as the representative of government

officers who has the power to create regulations.

While client represents the business world. The

patron-client relations is benefiting each other

(mutualistis-simbiosis), where patron has the interest

to provide protection to client by setting the

regulation. While client is interested in giving

support and loyalty as a form of reward to the patron

from the protection given.

5 OLIGARCHY CAPITALISM

Yoshihara Kunio (1990) uses erzard capitalism to

give a picture of capitalism development in

Southeast Asia. The fake capitalism is seen to

produce non-independent capitalists, that heavily

rely on the government protection to survive. Non-

independent capitalists also identic with business

people who cannot compete in the global economy.

Furthermore, non-independent capitalists cannot be

expected to be an agent of social change, to promote

democracy to end the authoritarian system. Fake

capitalism is contrary to a thesis by Moore that says

“no bourgeoisie, no democracy”. The thesis shows

how important is the role of capital owner in pushing

for change. Capitalism revival in Europe has an

important role to push for change, that is to end the

monarchic system. On the contrary, fake capitalism

only produces what Richard Robinson calls as “the

New Richmen” who are afraid of change.

Neo-Marxist approach pays a significant

attention, especially in seeing capital-state relations

to the third-world economic development. In the

development of state capitalism, state usually has

relatively strong autonomy, including in facing big

domestic capitals, as well as taming the international

capital powers. Yet, state and capital relations

featured by state role domination is dynamic, along

with the domestic capital power revival.

Furthermore, it is not impossible that country can be

an instrument for capital powers to compete.

Economic crisis in Indonesia in the mid -1980s and

1997 is an interesting phenomenon in understanding

state-capital relations. Both of the crises has

weakened the role of state in the economy.

Economic liberalization to overcome the economic

crisis has been followed by the process of capital

internationalization, that enabled domestic capital

powers to build network with international capital

powers. Domestic capital power who are able to

build this important network obviously will have

different interest than those who failed to do so.

Domestic capital powers who built network with

international capital powers adopt the “economic

liberalization” agenda to support their economic

interest. They tend to demand transparency in

economic management. Thus, they are less likely to

rely on old ways in capital development, such as

political connection and patron client in their

business relations. While the businesses that failed

to build the network with international capital

powers will be strongly against economic

liberalization. They rely on their old ways, that is

protectionist economic policies to protect their

economic interest. The competing interest of these

economic powers has influence political changes in

Indonesia since 1998. The state has become the

arena for competing capital powers’ interests.

Political reformation developing since 1998 has

pushed for dramatic political change. This change

ended hegemonic party system and promotes the

Business Relations in Democratizing Indonesia

1493

progress of very competitive multi-party system.

Political party developed into important political

institution to gain power. Political party is not only

play an important role in the parliamentary

membership recruitment process, but also in direct

presidential election. Parliament developed to

become the competition for power. Political powers

in the parliament resulted from election process

followed by many parties truly reflects the highly

fragmented politics post the New Order regime.

Political changes has pushed for political

competition to become more potent and

consequently has driven the cost high (Saputra,

2018). Several interesting political phenomena to

observe. First, the increasingly cut-throat political

party competition caused difficulties in financing

political activities. Financial strain in parties drove

them to seek funding through illegal measures

(Mietzner, 2013). Second, political change follows

by high political cost has pushed capitalistic interest

in Indonesian politics.

The idea to strengthen presidential democracy

followed by multi-party system has brought along

several challenges. Direct presidential election

followed by many party system has resulted in

minority government. The minority government in

this context is president who reached the absolute

vote in presidential election, yet the elected

president does not have strong political support in

the parliament. Since 2004, government led by

Susilo Bambang Yudhoyono to Joko Widodo are

minority government. This type of government

opens space for the development of political

coalition. The shaping of cabinet is often pursued by

calculating political powers in the parliament.

Political coalition in the midst of high political

fragmentation tend to become political compromise

vulnerable to transactional politics. Political

reformation since the fall of the New Order regime

has become a fertile ground for capital power to

influence political changes. (Robison & Vedi R.

Hadiz, 2004) named political development in

Indonesia after the New Order as oligarchic

capitalism.

6 SOCIAL DISPARITY AND

CIVIL SOCIETY

Economic crisis occurred in the mid 1980’s has

indeed opened opportunity for political change.

Democratization demand in the mid 1980’s has

flourished alongside the economic changes followed

by the weakening role of government in the

economy. Demand for democratization is mostly

focused on the pressure toward the importance of

transparency in economic management. From the

theme, political demand has reflected more of the

economic interest of the capital power, especially

those who created network with international capital

power. They are able to detect the importance of the

state to control rent seeking activities alongside

Indonesian economic changes. Democratization

demand is more elitist since it only becomes the

attention of intellectuals (higher education) and less

interest in the general public. The demand for

democratization is viewed over premature and thus

easily controlled by the New Order authoritarian

regime. On the other hand, the demand for

democratization pushed the New Order authoritarian

regime to consolidate the powers growing in the

community.

Mochtar Mas’oed (1987) explains the concept of

state corporatism and societal corporatism in

understanding the mechanism of organizing

developing interests in the general public. State

corporatism is a model to organize public interests

that grew in authoritarian political system. In this

system, the existence and continuation of

organization or public powers are very much

determined by the state. In pursuing interest, they

are being demanded to obey the rules made by the

government. While societal corporation is the

existence of organization or public powers that has

more relative autonomy. Bargaining is an important

aspect for the continuation of the public powers.

They are not easily intervened by the government. In

the authoritarian political system, repressive and co-

optative ways became common mechanism to

organize public powers. Thus, the role of civil

organization or public powers in authoritarian

political system are hardly be expected to serve as an

effective platform to fight for members’ interests.

On the contrary, civil organizations has become a

tool for state to control the society. (MacIntyre,

1994) argues that ‘corporation has been a central

feature of political life throughout the New Order

period serving as a guiding principle for government

efforts to organize and control political

representation.” Organization of public powers can

be inclusionary or exclusionary. It can be a strategy

to divide and rule. A long standing state corporatism

is one reason to influence weak and fragmented

society.

The end of the New Order authoritarian regime

has weakened state corporatism, and thus it opened a

wide space for the rise of growing public powers

known as the civil society. Civil society is an

element that receives less attention in the

democratization process in Indonesia. The political

change in the New Order since 1998 is seen with

significant improvement, especially in promoting

democracy institutionalization. Some important

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political changes that has been achieved so far, such

as: military reform, that emphasized more on the

civil supremacy over military, multi-party system,

decentralized government system, direct presidential

election, bicameral system institutionalization in the

legislative body, to press freedom. Viewed from the

electoral democracy institutionalization, the political

change since 1998 has brought Indonesia to become

a big democratic country in the world. But, the

dramatic political change has not been able to

answer the challenge that deliver social justice.

Corruption practices remains everywhere with the

implementation of decentralization. Poverty issues

continues to be worsen by economic crisis of 1997

and remains as a serious challenge in the midst of

economic recovery in Indonesia. Even the growing

political reformation to end the New Order

authoritarian regime has been stabbed by the old

powers (Robison & Vedi R. Hadiz, 2004). The

revival of oligarchy capitalism is a serious challenge

for the strengthening of civil society, as a necessary

element to build substantial democracy in Indonesia.

The entry of capital power in Indonesian politics

alongside with the strengthening of electoral

democracy institutionalization is an interesting

phenomenon. Winters (2011) offers a different

perspective in understanding the strengthening of

political oligarchy post the New Order. This

approach based on the assumption that unequal

distribution of wealth is a determining factor for

inequality of power distribution. The wider the gap

of material wealth distribution, the bigger the power

and influence of the wealthy in their political

motives and purposes. The involvement of capital

power in Indonesian political changes post the New

Order can be seen as a strategy to secure business

and affluent survival. While in the New Order

regime, business and political pattern in capital

development is more characterized by patron-client

relations. The fall of Soeharto New Order regime,

thus, has ended the patrimonialistic business

relations. The involvement of capital power in the

political arena as seen in the business world

involving in the practical political activities such as:

becoming political party administrators, involved in

the candidacy of parliament members to district

election – viewed as a strategy to maintain wealth.

In the oligarchy political system, material source is

an important factor to achieve influence and power.

Ironically, capitalism built by oligarchy will not

bring meaningful influence in ending economic

disparity.

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