Military Businesses in Post-Suharto Indonesia: Decline, Reform and Persistence

Chapter 5 Military Businesses in Post-Suharto Indonesia: Decline, Reform and Persistence

Marcus Mietzner and Lisa Misol

One of the most crucial challenges for transitional or consolidating democracies is establishing effective government control over the armed forces (Diamond & Plattner, 1996 ). Without such control, the armed forces (or factional elements within them) retain the capacity to sabotage democratic reforms – most notably elections, the creation of independent legislatures and judiciaries, as well as the expansion of civil liberties. Many states undergoing democratic transitions try to impose control over their militaries by removing them from political decision- making, placing pro-reform officers in key positions and strengthen civilian institutions (Cottey, Edmunds, & Forster, 2002b ). If militaries played a particularly strong role in the authoritarian regime that ruled prior to the democratic transition, new government leaders may also opt to make concessions to the officer corps, such as amnesty for past human rights abuses or some form of continued role in security affairs (Mainwaring, 1989 ). But one field that is often overlooked by civilian officials in democratizing states is the importance of gaining control over the military’s finances. More often than not, institutional reforms are being carried out that fail to curtail the military’s access to or even direct possession of vast monetary resources. With these resources, militaries become independent of the official defense budget allocations provided by the state, and can thus finance operations that run counter to the interests of the government (Br€ommelh€orster & Paes, 2003 ). Hence, even states that have successfully introduced electoral reforms and made other important institutional changes can still see their democratization processes undermined by militaries with sufficient financial autonomy to pursue their own agendas.

M. Mietzner ( * ) Australian National University, Canberra, Australia e-mail: marcus.mietzner@anu.edu.au

L. Misol Human Rights Watch, Washington, D.C., USA e-mail: misol@hrw.org

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Both Nigeria and Indonesia have had significant problems with the continued financial autonomy of their post-authoritarian militaries. This should not be surprising. Both countries have experienced decades of military-run or military- backed regimes, during which time their armed forces built vast commercial empires that funded the operational costs of the troops as well as the extravagant lifestyles of the top brass (Nwagwu, 2002 ; Robison, 1986 ). When Nigeria’s military regime formally came to an end in 1999 and Indonesia’s long-time ruler Suharto fell in 1998, it was to be expected that the military leaderships in both countries would try to hold on to their businesses and other funding sources. In this chapter, we discuss the development of military businesses and off-budget funding sources in Indonesia, with a particular focus on the post-1998 period. This discussion will show that while the military’s business empire was seriously reduced during the Asian Financial Crisis of 1997 and 1998, the post-Suharto elite has been reluctant to introduce reforms that would bring Indonesia’s armed forces (Tentara Nasional Indonesia, TNI) fully on budget. Even when the first initiatives were finally taken in 2004, they remained fragmentary and ineffective. As a result, a substantial percent- age of TNI’s expenditure (probably around 20%) continues to be raised from off- budget sources, including illegal ones. And whereas this figure constitutes a decline from the very high levels of the early 2000s (when off-budget sources reportedly provided around 70% of TNI’s total funding), it is still much too large for a consolidating democracy.

In recent years, the scholarly literature on the subject has downplayed the dimension and significance of off-budget funding in Indonesia’s military. For example, Rieffel and Pramodhawardani ( 2007 , p. 5) suggested that “the amount of off-budget money obtained by the TNI and used ‘for operational purposes’ is much smaller than commonly believed.” Further, they claimed that the “net income generated by the TNI’s off-budget activities in 2006 [. . .] was equivalent to only 1.5–3.0% of the government’s defense budget.” While Rieffel and Pramodhawardani stated that their research did not imply that the problem of military businesses was “overblown,” it had exactly this effect. Some international media outlets adopted these alleged “new” figures, celebrating them as an indica-

tion of successful reform. 1 In addition, the Indonesian government’s own data seemed to confirm Rieffel’s and Pramodhawardani’s figures: in 2010, the Ministry of Defense estimated the total value of all TNI businesses to be only around US

$320 million. 2 But all these estimates have one major flaw: they exclude the vast amounts of money that TNI officers obtain through protection services, moonlight- ing, involvement in illegal logging and mining, arms trade, land deals and other semi-legal or illegal activities. For us, a serious estimate of TNI’s off-budget sources must include all payments that TNI members receive outside of their official allocations, whether they are used to cover operational costs or to

1 See, for instance, “Indonesia’s Army: Going out of Business,” The Economist, 3 October 2008. 2 “Military Businesses Handover by August,” The Jakarta Post, 15 April 2010.

5 Military Businesses in Post-Suharto Indonesia: Decline, Reform and Persistence 103 supplement insufficient salaries. 3 In our chapter, all estimates will be based on this

definition. 4 This chapter approaches the subject of military businesses and off-budget financing in Indonesia in four separate but interconnected sections. The first section explores the historical roots of off-budget funding in Indonesia’s military, which reach back to the guerilla war in the 1940s, the consolidation of the territorial command structure in the 1950s and the establishment of the military-backed New Order regime in the 1960s. Second, we discuss the development of military businesses after the Asian Financial Crisis and Suharto’s fall in 1998, highlighting both the partial collapse of TNI’s commercial network and the military’s attempts to defend the remaining enterprises amidst the pressures of democratization. The third segment focuses on the government’s program of taking over military businesses, which had been mandated by parliament in 2004 but took until 2009 to produce a vague action plan. This action plan, we argue, has not led to substantial change in the way military businesses are run, and is certain to leave the large field of non-formal fund-raising untouched. Finally, the conclusion ties our analysis to broader discussions of the relationship between off-budget funding and democratic civilian control of the military, emphasizing that the decline of Indonesia’s formal military enterprises and the gradual decrease in the percentage of off-budget financing should offer no grounds for complacency. Militaries that retain control over independent funding sources pose a risk to democratic governance, regardless of whether their overall proportion of the defense budget is in decline or not. As a nation widely praised for its democratic successes, Indonesia needs to maintain the goal of a fully state-funded military if it wants to further consolidate its post- authoritarian political system.

3 This means that if a TNI soldier receives US$150 a month in salary (which reflects average wage levels within TNI in 2009), but obtains an additional US$200 in order to cover his real-life costs,

then those US$200 need to be categorized as off-budget funding. In Rieffel’s and Pramodha- wardani’s calculations, this unofficial income would not be counted because they are not used “for operational purposes.” See “Gaji Prajurit Naik 15 Persen,” Berita Sore, 6 January 2009.

4 In other words, our definition covers all three elements generally mentioned by analysts as being part of Indonesia’s military business typology. According to this typology, business enterprises

under TNI control, frequently established under foundations and cooperatives, are commonly categorized as “formal,” “institutional,” or “legal” military businesses. Alliances with private entrepreneurs that entail TNI receiving payment for goods or services (often involving the misuse of state assets) are considered “informal” or “non-institutional” or “grey” businesses, with the last term reflecting their questionable legal status. Finally, “illegal” businesses describe various economic activities by military personnel that clearly fall outside the law. Some authors add a fourth category for either acts of corruption or the business interests of retired personnel. See, for example, Artjana ( 2005 , p. 36), Misol ( 2006 , pp. 2, 3), Rieffel & Pramodhawardani ( 2007 , p. 39), and Susilo ( 2005 , pp. 28, 29).

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Military Businesses and Off-Budget Funding in Indonesia: