http://tbn0.google.com/images?q=tbn:paUQX8noqZ_UnM:http://cache.daylife.com/imageserve/02Lw5HC715bBm/610x.jpgIndonesia: History of a bankruptcy orchestrated by IMF and the World Bank

The present text is part of a book to be published by VAK in Mumbai. The present text was first published in French in Damien Millet – Eric Toussaint, Les Tsunamis de la dette, CADTM-Syllepse, Liège-Paris, 2005.

by Éric Toussaint, Damien Millet

Media coverage of the tsunami suddenly made Indonesians seem like distant relatives struck by misfortune. Effective aid will call for better knowledge of their history. It requires knowing where they come from, what their hopes, disappointments, successes and misfortunes have been. Learning about their lives reveals a complex history, beyond the terrifying images and unfathomable death toll. Looking back at the story behind the multiple political and economic upheavals of the country helps firstly, to better understand the fate of Indonesians hard-hit by natural disaster. And secondly, supports the call for the cancellation of Indonesia’s external public debt.

A key player on the Asian chessboard

The Indonesian archipelago has a striking array of geographical and economic assets. Indonesia is made up of about 13,677 islands, forming an arc between continental Asia and Australia. It controls the seaways between East Africa, the Middle East and India on its Indian Ocean side. On its Pacific Ocean side, it lies between China, Japan and the West Coast of the United States. Indonesia’s tropical forest is the second largest in the world, after the Amazon’s. The archipelago produces a wealth of agricultural products (rice, rubber, coffee, cocoa, soybeans, palm oil, tea, sugar, bananas) and natural resources (natural gas, tin, bauxite, nickel, copper).

Moreover, Indonesia has petroleum deposits long coveted by many. At the dawn of the 20th Century, a Netherlands monopoly, Royal Dutch, held control over Indonesia’s oil. The United States, which had taken over control of the Philippines in 1898, began to take an interest in Indonesia and attempted to penetrate its market. The US Standard Oil Company launched a price war on Royal Dutch and quickly got it into financial difficulty. The Netherlands firm was finally rescued by a merger of Royal Dutch with the British firm Shell, in 1907. However, US pressure proved so strong that the British and Dutch accepted Rockefeller opening a subsidiary in Indonesia in 1912, which began to pump oil the same year. Then, the First World War broke up European interests in Indonesia, enabling US firms to penetrate the rubber market. In 1914, Goodyear and Rubber had already built a plant in Sumatra, and the US firm, acting through its “Holland-Amerika Plantege Mij” branch, acquired 80 000 acres for rubber production. This firm took control of the largest rubber plantation in the world under single ownership. Such hard-nosed US business tactics were proof of how important they considered the islands in economic terms.

After the Second World War, Southeast Asia was fulfilling two main roles: it supplied raw material to Western companies and this region alongside East Asia (China and Korea) and South Asia (India). Moreover, it was a key arena for clashes of where Cold War related interests.

The thousand-profit colony

Indonesia’s fame as the Spice Islands goes back to the 16th Century. The Portuguese marketed the cloves and nutmeg produced in the Moluccas. Profits were high, and the Dutch took over the island by fire and sword. They ruled it from 1605. Since then, almost all the Indonesian islands, explored little by little, became the preserve of the Netherlands. Trade exchanges took root and the Dutch brought in new plants such as the coffee tree, indigo, and sugar cane…

During the Second World War, the Japanese invaded the Indonesian islands, after the attack on Pearl Harbor in December 1941. This period saw the growth of a strong movement for Indonesian independence. Three days after the Japanese surrender, Sukarno and Mohamed Hatta proclaimed Indonesian independence, on 17 August 1945. But, after the war ended, the Allies occupied the archipelago and waited for the Dutch to return. The former colonial masters found themselves in an uncomfortable position as the clamour for independence grew. The era of empires was drawing to a close.

In 1947, Indonesia was the focus of a particularly controversial episode in World Bank history. The Bank granted a 195-million-dollar loan to the Netherlands while the Dutch government was conducting an offensive against Indonesian nationalists. This was the second loan the World granted in its history. Two weeks before approval of this loan, the Netherlands launched their offensive. Over the two following years, there were as many as 145 000 Dutch occupying troops: it was a large-scale operation, and hard to keep under cover. Although the UN declared a cease-fire in 1948, the Dutch launched several land and air attacks. There was a hue and cry at the UN and in the United States, harshly criticising Dutch policy in Indonesia and Bank involvement. The latter responded that the loan had been granted to the Dutch government for spending to be made in the Netherlands. The critics shot back that since money was fungible, the Dutch government could use the Bank loan in support of its military effort in Indonesia |1|.

The United States realised that the aid they were granting to the Netherlands (400 million dollars) through the Marshall Plan was indirectly funnelled to the military and police intervention in Indonesia. When they did, they got the UN to host talks at The Hague, in August 1949, and sovereignty transfer was signed on 27 December. Indonesia became a Republic and Sukarno was elected President.

However, the legacy of colonialism weighed heavily on Indonesia. The new nation had to repay a significant colonial debt. Moreover, the Netherlands had “bequeathed” a production structure essentially based on export crops, making it dependent on the elastic course of the international economy. Moreover, most wealth created was still in the hands of Dutch firms. Finally, Indonesia took its first steps as a society scarred by colonial rule. This left it with a high illiteracy rate and only 1,200 physicians and 120 engineers for a population of 80 million inhabitants.

Sukarno Presidency: the Third World defies neo-colonialism

Sukarno was one of the principal forerunners of the non-aligned movement, which was founded in Belgrade in 1961. The Conference which he organised in Bandung (Java Island), in 1955, launched this movement onto the world stage. Sukarno, Nasser and Nehru were the leaders who embodied Third World hopes against the old colonial system of domination. During this meeting, Sukarno made a speech on the Conference’s aims, of which here are a few excerpts: “The fact that leaders of Asian and African peoples can meet in one of their own countries to debate and reflect on their common issues is a new historical beginning (…). We are often told that colonialism is dead. Let us not be deceived or even soothed by that misleading formula. 1 am assuring you that colonialism is very much alive. How can we affirm the contrary so long as vast areas of Asia and Africa are not free? (…) Colonialism has also its modern dress, in the form of economic control, intellectual control, actual physical control by a small but alien community within a nation. It is a skilful and determined enemy, and it appears in many guises. It does not give up its loot easily. Wherever, whenever and however it appears, colonialism is an evil thing, and one which must be eradicated from the earth” |2|. Sukarno upheld an anti-imperialist outlook in terms of foreign policy. In 1956, he repudiated colonial debt and the following year, he nationalised Dutch companies.

Sukarno’s policies, inside and outside his country, were based on a philosophy of equilibrium. Indonesia is a country with a great cultural diversity and Sukarno attempted to maintain a balance among the different factions in his country, with the personal objective of remaining in power alone. The first Indonesian elections took place in 1955. The President’s party (PNI) obtained 25 % of the votes and the PKI, (Communist party), 16.4 % |3|. Sukarno, who was a nationalist but not a communist, worked alongside the PKI in order to establish his legitimacy.

On the international scene, Sukarno deftly played the Cold War blocs against each other. But tensions were rising. The United States disapproved of the massive Soviet aid to Indonesia, thinking the latter could be won over to a pro-Communist stance. Hence, they backed internal rebellions that sought to destabilise Sukarno, who spoke out against this backing at the UN. Until 1963, Sukarno succeeded in playing the two blocs against each other but they called on him to choose sides. The United States decided to act through the IMF. An IMF delegation toured Indonesia in 1962 and proposed financial aid conditional on close co-operation with the Fund. In March 1963, the United States provided a 17-million-dollar loan, and two months later, the Indonesian government announced a series of new economic measures (devaluation of the rupee, austerity budget, suspension of subsidies…) in conformity to IMF policy. The next month, the OECD members met to agree upon a fund mobilisation accord. The United States proposed to contribute to it, alongside the IMF and the WB, to the tune of half the estimated 400 million dollars. In August, under US impetus, Indonesia signed a “stand-by arrangement”, under which it received a 50-million-dollar loan.

But everything changed in September 1963 when the British proclaimed the Malaysian Federation without consultation. Sukarno viewed the proclamation as a destabilising manoeuvre and reacted by nationalising British firms. This entailed cancellation of the agreements reached with the IMF. Nevertheless, the UN agreed to the creation of Malaysia and Sukarno, who failed to win his case, slammed the door on the UN in 1965.

The economic situation was disastrous. The many loans received from the West and the USSR were wasted on consumer goods, prestigious projects and weapons. Although Sukarno defended the Indonesian people’s rights, he failed to redress his country’s economy. Indonesia’s economy, dependent on the outside, was hard-hit by the collapse in the price of raw materials (the price of rubber slumped dramatically) while Sukarno’s lavish public spending policies played a part in fuelling inflation which reached a 600% yearly rate at the end of his time in power. The Cold War was reaching its climax, and Sukarno attracted Washington’s ire by nationalising all foreign private firms (except for the petroleum industry). He left the IMF and the WB in August 1965 and decided to take charge of the country independently.

September 1965: massacre of 500 000 civilians accused of being Communists begins

On 30 September 1965, General Mohamed Suharto, commander-in-chief of the army, launched a massive clampdown on the left-wing parties. He chose the PKI as his primary target, accusing it of fomenting a Communist putsch. Suharto succeeded in seizing power and physically liquidated the PKI. Between 500,000 and 1 million civilians were killed merely for membership in PKI or sympathising with it. Little by little, Suharto sidelined Sukarno. In March 1966, Suharto finally succeeded in forcing Sukarno to officially hand over his powers. Six days after the turnover, the United States government announced that it was opening up a line of credit for Indonesia, amounting to 8.2 million dollars, for the latter to purchase US rice |4|. On 13 April 1966, Indonesia rejoined the World Bank |5|. Once again in 1966, US president Lyndon B. Johnson, on tour of his troops in Vietnam, praised the Indonesian Model in a speech there |6|.

The Suharto era: The “New Order”

Suharto’s regime continually resorted to terror and physical liquidation. In addition to the Communists, the dictatorship targeted PNI members, as well as Muslims in Java, Hindus in Bali, and Christians in North Sulawesi. Suharto was re-elected every five years by a parliamentary institution (People’s Consultative Assembly) made up of 1000 members. The President directly chose 600 and 400 others were elected.

Suharto aligned his policies closely on US ones. But despite the obvious convergence, the United States did not wish to grant new loans directly to the Suharto regime. As the US had done in 1963 under other circumstances, they decided to entrust management of their interests to the IMF. Fund assistance was conditional on implementation of the policies it recommended. At the end of summer 1966, an IMF mission studied a new stabilisation programme and the government rapidly implemented the IMF’s macroeconomic conditions. Indonesia officially returned to the IMF fold in February 1967. The Western countries were swift to respond. Firstly, they granted 174 million dollars in aid in order to bail out the Indonesian crisis. Then, they proceeded to restructure the debt because 534 million dollars had to be reimbursed for debt servicing (interest, principal and arrears) by the end of 1966. This amounted to 69% of estimated export revenues |7|. Without this new payment schedule, debt servicing would have cancelled out the impact of foreign aid. In December 1966, following a Paris Club meeting, the Western creditor nations accepted a moratorium |8| until 1971, on reimbursement of the principal and the long-term debt interests contracted before 1966. Without IMF support and US pressure on the members of the Paris Club, this reorganisation would not have taken place.

But the effects of a moratorium proved merely temporary and, in 1971, repayments had to resume. From then, creditors signed the most favourable agreement ever granted |9|. Debts prior to 1966 (contracted under Sukarno) had to be repaid in 30 annuities over a period from 1970 to 1999. This reorganisation was followed by devaluation and a reform of exchange rates that made Indonesia the country with the freest exchange rate.


According to the 2004 Transparency International World Report on Corruption, Mohamed Suharto was the most corrupt leader in the world. He embezzled between 15 and 35 billion dollars between 1967 and 1998. This was far ahead of Philippines Ferdinand Marcos, who pocketed between 5 and 10 billion $US. According to a World Bank report |10|, between 20% and 30% of the budgets linked to development funds were embezzled and Bank loans were clearly involved. For example, the development budget with headings such as “development infrastructures” funded redecoration of government buildings or the purchase of official vehicles, and not the improvement of public welfare.

The World Bank is one of the country’s largest creditors. In 2002, the Indonesian debt to the institution amounted to more than 11 billion dollars out of a total of 79 billion dollars of external public debt.

From the outset, World Bank relations with Indonesia were unlike any other. The new World Bank president, Robert McNamara |11|, made his first overseas visit to Indonesia. The Bank then concocted and maintained the vision of an Indonesian miracle, although it was fully aware of the fraudulent practices of Suharto’s regime. Notwithstanding this, and in a bid to satisfy both political and geo-strategic interests, loans were not reduced, but actually continued to increase constantly.

The case of East Timor

In 1975, after the collapse of the Salazar regime, the Portuguese colonial administration and army, still occupying Timor Island, decided to pull out of their colony. The Revolutionary Front of Independent East Timor, waging an armed struggle against Portuguese occupation, declared the territory independent |12|. But one month later, Indonesian military forces invaded the island and, in 1976, the Indonesian government proclaimed East Timor its 27th province. The United Nations condemned this annexation and continued to view Portugal as the official territorial administrator. However, some States, including the US, gave de facto recognition to the annexation. They had every interest in having oil reserves fall into the hands of a “friendly” dictator rather than under Portugal or an independent Timor.

Violent combat broke out and the Indonesian army killed 100,000 people out of a population of approximately 750,000 inhabitants. Repression was a leitmotiv on the island and any protest met with further massacres. In 1992, the UN Human Rights sub-commission condemned Indonesia for its “policy of repression in East Timor”.

Did these massacres dissuade the World Bank from granting loans to a country whose government was overtly carrying out a ruthless oppression of any opposition movements? Did the WB use its loans to ensure respect for human rights in Indonesia? Not at all, because World Bank loan grants to the Indonesian government actually increased during this period:

The transmigration project’s beginnings |13|

The Indonesian transmigration programme was a large-scale project in terms of both time and space and had weighty consequences on many levels. The concept of Kolonisatie was born in 1905 under Dutch rule. It aimed to move Javanese families to the less densely populated outer islands (Borneo, New Guinea and Sumatra) in order to reduce what was already described as “overpopulation” in Java |14| – where 30 million people lived. At the same time, the outer islands were being developed through the input of agriculture and irrigated rice cultivation. From 1947, when the Netherlands lost control over the archipelago, Kolonisatie was renamed Transmigrasi, or transmigration. This programme’s objectives remained the same, at least on paper, as the colonial power’s earlier one:

to decongest Java by displacing whole families to live in the so-called under-populated islands, and thus establish “a more balanced demographic development |15| “;

to reduce poverty and unemployment by giving landless central island peasants the opportunity to settle on “empty” lands which they would be free to cultivate;

“to more effectively exploit the potential of the outer islands” |16|.

After independence, Sukarno’s vice-president, Mohammad Hatta, while criticising the colonial power’s emigration policy, insisted on the need to take the project further but adopting a different approach than the Dutch had used. Instead of simply moving the poorer peasants to lands where they will remain poor peasants, it was necessary to industrialise the outer islands, so the transmigrants could thrive and prosper in their new environment. This industrialisation was never carried out.

Suharto and the World Bank: transmigration moves into high gear

After his coup d’état, Suharto pushed even more determinedly for transmigration, with greater means at his disposal than Sukarno had before. From 1969 to 1999, five-year development plans succeeded one another under the title of Repelita – the last one was never completed because of the 1997-1998 economic and political crisis. International assistance played a very important role in carrying out this huge project.

Under Suharto’s rule, there were no restrictions on foreign exploitation of the outer islands’ resources. This benefited the central government and the firms involved, but at great cost to local populations. A large share of their habitat and means of subsistence were destroyed forever. This intensive exploitation of natural resources and establishment of farmlands where forests had stood on the outer islands was called “regional development”. Outer island lands were seen as “vacant” because the indigenous people who had lived there for thousands of years had no title to them. These lands were then declared “in the service of the State”, and were confiscated by force, generally with no compensation.

Transmigration inherited lands not set aside for forestry concessions (allotted to private or semi-public companies for very lucrative operations), such as zones already partially cleared, alang alang savannahs or marshy forest; all of these were very poor farmland. For government agents in charge of locating sites to be cleared, it did not really matter whether the sites were arable or not. They had to chart out and submit information on access to the sites, the number of hectares to be cleared and the number of families that could be settled there. In general, the best lands were already being farmed by the indigenous people. Thus, the sites reserved for transmigrated families were exploited to the limits of their potential. This quickly made them unfit for any farming for any farming activities despite the installation of heavy infrastructures and massive use of artificial fertilisers and pesticides. This untenable situation resulted in “transmigrants” abandoning the villages to seek employment in the civil service or companies present in the region.

The Ministry in charge of transmigration was shored up by great international support for the project during the years the Suharto regime was most firmly in power (1970 – 1989). and counted on growing profits from the new sources of wealth transmigration would bring in (taxation on foreign companies and agricultural output). As a result, it continued to boost transmigration quotas to the outer islands as the Repelita (five-year development plans) succeeded one another. To meet these demands, heavy pressure was put on civil servants assigned to transmigration and local police officers to come up with a given number of people before a set deadline, to be sent overseas. Propaganda played a very important part in the recruitment of families for transmigration. It was meticulously organised, via governmental messages and especially via testimonies from certain transmigrants. These spokespersons, paid off in various ways or forced by military blackmail, praised their new life as settlers on an outer island.

Forced transmigration: “the greatest voluntary relocation programme in the world”

The World Bank called the transmigration project as “the greatest voluntary relocation programme in the world”. But very soon, the people involved had no choice but to take part. Indeed, it appeared rather quickly that the programme was also used to rid Java of undesirable inhabitants. Thus, in the principal Javanese cities, “non-conformists”, elderly people, the ill (including leprosy sufferers), beggars and vagrants saw themselves forced, either to disappear in the countryside (where they had little chance of survival), or join in the transmigration. They were then loaded, by night, onto army trucks and taken to “transit camps” where they were trained in view of their resettlement |17|. Since potential migrants had to be married, the authorities organised forced weddings between unmarried people before they set off, and when people were recruited by force, the Department of Social Affairs organised mass wedding ceremonies.

Transmigration and violation of the rights of indigenous people

The forest – a vital resource for Aboriginal peoples in many ways – was disappearing little by little. Companies and commercial plantations were cutting it down, while government teams were clearing sites intended for agriculture and resettlement of migrants. Besides, mining companies were reducing stands of trees on entire mountain slopes to pulp and pouring tonnes of tailings into rivers, thereby polluting them irremediably. These rivers were the only source of water supply for indigenous people, so the impact on health was dire. Oil wells along the coasts also harmed marine fauna and flora, another source of food for the indigenous populations.

Some transmigrants believed they were carrying out a civilising mission, conveying “good manners” to “savages”, and above all, teaching them how to farm the land. Indigenous people were supposed to observe the newcomers and learn from them |18|. This created a huge gulf between the two groups living there from the outset. Transmigrants were not interested in local food production techniques. As for the native people, they felt a deep frustration seeing these groups of unknown people settle on their lands, cultivating them without any respect. In fact, intensive agriculture killed the lands instead of making them more productive. Moreover, the newcomers found many jobs in various resource industry firms, while natives had no right to seek employment with these companies |19|. The indigenous people harboured deep feelings of injustice, seeing transmigrated people as a cause of their plight, becoming outcasts in a world in which they had lived in balance in earlier times.

Transmigration certainly played a very important role in degrading the environment where the indigenous people lived, but in general, it would be unfair to blame the transmigrants. The people really to blame were those who devised, carried out and funded the project. First and foremost, Indonesian authorities and international institutions were to blame (among the latter, the World Bank played the leading role). But so were certain Western governments (the United States, the United Kingdom, Germany, Israel…) and the national and foreign companies involved in actually carrying out the project. Programmes funded by international loans played a part in the development and proliferation of intensive natural resource exploitation anda faster rate of opening up land areas intended for commercial plantations. These loans were always contingent on opening up markets at all levels – elimination of customs barriers, attraction of foreign capital, priority to single export crops, liberalisation and privatisation of the goodsandservices distribution sectors, etc.

Frenzied exploitation of natural resources by transnationals

As for the involvement of overseas firms, an important case concerned the US mining company Freeport McMoran. Since 1967, this firm had holdings on the huge Garsberg site and became one of the most important suppliers of tax income to the government. This mine exploits the largest gold deposit in the world, as well as copper deposits, and only employs Westerners and Javanese immigrants on staff. Very few jobs are provided to indigenous people, and involve the most dangerous tasks. To make matters still worse, in order to occupy all the space the company felt it needed to mine the subsoil and the mountain sides, the firm sought aid from the military to expel the Amungme Papuan people who had lived on these lands for millennia. The indigenous people were paid no compensation for their stolen lands, as their property title was not recognised. Extraction proceeded at a very rapid pace; the mine was worked 24 hours a day, 365 days a year. The very serious harm done to the environment seems irreparable, relying on the quantity of highly toxic waste dumped in the rivers and onto the soil, making the earth unfit to till. Freeport’s profits were more than 125 million dollars a year during the 1980s, but the local population never received the slightest percentage of these earnings |20|. This is but one example of an all too common situation in regions affected by transmigration.

World Bank’s direct participation

The transmigration programme began to attract the attention of creditor institutions in the early 1970s, when Suharto had already made a strong push to relaunch the project. At the time, the President’s high ambitions lacked the finance capital and technology needed to carry them out. Little by little, several international development agencies would provide the needed capital.

The World Bank was his main source of outside funding, above all during the fifteen years of the programme’s golden age (1974-1989) but also in subsequent years. So it is worthwhile to look more closely at the part it played.

World Bank loans granted between 1976 and 1986, the programme’s most active years (due to the very loans), totalled 630 million dollars |21| but approximately 130 million dollars were cancelled, bringing World Bank contributions down to 500 million dollars. This contribution was not limited to financial support. It also involved political support as it was attracting millions of dollars more in support of the project (aid from the Netherlands, German, and US governments, from the Asian Development Bank, the UNDP and the World Food Programme -WFP-). From 1983, the World Bank granted a further loan of approximately 500 million dollars for the development of commercial plantations (Nucleus Estate Smallholders schemes), but this loan actually included the settlement of transmigration villages in the zones concerned.

Between 1950 and 1974, the total number of people the government displaced through transmigration amounted to 664000. But, from 1974, with World Bank support, 3.5 million people were displaced or assisted, and approximately 3.5 million other people migrated on their own, but were encouraged by the government and hired on in commercial plantation firms or, in smaller numbers, in the mines, in the specific case of West Papua. Other loans were granted for the selection and planning of sites developed to take in approximately 2 million people. The World Bank played a direct part in displacements and resettlements. Its loans made it possible to cover almost the entire cost of the “official” migration of some 2.3 million people, and to “catalyse” the resettlement of another 2 million spontaneous transmigrants.

The transmigration-related projects receiving the most World Bank support were those in which national or overseas private firms played a direct role, and were liable to spark foreign trade and attract more ambitious transnational investments. A significant example of this particular preference was the generous funding for industrial plantations. The Bank played a middleman’s role between investors and the labour power they needed, in the form of transmigrants. We also note that the World Bank took a major part in drives to recruit homeless people and political prisoners to send them off to the most isolated and least desirable transmigration sites. The World Bank also supported the government in its expropriations of lands belonging to indigenous people, although it has never officially owned up to this.

At the end of the 1980s, many virulent criticisms were voiced from within and outside the archipelago, accusing the World Bank with taking part in a geopolitical domination project with an array of negative social and ecological side-effects, while failing to respect human rights as it went forward |22|. The World Bank had indeed played a capital role in this project, which caused irreparable harm. This damage included clamping down on the indigenous people in the outer islands and violating their land ownership rights. They involved exorbitant costs (7000 dollars per family according to World Bank estimations |23|) with respect to the outcomes since, according to a 1986 World Bank study, 50% of the displaced families lived under the poverty line and 20% beneath the subsistence level. Meanwhile, they did not resolve density problems on Java; but led to massive deforestation of the outer islands.

The World Bank, criticised from all quarters, decided to cease funding earmarked for new transmigration sites and coverage for transmigrants’ travel costs. It continued to concentrate loans on shoring up existing villages |24| and maintaining commercial plantations. Hence, it only abandoned a small part of its participation in the programme.

Naturally, the World Bank denies all the allegations made by critical observers. In 1994, it decided to carry out an internal evaluation study |25| of the projects it had funded, in order to determine any possible responsibilities. In this report, the World Bank admitted that the Sumatra project “had a negative and probably irreversible impact” on the Kubu people, a nomadic people whose survival depends on slash-and-burn agriculture, hunting and gatherings in the forest. The audit went on to say “although the Kubu’s existence in the project zones had been known from the planning of the project, little effort was made to avert problems”.

World Bank loans for the Transmigration programme have all the features of the constitution of an odious debt. They were contracted by a despotic regime that was in a position to use them for repression; they were not contracted for the welfare of the people. In consequence: this debt is null and void – it must be cancelled. But that is not sufficient remedy. As we have seen the World Bank supported transmigration project involved the forced displacement of groups of people. The World Bank cannot simply claim that it was unaware of this. It was also complicit in the violation of the rights of indigenous peoples who had lived in the zones settled by the transmigration project. These very grave acts must not go unpunished.

The 1997-1998 Southeast Asian Crisis

The 1997 Southeast Asian crisis hit Indonesia hard and shocked the country with its virulence. In less than one year, foreign capital withdrew from the country, the value of the rupee dropped drastically and mass unemployment set in. An HCCI study indicates that “at the end of 1998, according to government statistics, 50% of the population was living below poverty level, estimated in Indonesia at $0.55 per day in cities and $0.40 in the countryside” |26|.

The causes lie on the one hand with the Indonesian economy, based on endemic corruption, collusion between the government, the banks and private conglomerates and massive influxes of foreign capital, which made it possible to regulate the balance of payments. And on the other, on IMF policies, which contributed to feverish property and stock market speculation by untrammelled, opening to foreign capital.

The IMF imposed emergency measures to solve the 1997 crisis. Once again it failed, extending and deepening the crisis. The majority of the State budget is earmarked for debt repayment. In 2004, the share was close to 28% and this situation was expected to continue.

J. Stiglitz does not mince his words: “Economic policy should be directed at minimising the depth and duration of any economic downturn. Unfortunately, this was neither the intention nor the impact of the IMF prescriptions” |27|. The people, hard-hit by the impact of these measures, began to launch protests. On 5 May 1998, as foreseen by agreements signed with the IMF, Suharto eliminated subsidies on basic goods, increasing the price of kerosene, electricity and gasoline by 70%. This stepped up the huge popular mobilisation that had begun several months earlier. Fifteen days later, Suharto stepped down after 32 years heading a dictatorial regime.

By imposing draconian conditions for any aid to Suharto, the IMF encouraged the dictator to implement very unpopular economic measures. These measures consolidated the very broad opposition movement that succeeded in removing the dictator from power. Washington certainly thought Suharto had done enough to defend US interests. With the Cold War over for ten years, it was time to move on.

The Indonesian debt today

Today, Indonesia is a severely indebted country. The growth of the long-term external public debt was impressive indeed. Massive repayments over the past few years have barely succeeded in keeping pace with it.

The division by creditors indicates a rather limited private share, in large part due to the fact that the contribution of capital from the IMF and the industrialised nations for priority reimbursement of private creditors converted part of the debts owed to private creditors to multilateral and bilateral debts, which took on a strong majority position.

Payments on the public external debt have provoked a veritable bloodletting of capital:

In 2002, half of the repayments made by Indonesia went to the IMF and the World Bank.

The 1997-1998 crisis brought in capital on a short-term basis, but since then, repayments have weighed heavily on the Indonesian budget. This is why net transfer |28| on the debt became (slightly) positive in 1998 before going deep into the red afterwards.

On the other hand, in terms of human development, several indicators are particularly worrisome:


In short, the 1965 military coup d’état deprived the Indonesian people of the possibility of determining their own future. And yet with the Bandung Conference in 1955, Indonesia had begun to take its rightful place on the international scene. The threat of seeing one of the most populous countries on earth playing a key role in establishing a new world order was what led the United States and the Bretton Woods institution to provide active support to the Suharto dictatorship.

These institutions made their choice on the basis of political and geostrategical factors. Their financial support enabled Suharto to carry out policies counter to human rights. Suharto served the interests of the major Western powers in the region and enabled transnational corporations based in the industrialised countries to take their fill of Indonesia’s natural resources. The World Bank and the IMF were the active accomplices in these policies. The local ruling class supported Suharto and did not seek to invest in the development of the country. They preferred to abet the transnationals’ depredation of Indonesia’s natural resources.

Starting from the crisis in 1997, IMF-imposed measures aggravated the economic situation and brought about a sharp increase in the internal and external public debt. The historic balance sheet of the IMF and World Bank’s role in Indonesia is an unqualified disaster. In consequence, the credits they hold on this country must be cancelled in full. Moreover, the World Bank and the IMF must be brought to account for their complicity in the Suharto regime and for projects such as transmigration, which amount in several respects to a crime against humanity.

The bilateral debts are in the hands of countries that directly shored up the Suharto dictatorship, so they must also be cancelled. The same applies to debts owed to foreign private concerns that took part in the corruption of the Indonesian regime, pillage of the country’s natural resources and exploitation of its workers.

After the drama brought about by the tsunami, the World Bank and the governments of the creditor nations declared that they would display generosity. The reality has proven far different. The highly mediatised aid in the wake of the disaster was provided chaotically and proved (ephemeral). Above all, while claiming to provide financial assistance for reconstruction, creditors grouped together in the Club de Paris (who also administer the World Bank and the IMF) decided to collect late interests on the part of the service of the debt what had not been paid in 2005 |29|. The moratorium granted by the Club de Paris is merely sham generosity, since the States accepting it will make their people pay it back to the very last cent. Is this any way to treat the people who have endured the tsunami? We can also see this through measures recently adopted. The Indonesian government, under pressure from its creditors, has imposed a sharp increase (+29%) in the price of fuel on March 1st, 2005, provoking strong discontent among the people. The tax revenue that will come out of this increase will mostly be earmarked to make up for the budget deficit and repay the debt |30|. Social movements must keep their eyes open and exert every possible influence on the political and financial authorities to make sure they finally take into account the living conditions of the poorest.

Damien Millet is a mathematics teacher, president of The Committee for the Abolition of Third World Debt (CADTM)-France. Eric Toussaint is a historian and political scientist, president of CADTM-Belgium. He is the author of Your Money or Your Life. The Tyranny of Global Finance, Haymarket, Chicago, 2005. Damien Millet and Eric Toussaint are coauthors of The Debt Scam, Vak, Mumbai, 2003 and Who Owes Who?, Zed Books, London, 2004.

Complementary bibliography:

DIBLING, Sébastien. 2004. “Indonésie: la complicité des institutions financières”, in Le Droit international, un instrument de lutte ?, CADTM/SYLLEPSE, Liège- Paris, PP. 63 – 75
OTTEN, Mariël. 1986. Transmigrasi: Indonesian Resettlement Policy, 1965-1985, IWGIA, Copenhagen, 254 p.
TOUSSAINT, Eric. 2004. Enjeux politiques de l’action de la Banque internationale pour la Reconstruction et le Développement et du Fonds monétaire international envers le tiers-monde, Thèse de doctorat en Sciences politiques, Université de Liège et Université Paris 8, 350 p.
THE ECOLOGIST, Banking on disaster. Indonesia’s Transmigration Programme, vol. 16 n° 2/3, 1986, pp. 58 – 117

End notes:

|1| Bruce Rich, Mortgaging the Earth ,London, Earthscan, 1994.

|2| Asia-Africa Speaks from Bandoeng, (Djakarta, Indonesian Ministry of Foreign Affairs, 1955), p. 19-29.

|3| R. Aarse, L’Indonésie, Karthala, 1992.

|4| Payer, Cheryl. 1974. The Debt Trap : The International Monetary Fund and the Third World, p. 75-90

|5| Kapur, Devesh, Lewis, John P., Webb, Richard. 1997. The World Bank, Its First Half Century, Volume 1: History, Brookings Institution Press, Washington, D.C., p. 1222.

|6| ARTE, Les mercredis de l’histoire : Massacre en Indonésie, Australie, France, Thirteen WNET New York, Arte France, YLE TV2 Documentaires, Australian Film Finance Corporation, Hilton Cordell/Vagabond films production, BFC Productions, c.2001

|7| Payer, Cheryl. 1974. Ibid., p.80

|8| More than half of the Indonesian debt was contracted with the USSR, and by granting a moratorium on their debt, Western creditors were underwriting reimbursement of the Soviet debt. In order to avoid any capital outflow to the USSR, they granted this favoured status on condition that the Soviets do the same. The latter agreed, as they feared they would not be repaid at all in the event of a refusal on their part.

|9| This new contract included the most favoured nation clause, meaning the Soviet debt would be repaid at a faster rate.

|10| World Bank, “Summary of RSI Staff Views Regarding the Problem of ‘Leakage’ from the World Bank Project Budget” August 1997.

|11| Robert McNamara presided over the World Bank from 1968 to 1981.

|12| Amnesty International, Indonesia and East Timor, September 1994.

|13| This part is largely inspired by Alice Minette’s research work, Anthropologie d’un malentendu. Analyse du projet de développement “Transmigration” en Indonésie et de ses conséquences sur les îles périphériques de l’archipel en général, et sur la Papouasie Occidentale en particulier (unpublished first degree thesis), Université de Liège.

|14| Nevertheless, Javanese population continued to increase and was up to 50 million inhabitants in 1941.

|15| Adriana Sri Adhiati and Armin Bobsien, Indonesia’s Transmigration Programme – An Update, report prepare for Down To Earth, 2001 (http://dte.gn.apc.org/ctrans.htm)

|16| Adriana Sri Adhiati and Armin Bobsien, Ibid.

|17| One of these camps was a small island off the coast of Java from which it was impossible to escape, and where the aforementioned “undesirables” saw themselves memorising agricultural techniques and the State ideology.

|18| Subandrio, Foreign Affairs Minister under Suharto, explained to the Press one day that “Indonesian policy towards the Papuans was “to get them down from the trees, even if we have to pull them down.”

|19| Out of the total number of employed workers in these companies, only 3% were of local origin. To the 3% were allotted the most thankless and dangerous tasks. The rest of the staff came mainly from Java or the West.

|20| On the subject of Freeport McMoran’s activities in West Papua, see Matthew Thomas, “West Papua: The Obliteration of a People” in Briefs of University of Colorado, Denver, 1996,consulted on the site: http://carbon.cudenver.edu/public/f… le 29/11/04 ; Agus Sumule, “Working Paper n°36 : Protection and Empowerment of the Rights of Indigenous People of Papua (Irian Jaya) Over Natural Resources Under Special Autonomy” in Resource Management in Asia Pacific, RMAP Working Papers, State University of Papua, 2002.

|21| The source of the following paragraphs is in Bruce Rich, Ibid.

|22| Among the criticisms addressed to the Bank on the subject of damages and failure to respect human rights due to its support to government actions in West Papua, the best known are the letter the Minority Rights Group (New York) addressed to Bank president A.W. Clausen, the condemnation by the World Council of Indigenous People during its 1984 regional meeting, a petition submitted to the Inter-Governmental Group of Indonesia in 1984-85 by the Australian Council For Overseas Aid and by many associations for the defence of indigenous rights. These complaints were not taken into account by the Indonesian government, or by the Bank, that continues to support the disrespect for indigenous rights in Papua.

|23| World Bank, Indonesia Transmigration Sector Review, cited in Bruce Rich, Ibid.

|24| This reinforcement, called “Second Stage Development”, consisted of the improvement of infrastructures and overall living conditions in transmigration villages, as well as the rehabilitation of sites where there had been a high desertion rate among transmigrants.

|25| “Indonesia Transmigration Program: a review of five Bank-supported projects”, 1994; “Impact Evaluation Report : Transmigration I, Transmigration II, Transmigration III”, 1994.

|26| See Amandine Giraud, La crise indonésienne et le rôle du FMI, HCCI, 2001.

|27| Stiglitz, Joseph E. 2002, Globalization and its Discontents, p. 122.

|28| Net transfer on the debt is the difference between new loans received during a period and total repayments (principal and interest during the same period. Thus, net transfer on the debt is positive when the country or continent concerned receives more (in loans) than what it repays. It is negative if the sums reimbursed are greater than the sums lent to the country or continent concerned.

|29| See the Paris Club decision made public on 10 March 2005 at http://www.clubdeparis.org

|30| Financial Times, 1st March 2005.

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