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NEWS RELEASE
1/28/98
CONTACT: Kathleen O'Toole, News Service (650) 725-1939;
e-mail kathleen.otoole@stanford.edu
Military general likely to succeed Suharto, adviser to Indonesia says
The next three months are critical for Indonesia. The world's fourth most populous country must immediately select a vice presidential candidate and probable successor to President Suharto if the country's economy is to stabilize, says Walter Falcon, director of Stanford's Institute for International Studies.
"Almost certainly the next president will be a Javanese general whose name ends in 'o'," he says, noting that about a half dozen generals fall into that category. "The questions really are which one, how he will be selected and whether he will be acceptable to the Indonesian army, the international investors and the current president, who, in spite of all the problems, remains powerful."
Falcon has been deeply involved with Indonesia throughout Suharto's three decades of rule. An agricultural development economist who grew up on an Iowa farm, Falcon first went to Indonesia in 1968 as part of a Harvard advisory project. He has spent at least a month of every year in Indonesia since, writing and co-editing three books about the country, supervising Stanford graduate students and advising the government's food, planning and finance ministers along the way. On his most recent trip in September, he was able to observe firsthand the land-clearing and resulting smoke that overhung many of the country's 13,000 islands, angered its neighbors and thrust the country into the international news.
"My involvement is long and close. For the last 10 or 15 years, I've worked there on the basis of handshakes," Falcon said recently as he prepared a lecture on Indonesia. "I am very proud of the advice I have given Indonesia on agricultural price policy and poverty alleviation, but I am reluctant to talk publicly about personalities." He will say only that a number of people who headed government bureaus when he started are now in the cabinet. "Indonesia is a very diverse country and it has a diverse cabinet and bureaucracies as well." The leaders he knows best are the technocrats, sometimes referred to as "the Berkeley Mafia," because many of them earned advanced degrees at the University of California-Berkeley.
Finding an acceptable successor to Suharto is the biggest problem Indonesia faces, and it has little time to do it, he said. "The market is saying to the president, we are concerned about your family's involvement in the economy, your health and that there isn't a successor process in place. The problems of economic development have shifted over to problems of political development."
On Jan. 20, the 76-year-old Suharto hinted that his running mate in March elections would be a longtime aide and civilian minister, Bacharuddin Jusuf Habibe, a German-trained aeronautical engineer. Newspapers suggested Suharto had lofted a trial balloon to see how others react. Habibe is not likely to be acceptable to all constituencies, Falcon said, because his reputation has been tainted by his support of an airplane development project that was among the prestigious but economically disastrous projects that the International Monetary Fund required the government to stop funding as a condition of its $40 billion rescue package. But there isn't a large field of acceptable candidates, Falcon said. "Part of Suharto's skill, and also his greatest fault, is that he was good at playing factions off against each other so there was no one to challenge him." A general is the most likely successor, and one from Java because it is the "cultural heartland" of the country, he said.
The constituencies that must be satisfied, Falcon said, are Suharto's family, because of their massive economic involvement; the Army, because the constitution specifies both a peacekeeping and political role for it; and the international markets, which have punished Indonesia in recent months and weeks, causing the value of the country's currency, the rupiah, to fall from 2,500 to the dollar to 15,000 to the dollar, a loss of value greater than in other Asian countries. "Perhaps the market will quiet," Falcon said, "if Suharto picks an acceptable vice president and then agrees to step aside very early in his next term."
If the rupiah continues to slide against the dollar, Falcon worries "how unruly the population will get and how tough the army will want to be. Those are big questions. Another is whether the army will be able to speak with one voice." Indonesia is a diverse country of 200 million, and some newspapers have speculated about potential factionalism in the military.
Falcon is hopeful that Indonesia can recover because the International Monetary Fund's latest agreement with Suharto allows his government to construct a partial safety net for the short term.
Indonesia needs it, he said, because "people can't borrow now; industry and construction have come to a halt; millions of workers are unemployed and are now down to a meal a day. There has been a six-month drought and the next harvest isn't due for another three months. Indonesia is looking at low domestic food supplies, with heavy rice imports to be resold at great subsidy, and yet people are out of work with no money to buy the food that has gone up in price."
The IMF, as it has elsewhere in Asia, insisted Indonesia overhaul its banking system, eliminate subsidies to unprofitable industries and end government-authorized monopolies. But the government has been allowed to buy rice, the basic staple, at $300 a ton abroad and sell it locally at $150, and to start rural work programs to provide some work for people laid off from its formerly massive construction industry.
The IMF is requiring price de-control of non-essential food items, such as cloves, oranges, wheat flour and sugar. Agricultural subsidies have caused market distortions the world over, Falcon said, but Indonesia had created particularly perverse incentives by giving certain groups exclusive contracts for marketing. One of Suharto's sons, for example, is the exclusive supplier of cloves, used in Indonesian cigarettes. Such arrangements allow the marketing groups to make high profits while the government absorbs the price and foreign exchange risks.
In the current crisis, it is easy to forget how successful the Suharto government has been at raising Indonesia's standard of living, Falcon said. A September 1965 uprising plunged the country into a civil war that took an estimated 500,000 lives and reduced its economy to a bartering system. When Suharto managed to gain control and Falcon first went there in 1968, seven of 10 Indonesians lived below a poverty line of $1 a day.
Over three decades, Indonesia developed first agricultural and then industrial prowess. It went from an importer of rice to an exporter, and until the last month or so, fewer than 15 percent of Indonesians were below the poverty line.
"Development of the countryside has been enormously successful, and while there were parts of both the political and economic development that most people were not happy with, the fact is that, in spite of the first family, the income distribution has gotten better, not worse," Falcon said.
Critics have pointed to cronyism and corruption as the source of Indonesia's problems today. "There have been problems of corruption and overexuberant involvement of the first family in business," Falcon said, but in the past "when times got tough, the policy usually got better, and that's the way this current crisis started out."
But 1997 was a bad year for Indonesia in several ways, Falcon said. Because of the El Niño drought, many Indonesians considered it a good year to set forest fires to clear land. The pollution created throughout southeast Asia enraged the country's neighbors and generated negative headlines. On top of that, a scandal developed around a bogus gold mine, two airplanes crashed, and civil unrest continued in East Timor. "Indonesia was rarely in the news before, and it seemed suddenly like everything you read about it was a problem," Falcon said. "People internationally began to worry about who was in charge. "
The fact that Indonesia is usually out of sight and mind in the United States is one thing going against it now, Falcon said. Mexico and Korea are both better understood and more important strategically to the United States, he said, and therefore get more of its attention. Indonesia is strategically important to Japan, but Japan has its own financial difficulties.
On the plus side, he said, Indonesia has done a good job of reducing surplus labor in its rural areas and developing export skills, and it has a new, younger set of leaders who could reduce crony capitalism with stable leadership at the top.
"One of the scary things about Indonesia's situation is that, with the problems of succession, prices and food supplies, if unrest occurs, it could well be violent, and violence often takes on a religious or racial character," Falcon explained. He doesn't expect such developments, however, at least not on a major scale. "Indonesia has a much larger middle class than it did in 1965 and a middle class has much more to lose. The army is better organized also and is prepared to be quite harsh," he said.
"Yet the next three months are going to be very touchy. It will take good policy, good luck and good choices."
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