When Generals Rule The Economy

Sumber: dokpri

Back To Basic

Edi Sudrajat - the 10th Commander of the Indonesian Armed Forces

Last month, netizens in Indonesia were outraged. The growing controversy surrounding the revised security bill sparked public concern. Many citizens voiced opposition, but their appeals proved futile. Despite widespread resistance, Parliament approved the bill without hesitation.

This triggered demonstrations across the country. From Jakarta to Jayapura, citizens gathered at their local parliaments demanding one thing: retract the revised security bill.

To this day, parliament won’t back the decision.  If so, is the people's concern valid? The answer is yes. Indonesia lived through thirty-two years of military involvement in government during the New Order, and even earlier under the Old Order. There was a time when soldiers held influence not only in politics but also in the economy. The question is: how did their presence shape the economy, and why should guns stay out of business?

History 101

As the saying goes, “TNI Bersama Rakyat” contains some truth in it. The military’s roots in the economy trace back to the independence war period. At that time, the army did not have the proper supplies to fight the Dutch. That is why the army could not fight confrontational manner. It just was too risky. To combat them, the concept of Perang Gerilya Semesta was introduced. This method of war requires the elements of civil, army, and political society to unite and participate in the war. The method works. This unity led communities to feed, shelter, and support soldiers. In return, the military pledged to repay this support. Their repayment would be either in effort or later years (Samego, 1998).

During the war, one thing became clear. The military conditions aren't getting any better. In the context, the welfare of the soldiers. Even getting basic needs like clothes is hard (Borsuk, R., & Chng, N, 2016). With the newly formed state also facing immense hardship, the military could not rely on government support. The solution that many military commanders took was to do business.

The business that they did was smuggling. During a time of war and instability, access to trade routes and goods was limited. Yet the military, with its structure and reach, had resources that others didn’t. They seized this opportunity. Teuku Mohamad Daud, a soldier turned businessman, once said, “We have to finance our supplies by smuggling agricultural products from Riau” (Borsuk, R., & Chng, N, 2016).

Their economic role grew more prominent during the Nationalization initiative. In a move to eliminate Dutch influence, the government forcibly nationalized Dutch companies (Setiyono, 2024). To make sure the operation still happens, the government entrusts the military to take over. This was done because the government believed only the military had the enough resources to manage a company (Ardanareswari, 2019).

After that, the military role in the economy became increasingly massive. Their involvement became official when Suharto assumed the presidency. Under his administration, the Dwifungsi ABRI doctrine was formally enforced. This concept allows the military to participate in political and economic activities to maintain stability. With all that said, how do they affect the economy? 

How they play and their effects on The Economy 

Following the solidified Dwifungsi doctrine, businessmen started to flock to military officers. Under President Suharto’s administration, this dynamic fostered a patron–client structure that undermined innovation. In this system, businessmen sought proximity to powerful generals to secure access and protection. The general provided political backing and influence; the businessman handled operations. It was a mutually beneficial relationship, but only for those inside the circle. Everyone else was excluded.

This patron-client relationship is best exemplified by Batara Indra Group. This group was founded by Robby Sumampow and backed by General L.B Moerdani–One of the most powerful generals at the time. Operating in Timor Timur, this group controlled monopolies over coffee and Sandalwood. According to Indria Samego (1998), in his interview with a Dili Businessman, tenders for state projects such as road construction, government buildings, and housing all went to Batara Indra. Local entrepreneurs were left with only the scraps. This is how patron-client harms the economy. It creates inequality and promotes a system where the reward is given to the most connected. Not the most innovative. 

Another example is Yayasan Kartika Eka Paksi. In the book of Bila Abri Berbisnis, this military foundation collaborated with notable names such as Tomy Winata and Sugianto Kusuma, also known as Aguan. Under the foundation, the military owned 26 companies, of which 22 of them are owned by PT Tri Usaha Bhakti (Samego, 1998). Their relationship with the military enabled both figures to rise as business magnates in Indonesia. 

Beyond patron-client relationship, military involvement in the economy created a structurally unequal playing field. As the only group permitted to wield guns and simultaneously participate in socio-economic activities, the military had privileges that ordinary citizens and businessmen could never access. From lobbying to protection from scrutiny, their playing field was vastly different from normal citizens.

One clear example is Bank Pacific, owned by General Ibnu Sutowo. Not only was it tied to a prominent military figure, but the Central Bank of Indonesia (BI) also held a 36,7% stake in it (Samego, 1998). By 1996, Bank Pacific had accumulated Rp 2.1 trillion in debt. If the system were truly a competitive and rule-based system, Bank Pacific should have been liquidated just like Summa Bank was before. Instead, Bank Indonesia injected more money to keep it alive. It wasn’t until 1997, when the bank could no longer be saved, that it was finally liquidated.

Also, the system promotes regulatory capture. Radius Prawiro, former Minister of Trade in the Soeharto Era, said that under Ibnu Sutowo, Pertamina grew from a third-world country company to a multinational company. However, underneath it, Pertamina has bad management and experience. This was a disaster waiting to happen. Ibnu Sutowo’s mismanagement created a debt of 1,55 Billion Dollars. That amount of money is the same as Indonesia’s foreign reserves at the time (Borsuk, R., & Chng, N, 2016). The massive debt happens because there is no regulatory institution that enforces accountability in the company. As noted by Caprio (2013), Without any significant accountability, regulators can both ignore basic incentives and choose not to enforce regulations. By all accounts, such a massive financial failure should have led to prosecution. But instead, Ibnu Sutowo walked away freely after being dismissed from his post. This form of regulator only serves their interest, not the public. 

Figure 1. Moral Hazard

Source : economicshelp.org

When generals operate without checks and face no consequences for failure, it creates a moral hazard. They will continue acting in their own interest, knowing the system will protect them from prosecution. This was evident in the case of Ibnu Sutowo, who recklessly misused state funds through Pertamina, eventually driving it into bankruptcy. Despite the scale of the damage, which was equivalent to Indonesia’s entire foreign reserve at that time, he was never held accountable. 

This problem wasn’t unique to him. When General M. Jusuf attempted to enforce Government Regulation No. 6 of 1974, which prohibited active-duty soldiers from engaging in business, it was estimated that 200 to 300 officers would be affected (Samego, 1998). Yet, many of those businesses continued to operate, openly defying the law. It was a moral hazard showing on the face.

This pile of problems contributes to what Kunio Yoshihara believes as ersatz capitalism. Ersatz means Imitation. Professor Kunio believes this type of capitalism happens in many countries in South East Asia. According to Kunio (1990), an ersatz capitalism is not driven by innovation, but through patronage and rent-seeking behavior. Unlike Western capitalism, which relies on institutions like the rule of law, property rights, and competition, Indonesian capitalism in the Soeharto era was none of that. 

From privileging connections over competence to shielding elites from accountability, the effects of ersatz capitalism leave Indonesia with a trail of 'what-ifs'. For instance, what if Pertamina were managed professionally? When the oil boom of the 1970s occurred, Pertamina generated an extraordinary increase in revenue, tripling Indonesia’s income from oil and significantly boosting the state budget (Pramisti, 2020). Although much of the oil revenue was used to build schools and fund government salaries, it could be implied that not all of it reached the public. Ibnu Sutowo, the head of Pertamina at the time, along with his inner circle, are known for their lavish lifestyles. In one telling example, after one of Sutowo’s subordinates died, it was revealed in 1977 that he had a deposit account worth over $45 million (Matanasi, 2017). In today's value, that amount would be equivalent to around Rp 3.7 trillion, accounting for inflation. If an underling held that much, one can only imagine what those higher up possessed. This kind of elite was a product of ersatz capitalism. This is what you get if the system protects elites and not the public interest. 

Another consequence of ersatz capitalism is the creation of high barriers to competition. In a system where access depends not on ideas but on connections, innovation is discouraged. The unwritten rule is simple: success depends on who you know, not what you build. As previously shown, Batara Indra’s monopoly in Timor Timur, backed by powerful military figures, effectively stunted the growth of local entrepreneurs. Similar patterns occurred across the archipelago, especially outside Java, where local business actors were routinely sidelined in favor of capital-based elites with political ties. The result was a centralized, exclusionary economy. The case of Batara Indra showed how the coffee was in Timor Timur, but the money was in Jakarta. 

Ersatz capitalism is also a reason why the invisible hand is distorted. Adam Smith believes that even though individuals are acting in their self-interest, their upbringing will unintentionally benefit others. In short, the market will find its optimum. But what happens when their individual interest is constrained? That is exactly what happened in Indonesia's past, as shown at the top. 

What to Learn

Throughout history, some commanders attempted to professionalize the military, like General Jusuf. Generals Edi Sudrajat and Wismoyo Arismunandar echoed this effort through the Back to Basics doctrine, a call to return the military to its core duties (Sinjal, 2021). 

When that didn't work, reformation happened. Since 2004, TNI soldiers have been prohibited from engaging in business activities. The official revised bill reaffirmed this restriction, and it appears that the Dwifungsi doctrine won’t be returning anytime soon. 

But as history proved, the military involvement in the economy is detrimental.  When they play the game called economy, they have a different playing field that makes it difficult to fight as an equal when you are a normal citizen. We have to remember that the reason why they got involved in the economy is that the country needs stability and needs to improve its welfare. 

However, the hardship of soldiers cannot be used as a justification for their unfair business practices. If the root of the problem lies in the stomach, then the solution should stay within military boundaries. That way, although slowly, the military could become more prosperous. 

More importantly, the country must learn a broader lesson: innovation does not emerge from privilege. It emerges from rules, competition, and fairness. If the systems still reward who you know instead of what you build, Indonesia risks recycling its past rather than escaping it.

At the end of the day, General Edi Sudrajat was right. The army should go back to basics. It is never a good thing to mix between guns and wealth. 

References : 

Ardanareswari, I. (2019). Untung Tentara dalam Nasionalisasi Perusahaan Belanda. tirto.id. https://tirto.id/untung-tentara-dalam-nasionalisasi-perusahaan-belanda-egpr

Borsuk, R., & Chng, N. (2016). Liem Sioe Liong’s Salim Group: Pilar bisnis Soeharto. Kompas.

Caprio, G. J. (2013). Regulatory capture: Why it occurs, how to minimize it. North Carolina Banking Institute, 18, 39–51. https://scholarship.law.unc.edu/ncbi/vol18/iss1/6

Matanasi, P. (2017). Korupsi Pertamina: Haji Thahir Meninggalkan Harta & Kartika. tirto.id. https://tirto.id/korupsi-pertamina-haji-thahir-meninggalkan-harta-kartika-cBxV

Pettinger, T. (2019). Moral hazard. Economics Help. https://www.economicshelp.org/blog/105/economics/what-is-moral-hazard/

Pramisti, N., Q. (2020). Indonesia 1970an: Kaya Minyak tapi Nyaris Pailit karena Pertamina. tirto.id. https://tirto.id/indonesia-1970an-kaya-minyak-tapi-nyaris-pailit-karena-pertamina-f5qX

Samego, I. (1998). Bila ABRI berbisnis. Mizan.

Setiyono, B. (2024). Gonjang-ganjing Nasionalisasi Perusahaan Asing. Historia. https://historia.id/ekonomi/articles/gonjang-ganjing-nasionalisasi-perusahaan-asing-D8ojy/page/1

Sinjal, D. (2021). Wismoyo Arismunandar “Back to Basic”. Sinar Harapan. https://www.sinarharapan.co/opini/pr-3852832677/Wismoyo-Arismunandar-Back-to-Basic

Yoshihara, K. (1990). Kapitalisme semu Asia Tenggara (A. Setiawan Abadi, Trans.). LP3ES. (Original work published 1988)