Indonesia is home to a large concentration of powerful and wealthy families which essentially dominate the business landscape over multiple sectors and industries. This concentration of wealth potentially undermines the country’s potential, as well as the wellbeing of its citizens. How Indonesia got to this point – and the lessons it should learn as to how it must go forward – is an important issue scarcely discussed in the current policy landscape within the country.

A ride through Jakarta’s metro will take you through the heart of the city, making stops at stations named Blok M BCA, Setiabudi Astra, and Fatmawati Indomaret. BCA, Indonesia’s largest privately controlled bank, is majority-owned by the Hartono family through a chain of holding companies – and is just one of their many business lines. Astra is a conglomerate that holds the sole import rights to Toyota in Indonesia, built by magnate William Soerjadjaja before eventually being sold off to a foreign investment holding company. Indomaret is a large chain of convenience stores owned by the Salim Group, and ultimately business magnate Anthoni Salim. While handing out naming rights for mass transit is fairly common in cities, few have this level of conglomerate branding so pervasive.

Almost everything in an Indonesian household has been run through a conglomerates’ business line. Everyone’s favourite instant noodles, Indomie is run by Salim Group’s Indofood, and sold in their Indomaret grocery stores. Personal cars and motorcycles are imported by conglomerates like Astra. The ownership of emerging e-commerce sites will eventually trace back to conglomerates. While this might not seem like an issue at first glance, this level of concentration in the ownership of capital may create issues with Indonesia’s growth, inequality, and price levels in the economy.

On the macro-level, perhaps conglomerates and the magnates who own them aren’t doing “moral wrong.” They are merely exercising their power within the existing framework to create the best outcomes for themselves. However, the existing framework is too loose, potentially creating adverse effects for the country’s economy as a whole if the current institutions are kept the way they are.

Fortune Favors the Opportunistic

Indonesia is a striking case study of how the political landscape of a nation can have strong and long-lasting adverse effects on the economy. The inequality in Indonesia is borne out of political-economic institutions that grant rent-seeking powers to the ultra-wealthy. President Suharto’s draconian New Order regime – which lasted from the mid-sixties well into the nineties – instilled policies that allowed conglomerate families to amass great wealth. Unsurprisingly, the growing concentration of national wealth is tied to the country’s history of political turmoil.

The mid-1960s in Indonesia was marred by civil unrest, mass killings, and political instability. Anti-communist tensions – as is common in the world due to Cold War proxy battles – allowed then-general Suharto to stage a creeping coup against sitting president Soekarno and usurp power for himself. The following thirty years that followed were characterized by military control, media censorship, and complete authoritarian rule. 

Suharto’s dictatorship was not just supported in the political landscape, but he also had many allies within the business world. For instance, Sudono Salim – later of the Salim Group – developed a close relationship with the president when he was a colonel serving in the Indonesian military. After Soeharto’s presidency began, he gave Salim (and his other business connections) unfettered power within a tightly regulated business environment, while they gave him a gateway to easily implement economic policy.

Among the directives initiated by the government were exclusive licenses on imports, preferential credit market access, and favourable government contracts – cementing the magnates’ place as existing oligopolies, or more exactly, oligarchies. The influence of the directives on the country cannot be understated – by the 1980s, a large majority of the industries within the country had at least four firms – oftentimes owned by the same parent company across multiple industries – holding at least 40% of the industry’s market share.

However, the regulation cited as the most influential reason behind the conglomerates’ accumulation of wealth was the banking deregulation act, PAKTO 88. The PAKTO 88 executive actions promoted large-scale banking sector deregulations, which further strengthened existing monopolies created by the aforementioned selective protectionism. The idea behind the act was to prevent investment from escaping overseas, diversifying the economy away from oil and gas, and to generate economic growth.

While the short-term outlook created by the policy looked great, sparking economic growth and attracting foreign investment, in the long term, the outlook was much more bleak. The PAKTO 88 act allowed for a large consolidation of ownership to the powerful. The Salim Group was one of the main beneficiaries – being able to grow his BCA Bank into a very large corporate entity before eventually selling it to the also-powerful Hartono family in the wake of the 1997 Asian Financial Crisis.

In principle, banking deregulation may be seen as a net positive – removing the red tape around an inefficient and highly regulated sector lowers the barriers to entry such that anyone could enter the sector. In reality, however, it was really only a good time if you were a magnate. The act lowered the funds needed to establish a bank from upwards of Rp. 50 Billion to just Rp. 10 Billion – dropping the barrier to entry from “virtually impossible” to “merely attainable if you’re ultra-wealthy.”

The existing corporate oligarchy was able to form banks much more easily, giving them much easier credit access. Loose regulation meant insider lending – the practice of lending from your bank to another connected body (e.g. a parent company) was not prohibited. The problem here is easy to spot. Newly formed banks were used as vessels to provide greater borrowing power to expand the scale of other connected ventures owned by the magnate.

This issue was compounded by the fact that banks were able to determine their own interest rates. This made insider lending much easier – allowing banks to borrow to connected entities at interest rates so low, that they were essentially providing loans with negative interest. This was coupled with the fact that these banks were able to smother smaller competitors of their corporations’ main operations by posturing high interest rates on their loans. Experts opined that non-market driven rates essentially created the credit congestion that eventually caused the 1997 Asian financial crisis.

The winners from the PAKTO 88 act remain the same dominant forces present in the Indonesian market today. Unilateral credit expansion plays a massive role in the forming of these monopoly-conglomerates, creating business empires in many of Indonesia’s most GDP-productive sectors, such as manufacturing and agriculture.

Who Holds the Power?

Indonesia’s current political and economic landscape has changed quite a lot since the New Order days, but the big players dominating the business landscape have by and large remained the same. While data on market shares within the country are quite opaque, a few big players owned by conglomerates dominate the scene of Indonesia’s industries – with the same familiar names popping up.

Japanese cars are by far the most popular cars in Indonesia, with over 90% of cars sold being Japanese. Yet, who owns the distribution rights to these cars? Salim’s Indomobil group holds licenses to sell Suzukis and Nissans, while Astra holds exclusive licenses to sell Toyotas and Honda motorcycles. Additionally, the aforementioned companies are also big players in palm oil, along with fellow conglomerates Bakrie and Sinar Mas. Those two latter companies are also big in the mining industry – one of Indonesia’s most lucrative industries. Indonesians will also be familiar with Sinar Mas’ exploits in the real estate industry, which they hold a large share of along with fellow conglomerate Lippo Group. We start to see the problem here.

The main beneficiaries from banking deregulation in 1988 essentially own Indonesia’s private economic landscape, only being rivalled and beaten in size by a handful of state-owned enterprises.

That being said, standard economic consensus is that a monopoly is too small. While this may be an odd claim, monopolies and oligopolies produce at their profit maximizing level, which is in almost all cases far below the output that a competitive market would have produced. This is a problem that most countries face – large and powerful companies often drive prices up and output down, stunting economic growth in the long run. However, Indonesia faces a unique problem – an effective monopoly (or more specifically, oligopoly) in shareholding.

The PAKTO 88 Act essentially consolidated a large plurality of Indonesia’s wealth in the hands of Suharto’s cronies. This “monopoly in shareholding” presents an equally big problem – it creates a structural inequality with a difficult cure. We hear “the rich become richer” a lot, and this is particularly defined in an environment where equity concentration is this pronounced. Oftentimes, monopolies are just merely economically inefficient, but in this case it is an engine of further inequality. The abundance of conglomerates’ strongholds across sectors allow for other non-competitive practices like tolerating losses in emerging markets by effectively subsidizing from more profitable ventures to stave off smaller competitors. 

These issues mean that the economy would continue to face a multitude of problems. The further monopolization of capital may mean a lack of economic development and output due to the lack of competition, and fears that anticompetitive practices may eventually drive up prices for consumers. Conglomerates’ power over several sectors are not merely reflections of poor inequality in Indonesia, but a vessel of further inequality if kept unchecked. 

What the Future Holds

It however seems that this issue is currently the least of incumbent President Prabowo Subianto’s concerns. Incoming policies on further deregulation to appease Donald Trump’s impending tariffs have opened a whole can of worms that may further strengthen conglomerate power in Indonesia. The removal of import restrictions (sounds familiar?), this time to reduce the country’s trade surplus with the US, risks undoing a decade of protectionism for smaller domestic companies. Although the removal of restrictions is less targeted this time around, it is not surprising to see that like the PAKTO 88 act, companies with the highest capacities and credit capabilities stand the strongest to benefitting.

New and fast growing industries are not immune to the reach of magnates either. While e-commerce has swept Indonesia and much of Southeast Asia, much of the space is dominated by conglomerate subsidiaries. Some of Indonesia’s largest e-commerce providers are held by large conglomerates. While Bukalapak and Tokopedia seem to have been founded more in a start-up manner, BliBli was founded by the Hartono family’s conglomerate, Djarum, while Shopee and Lazada are owned by Singaporean and Chinese conglomerates, Sea Ltd. and Alibaba respectively.

Indonesia’s Competition Supervisory Commission (KPPU) has so far taken an ex-post approach surrounding competition policy decisions. Mergers and acquisitions are not preemptively blocked, but merely reviewed – with the governing body proposing behavioural changes to business practices. The legal framework behind corporate entries into new business lines is also very difficult to regulate, with not a lot of international precedent. We opine that this approach is not strong enough in a world with increasingly concentrated capital. The law must take a more proactive approach grounded in economic theory in order to maintain and improve the competitive balance in the country.

While something like ordering a divestment is too complicated and politically risky, it is clear the path that the country has set forward is unsustainable. Something will have to give in order for the country’s economy to diversify and be less dependent on the actions of a powerful few.

Image credits: Wikimedia Commons / Bagus Ghufron

Rafa Tjipta
Rafa is a third-year student at the University of Toronto studying Commerce and Economics. Born and raised in Indonesia, his interests lie in the fields of labour economics and industrial organization. Rafa loves Chipotle and the Vancouver Canucks.