+ All Categories
Home > Documents > Indonesia's Dangerous Transition: The Politics of Recovery and … · 2011-02-03 · INFORMATION...

Indonesia's Dangerous Transition: The Politics of Recovery and … · 2011-02-03 · INFORMATION...

Date post: 12-Mar-2020
Category:
Upload: others
View: 2 times
Download: 0 times
Share this document with a friend
45
Department of the Parliamentary Library INFORMATION AND RESEARCH SERVICES Research Paper No. 18 1998-99 Indonesia's Dangerous Transition: The Politics of Recovery and Democratisation
Transcript

Department of the

Parliamentary Library ~~J>~~~!~-"<Zl<1.('-~

INFORMATION AND RESEARCH SERVICES

Research PaperNo. 18 1998-99

Indonesia's Dangerous Transition: The Politicsof Recovery and Democratisation

ISSN 1328-7478

© Copyright Commonwealth of Australia 1999

Except to the extent of the uses permitted under the Copyright Act 1968, no part of this publication may bereproduced or transmitted in any form or by any means including information storage and retrieval systems,without the prior written consent of the Department of the Parliamentary Library, other than by Senators andMembers of the Australian Parliament in the course of their official duties.

This paper has been prepared for general distribution to Senators and Members of the Australian Parliament.While great care is taken to ensure that the paper is accurate and balanced, the paper is written usinginformation publicly available at the time of production. The views expressed are those of the author andshould not be attributed to the Information and Research Services (IRS). Advice on legislation or legalpolicy issues contained in this paper is provided for use in parliamentary debate and for relatedparliamentary purposes. This paper is not professional legal opinion. Readers are reminded that the paper isnot an official parliamentary or Australian government document. IRS staff are available to discuss thepaper's contents with Senators and Members and their staff but not with members of the public.

Published by the Department of the Parliamentary Library, 1999

INFORMATION AND RESEARCH SERVICES

Research PaperNo. 18 1998-99

Indonesia's Dangerous Transition: The Politics of Recoveryand Democratisation

Dr Stephen SherlockForeign Affairs, Defence and Trade Group28 April 1999

Acknowledgments

The author would like to acknowledge the help in producing this paper given by Frank Frost, Bob Lowry,Steve ONeill, Michael Ong, June Verrier, Doreen White and Susan Wilson.

About the AuthorStephen Sherlock is currently on leave from the Information and Research Services and living in Jakarta.He is a Research Fellow with the Asia Research Centre at Murdoch University and is working as aconsultant on issues regarding political and social change in Indonesia.

Inquiries

Further copies of this publication may be purchased from the:

Publications Distribution OfficerTelephone: (02) 6277 2720

Information and Research Services publications are available on the ParlInfo database.On the Internet the Department of the Parliamentary Library can be found at: http://www.aph.gov.au/library/

A list of IRS publications may be obtained from the:

IRS Publications OfficeTelephone: (02) 6277 2760

Contents

Major Issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 1

The Economy-Stabilising but Fragile. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 2

Background-Thirty Years of Growth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 2

The Crisis Hits Indonesia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 3

The Regional and Sectoral Face of the Crisis . . . . . . . . . . . . . . . . . . . . . . . . . . .. 4

Has the Economy Stabilised? 5

Basic Problems Unresolved. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 5

Bankruptcy Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 6

Bank Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 6

Investor and Business Confidence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 7

The Social Effects-A Reversal but not a Catastrophe . . . . . . . . . . . . . . . . . . . . . . . .. 9

Early Fears Exaggerated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 9

Employment and Survival in the Cities and Provinces. . . . . . . . . . . . . . . . . . . .. 10

A Reversal with Long Term ill-Effects. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 12

Demokrasi, Reformasi and New Elections. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 13

A Few Hurdles Cleared .. " . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 13

... But Many More to Go. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 14

Where to for ABRI? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 15

Electing a New Parliament and President. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 18

Many New Parties-Few are Strong. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 19

Forecasting the Election Result . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 21

Choosing the President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 22

Unity in Diversity? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 23

Attacks on Sino-Indonesians . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 24

Violence in Ambon and Kalimantan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 24

Aceh 25

Irian Jaya/West Papua 25

East Timor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 26

Decentralisation and Regional Autonomy. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 27

The Implications for Australia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 28

From Weakness to Strength: Indonesia-Australia Relations. . . . . . . . . . . . . . . .. 28

Australia and the Region . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 29

Bilateral Relations and the Indonesian Crisis. . . . . . . . . . . . . . . . . . . . . . . . . . .. 30

Conclusion 31

Endnotes 33

Indonesia ... Administrative Divisions;~ ltrtematlo~31. bou~~!Y' ,

.......... ~.- 'Provioce-I~J bol.md~ry* NatioilaltapItBlG> Provinc"levd ""pilar

sf'Jd¥agyakilttts,m tplx:fiil rogftm$'11 Ri1YDi$ d$pedDl ~i1~ff:;fty d/#Tif:t.:

20t> -400 Kiloloottirs. .' .

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

Major Issues

Indonesia is passing through a time of rapid and historic social and political change as itattempts to recover from the effects of economic crisis, achieve a peaceful transition ofdemocratic rule and deal with conflicts amongst its diverse peoples and regions.

Indonesia's gross domestic product (GDP) fell by 14.8 per cent in 1998 and will fall by 2per cent in 1999 before possibly returning to small growth in 2000. The recession has beengreatest in the most industrialised and urbanised areas of the country, especially Java.There are signs that the worst of the crisis may be over, but further progress will dependon a successful election and reform of political and economic institutions. Remaining tasksinclude reform and implementation of bankruptcy laws, recapitalisation of the financesector and attracting foreign capital. A fundamental requirement for progress is thestabilisation of the political situation and the building of both new political institutions anda new leadership.

The economic crisis has brought to a halt the progress in improving the standard of livingof the mass of Indonesians that had been achieved under President Soeharto's New Order.The early estimates about a huge increase in the numbers falling back into absolutepoverty have been revised downwards, although the new calculations have receivedrelatively little attention in the international media. The first effects of the crisis were rapidincreases in the price of staple commodities and a great rise in urban unemployment. Theeffects have flowed through to rural areas, especially in Java where many people dependon urban incomes. Some less-developed regions of Indonesia were shielded from someeffects of the crisis because of their isolation from the modem economy, but the worstlong-term impact on overall health and education standards may be in these areas.

Since the downfall of Soeharto in May 1998, the immediate political situation hasstabilised and the framework for elections in June 1999 has been established. The studentmovement continues to question the legitimacy of the Habibie Government, but themovement has lost the momentum it had in 1998. Habibie has been unable to deal withquestions such as pressures for accounting for the wealth of Soeharto and his family andthe fundamental issue of the continuing role of the Armed Forces (ABRI) in the affairs ofcivil government. The mutually supportive relationship between Habibie and the ABRIChief, Wiranto, has since been one of the key foundations of the post-Soeharto order.ABRI sees itself as the guarantor of the unity of Indonesia and the new President will haveto accept this political reality or embark on a major political struggle to change it.

i

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

There is a long complicated process between the parliamentary elections in June and theselection of the president in November. It is too early to draw conclusions about theeffectiveness of the new electoral laws in providing for a free and fair election. Theinterregnum between the parliamentary and presidential elections may cause a dangerouspolitical vacuum and a delay in the urgent reform agenda. Many new parties have beenestablished, but only a few are likely to win parliamentary representation. Because noparty seems likely to win a majority, there will have to be some kind of accommodationamongst the three leading presidential candidates, Megawati Sukamoputri of theIndonesian Democratic Party of Struggle, Amien Rais of the National Mandate Party andAbdulrahman Wahid of the National Awakening Party.

The New Order's approach to maintaining the unity of the diverse Indonesian archipelagowas centralised government and suppression of expressions of regional identity orseparatism. This exacerbated cultural and regional resentments. Transmigration from Javaand other provinces to the outer eastern areas has led to conflict between local people andthe new arrivals who are culturally different and are perceived as monopolising economicopportunities. However, resentment against the Sino-Indonesian community, separatism inAceh, East Timor and Irian Jaya and confrontation in Ambon and Kalimantan need to beseen as three distinct and geographically confined causes of violence and not as a generalbreakdown of social relations in Indonesia. Habibie's offer of autonomy or independenceto East Timor will probably lead to the territory's independence, but the actions of ABRIand the Indonesian Government may result in a traumatic transition. It appears thatIndonesian unity will only be maintained if there is a shift in economic and political powertowards the provinces.

Relations between Australia and Indonesia have gone from hostility and suspicion to closeengagement in the last forty years. The economic crisis in Indonesia has caused regionaltensions which Australia must try to minimise and it has also emphasised the keyimportance of bilateral relations. Australia has taken on a role of advocate for Indonesia ininternational forums as Indonesia seeks assistance in solving its economic problems.Australia will have to be deeply involved in resolving the problem of East Timor, but theissue should not be allowed to dominate Australia-Indonesia relations. It is in Australia'sinterest that Indonesia overcomes its economic problems, has a peaceful transition todemocratic rule and is able to deal successfully with the tensions amongst its diversepeoples and regions.

ii

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

Introduction

Indonesia is passing through a time of rapid and historic social and political change. Theauthoritarian New Order government of former President Soeharto was toppled in May1998, following a mass popular uprising in Jakarta and other centres and a collapse ofconfidence in President Soeharto amongst the Armed Forces (ABRI) and the politicalelite. The political collapse was triggered by massive economic problems brought about bythe Asian financial crisis of 1997.

After Soeharto's resignation on 21 May, his Vice-President, B. J. Habibie, assumed officewith the promise of early elections and economic and political reform. Continuing unrestmeant that new and democratic elections for Indonesia's parliament and president had tobe held without delay. But in order for this to occur, almost every aspect of Indonesia'spolitical institutions had to be reformed in a very short time. Recent months have seen ahectic process of legislative and administrative reform, as well as a proliferation of newpolitical parties as the weight of repressive government control has been lifted.

The heady drama of reform and democratisation has been played out against a backgroundof one of the deepest economic crises Indonesia has ever experienced. The plummeting ofIndonesia's currency, the rupiah, to a fraction of its pre-crisis value, the virtual collapse ofthe banking system under the weight of unserviceable foreign and domestic debts, togetherwith arguably counter-productive government policy responses, caused a deep recession.This triggered mass unemployment, rapid inflation and food shortages and threw millionsof Indonesians back into an economic insecurity many thought they had escaped.

The crisis also revealed what many people had been arguing for many years, that the NewOrder's economic achievements had come at the price of political repression which hadsuffocated the growth of healthy political institutions. Dominated by the personality ofPresident Soeharto, the New Order silenced voices of opposition and reduced parliament,the judiciary and the press to the tools of the president. The Armed Forces were reliedupon to prevent any expression of the deep social, cultural and regional divisions inIndonesia. ABRI has also been accused of sometimes manipulating such divisions forpolitical and financial gain. Freed of many of the restrictions of the New Order, manysocial divisions have now resurfaced in a violent and unpredictable way, as thedisturbances in Ambon and Kalimantan have illustrated.

This paper analyses the recent events inIndonesia, describing the course of the country'seconomic crisis, the social effects of the crisis and the elements of the process of political

1

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

reform. It aims to provide an understanding of the problems facing Indonesia as it attemptsto remake its political institutions and establish a new government with popularlegitimacy, while dealing with the effects of economic recession and the emergence ofpotentially dangerous social conflict. It outlines the key players in the upcoming electioncampaign and the issues involved in the selection of a new president. The paper discussesimplications for Australia in managing relations with Indonesia at a time of economiccrisis and rapid political change and the emergence of difficult policy questions such asEast Timor.

The Economy-Stabilising but Fragile

Background-Thirty Years of Growth

Probably the greatest achievement of the years of the New Order regime was the economictransformation of Indonesia. From one of the world's least developed countries in the early1960s, Indonesia was, by the mid-1990s, developing ambitions to join the ranks of EastAsia's newly industrialising countries. A huge part of the legitimacy of the Soehartoregime rested on the fact that it delivered material benefits to the mass of the Indonesianpopulation, benefits which it asserted would not have been possible without strong centralpolitical control. Soeharto liked to have himself portrayed in official publicity as BapakPembangunan-'father of development'.

Following the 1965 downfall of Indonesia's first president, Sukarno, and the end of theforeign policy adventurism which absorbed most of his attention, Indonesia receivedmajor financial assistance and advice from foreign aid donors. By the beginning of the1970s, President Soeharto's efforts to stabilise the country's chaotic economic situation had

. succeeded and a program of economic planning directed public investment intoinfrastructure, agriculture and manufacturing. Growth was given a major boost by theexploitation of the country's large oil reserves, which became the most important source offoreign exchange. Despite periodic problems, particularly from fluctuating oil prices andscandals associated with bad management of the oil industry, Indonesia maintainedconsistently good rates of economic growth. From 1965 to 1996, growth averaged six percent per annum and even in the worst years never dropped below about two per cent. 1 Inrecent years the country has established a significant industrial base and moved beyond adependence on oil exports, although this industry remains the largest single export earner.

2

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

The Crisis Hits Indonesia

Despite its impressive economic record, Indonesia was hit very hard by the Asian financialcrisis from mid-1997. Indonesia was highly vulnerable because most of its long-termdevelopment investment in recent years had been based on short-term finance channelledthrough a poorly structured and badly regulated finance industry. Much of this capital hadalso been directed into a bloated construction sector. But the country's greatest weaknesswas its feeble political institutions, dominated by an aging president who had refused tobow to the pressures for reform that had been building for at least a decade. Thegovernment's incapacity to respond effectively to the fall of the rupiah led to a collapse ofdomestic and international confidence in the Indonesian economy. The ensuing politicalturmoil hastened the downward spiral of economic collapse.

The crisis was triggered by the fall of the Thai currency in mid-1997, which quicklyflowed on to other Southeast Asian currencies such as those of Malaysia and thePhilippines and which became a widespread financial crisis throughout East and SoutheastAsia. After some initial resilience, the Indonesian rupiah was subjected to heavydownward pressure from August 1997. This forced Indonesia's central bank, BankIndonesia, to abandon its policy of fixing the currency within a prescribed band and toallow the currency to float freely. But the real problems emerged when panic selling of therupiah revealed the huge exposure to short-term foreign debt on the part of Indonesianbanks and other concerns. The Government's regulatory control of the financial sector wasalso revealed to be very poor. In a few months the rupiah had fallen far below anyone'sworst predictions. By the beginning of 1998 it had fallen from around 2500 to the USdollar to 10 000 to the dollar, a 75 per cent devaluation from mid-1997. The currency fellto its low point of 17 000 to the US dollar at the end of January 1998, recoveringsomewhat in the following months only to crash to similar levels following the politicalcrisis of May 1998.

The collapse of the rupiah brought on a massive recession. Exposure to foreign debt,combined with changes in monetary policy which caused huge rises in interest rates andrestrictions on credit, resulted in the technical bankruptcy of virtually every majorIndonesian firm. As a first step to rebuild the financial sector, the government announcedthe closure of 16 private banks, a move which obliterated any remaining confidence in thebanking industry.2 The construction sector, which had fuelled much of Indonesia's recentgrowth, was especially highly-geared and suffered particularly badly, throwing about amillion workers out of work. The crisis was worsened by the worst drought the countryhas experienced this century and by very low prices for oil, Indonesia's principal export.As the effects of the recession worked their way through the rest of the economy,Indonesia's growth rate tumbled from eight per cent in 1996 to 4.6 per cent in 1997 tominus 14.8 per cent in 1998.3 Inflation accelerated rapidly, especially in imported goodsaffected by the falling rupiah and in food, exacerbated by the effects of the drought. In thetwelve months before the third quarter of 1998, inflation exceeded 80 per cent and averageinflation for the year was around 55 per cent.

3

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

The Regional and Sectoral Face of the Crisis

Although no part of Indonesia has been able to escape the effects of the economic crisis,its impact has been felt differently in different regions of the country and in the varioussectors of the economy. Because Indonesia's economic crisis first manifested itself as acollapse of the currency, the sectors most exposed to foreign debt were the first to beaffected and have been the most severely hit. Jakarta was already facing a building glutand the collapse of the over-exposed construction industry has left the city's skyline with alegacy of half-finished high-rise skeletons, as well as many half-occupied or even emptynew buildings. The contribution to GDP from the construction sector dropped by abreathtaking 43 per cent in the twelve months before mid-1998. The effects soon flowedon to downstream industries, with machinery production falling by 72 per cent, iron andsteel production by 32 per cent and cement by 24 per cent. In the sarne period activity inthe finance sector fell by 25 per cent. Other sectors such as retailing, transport and hotelssuffered major declines.4

In contrast, agriculture has been relatively unaffected by the overall fall in economicactivity, suffering only a 2.4 per cent total decline in the twelve months to mid-1998. Foodproduction was reduced by the drought and bushfires caused by the prolonged EI Ninoeffect and many areas had to be supplied with emergency food aid. But with the end of thedrought, the only major long term effect of the currency crisis has been to increase theprice of imported inputs such as fertiliser. With the return of good rains and the end ofbushfires, rice output has recovered and production by plantations, forestry and fisherieshas been stimulated by improved terms of trade created by the fall in the rupiah.

The production and export of oil has continued to increase, but falling world prices havereduced total earnings. Despite the attractions of a weak rupiah, revenue from tourism hasfallen. The number of arrivals dropped by around 20 per cent during 1997-98 because ofadverse international publicity about violence and unrest in Indonesia.

In regional terms, the recession has been greatest in the most industrialised and urbanisedareas of the country. Java, the political and demographic heartland of Indonesia, hassuffered the most severe impact as the home of most of the country's industrial base. Othermore industrialised areas, such as the large western island of Sumatra, have also beenseverely affected. Traditionally poorer provinces in the eastern part of Indonesia were lessintegrated into the world economy and their greater dependence on subsistence agricultureshielded some of them from the effects of the financial crisis. Particular islands in the easthave also fared relatively well. This is most notably so for Bali, whose tourism industryhas generally survived the current problems and which has also benefited from theincreasing export of commercial crops such as fruit. The oil-producing provinces of theisland of Kalimantan have also been less affected by the crisis. All provinces have,however, been affected by the deterioration in the central government's fiscal position andthe consequent reduction in provincial expenditure.

4

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

Has the Economy Stabilised?

At the time of writing there are clear signs that the worst may be over for the Indonesianeconomy, although the recession has not yet bottomed out and growth will be very weakfor some time. The rapid fall in GDP has ceased, but forecasts still expect a further fall ofaround two per cent in 1999, with a return to small positive growth in 2000.5 The free fallin the rupiah has also come to end and the currency has traded within a range of 7000 to10 000 to the US dollar since September 1998. The breaking ofthe drought, together withthe overcoming of food distribution problems, has meant that food prices have stabilisedand fallen. This contributed to an overall fall in the rate of inflation, although mostforecasts still expect it to be over 12 per cent in 1999. The weak rupiah has helped tomaintain a trade surplus, with exports of oil, agricultural products and some manufacturessuch as textiles and electrical goods performing well.6

.

Despite the apparent stabilisation, there is still some doubt about its sustainability andabout when a sustained recovery might begin. The relative recovery of the rupiah hasdepended on external factors such as the weakness of the US dollar and on the inflow offoreign financial support. Indeed, early hopes of a return to strength in late 1998, when therupiah moved towards 8000 to the dollar have been disappointed by continued volatilityand a fall back to around 9000 to the dollar for much of the first quarter of 1999. At thislevel, most firms on the Jakarta stock exchange remain technically insolvent. Inflationarypressures still remain strong. Interest rates eased slightly with the apparent strengtheningof the rupiah in late 1998, but they remain at unacceptably high levels, at around 40 percent. Fiscal problems may emerge because projections for the 1999-2000 governmentbudget were based on an exchange rate of 7500.

Basic Problems Unresolved

Whatever optimism may be drawn from recent signs, however, there are a number offundamental structural problems in the Indonesian economy which must be overcomebefore healthy economic activity can resume. The principal issues include:

• reform and implementation of bankruptcy laws to allow restructuring of the corporatesector

• recapitalisation and restructuring of the finance sector, and

• attracting foreign capital back to the country and assuaging the fears of the Sino­Indonesian business community.

5

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

Bankruptcy Laws

With the majority of major businesses in Indonesia being technically insolvent and unableto obtain any sort of finance, the prospects for new investment to take advantage of thecompetitive exchange rate are bleak. There is thus an urgent need for a regulatoryenvironment in which the corporate sector can be restructured, with bankrupt concernsclosed and viable companies or parts of companies allowed to grow.

The Government attempted to address these problems with new bankruptcy legislationleading to the establishment of commercial courts in August 1998. The courts have,however, been almost completely ineffective. Commentators have ascribed the failure ofthe new laws to a combination of legal and administrative shortcomings and continuingeconomic obstacles. Only 31 cases have been heard to date and concerns remain about theprofessionalism of judges. With economic conditions so bad, resort to the courts wouldmean debtors losing their assets and creditors recovering a mere fraction of what is owedto them. In the absence of effective bankruptcy laws, many firms who could make debtrepayments avoid doing so because of the lack of real sanctions. Debt-forgiveness is mademore difficult by international factors-38 per cent of all Indonesian corporate debt is toJapanese banks who are already saddled with massive domestic and foreign non­performing loans.7

Bank Restructuring

More progress has been made on the recapitalisation of the banking sector, but the processis far from complete. Questions remain over the success of moves so far and the issue isfraught with political sensitivity. Before the crisis there were over 200 banks operating inIndonesia, many set up only in recent years following the liberalisation of banking at theend of the 1980s. Despite the injection of about US$13 billion worth of liquidity into thebanking system by the Government since late 1997, most banks have fallen into technicalinsolvency. Estimates of non-performing loans range from 30 to 70 per cent of total loans.All the banks are heavily indebted to the central bank, Bank Indonesia, to the extent ofnearly three times their combined equity capital. 8

In August 1998 the Government established the Indonesian Bank Restructuring Agency(ffiRA) to oversee the closure of those banks beyond rescue and the consolidation ofdeposits and assets into a smaller number of recapitalised institutions. The process hasinevitably taken longer than originally projected, not only because of the magnitude of theproblems but also because of public criticism and controversy over the issue.Recapitalisation has involved a huge injection of public funds into many private as well asstate-owned banks, a process which has been attacked as a subsidy to incompetentcorporate players. There has been scepticism about the process and speculation that thosebanks with the strongest political connections will be the most likely to survive as a resultof public assistance.

6

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

In March 1999, after two postponements, the IBRA announced a program for restructuringthe banking industry. Under the program, 38 banks were closed as having no prospect ofregaining financial viability, seven banks were taken over by the Government and theowners of nine banks were given until 21 April 1999 to inject at least 20 per cent of capitalrequirements and enter into an investment contract with the Government. The Governmentwould provide the remaining capital in the form of bonds. The IBRA announced that 73private domestic banks were considered to meet minimum capital adequacy standards andwould be allowed to remain functional, subject to six-monthly reviews.9 It remains to beseen if any action, legal or financial, will be taken against the directors of the failed banks,whose bad commercial decisions will cost so much taxpayers' money to rectify.

Following the release of the plan in March 1999, the Finance Minister, Ginandjar, likenedthe banks to a human heart which, if made healthy, would pump fresh blood to revive theproductive sectors of the economy.lO Bank Indonesia predicted that the rupiah wouldrecover to as much as 7000 to the dollar within three months and that banks would be ableto begin lending again by July, after the uncertainty of the June election period subsided.Many analysts remain sceptical, however, about whether the changes will begin to havesuch significant effects by that time. There are also doubts about the Government'scapacity to find the funds necessary for restructuring the banks. Reimbursing thedepositors and creditors of the 38 liquidated banks is alone estimated to cost US$5.8billion, but is essential to prevent a recurrence of the panic which resulted from the closureof banks in 1997.11 Some commentators have argued that the need to service the bondsissued for recapitalisation will effectively lead to the Government's printing money andthus to a restoking of inflationary fires. 12 The Government hopes of financingrecapitalisation through the privatisation of state-owned firms is unlikely to be fulfilled,with sales to date realising less than half the expected US$l billion.13

Investor and Business Confidence

After the onset of the crisis in late 1997, the Indonesian regulatory authorities appeared tohave little control over, or even knowledge about, the state of the country's finances andthe Government as a whole seemed incapable of developing a coherent policy response.This led to a complete collapse of international investor confidence in Indonesia. Whenthe growing economic problems led to a crisis of legitimacy for the New Order, one of thegroups which most suffered in the ensuing turmoil was the economically important Sino­Indonesian community. The flight of Sino-Indonesian business people created thepotential for the loss of a major source of investment capital and human expertise. It alsocontributed to the international image of Indonesia as insecure in physical as well aseconomic terms.

Thus quite apart from the crucial technical issues involved, the construction of a newframework for the financial sector is essential for the restoration of investor confidence inIndonesia. Until international capital can be assured that the climate for investment in

7

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

Indonesia is safe, there will be limited scope for attracting the finance necessary for thecountry to take advantage of the favourable exchange rates resulting from the fall in thevalue of the rupiah. First of all, the many foreign creditors of the Indonesian corporatesector, especially Japanese, will need to recover a reasonable proportion of the debt owedto them. Secondly, investors will demand assurances that the regulatory and policy­making environment is competent, transparent and consistent and that business is possiblewithout having to cultivate relations with politically powerful individuals and families.Underlying all these issues is the fundamental requirement that the process of changetaking place in Indonesia today succeeds in stabilising the political situation and buildingboth new political institutions and a new leadership.

For the Sino-Indonesian business community these latter issues are of vital and immediateimportance. This is not just because Sino-Indonesians, from corporate leaders to smalltraders, need guarantees of their personal safety from mob attacks, but becauserestructuring the Indonesian economy has become linked, in some people's minds, with anattack on perceived Chinese domination. One of former President Soeharto's greatestliabilities was a popular perception that he gave special favour to Sino-Indonesian friendsand some Indonesians have seen Soeharto's downfall as the opportunity to end thisperceived imbalance. The background to the resentment against the Chinese community isdiscussed in a later section of this paper.

In the populist rhetoric of some politicians attempting to exploit such sentiments, criticismof corporate 'conglomerates' has become code for attacks on the Sino-Indonesiancommunity. Many commentators consider that ideas such as the call by the Minister forCooperatives and Small Enterprises, Adi Sasono, for a 'people's economy' are designed asmuch to appeal to anti-Chinese feelings as to encourage increased economic involvement.There is anxiety that the people's economy idea, under which cooperatives and smallbusiness would be strengthened by government and the power of large companiesrestricted, could lead to arbitrary reallocation of assets by the state. It has also raisedconcerns internationally because of its overtones of economic nationalism and hostility to" .. 14lorelgn Investment.

Disparities of wealth in Indonesia have been a source of discontent for some time and thenew realities of post-New Order politics mean that governments will no longer be able toignore or suppress such discontent. It would be counterproductive for all Indonesians,however, if the competing political forces emerging in the country today attempted tobuild themselves a support base through scapegoating of the Sino-Indonesian communityor through empty economic populism. Indonesia is too economically weak to spurn thecontribution of whole sections of its own community or the resources of the outside world.

8

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

The Social Effects-A Reversal but not a Catastrophe

As a result of the economic achievements of the New Order, great progress was made inthe 1980s and 1990s in improving the standard of living of the majority of Indonesians.Consistently good growth rates enabled Gross National Product (GNP) per capita toincrease from less than US$lOO in 1970 to US$l1 10 in 1997.J5 The estimated number ofpeople living in absolute poverty decreased from around 70 per cent of the population inthe 1970s to 11 per cent before the 1997 crisiS. 16 On social indicators such as health andeducation, consistent improvement was registered. For example, infant mortality declinedfrom 118 per 1000 live births in 1970 to 47 per 1000 in 1996 and adult literacy increasedfrom 56 per cent of the population in 1970 to 84 per cent in 1995.17 Indonesia began tomove towards a population distribution more typical of a developed country, with totalpopulation growth rates declining at the same time as urban population increased. Thisreflected a shift of economic opportunities away from agriculture towards services andsecondary industry in the cities.

Early Fears Exaggerated

In the months immediately following the onset of Indonesia's financial and currency crisisat the end of 1997, grave fears were expressed about the effects of the economic downturnon people's well-being and living conditions. The mass lay-offs of workers in Jakarta andother cities, together with the spiralling increase in the cost of basic commodities, led toexpectations of a large-scale return to poverty for millions of Indonesians. While theeffects of the crisis have indeed been serious, the early calculations about the extent andintensity of impoverishment have been questioned in recent months. As trends havebecome clearer, observers have concluded that the absolute numbers of those thrown intopoverty is not as great as first thought and that the worst effects have mainly been in urbanareas.

The first attempts to calculate the social effects of the crisis were carried out byIndonesia's Central Bureau of Statistics which concluded, largely on the basis of inflationrates, that the number of people falling below the poverty line had increased to 39 per centof the population in 1998, or about 80 million people. Another estimate arrived at the evenworse figure of 48 per cent of the population. IS Numbers of such magnitude sent shockwaves throughout the international community and were highlighted in foreign mediareports. The methodology of these studies was soon called into question, however, becausethey assumed that nominal incomes and expenditures remained unchanged with increasinginflation.19

More sophisticated studies carried out by Indonesian and international agencies reachedvastly different conclusions and calculated that the numbers below the poverty line hadincreased by three per cent to about 14 per cent.20 Other indications are that the moreimmediate effects of the crisis have fallen most heavily on those who were relatively well

9

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

off, rather than on the very poor. These more temperate calculations have, however,received less international media coverage and common perceptions of the situation inIndonesia continue to be coloured by the earlier reports. Nevertheless, a three per centincrease represents about six million people and a significant new burden on thegovernment.

On the other hand, some analysts have cautioned that the number of people falling belowthe poverty line may continue to rise even if the economy stabilises. Studies of poverty useexpenditure rather than income as a measure and many people have almost certainlystruggled to maintain their spending by running down their savings and selling off familyassets. Since most economists do not expect a return to healthy growth for several years,many people will exhaust their reserves and begin to slip below the level regarded asabsolute poverty-the level below which a reasonable subsistence cannot be sustained.The poor of Indonesia are likely to be more numerous in the coming months.

Employment and Survival in the Cities and Provinces

Any attempts to quantify the social effects of the economic crisis are, however, of limitedvalue if they go no further than country-wide averages. To understand how the downturnis affecting people's lives, the picture must be examined on a more detailed regional basis.Not surprisingly, because the crisis began in the modern industrial sector of the economy,the people who felt the first effects were those in urban areas and in the regions mostclosely linked with the modern economy.

The.collapse of the rupiah first hit urban industrial and service industry workers and urbanconsumers as a whole. An estimated one million workers in the construction industry losttheir jobs in the early months of the crisis and were joined by possibly about anothermillion from other sectors.21 To these effects were added the rapid increase in prices forbasic consumer goods such as food and transport. Many in the middle class, as well assalaried employees and workers, have lost much of the relative affluence they had come toaccept as normal. Small business people have been bankrupted or confronted with a majordecline in business. These groups were also the greatest consumers of imported goods andof public goods such as transport, electricity, education and health services, all of whichhave become much more expensive.

The earliest estimates of unemployment put the figure at 22 per cent, but a recent study bythe International Labour Organisation (ILO) indicates that unemployment has risen fromabout five per cent pre-crisis to seven per cent in mid-1998.22 Such a figure is misleading,however, when seen from the perspective of a developed country such as Australiabecause it fails to measure the level of underemployment in agriculture and the informalsector. Millions of people in developing countries such as Indonesia are employed for onlya few hours a day or week or for only part of the year. In the absence of a social securitysystem and because of the family basis of most agriculture, many of the people thrown out

10

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

of work since the crisis have returned to their villages or must eke out an existence in theinformal sector of the economy (hawking, scavenging, begging etc./3 Because of themodernisation and commercialisation of agriculture, however, rural areas are no longerable to soak up excess labour in the same way as in the past, leading to a great expansionin urban and rural informal sector semi-employment. This is especially the case in thedensely populated island of Java where, for a number of years, the majority of theworkforce has been employed in secondary industry and services.

One paradoxical effect of the crisis has been that total employment has actually increased.ILO and Indonesian Government figures suggest that total employment in 1998 was 4.5million higher than the year before and that labour force participation by people aged 10years and above had similarly increased. This has occurred because real wages have fallenin virtually all sectors of the economy-by about 30 to 40 per cent.24 In order to maintaintheir incomes families have been forced to increase their participation in the workforce.More women have taken up paid employment, but the greatest effect has been to increasethe number of young people in the workforce. Many young people are foregoing furthereducation to replace incomes lost when older family members have lost their jobs. Whileemployment in finance, industry, construction and transport has declined, more youngpeople are seeking some sort of income in the informal sector and in agriculture.25

As has been noted, Indonesia's 27 provinces have felt the impact of the crisis verydifferently. With the relatively small effects on agriculture, people in the traditionally poorprovinces in the east of the country (the region closest to Australia) have suffered littledecline in their standard of living. This was not obvious in the early days of the crisisbecause the drought and extensive bushfires were a severe blow against production of thebasic commodities such as rice and maize. With the return of good rains, however, recentharvests have been good and have sheltered eastern provinces such as Maluku and Eastand West Nusa Tenggara from some of the problems suffered by people in the moreindustrialised provinces.

It should be emphasised, however, that conditions in these regions are better only inrelative terms. They remain the poorest parts of the country and social indicators such aseducation and health will be lower than the rest of Indonesia for the foreseeable future.Nevertheless, the improved terms of trade for export-oriented agriculture have benefitedsome people in predominantly rural provinces. Some workers in the more wealthy andindustrialised island of Sumatra have also been able to find work in the expanding export­oriented production of palm oil, cocoa and coffee.26

The important exception to the relatively good picture for rural areas is the island of Java,where half of Indonesia's population lives. Although there are some places producingcommodities for export, Java's agricultural output is dominated by rice for the domesticmarket. Since rice procurement prices have been deliberately kept low by the Governmentin order to protect consumers of this number one commodity, rural incomes in Java havesuffered as a result. With Java's dense population, large parts of even the island'sagricultural areas are semi-urban in character and the majority of employment is now non-

11

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

agriculture. Many families have come to depend on the support of family members in thecities and towns. Loss of urban jobs has directly affected incomes in many villages and thecapital-intensive nature of agriculture in Java has made the re-absorption of theunemployed into the village economy almost impossible. Thus the people of Java, both theurban poor and their counterparts in rural areas, have been badly hit by the industrialrecession without benefiting from the shielding effect felt in many agricultural provinces.

A Reversal with Long Term III-Effects

While the immediate social effects of Indonesia's economic downturn, in terms of theincidence of poverty and complete joblessness, do not appear to be as bad as was firstthought, many observers have become more concerned about the long-term impact of thecrisis. At the very least, the last two years have represented a tragic reversal of the 30years of almost continuous progress in human development in Indonesia. Purely in termsof growth in GDP, it will take many years to recover the lost ground and return to the pre­crisis levels of growth.

But even when the Indonesian economy does finally regain the standards of growth itenjoyed before 1997, many of the people most affected by the crisis may suffer long-termill-effects. The most serious example of this is in standards of education. Large numbers ofyoung people appear to have been withdrawn from school in order to reduce familyexpenses and strengthen faltering incomes. A World Bank report estimated that as manyas 2.8 million children would drop out of primary school and junior secondary school in1998-99.27 Recent Government estimates have been even higher.28

Because of this sudden rise in the number of children leaving school a whole cohort ofyoung Indonesians may lose the opportunities won by their seniors. The experience ofother developing countries shows that once young people are withdrawn from educationthey rarely return. The numbers leaving school have been of serious concern in urbanareas, but drop-out rates are especially high at secondary level in rural areas. Olderchildren have more eaming power and although rural areas have suffered smaller absolutefalls in income, they have a larger proportion of people on the margin of poverty.Secondary enrolments in the villages are already much lower than in the cities and if theydrop further behind, one of the legacies of these years of crisis will not only be a fall incountry-wide standards of education but even greater urban-rural disparities.

A similar area of concern is in standards of health. The collapse of the rupiah doubled oreven tripled prices for drugs, vaccines, contraceptives and other medical supplies becausethey more mostly imported or made with imported inputs. These price increasesparticularly hurt people close to the poverty line as they delay or fail to seek medicaltreatment. The effective cost of medical care has also increased because even the mostbasic drugs are not available in public hospitals. Lack of timely medical care can haveserious effects on people's long-term health and a prolonged crisis could reverse much of

12

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

the recent progress made in improving health standards amongst Indonesia's poor. Onceagain, it is likely to be in the poorer rural areas that these effects are most felt.

For millions of people drawn into the modern sector of the economy and benefiting fromthe overall improvement in the levels of human development in Indonesia in recent years,the crisis has cut short the promise of escaping the poverty which had ruled their families'lives for generations. The downturn has shattered what appeared to be the promise ofpermanent economic security. It has been a psychological blow to confidence thatIndonesia had finally overcome its long history of economic and political instability andwas set on a path to development and prosperity. .

Demokrasi, Reformasi and New Elections

Since the dramatic events of the overthrow of President Soeharto in May 1998, Indonesiahas been on a rollercoaster of political change. The shattering of the tight control wieldedby the authorities under the New Order revealed what many Indonesians had felt for sometime-that the development of their country's political institutions had not kept pace withthe transformation of Indonesian society in the past 30 years. The months since May 1998have seen a flowering of political consciousness and debate and the proliferation of newpolitical organisations. The parliament and government have been forced by popularpressure to establish a range of new political institutions and procedures to accommodatethe new politicisation and to facilitate the holding of Indonesia's first truly democraticelections since 1955.

This exhilarating and sometimes frightening process has not occurred without conflict, butmany of the worst fears held about the potential for widespread violence have not beenrealised. The international media have concentrated on the serious violence in places suchas Ambon and Kalimantan, violence which is indicative of the breakdown of localpolitical structures in some areas and the weakening of national institutions such as ABRI.But this violence has not been directly related to the accelerating election campaign or todebate about political reform, all of which has taken place without violent conflict, withthe important exception of the shooting of student demonstrators in November 1998. Allmajor parties have accepted the processes and timetable for the election as developed bythe parliament and government and all have an interest in seeing that the campaign is aspeaceful as possible and that the result is seen as legitimate.

A Few Hurdles Cleared ...

All political institutions and processes under the New Order were dominated by PresidentSoeharto. Presidential elections were a ritual whose results were known well before theycommenced. Only three officially-designated parties were allowed to contest elections forthe rubber-stamp parliament and campaigns were strictly controlled. Between the time ofthe five-yearly elections, no party was allowed to campaign and the press was subject to

13

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

often arbitrary and inconsistent censorship, with newspapers and magazines liable tosudden closure. Alongside the personal authority of President Soeharto, the only importantcentres of institutionalised political power were the Armed Forces (which operated under adual administrative and military function discussed in the following sections) and Golkar,the party which all government employees had to support and which was intertwined withthe official administrative structure.

Since the downfall of President Soeharto in May 1998, however, the political situation inIndonesia has undergone a radical transformation. When then Vice-President Habibieassumed the office of President, according to the provisions of the Indonesian constitution,there were deep concerns expressed about his legitimacy, competence and willingness tobring about the necessary changes to the regime which had put him in power. The newPresident moved quickly, however, and promised early democratic elections and made anumber of other gestures such as releasing a number of political prisoners.

Despite the uncertainties and tensions of the period since May 1998, important progresshas been made in the process of transition from the New Order and towardsdemocratisation. For a country which had only a short period of democratic rule in theearly 1950s and which suffered horrendous violence during the last change of regime in1965, the importance of such relative success should not be undervalued.

Central to this progress has been developing the reform of electoral laws and the creationof electoral apparatus to facilitate democratic elections. The framework for this apparatuswas set down in a special session of the MPR or People's Consultative Assembly held inNovember 1998. The new Government has also made good on its promises not to interferewith the growth of free expression, with the Information Minister freely issuing licencesfor new publications and openly questioning whether such licences were even necessary.In a' significant move designed to associate itself with reform, ABRI issued a formalapology for its excesses under the New Order and agreed to a reduction in itsparliamentary representation, issues which are discussed later in this paper.

... But Many More to Go

There are nonetheless major limitations to the progress of reform to date and a wide rangeof significant problems and potential pitfalls to come. Whatever its professed commitmentto reform, the Habibie Government is still a creature of the New Order which suffers froma major problem oflegitimacy. Similarly, the MPR session of November was composed ofmembers who won their positions under the highly undemocratic procedures of theSoeharto regime and most of them are very unlikely to be re-elected to Parliament in thecoming elections.

The legitimacy of the Government has been repeatedly called into question by the pro­democracy student movement. The students mobilised in force during the special MPR

14

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

session, rejecting the right of Soeharto appointees to set the agenda for reform. They havecontinued to call for the resignation of President Habibie and the creation of a presidiumof reformist leaders to take the reins of government, for the abolition of ABRI's dual roleand for Soeharto to be called to account for his abuses of power and accumulated wealth.Nevertheless, because of internecine divisions in the student movement and because ofunwillingness and/or inability to mobilise wider social forces (such as organised labour orthe middle class) in support of its demands, the student movement has lost most of itsformer momentum.

With each passing month the continued survival of the Habibie Government and apparentprogress on the economic and political fronts has blunted the edge of the students'demands. The students suspended their demonstrations for the month-long festival ofRamadan in January and have not been able to regain their momentum since that time. Itremains to be seen how important the students will be as the election draws closer andafter the post-election manoeuvring begins.

The waning of the student movement has also allowed the Habibie Government to side­step scrutiny over other difficult issues such as accounting for the wealth amassed bySoeharto and his highly unpopular family members during the years of the New Order.This issue does,however, remain a very awkward one for Habibie. He was severelyembarrassed when a newsmagazine published what it said was a telephone call betweenHabibie and his Attorney-General apparently colluding in an attempt to bringinvestigations into Soeharto's wealth to an early end.

Incidents like this rekindle suspicions that Soeharto continues to wield influence from hisgovernment-provided residence in central Jakarta, the same house where he lived asPresident. They also remind people that Habibie was Soeharto's protege and contribute tothe impression of the current Government as an interim one of questionable legitimacy.The fact that Habibie's Golkar party has yet to decide if he will be its candidate forPresident underscores that even his own people fear his associations are an electoralliability.

Where to for ABRI?

A critical and potentially dangerous flaw of the Habibie Government is that it is unable tocome to terms with its political antecedents and thus to help in the process of allowing thecountry as a whole to deal with some of the dark legacies of the immediate past. This isespecially the case with the debate over the continuing involvement of ABRl in theinstitutions of civil government and its often covert influence over daily decision making.One well-known critic of the Soeharto regime, Dr George Aditjondro, who was forced toleave Indonesia in the mid-1990s, went as far as to argue that under Habibie 'it is still(ABRI Chief) General Wiranto who really calls the shots'.29

15

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

ABRI has been one of the few national institutions that has sustained a leading role in the50 years since independence. Under its dwifungsi (dual function) role, ABRI has played apart in promoting economic and social development as well as maintaining internal andexternal security. Many ABRI officers fill key positions in civil administration and othershave used their positions to establish lucrative business enterprises.30 Despite its bloodyrole in the events of 1965 (and for some Indonesians, because of it), and the corruption ofmany officers, ABRI remained a respected institution and its role as a parallelgovernmental structure was relatively unquestioned by many Indonesians.

Part of the respect enjoyed by ABRI was, of course, generated by fear of its capacity tosuppress political dissent. As an armed force whose main rationale was internal rather thanexternal security and which was a constant visible reminder of the foundations of the NewOrder, ABRI had used force on many occasions to maintain order during the 1970s and1980s. But particularly in the last decade, many Indonesians, besides the marginalised EastTimorese, Irian Jayans and Acehnese, came to resent the repressive hand of ABRI, thesilencing of dissidents and the privileged lifestyle of ABRI leaders. These issues became acentral part of a generalised sense of disaffection with a rigid regime based on a leaderwho it seemed would never step down and who thought that prosperity could buylegitimacy indefinitely.

The problem for ABRI today is that the gradual erosion of its legitimacy in recent yearshas accelerated rapidly since the downfall of Soeharto. When soldiers shot four studentdemonstrators dead outside the elite Trisakti University on 12 May 1998 and outside AtmaJaya University during the special session of the MPR in November 1998, it turned itsguns on middle class people who had never before felt the direct hand of ABRI repression.Many Indonesians respected the student movement as a non-partisan voice whichcontrasted starkly to the venal manoeuvring of established political figures. Contributingto ABRI's rapid loss of popularity was its kidnapping and torture of political activists inthe lead-up to the March 1998 election and its failure to stop, or even its complicity in,attacks on Sino-Indonesians and their property during and after May 1998, including therape of ethnic Chinese women.

Accompanying ABRI's loss of popularity has been a lossof people's fear of the capacity ofthe armed forces. One pernicious result is that rioters in places such as Ambon andKalimantan are now more prepared to kill and bum in defiance of ABRI's attempts tocontrol them.

Despite ABRI's strong backing of Soeharto until almost the last moment in May 1998, theCommander of ABRI, General Wiranto, did not delay in declaring the Armed Forces'support for Habibie after his accession to the presidency. The mutually supportiverelationship between Wiranto and Habibie has since been one of the key foundations ofthe post-Soeharto order. Wiranto's response to the changing political situation has beenpublicly to accept the need for change while attempting to limit investigations into the pastactions of leading ABRI officers and to insist on a continuing, if reduced, formal role forABRI in civil politics. A small number of ABRI officers, including members of the elite

16

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

special services Kopassus force, have been tried and jailed for their role in human rightsabuses.3

! On the other hand, Habibie has continued to deny that ABRI was responsible forthe shooting of demonstrators in November 1998.32 Commentators have questionedWiranto's or Habibie's capacity to extend investigations without creating divisions in themilitary and further undermining ABRI's legitimacy.33

The continuing central role of ABRI in Indonesian politics is symbolised by the fact that,even after the June elections, it will still retain 38 appointed members in Parliament.Although a reduction from the 75 members in the present Parliament, this provision hascome under heavy criticism, from both inside and outside Indonesia, because it is seen asincompatible with democratic government.34 Similarly, the significance of the separationof the police force from ABRI is limited by the fact that it will still be under the authorityof the Defence and Security Minister, who is General Wiranto.

The role of ABRI remains one of the biggest questions hanging over post-Soeharto affairs.For observers of Indonesian politics, ABRI has always been a central part of theirassessment of any major development. And despite ABRI's loss of legitimacy and itsofficial agreement to a partial withdrawal from political affairs, there is little doubt thatABRI would intervene if political conditions were to deteriorate and lead to seriousviolence, although there is little immediate prospects of that occurring. In particular, ABRIleaders would not stand by if they considered that separatist movements in Indonesia werethreatening the integrity of the unitary republic.

Within ABRI itself, there is an intensifying debate about the proper place for the military ina modern democracy. Some leaders are inclined towards maintaining dwifungsi and a focuson internal security, with others favouring various degrees of withdrawal from civil affairsand a restructuring of ABRI along the lines of a more conventional external defence force.ABRI is a highly factionalised organisation and the control of officers in the provinces bythe Commander of the Anned Forces is often weak, as the events in East Timor haveindicated. Establishing a reliable chain of centralised discipline is one of the principal tasksfacing General Wiranto.

But even as ABRI military organisation and doctrine changes, it will remain a key part ofthe politics of the Indonesian state for many years to come. The objections of pro­democracy leaders and activists to the military's intrusion on the will of the people will bejust one factor in the equation. As one commentator has observed:

When the new president is elected in late 1999 ... one of the fIrst measures must be toestablish executive government authority over defence policy and senior appointmentswithin ABRI.35

ABRI sees itself as the ultimate guarantor of the unity of the culturally and geographicallydiverse Indonesian archipelago and the new president will have to accept this fundamentalpolitical reality or else embark on a ml\jor political struggle to change it.

17

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

Electing a New Parliament and President

Elections for the Dewan Perwakilan Rakyat (DPR) or House of Representatives are to beheld on 7 June 1998. These parliamentary elections will not, however, immediatelydetermine who will be President of Indonesia for the next five years. There is a long andquite complicated process before the President is selected in November 1999.

After the June election, the DPR will be composed of 500 members, 462 of whom will beelected and 38 of whom will be representatives of ABRI. Members will be elected byproportional representation, with each of Indonesia's 27 provinces forming multi-memberelectoral constituencies, along the lines of the Australian Senate. Unlike the Senate,however, the number of representatives for each province will be determined by itspopulation. Parties must receive a minimum of five per cent of the vote in a province towin representation in the DPR. Electors will vote on a party-list system, punching a hole inthe ballot paper over the symbol of the party for which they wish to vote. Electoralprocedures are still being finalised by a General Elections Commission (KPU) appointedunder an Act of the DPR.

Unlike in the Westminster system, the executive (the President and his Cabinet) will notbe drawn from the legislature, but will be elected by the MPR, which will convenedsometime before November 1999. The MPR will be composed of the 500 members of theDPR, together with 135 regional delegates and 65 social group representatives. Theregional delegates will be elected by their respective provincial assemblies, elections forwhich are being held at the same time as the DPR elections. At the time of writing, it hasnot yet been determined how the social group representatives will be selected.

The main function of the MPR is to elect the President who may be, but does not have tobe, a member of the DPR. Special supra-legislative sessions of the MPR (such as the oneheld in November 1998) can also be convened to pass decrees which form a framework towhich legislation passed by the DPR must conform. For example the November 1998special session of the MPR decreed that ABRl would retain representatives in the newDPR, but it was the current DPR which decided the exact number.

At the time of writing it is too early to draw conclusions about the workability of theelection procedures and the effectiveness of the KPU in ensuring a free and fair election.First reports by non-government monitoring bodies have not indicated seriousadministrative problems or attempts to interfere with the process, although there have beenreports of Golkar candidates attempting to manipulate the registration process throughcontinuing connections in the civil service.36 Public perceptions that the poll was fair will,of course, be critical to the legitimacy of the post-election government.

The broad outlines of the complex election procedures are laid down in Indonesia'sconstitution and presented few complications when the composition of parliament wasalmost largely pre-determined and the election of the President was a foregone conclusion.In current circumstances, however, there will be a long interregnum when the composition

18

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

of the DPR and the provincial assemblies is finalised and when the parties negotiatearrangements within the parliaments and develop alliances and coalitions amongst therevarious presidential candidates.

In the current political climate in Indonesia this interregnum could become a major flaw inthe process. The current President will have even less legitimacy than now (especially ifGolkar performs badly), but his replacement will not yet be in office. In something like apolitical vacuum it will be very difficult to attend to the multiplicity of extremely urgentproblems facing the country. Even with the possibly turbulent election period out of theway, international investment will continue its reluctance to return if it perceives that theGovernment is politically unable to resolve issues in reforming Indonesia's economy. Ifthere is an upsurge of violence in secessionist areas or in places such as Ambon, someABRI officers may be tempted to act unilaterally if they consider that the Government isunable to act resolutely.

Many New Parties-Few are Strong

Over 200 new political parties sprang up in the months after Soeharto's downfall and 48were ruled as eligible to stand candidates in the forthcoming election, under the guidelinesadministered by the KPU. These guidelines were largely aimed at ensuring that onlyparties with a spread of support across a number of provinces would be able to contest. Ofthe 48 parties, only about six or seven are thought likely to win significant representationin the DPR. The major parties are as follows:

• PDI-PeIjuangan-Indonesian Democratic Party of Struggle (Partai Demokrasi IndonesiaPeIjuangan). The PDI-PeIjuangan, formally established at a rally of 120000 people inJakarta on 14 February 1999, is led by the daughter of the leader of Indonesia'sindependence movement and first President, Sukamo. The party originated from a split inthe official PDI (see below) brought about when President Soeharto ordered ABRI tointervene in the party's affairs in July 1996 to prevent Megawati from assuming leadershipof the PDI. Since the forcible takeover of the PDI by pro-Soeharto forces in 1996,Megawati has been a symbol of opposition to the status quo under both Soeharto andHabibie. Nevertheless, her own political position is unclear and many observers haveraised doubts about her personal political capability. The PDI PeIjaungan claims to standin the secular nationalist tradition championed by Soeharto, but the party has not clarifiedits position on a large number of issues, especially on the economy. The party has beenstrengthened by the defection to it of a number of leading Golkar figures. PDI-PeIjuanganis widely expected to receive the highest number of votes, but far short of a majority.

• PAN-National Mandate Party (Partai Amanat Nasional). PAN was formed in 1998 andis led by Amien Rais, the popular Islamic leader who was a major figure in the massmovement which led to the fall of President Soeharto. Rais has been the principal leader ofthe mass Islamic modernist organisation, Muhanunadhiya, although he has now resigned

19

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

from the position to contest the presidential election. Rais had a reputation of associationwith 'fundamentalist' Islamic politics, but has been keen to remake his image, arguing forreligious tolerance and secularism in the face of growing religious-based tension. PAN hasattempted to woo the support of the economically important but socially-marginalisedSino-Indonesian community. PAN is generally held to be the closet rival of PDI­PeJjuangan in electoral support.

• PKB-National Awakening Party (Partai Kebangkitan Bangsa). The PKB is closelyassociated with Indonesia's other important popular Islamic leader, Abdulrahman Wahid(popularly known as Gus Dur), although Gus Dur is not the party's official leader. GusDur is the leader of the mass Islamic organisation, Nahdlatul Ulama (NU), which waspreviously closely involved in politics but which withdrew into cultural and social serviceactivities during the 1980s under Gus Dur's leadership. NU has been associated with theless strict and more tolerant traditions of Indonesian Islam. The PKB has not yetannounced its candidate for the presidency, but it may not be Gus Dur because he is inpoor health and almost blind.

• Golkar-Development Functional Groups (Golongan Karya). Golkar was the politicalorganisation established by President Soeharto and which was the quasi-official party ofthe New Order. All civil servants were expected to be members of Golkar and to activelysupport its candidates in parliamentary elections. Membership of Golkar was an importantroute to political influence as the party had unofficial control over many governmentresources, including development funds. Following the fall of Soeharto, Golkar was takenover by supporters of President Habibie at a party congress in 1998, an event which led tothe departure of a number of party leaders. It remains unclear how much popular supportand grass roots influence Golkar retains from the days of the New Order and how much

.:. these associations are a political burden. A rally organised by the party in Jakarta in March, attracted about 200 000, but there were press reports of people being paid to attend.37

Whether these reports are true or not, it is a fact that Golkar has huge financial resources atits disposal, accumulated as a result of its status under the New Order. Most commentatorsconsider the party will still remain a major player after the election. Golkar has announcedthat it has five possible candidates for president, one of whom is Habibie.38

• PPP-United Development Party (Partai Pembangunan Persatuan). The PPP was one ofthe three organisations officially permitted to contest parliamentary elections under theNew Order. It was originally formed as a union of a number of Islamic parties reluctantlybrought together under the compulsion of government decree in the 1970s. Despite beinga creature of the Soeharto regime, the PPP became an outlet for limited political dissent inthe final years of the New Order. It increased its vote in the 1998 parliamentary electionswhen the PDI, under its pro-Soeharto leadership, lost much of its popular support. Theparty is projecting itself as an Islamic party and is expected to retain at least some of itsprevious vote.

• PBB-Crescent and Star Party (Partai Bulan Bilang). The PKB is an Islamic partyclaiming descent from Masyumi, an important party during the time of President Sukarno.

20

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

It does not have a strong national leader, but may win some support in former Masyumistrongholds in Java and Sumatra.

• PDI-Indonesian Democratic Party (Partai Demokrasi Indonesia). The PDI was the thirdof the organisations allowed to contest parliamentary elections under the New Order and,like the PPP, was formed as the forced union of a number of parties-in this case partiesof a secular nationalist complexion. The party lost much of its credibility when it wasforcibly taken over by pro-Soeharto elements with the support of ABRI in July 1996. Theformalisation of the split in the party, with the formation of Megawati's PDI-Perjuangan,probably ensures that the PDI will be the weakest of the main parties in the election.

All the parties, including the many smaller one not listed here, can be characterised asfalling into three broad political streams, similar to those which characterised Indonesianpolitics before 1965. The first stream is composed of Islamic parties, themselves roughlydivided between those which are largely secular in outlook (the strongest representation ofwhich are PAN and PKB) and those which espouse more doctrinal politics, including thecreation of an Islamic state. The second stream is made up of secular nationalist partiesand is now dominated by Megawati's PDI-Perjuangan. The third stream, which shadesover into the nationalist stream, is composed of various left wing, labour and minorityparties. This stream was dominated by the Communist Party of Indonesia before 1965, butis now overshadowed by PDI-Perjuangan.

Forecasting the Election Result

The art and science of polling and election forecasting is highly developed in Westerndemocracies, but is still often only able to provide a general guide to election results. Thescope for useful comments on the possible results of the Indonesian election is thereforeextremely limited when so little data is available about patterns of electoral support andwhen the intricacies of coalition building between the election of the DPR and the electionof the President will be so complex.

Most analyses of possible election scenarios are based on a combination of limited polling(mainly in urban areas), and projections based on the voting patterns revealed inIndonesia's last democratic election in 1955.39 Such analyses usually see PDI-Perjuanganas capturing the majority of votes from the nationalist and left wing streams, and PAN andPKB predominating amongst Islamicist voters. Golkar will probably draw most of itssupport from the Islarnicist vote. Most forecasts see both PDI-Perjuangan and PANwinning between 20 to 30 per cent of the vote, with PKB receiving between 10 and 20 percent. Support for the other major parties is usually put at between five and 10 per cent,with Golkar the least amenable to prediction.

21

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

Choosing the President

Mter the results of the election are known, there will be a reversion, for a few months atleast, to something very similar to the back room manoeuvrings that have dominatedIndonesian politics since the late 1950s. The major difference is that there will be nosingle figure like Sukamo or Soeharto as the ultimate arbiter. Since it is almost certain thatno party will win a majority, the successful presidential candidate will inevitably besupported by a coalition or loose agreement of a number of parties. '

The most likely contenders are, of course, the national leaders of the three main parties,Megawati, Amien Rais and Gus Dur, but no commentator has been willing to make aconfident assessment of what alliances may be formed by these or other national figures.As one leading analyst, Harold Crouch, has observed:

You could construct 20 scenarios about what will happen, each one equally plausible andeach totally different from any of the others.40

Anyone of the three main leaders will need the support of at least one of the other two tomarshal enough support in the DPR. But relations amongst them are exceedingly complexand not always cordial. Personal relations between Gus Dur and Amien Rais, for example,are said to be very frosty. Gus Dur is reportedly unwilling to support Megawati because ofher gender, even though they have cooperated quite closely in recent months.

If one of the three main figures does not emerge as the dominant player, it is quite likelythat some form of joint executive arrangement will be created. For example, there could bean agreement between Megawati and Amien Rais where Megawati (with her greatpo.pularity as Sukamo's daughter) is elected President, with Amien Rais Vice-President orFirst Minister. This latter scenario is exactly the compromise which was reached afterindependence in the 1940s, when the two principal leaders of Indonesia's independencemovement, Sukarno and Hatta, became President and First Minister respectively.

If the three big leaders are unable to work out an arrangement amongst them, it has beensuggested that less prominent contenders might be the only acceptable President for boththe major and minor parties. Major figures who have been talked about as possibly fillingthis role include the Sultan of Yogyakarta (a respected figure who, although a Golkarleader, played a role in persuading Soeharto to resign,) and the Cooperatives Minister, AdiSasono, (a populist leader who has established some support calling for a greatereconomic role for non-Chinese).41 Golkar leaders have expressed support for GeneralWiranto as a compromise candidate, but this is partly because Golkar has been unable toput forward a candidate of its own that is not burdened with New Order associations.42

However, all these latter individuals, as well as Habibie, are closely associated in thepublic mind with the New Order and may lack popular legitimacy.

22

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

Unity in Diversity?

This paper has emphasised that the various regions of the vast archipelago of Indonesiawere very differently affected by the economic crisis and that the long-term and short-termimpact on the living standards of people in each region will be also not be uniform. Thegeographical, economic and cultural diversity of Indonesia of this country of 205 millionpeople and 17 000 islands has become especially obvious in recent years, but has alwaysbeen a fundamental political reality for Indonesia's leaders. The Dutch flirted with the ideaof establishing a federal state in the final years of their rule and there were a number ofrevolts against central authority in the early years of the independent Republic ofIndonesia, the most important of which occurred in the Aceh region of Sumatra.

Under the New Order, the approach to the issue of regional interests or to ideas ofautonomy or separation was suppression by ABRI or token gestures such as thedesignation of Aceh as a daerah istimewa (special region), a status that gave no autonomyin reality. Government was heavily centralised in Jakarta and the deployment of ABRIforces was regarded as the only consistently workable response to separatism. The easingof overcrowding on Java by the transmigration of people to the less populated outerislands was seen as a way of cementing national unity and minimising,cultural differences.Conflicts between local people and the transmigrants or between already existing localgroups were forced underground by ABRI suppression. Expression of Sino-Indonesiancultural identity as well as anti-Chinese sentiment were generally suppressed underPresident Soeharto's rule.

While the policies of the New Order were mostly successful in suppressing expressions ofregional separatism and of conflicts between Indonesia's ethnic and religious groups, theyhad no success in dealing with the roots of these differences. With the general freeing upof political expression since May 1998 and with the decline of ABRI authority andcontrol, long-standing resentments and tensions in certain areas have exploded into violentconfrontation.

There are three main potential sources of conflict in Indonesia today that might be seen asoriginating from the diversity of the country: anti-Chinese feeling, tension between socialgroups in some eastern islands and the separatist movements in Aceh, Irian Jaya and EastTimor. It is important to distinguish these quite distinct elements because some reportsgive an inaccurate impression of generalised, indiscriminate violence across the country.In the words of a distinguished Australian observer of Indonesia, Jamie Mackie:

The violence ... lends itself readily to television reporting, providing images which seizeattention but rarely are accompanied by deeper analysis. This can easily create amisleading impression that Indonesia is a seething cauldron of racial hatreds. Theprospect of an independent East Timor and secessionist demands in Irian Jaya, Aceh andelsewhere also conjure up alarming parallels with Bosnia or the breakup of the SovietUnion. But the reality is different.43

23

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

Attacks on Sino-Indonesians

Anti-Chinese feeling has been a long standing feature of Indonesian society. Sino­Indonesians have lived in the country for centuries, speaking local languages as their firstlanguage and often retaining few distinctly Chinese cultural connections. But becausemany Chinese migrants took up opportunities in small-scale trading created by Dutchcolonialism, many local people resented what they saw as the wealth and privilege of theChinese community. Attacks on Chinese people and businesses (most of which were verysmall) became a feature of times of economic and political stress. It was often convenientfor authorities in both pre- and post-independence times to allow such violence to act as ascapegoat and an outlet for resentments about broader issues. Sino-Indonesians are nowestimated to make up from two to three per cent of the population, or about four to sixmillion people. The growing wealth of a few Sino-Indonesian families under the NewOrder heightened stereotyped images of the Chinese community. In the words of theIndonesian Ambassador to Australia, Wiryono:

The rapacity of the small coterie has rankled so much in the public mind that it gavecurrency to the impression that all Chinese Indonesians were similarly privileged.44

The Sino-Indonesian community again became a target for rioters during the events ofMay 1998. This violence has subsided for now, but most Sino-Indonesians remain anxiousabout their future and some have left on an indefinite basis or for the duration of theelection campaign.

Violence in Ambon and Kalimantan

Tensions in the eastern provinces of Maluku and West Kalimantan have caused the mostbloody confrontations of recent months. In Maluku, especially in the provincial capital ofAmbon, indigenous people have clashed with transmigrant Bugis and Makassar peoplefrom South Sulawesi. The Christian Maluku people and the Muslim transmigrants hadlived together in reasonable harmony for many decades, but recent years have seen anacceleration of migration into the province. The transmigrants began to predominate insectors such as petty trading as well as in peddy cab driving and labouring, traditionallyimportant sources of employment. Growing resenttnent was worsened when theappointment of a Muslim governor in the early 1990s led to a perception that Muslimswere being favoured in government jobs and that Islamic practices were being enforcedinside the administrative service.45 There was a serious outbreak of violence in 1997 whenthe onset of the crisis sharpened competition over economic opportunities. The upsurgewas suppressed, onIy to break out again during the Islamic fasting month of Ramadan inJanuary 1998. While the situation was soon brought under control there has been severalserious outbursts of violence and loss of life since then.

24

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

The picture has been similar in the eastern province of West Kalimantan, whereindigenous Christian Dayaks have clashed with Muslim transmigrants from the island ofMadura in east Java. Here the picture has been complicated by the fact that local MuslimMalay people have often sided with the Dayaks. The background to the conflict has alsoinvolved competition over jobs and other economic opportunities which the local Dayakand Malay people perceived were being monopolised by more aggressive recent arrivals.

Aceh

The secessionist movements in Aceh, Irian Jaya and East Timor can be discussed togetherbut each needs to be understood for its own unique features. The region of Aceh inwestern Sumatra was one of the first areas to be converted to Islam from the sixteenthcentury. It has long had a sense of distinct identity and was the site of repeated rebellionsagainst Dutch rule. Since the time of Indonesia's independence there has been sporadicsupport for the region's independence, peaking in an uprising in 1953 which was crushedby the army. The movement revived in the 1980s and 1990s, with growing resentment thatlocal people were not benefiting from the exploitation of the region's rich oil and gasreserves. The deployment of ABRI forces against the secessionists fuelled popularresentment against rule from Jakarta. Since May 1998 the separatist movement has beenable to operate more openly and the revelation of ABRI human rights abuses forcedGeneral Wiranto to visit Aceh in August 1998. He announced the ending of Aceh's statusas a Military Operations Region and issued a formal apology for past military excesses.Both President Habibie and Wiranto paid another visit in March 1999.

Irian JayaIWest Papua

Irian Jaya (or West Papua, as it is known by the separatists), the other half of the island ofNew Guinea, only became part of Indonesia in 1962, until when it was still administeredby the Netherlands. Indonesia's claim to West New Guinea (as it was called then) wasbased on the fact that the territory was formerly part of Netherlands East Indies, to whichIndonesia was the heir and successor state. An independence movement has its genesis inDutch plans for West New Guinea independence and even, for a time, independence inunion with Australian-administered Papua and New Guinea.

Much of the local Melanesian population considered that the UN-supervised 'Act of FreeChoice' was fraudulent and unrepresentative. While the consequent seccessionistmovement grew and survived, it has never been able to mount a significant challenge toIndonesian rule from amongst the small, scattered population of the vast region. But themountainous terrain has prevented ABRI from completely defeating the rebels of the FreePapua Organisation (Organisasi Papua Merdeka or OPM). Resentment amongst theindigenous population has grown with the arrival of large numbers of transmigrants from

25

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

Java and South Sulawesi. The transmigrants are not only culturally foreign to theindigenous Melanesian people (who are animist or Christian), but are seen asmonopolising economic opportunities in the territory. The province's population of twomillion is now half composed of newcomers. The exploitation of Irian Jaya's mineralresources is seen as bringing little benefit to local people, while damaging the environmentand the basis of traditional fishing and gardening.

East Timor

East Timor is a particularly special case because it was never part of the Netherlands EastIndies and did not formally become the twenty-seventh province of Indonesia until 1976,after the invasion of 1975 which crushed the newly declared independence of the territory.The war against the Fretilin-led independence movement and the disruption of the localeconomy caused by the forced relocation of much of the population is widely believed tohave resulted in 200 000 deaths, about a third of the then total population. The guerrillamovement remained weak militarily through the 1980s, but continued to inspire anexpanding movement of urban civil resistance which led to the Dili massacre of 1991.Like Irian Jaya, resentment against rule from Jakarta has been fuelled by transmigrationand the ensuing economic competition and cultural and religious friction. Unlike IrianJaya, the East Timorese cause has been able to capture attention and support in theintemational community.

Since the Dili massacre the issue of East Timor has been an ever increasing foreignrelations problem for the Indonesian Government. A powerful motivation behind PresidentHabibie's sudden offer of autonomy or independence to East Timor was to be rid of aproblem which seemed an unnecessarily troublesome irritant when his Government wastrying to cope with a myriad of other more serious economic and political issues. Manycommentators have observed, however, that Habibie's offer was implicitly a threat towithdraw precipitously from the territory if the Timorese did not agree to autonomy withinIndonesia. An abrupt departure would strip the territory of capital and human resources.The prospect played on fears of a repetition of the internal conflict which broke out in theterritory after the sudden departure of the Portuguese in 1975.

This unexpected move by the Indonesian Government appears to have come largely atHabibie's personal initiative, without the support of Foreign Minister Ali Alatas or otherministers. It recalls the fears expressed by many observers at the time of Habibie'saccession to the Presidency about his idiosyncratic approach to government. Together withthe actions by ABRI officers in East Timor in providing arms to anti-independenceelements in the territory, it raises serious concerns about the processes of policy makingand coordination in Indonesia and about Jakarta's control over ABRI. Moreover, therefusal to allow a referendum on autonomy or independence created an atmosphere ofconfrontation. Possibly 25 independence supporters were killed by anti-independencemilitias in early April 1999 and later full-scale mobilisation of the militias in the streets of

26

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

Dili led to the further deaths and the systematic terrorisation of supporters ofindependence. It is still unclear at what level in ABRI the decision to arm the militias wasmade, but as commentators have pointed out, as the Commander in Chief of the ArmedForces, the ultimate responsibility rests with President Habibie.46

Whatever the perils in the current situation, Habibie's offer has probably created a processthat will eventually lead to East Timorese independence. Whether this occurs as part of agradual transition, as the Timorese independence movement has advocated for manyyears, or takes place in a storm of death and destruction is an open question. A great dealwill depend upon the successful involvement of foreign parties such as the governments ofAustralia and Portugal and the United Nations. At the time of writing, UN-sponsoreddiscussions between Indonesia and Portugal had reached agreement for a vote onautonomy for East Timor to be held in July 1999, although the details of the proposal werestill unclear. A key adviser to Habibie, Dewi Fortuna Anwar, had earlier suggested thatEast Timor might be given a status similar to that of Hong Kong, but the idea was quicklydismissed by Foreign Affairs Minister, Ali Alatas.47

Decentralisation and Regional Autonomy

The number one issue preoccupying political practitioners in Indonesia is the reform of theinstitutions of central government and seeing the country through the potentiallydangerous election period. But no government will be able to delay addressing itself to thequestion of rebalancing the relationship between Jakarta and the provinces. It is clear thatthe New Order's approach to maintaining the unity of the diverse Indonesian state onlyaggravated potential problems or, at best, delayed their resolution. In any case, what waspossible under an authoritarian regime is unviable under the democratising politics ofIndonesia today.

The most pressing concerns are obviously those of Aceh, Irian Jaya and East Timor, but asone commentator has said:

It will be impossible to find solutions to such urgent issues ... until the broader questionof regional decentralisation has again been thoroughly debated and satisfactorilyresolved.48

The Habibie Government has promised to reallocate more central government money infavour of provinces, with expenditure transfers to the regions being increased in the lastbudget from US$1.6 billion to US$1.9 billion. More importantly, it has suggested a wide­ranging reform of provincial government to increase local administrative autonomy and toallow an increased proportion of locally raised taxes to be made available for localexpenditure. In April 1999 the DPR passed a law providing for reforms which would passa range of powers to the provinces, including control over land use in industry, mining,

27

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

forestry, ports and tourism.49 The Government has proposed that further reforms be put tothe DPR for consideration after the June elections.5o

The fate of reforms will, of course, depend on the composition of the new DPR and on theidentity of the President. But since the major parties all say they are committed to someform of decentralisation, the debate will probably be over implementation rather thanprinciple. This issue will, however, be a major test for managing the relationship betweenthe new DPR and Government and ABRI. As has been emphasised, ABRI has seen itselfas the guardian of unity and has traditionally been very hostile towards any suggestion ofthe diminution of central authority. Moreover, redistribution of power within theIndonesian state also inevitably bears on the question of ABRI's dual function role. Anincrease in the power of provincial governments would very likely undermine the exerciseof influence by ABRI officers at the local level. A successful resolution of this keyquestion will involve a delicate compromise between the pressure of newly empoweredelements of Indonesian society and the resistance of long-established and powerful vestedinterests.

The Implications for Australia

From Weakness to Strength: Indonesia-Australia Relations

Relations between Australia and Indonesia since the declaration of an independentIndonesian state in 1945 have been rocky, with periods of good relations broken bysometImes open animosity. Until the late 1980s, relations were dominated by political andsecurity issues in Southeast Asia played out against 'the background of the Cold War.During the rule of Indonesia's first President, Sukarno, the relationship was often tense andsometimes hostile. This was most notably the case during the early 1960s over the issuesof Indonesia's integration of Irian Jaya51 and during the time of Sukarno's 'konfrontasi'campaign against the newly formed state of Malaysia.

Such major differences disappeared with Soeharto's rise to power from 1965-66, butrelations were still marked by a series of problems. The most prominent of these wereassociated with the invasion of East Timor in 1975 (including the killing of five Australia­based journalists) and the negative Indonesian response to a Sydney Morning Heraldarticle in 1986 detailing the business affairs of President Soeharto and his family. Popularperceptions reflected the mutual ignorance of two neighbouring but very differentsocieties, with most Indonesians hardly aware of Australia's existence and manyAustralians regarding Indonesia with fear and suspicion.52

, Since the late 1980s, however, the efforts of the Australian Government, accompanied byAustralia's generally increasing economic involvement in the region have facilitated the

28

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

broadening and deepening of the Indonesia-Australia relationship. These efforts coincidedwell with the Indonesian Government's desire to move its foreign relations beyond apredominant focus on ASEAN. The predominance of politico-strategic issues has beenreplaced by a broader range of trade and investment relations and greater people-to-peoplelinks in the form of two-way tourism, Indonesian students in Australia and the slowdevelopment of non-official as well as government-sponsored cultural exchange. Australiaand Indonesia are now also part of a network of regional relationships through theircommon membership of organisations such as APEC and the ASEAN Regional Forum.53

Until the mid-1980s trade between Australia and Indonesia was insignificant, but from1985 bilateral trade grew at an average rate of 19 per cent per year. Indonesia is nowAustralia's tenth most important partner, with bilateral trade exceeding $5 billion in1997-98.54 Accumulated Australian investment in Indonesia was calculated to be in thevicinity of US$6 billion in 1997.55 The strengthening of the official bilateral relationshipwas affirmed by the signing of the Timor Gap Treaty in 1995 and the Maritime BoundaryTreaty in 1997, a relationship underpinned by regular meetings at ministerial and officiallevel between the two governments. The signing of the Indonesia-Australia Agreement onSecurity at the end of 1995 formalised the already well developed defence and securityties between the two countries, although the mixed public reaction to the Agreementsymbolised continued popular uneasiness in Australia about Indonesia.56

Australia and the Region

There is little doubt that the Australian Government needs to be concerned about thepotential dangers of the continuing political crisis in Indonesia. Australia has an interest inminimising any regional tensions resulting from Indonesia's current problems bothbecause of Australia's general interest in stability in the Asia-Pacific region and becauseof its bilateral relationship with Indonesia. As the largest country in ASEAN, Indonesia isa key strategic player in the region and has been important in developing positions tomanage issues amongst the ASEAN countries and in developing a common ASEANposition on relations with China, including reducing tensions over regional territorialdisputes involving China. Resolving such issues has been a crucial element in theevolution of security arrangements in the Asia-Pacific since the end of the Cold War.

Political uncertainty in Indonesia has cast a shadow over many of these achievements. TheChinese Government has, on a number of occasions, made public its concerns about thetreatment of the ethnic Chinese minority in Indonesia. Tensions emerged betweenMalaysia and Indonesia over the issue of Indonesian migrant labourers in Malaysia whohave come under pressure to leave because of Malaysia's economic problems. Thefrictions were exacerbated by the exchange of accusations between Habibie andSingapore's Prime Minister, Goh Chok Tong, in February 1999, during which each allegeddiscrimination against ethnic minorities in their respective countries.

29

,.

"

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

There have also been hints of concern from other members of ASEAN over perceptionsthat Indonesia has been unwilling to take difficult decisions to reform its economy andthus find a solution to economic problems which threaten to damage the whole region.57

Invidious comparisons have been made with Malaysia and Thailand's ability to deal withits problems more effectively. There have already been disagreements between the US andIndonesian Governments in recent years over issues of human rights and labour rights andissues such as the shooting of demonstrators and attacks on religious and ethnic minoritiesunder the Habibie government have focused further critical US attention on Indonesia.

Bilateral Relations and the Indonesian Crisis

As one of Australia's closest neighbours, the political and economic fate of Indonesia wasalways going to be of direct relevance for Australia.58 This underlying reality becamemore obvious during the expansion of links between Australia and Indonesia over the lastdecade and has become particularly evident since the crisis in Indonesia. The annualAustralia-Indonesia Ministerial Forum, in which key ministers from each country discussissues in the bilateral relationship, is a symbol of the closeness of relations. Efforts toincrease ecomomic connections include the Australia Indonesia Development Area(AIDA), established in 1996, which links Australia with the 14 eastern provinces ofIndonesia, including Bali.

The Australian Government's response to the crisis has been to provide direct emergencyassistance to Indonesia and to contribute, both financially and at a policy level, to the IMFprogram of assistance. Bilateral assistance includes A$60 million over three years forhumanitarian assistance and A$70 million over three years for economic governanceprograms to assist the development of Indonesia's economic institutions. Australia willcontribute A$lO million to United Nations Development Program (UNDP) for its electionmonitoring program. Of the US$l billion in loans Australia pledged in 1997 as stand-byfinance to support Indonesia's currency, US$300 million has so far been disbursed. TheAustralian Government has also signalled that it would increase aid to East Timor if therewas a need to respond to new circumstances created by autonomy or independence in theterritory.

The increasing importance of relations with Indonesia in Australia's foreign policy hasbeen emphasised by the role of advocate for Indonesia that Australia has increasinglybegun to play in international forums. This was first evident when the AustralianGovernment argued for less onerous conditions to be attached to financial assistance toIndonesia during discussions with the US, Japanese and ED Governments and officials ofthe IMF and World Bank. Since that time many governments and agencies have come tolook to Australia to take the initiative in developing programs of assistance for Indonesia.Australia hosted a meeting of 11 Asia Pacific countries, 15 donor countries and eightinternational institutions in March 1999 to consider responses to the Asian economiccnSlS.

30

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

Because of long standing popular interest in Australia about East Timor, and because ofthe territory's proximity to Australia, recent developments have placed a particularlyimportant responsibility on the Australian Government. Any change in the status of theterritory, particularly if it is accompanied by violent conflict and economic dislocation,will have major implications for Australia's foreign policy, including aid and refugeepolicy. There will international expectations that Australia will be directly involved inmanaging the political, security and humanitarian implications. This was the backgroundto the talks on the issue of East Timor between Prime Minister Howard and PresidentHabibie in Bali taking place at the time of writing. In the event of an independent EastTimor, fundamental issues such as territorial boundaries and the East Timor Gap Treatywould have to be negotiated.

It would be unfortunate, however, if the East Timor issue were allowed to assumepredominant importance in Australia's relations with Indonesia and in Australianperceptions of events in Indonesia. The special features of the East Timor case make itmore important than the territory's size would suggest, but in the context of the historicchanges occurring in Indonesia today the East Timor issue should be kept in perspective. Itshould not divert attention from the fact that the rest of Indonesia, Australia's largest andmost important neighbour, is undergoing fundamental change and that Australia's greatestregional interest is in seeing that Indonesia recovers economically and regains politicalstability. An independent East Timor will, like most of the small countries of the Pacific,be a continuing responsibility (and perhaps burden) for Australia, but it is in relations withIndonesia that Australia's fundamental political, economic and security interests lie.

Conclusion

Indonesia is passing through a time of rapid and potentially dangerous transition. From anhistorical point of view, this period will be as significant as the country's struggle forindependence in the late 1940s and the violent upheavals of the mid-1960s which broughtPresident Soeharto's regime to power. The depths of the economic crisis into whichIndonesia fell in 1997 was largely due to the fact that political institutions in the countrywere already coming under pressure and were unable to cope with the sudden onrush ofunforeseen economic difficulties. Other countries in the region which faced similarproblems were able to deal with them, albeit with great stress, without the onset of thefundamental crisis of the state which Indonesia encountered.

In the second year of economic downturn and the first year of political reform, Indonesiaappears to have made progress towards recovery and reconstruction, but is facing manymore complex and hazardous hurdles. There are signs that the economic recession mayhave bottomed out, with the apparent stabilisation of the currency and an end to fallingrates of GDP. The social effects of the crisis, particularly in terms of absolute poverty, donot appear to have been as uniformly bad as early fears suggested, but are concentrated inparticular areas of the diverse Indonesian archipelago. Progress towards full recovery,

31

,

,

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

however, depends crucially on a successful election and on the development of politicaland governmental institutions which can both maintain stability and reassure potentialinvestors.

The early indications are good that the election campaign may pass off without seriousviolence. The most serious concern is that the likely absence of a clear winner willmagnify uncertainty in the post-election period. After over a year of a presidency whichmany Indonesians consider is of dubious legitimacy, Indonesia urgently needs aGovernment with the confidence to tackle the country's severe internal problems and torestore its economic and political profile in the international community. Unfortunately,the complex and lengthy process of selecting the President after the election of the DPRappears almost deliberately structured to maximise uncertainty and weaken policy­making.

A great deal of media attention has been focused on violence in areas such as Ambon andKalimantan and associated with the possibility of independence for East Timor. Thesuffering of the people who are caught up in these confrontations should never beminimised, nor should the potential for violence to spread beyond these places.Nevertheless, it is important to keep the scale of events in perspective. Violence hasremained confined to a quite specific number of places and relations between differentgroups in other regions with very similar problems have not broken down. It would besurprising if the economic problems which Indonesia has faced in recent times did not leadto confrontation, especially when the authority of many governmental institutions has beencalled into question. Indonesia is not in chaos, social relations between the vast majorityof Indonesians remain reasonably intact and civic institutions and services generallycontinue to function.

At the same time the immensity of the problems facing Indonesia today and which willcOI}front the new Government after the elections are daunting. For a country whose lastchange of regime was accompanying by a bloodbath and which has not had a free electionfor over forty years, a successful election and a peaceful transfer of power will be animportant achievement. The new Government will be faced with the immediate job ofameliorating the effects of the worst economic crisis in the country's history, but will haveto make rapid progress in reforming the country's economic structures before real recoverycan begin. At the same time it will have to cope with serious outbreaks of violence which,ultimately, will not be eased unless there is a real prospect of a major realignment ofdecision making within the Indonesian state.

Geopolitical realities made it inevitable that Australia and Indonesia would becomeclosely engaged and the actions of both Governments have ensured that this has come toproductive fruition in recent years. Indonesia's economic and political crisis has served toemphasise the commonalities of the two countries' situation in the region and thatAustralia must be directly involved in assisting a successful outcome to developments inIndonesia. It is in Australia's interest that Indonesia overcomes its economic problems,

32

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

successfully develops democratic institutions and rebalances the power relations betweenJakarta and the regions.

Endnotes

1. Kevin Evans, 'Survey of Recent Developments', Bulletin ofIndonesian Economic Studies, vol.34, no. 3, December 1998, p. 5.

2. For a summary of events in the Indonesian economic crisis, including a critique of the role ofthe Indonesian Government and the IMF, see the contribution by Ross McLeod in R. McLeodand R. Gamaut, East Asia in Crisis: From being a miracle to needing one?, London, 1988,pp.31-48.

3. Economist Intelligence Unit, Indonesia Country Report, 4th Quarter 1998, p. 8.

4. Evans, Bulletin ofIndonesian Economic Studies, op.cit., p. 22.

5. ibid.

6. Economist Intelligence Unit, Indonesia Country Report, 4th Quarter 1998, p. 36.

7. B1S Shrapnel, Asia Pacific Economic Outlook 1999 to 2009, February 1999, p. 84; EconomistIntelligence Unit, Indonesia Country Report, 4th Quarter 1998, p. 23; Oxford Analytica DailyBrief, 10 November 1998.

8. Oxford Analytica Daily Briefs, 28 September 1998, 18 February 1999.

9. lBRA Press Release, 13 March 1999.

10. Indonesian Observer, 23 March 1999.

11. Jakarta Post, 24 March 1999.

12. Reuters, 15 March 1999; Indonesian Observer, 19 March 1999.

13. Jakarta Post, 19 March 1999.

14. Asian Wall Street Journal, 14 January 1999.

15. World Development Report 1998/99, p. 190.

16. World Development Report 1998/99; The Economist, 3 August 1996, pp.19-20. It isimportant to note that these figures have been questioned as underestimating the number inpoverty. They are based on a level of under US$0.50 per day, when the usual internationalfigure is US$l per day.

17. World Development Report 1995, pp. 214 and 216; Human Development Report 1998, p. 148.

18. International Labour Organisation, Employment Effects of the Indonesian Economic Crisis,Jakarta, 1998; Sudamo Sumarto, Anna Weinberg and Lanat Pritchett, The Social Impact ofthe Crisis in Indonesia: Results from a Nationwide Kacamatan Survey, World Bank, Jakarta,1998.

19. Australian Agency for Intemational Development, The Effects of the East Asian Crisis onAgricultural and Rural Development in Indonesia, 1999.

33

,

30.

31.

32.

33.

34.

35.

36.

37.

38../ 39.

I f

40.

,:1

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

20. Sudarno Sumarto, Anna Weinberg and Lanat Pritchett, The Social Impact of the Crisis inIndonesia: Results from a Nationwide Kacamatan Survey, World Bank, Jakarta, 1998.

21. Oxford Analytica Daily Brief, 14 January 1998.

22. International Labour Organisation, Employment Effects of the Indonesian Economic Crisis,Jakarta, 1998.

23. The streets of Jakarta and other cities have seen a huge increase in the number of peopletrying to earn enough money for subsistence. Apart from hawkers, tiny street-stall owners andbeggars, every major intersection has a range of buskers, youths 'directing' traffic through U­turns for coins and ]ockeys'-young boys who, for a small payment, ride in cars to make upthe minimum number of passengers required by traffic regulations to enter the mainthoroughfares of Jakarta's city centre.

24. Tubagus Feridhanusetyawan, 'Social Impact of the Indonesian Economic Crisis', IndonesianQuarterly, vol. XXVI, no. 6, p. 351.

25. Australian Agency for International Development, The Effects of the East Asian Crisis onAgricultural and Rural Development in Indonesia, 1999, p. 5-7.

26. Feridhanusetyawan, 'Social Impact of the Indonesian Economic Crisis', op. cit., p. 348.

27. ibid., p. 355.

28. Indonesian Observer, 23 March 1999.

29. George Aditjondro, 'A New Regime, A More Consolidated Oligarchy, and a Deeply DividedAnti-Soeharto Movement', in G. Forrester and R. J. May (eds.), The Fall of Soeharto,Bathurst, 1998, p. 211.

Asiaweek, 5 February 1999, pp. 60-1.

Jakarta Post, 7 April 1999, p. 1.

Newsweek, Interview with President Habibie, 25 January 1999, p. 41.

Bob Lowry, 'Indonesia - Political Futures and Regional Security', Australian Defence StudiesCentre Working Paper No. 53, Canberra, 1999, p. 10.

One the principal demands of the student-led reform movement has been for an end to ABRI'sparliamentary representation.

Bob Lowry, 'Indonesia - Political Futures and Regional Security', op. cit., p. 12.

Jakarta Post, 10 April 1999, p. 2.

Jakarta Post, 10 March 1999, p. 1.

Jakarta Post, 16 February 1999, p. 1.

Amongst the deluge of election speculation in the Indonesian press, two sets of articles couldbe cited as representative: by Australian academic resident in Indonesia, Lance Castles, inJakarta Post, 29 and 30 March 1999 and by Mohammad A. S. Hikam of the IndonesiaInstitute of Sciences, Jakarta Post, 24 and 25 March 1999.

Harold Crouch, ANU, quoted in Canberra Times, 2 April 1999.

34

Indonesia's Dangerous Transition: The Politics ofRecovery and Democratisation

41. Australian Financial Review, 19 March 1999.

42. Sydney Morning Herald, 26 April 1999, p.6.

43. Jamie Mackie, 'Understanding Indonesia's Violence', Asian Wall Street Journal, 22 March1999.

44. Wiryono, 'Chinese Indonesians: The Way Ahead', Address to seminar on Chinese-Indonesiansat the Australian National University, 15-16 February 1999. Wiryono also debunked the oft­repeated myth that Sino-Indonesians control over 70 per cent of the Indonesian economy,arguing that a reasonable calculation would estimate Chinese-run businesses as making up nomore than 10 per cent of Indonesia's national wealth.

45. Far Eastern Economic Review, 8 April 1999.

46. Hamish McDonald and David Jenkins, Sydney Morning Herald, 20 April 1999, p. 9.

47. Jakarta Post, 12 April 1999, 13 April 1999.

48. Jamie Mackie, 'What Will the Post-Soeharto Regime Be Like?' in G. Forrester and R. J. May,op. cit., p. 206.

49. Australian Financial Review, 23 April 1999, p.31.

50. Far Eastern Economic Review, 21 February 1999, pp. 10-4.

51. Australia supported Dutch retention of West New Guinea for both defence and agriculturaltrade reasons (protection against possible introduction of agricultural diseases across the landborder with Papua and New Guinea) until a visit from Robert Kennedy in 1962 led to anabrupt change of policy.

52. For a survey of some Australians' views about Indonesia, see Rob Goodfellow, 'Ignorant andHostile: Australian Perceptions of Indonesia', Inside Indonesia, September 1993, pp. 4-6.

53. For a survey of Australia-Indonesia relations see B. Bishop and D. McNamara (eds.), TheAustralia-Asia Survey 1997-98, Melbourne, 1997, pp. 183-211 and Dept of Foreign Affairsand Trade, Country Economic Brief: Indonesia, Canberra, 1997.

54. Department of Foreign Affairs and Trade, Composition ofTrade Australia 1997-98.

55. Department of Foreign Affairs and Trade, Country Economic Brief: Indonesia, Canberra,1997.

56. For a discussion of issues surrounding the Security Agreement see Gary Brown, Frank Frostand Stephen Sherlock, The Australia-Indonesia Security Agreement: Issues and Implications,Research Paper no. 25, Department of the Parliamentary Library, 1995-96.

57. Asian Wall Street Journal, 27 February 1998.

58. For a discussion of the debate about policy options open to the Australian Government whenresponding to political conflict and change in Indonesia see Stephen Sherlock, The Politics ofChange in Indonesia: Challenges for Australia, Current Issues Briefno. 3, Department of theParliamentary Library, 1996--97, pp. 6--10.

35


Recommended