I n d o n e s i a 's Quiet Re vo l u t i o n

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For the past few years, most news reports from Indonesia have fe a t u red terro rists, .... rural peasantry (abangan), the secular aristocracy (priyayi), and the Is-.
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n Lex Rieffe l w rong impres s ion For the past few years, most news reports from Indonesia have fe a t u red terro rists, re g i onal insurgencies, and human rights violations. They portray a government that is dealing ineªectively with these problems and an economy that is falling further behind its Asian neighbors. Developments beneath the surface, however, lead to a more hopeful view: Indonesia—the world’s fourth most populous country and the largest by far with a Muslim majori ty—is undergo i n g a profound political tra n s i t i on. Over the past five years, its democra t i c s ystem has been overhauled quietly but bri ll i a n t ly, and the foundations for a better system of gove rnance have been put in place. The gove rnment that takes o⁄ce on October 20 will be the people’s choice more than ever before. Indonesia’s democratic tra n s f o rm a t i on, known as Reform a s i, began in 1998. In the wake of ten years of flamboyant dictatorship under President Sukarno and more than three decades of iron rule by President Suharto, the country’s political institutions were weak. Reformasi may have been more of an elite coup than a people’s rev o l u t i on, but its o bjective was to find a viable path to a just and prosperous society. In 1999, a new national parliament was chosen in the first openly contested elections since 1955, and Abdurrahman Wahid became president through an indirect vote. In mid-2001, Wahid was forced out of o⁄ce due to his erratic leadership, and Megawati Sukarnoputri—Sukarno’s eldest daughter—ascended to the presidency. The results of a national election last Ap ril 5 showed just how p rofound an eªect Reformasi has had on Indonesia’s political system. Lex Rieffel is a Visiting Fe ll ow at the Bro okings Institution.

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Indonesia’s Quiet Revolution Going into the election, President Megawati had all the advantages of incumbency, but the outcome reflected broad disappointment in her leadership. Her party—the secular nationalist pdi-p—won less than 20 percent of the popular vote for the 550-seat national parliament, down from 34 percent in 1999. Golkar—the centrist bure a u c ratic party nurtured by Suharto—came out on top, finishing with the most seats in parliament, although its share of the vote had fallen slightly since 1999. The poor showing of these two leading parties especially benefited the secular, pro g ressive Democratic Party (p d), led by form e r general Susilo Bambang Yudhyono, and the Prosperous Justice Party (pks), an urban-based Islamic party campaigning on a platform e m phasizing clean government. At the heart of Reformasi was a con s t i t u t i onal amendment that requires the direct election of the president for a five - year term beginning this year. Through a complex, finely tuned set of rules, the April 5 parliamentary election yielded the five tickets—for president and vice president—that competed in the first-round presidential election on July 5. The results were a sign of the electorate’s growing sophistication. Susilo Bambang Yudhyono (known as S.B.Y.) came in first with 34 percent of the vote. Based on an almost complete count, Megawati finished seven percentage points behind, edging out the Golkar candidate, retired General Wira n t o, to claim the second spot in the runoª election s cheduled for September 20. The April and July elections rea⁄rmed the strength of moderate Islam in Indonesia. Five of the eight parties that captured more than two percent of the vote in April were Islamic parties, but all of them had moderate leaders and platforms. Four of the five tickets that c ompeted in the July 5 election included a moderate Muslim ca n d id a t e, and yet a third of the voters picked the entire ly secular ticket headed by S.B.Y. For the past genera t i on, political succession has been a major challenge for Asian countries, and it has also become a burning issue in the Muslim heartland of the Middle East. Together with a successful transition out of International Mon e t a ry Fund tutelage and Paris Club debt relief, a smooth transition to a new gove rn m e n t on October 20, whether headed by S.B.Y or by Megawati, will be a major achievement for Indonesia, providing it an opportunity to set

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L ex Rief f el itself firm ly on the road to good gove rnance and an improved standard of living for its 235 million citizens. pa rt i es in flux The key st on e of Indonesia’s political system, rooted in the constitution of 1945, is a strong presidency. But in a stunning exercise in politica l a rch i t e c t u re, a set of con s t i t u t i onal amendments adopted between 1999 and 2003 injected cri t i cal ch e cks and balances into this fra m ew o rk. The con s t i t u t i on of 1945 provided for the election of a nation a l parl i ament (dpr), composed of party representatives, every five years. The dpr, together with a group of re g i onal representatives, the military, and other “f u n c t i onal groups,” formed the People’s Consultative Assembly (mpr), the primary function of which was to choose the country’s president. The president appointed the cabinet and gove rn e d largely by decree. Su h a rto formed and manipulated the three parties that “competed” in the dpr elections held between 1977 and 1997 and contro lled the selection of the other representatives who filled out the mpr. His favored party vehicle was Golkar, which evolved in the early 1970s out of an armyled anticommunist organiza t i on. The dpr routinely rubber-stamped legi s l a t i on put forw a rd by Suhart o’s cabinet, and the mpr d u t i f u lly reelected Su h a rto to the presidency every five years without opposition. In addition to instituting the direct election of the president and vice president, the amendments adopted after 1998 eliminated the “functional” representatives in the mpr. These were replaced by a senate composed of 128 directly elected, nonpartisan members, four from each of Indonesia’s 32 provinces. The mpr now consists of the dpr and the senate together, and its powers have been sharp ly curt a i l e d to include only amending the constitution, swearing in the president and vice president, and dismissing them for specified violations. The amendments also created a con s t i t u t i onal court to review laws and resolve disputed results of general elections, provided for a “general election commission of a national, permanent, and independent character,” and set forth basic human rights protections. In 2001, Indonesia underwent one of the most radical decentralizations of power in the world. Bypassing the provinces, subnational [100]

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Indonesia’s Quiet Revolution authority is now con c e n t rated in the country’s 349 kabupaten (districts) and 91 kota (cities). Although it is too soon to say to what extent such institutional changes will con t ribute to better govern a n c e, they are the chief legacies of Reformasi and should improve the prospects for routine transfers of power while reducing the potential for a re t u rn to authoritarian rule. The 1945 constitution was part of the deal Indonesia negotiated to win independence from the Du t ch. In 1950, it was replaced by a fe d e ra l constitution that instituted a parliamentary gove rnment with a titular president. The gove rnments formed under the 1950 constitution, howeve r, were fractious and short-lived; regional rebell i ons broke out, and the public beca m e A
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. served both to undermine faith in parliamentary democra cy and to stay the hand of those who had an interest in its ove rthrow. Once the elections were ove r, the long-term factors working against the parliamentary system and its creed asserted themselve s . ” These factors—especially tension among diªerent social and ethnic groups across the archipelago—still exist and represent the principal ch a llenge for the Reformasi system. The party structure is still in flux and may not settle into a viable pattern before voters’ patience runs out. Political analysts often link Indonesia’s party structure to its social structure, through the concept of aliran, usually translated as “current.” There are, according to such thinking, three “primord i a l”currents: the rural peasantry (abangan), the secular aristocracy (priyayi), and the Islamic clerics (santri). In the 1955 elections, the three currents were reflected in the rough parity among the Communist Party (pki), the Nationalist Party (pni), and the two parties that split the Muslim vote. (After a failed coup in 1965, the Communist Party leadership was exterminated and the party was banned.) The most extraordinary result of the April and July elections was the success of S.B.Y despite his lack of a close identification with any

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Democracy in action: candidate Susilo Bambang Yudhyono ...

one alira n. But even with his first-place finish in July, S.B.Y w i ll be the u n d e rdog in the September runoª unless he is able to get the backing of Golkar. If Golkar instead throws its weight behind Megawati, he will be hard-pressed to build enough support from Islamic parties to prevail. Sukarno’s nationalist party, pni, was recast as the p di during Suharto’s rule and then split in 1996 when Suharto tried to force Megawati out of politics. Her new party, pdi-p, garnered a third of the votes in the 1999 election on the strength of its deep roots and close association with the nationalist sentiment of the Sukarno era. The April 2004 election, however, was a catastrophe for the pdi-p that was only somewhat mitigated by Megawati’s second-place finish in July. The party’s future now rides on how Megawati fares in the September runoª. If she loses to S.B.Y, there is no obvious successor to pick up the pieces, and it will likely take more than a year for new leadership to emerge. Under Su h a rt o, Golkar prospered because of its use of patronage and its ability to deliver on campaign promises. Even after his dow n f a ll and disgrace, the strength of the Golkar machine enabled it to finish [102]

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and incumbent President Megawati Sukarnoputri

in second place in the 1999 elections, well ahead of the stron g e s t Islamic party. In this year’s parliamentary election, Golkar emerged on top, but only because of the poor showing of Megawati’s party and the split in the Muslim vote. Golkar’s future is hard to predict for several reasons, beginning with the surprising defeat of long-time p a rty leader Akbar Tanjung as the party’s nominee for president, followed by the poor showing of the man who defeated him, Wi ra n t o, in the July election. Wi ranto’s failure to make the September runoª puts Tanjung back in command of the party machinery, and also in a good position to use the party’s weight to decide who will be Indonesia’s next president. An alliance with Megawati would be tempting, as it would perpetuate the implicit partnership of the past three years. However, such an alliance might also push S.B.Y’s campaign into high gear and rally anti-Megawati and anti-Golkar sentiment enough to produce a humiliating defeat for the country’s two largest parties. The five leading Muslim parties won a combined 36 percent of the vote in the 1999 election, outpolling Megawati’s party by almost two points. Last April, the same five parties held their collective share at

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L ex Rief f el 35 percent but increased their margin over the single strongest party, Golkar, to more than 12 points. These numbers suggest that a coalition of Islamic parties supporting a single ticket could have won the presidency. But such a coalition is unimaginable. The Islamic aliran breeds leaders with an independent streak who would rather lose than unite behind a competitor. Although most of Indonesia’s leading political parties go back seve ral generations, they should be viewed as new parties created (or re-created) during Reformasi and defined more by personalities than by issues. As the parties become more institutionalized, they will begin to occupy more distinct zones in the political spectrum. Under strong cultural p re s s u re to avoid con f rontation, the smaller parties are likely to join broad cabinet coalitions rather than combine with others in an opposition group. One possible outcome is an extended period of rule by pdi-p or Golkar, along the lines of Mexico’s pri (the Institutional Revolutionary Pa rty). Another is that half a dozen parties will rearrange themselves into a new pattern every five years, with only minor changes in the overall direction of policy. m i l i ta ry shadow The Indon es i a n armed forces (known by their acronym, tni) still cast a long shadow over the political life of Indonesia today. In most accounts, the tni is portrayed as the dominant force in government policymaking, with an eªective veto over important decisions. The fact that retired generals led two of the tickets competing in the July 5 election re i n f o rced this view. On closer inspection, however, the tni l o oks opera t i on a lly lame and well past its prime. The tni’s image as Indonesia’s supreme power has a solid basis in history. It is still reve red for its role in winning independence f rom the Ne t h e rlands in 1950 and given credit for the stability and e c on omic growth of the Suharto era. But as an institution, the t n i has been declining for 20 years or more. Its share of the nation a l budget has fallen to less than 4 percent, com p a red with more than 25 percent in the early years of the Suharto regime. This is equivalent to less than one percent of gdp—half of what most of the tni’s Southeast Asian counterparts get. [104]

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Indonesia’s Quiet Revolution Under Reform a s i, the military has also become weaker operation a lly. This is in part an outcome of various reforms, including the formal separation of the police from the armed forces. It has also resulted from problems recruiting and training high-quality o⁄cers and procuring new equipment. There is currently no plan to develop the tni into an eªective fighting force subject to civilian control. At the beginning of 2003, the minister of defense issued a white paper that sought to set a reform agenda, but it glossed over fundamental issues such as the large amount of oª-budget funds that go to the military (an amount some estimate to be twice as large as its formal budget allocation). Since independence, the tni has maintained a command structure that para llels the civilian government down to the village level. Although it stresses the importance of defending the nation against external enemies, it has deployed its forces mainly to combat domestic insurgencies. Indonesians genera lly support the t n i’s actions to suppress insurgencies in Aceh and Papua, but the tni’s approach appears more consistent with permanent occupation than winning the hearts and minds of the people in these regions. The tni’s economic influence has also waned in recent years. Since the birth of the Indonesian nation, military units have operated a mix of legitimate and illegal businesses. In the 1970s and 1980s, a spra w l i n g network of military foundations and cooperatives sprang up, running a range of murky activities and drawing on questionable sources of funding. The tni’s resulting economic power probably peaked in the mid-1980s and then declined as the network of businesses owned and controlled by Suharto’s relatives and close friends gained prominence. Counterintuitively, the vacuum in the economy resulting from the collapse of Suharto, Inc., has been filled by thousands of small and medium-sized enterprises, not by the military. In contrast to other Asian countries such as South Korea and Thailand, not a single successful military-operated business can be found in the top ranks of Indonesian companies. As a political force, the tni is often portrayed as single-minded in pursuit of narrow interests. The military’s participation in this year’s election campaigns, however, belies such cohesion. Although active military personnel were ordered to remain neutral—to the point of waiving their right to vote—retired military o⁄cers were highly visible

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L ex Rief f el as candidates and supporters. Instead of coalescing behind a single party, however, they were scattered widely among all 24. This pattern reflects opportunism on the part of former o⁄cers (who see in politics the prospect of large financial rew a rds for minimal eªort) and of part i e s (which find that military experience gives a candidate fund-raising clout and organizational acumen). Meanwhile, a strong undercurrent of opposition to military leadership represents a credible check on creeping militarism. a p p roaching a tipping poi n t When she became president in 2001, Megawati inherited an extremely weak economy. Gdp remained below its pre–financial crisis peak, re a ched in 1996. Relations with the International Monetary Fund (imf), the World Bank, and the donor con s o rtium were strained. The country was seeking more debt relief from Pa ris Club and London Club creditors instead of phasing it out. And essential reforms were stalled, due to a power struggle between President Wahid and the parliament. Since then, the turnaround has been remarkable. The economic ministers appointed by Megawati were less political and more technocratic than their predecessors. Qu i ck ly labeled the “Dream Team,” they live d up to expectations in several key areas. In particular, led by Coordinating Minister Dorodjatun Kuntjoro-jakti and Finance Minister Boediono, they set the stage for a successful transition during 2004 out of imf balance-of-payments financing and debt relief. This step signaled the end of the recove ry from the 1997–98 financial crisis and the return to n o rmal relations with o⁄cial and private sources of external financing. A ll of Indonesia’s macroecon omic indicators improved from mid2 0 01 to early 2004, despite internal shocks such as the terro rist attacks on Bali in October 2002. Inflation fe ll from over 12 percent to 5 percent. Interest rates dropped from 17 percent to 7 percent. Foreign exchange reserves rose from $29 billion to $36 billion while the rupiah appreciated in real eªective terms. The ratio of gove rnment debt to gdp declined from more than 100 percent in 2000 to less than 70 percent at the end of last ye a r. The $1 billion international bond issue successfully floated by the Indonesian gove rnment in March 2004, bare ly a month before the parliamentary elections, underscores this exceptional record. [106]

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Indonesia’s Quiet Revolution Indonesia’s macroeconomic performance has been all the more surprising because it has been achieved without the active support of President Megawati and over the objections of at least two members of her economic team. The key to success was fiscal discipline, which Boediono was able to maintain with a combination of ch a rm, pedago gy, and toughness. Macroeconomic stability in the near term cannot be taken for granted, however. In the second quarter of this year, leading indicators began moving in unfavorable directions, presumably because of uncertainty about the elections. External factors are also now in a corre c t i onphase after an exceptionally favorable period. Rising interest rates in the United States will increase the cost of servicing external debt. The eªorts of the Chinese authorities to moderate the pace of growth and the expiration of the Multi-Fiber Agreement at the end of this year could translate into weaker demand for Indonesian exports. A steep decline in oil prices could depress new investment in the oil and gas sector just as the government is clearing away the last major hurdles. The new government that takes o⁄ce at the end of October will thus have to act quickly and skillfully to keep the economic transition on track through 2005. The bigger ch a llenge for the next gove rnment will be ove rcoming Indonesia’s current economic malaise, which is palpable. This malaise a rises from a number of fundamental questions about the country’s e c on omic potential. With a diverse array of ethnic groups sca t t e red over 6,000 islands, can Indonesia develop the social consensus to a ch i eve re f o rms to produce rapid growth over a sustained period, or w i ll it slip into the Latin Am e ri can pattern of high con s u m p t i onand recurrent debt problems? Wi ll resentment of the commercial power of the Indonesian-Chinese business community block this source of job creation? Wi ll Indonesia be able to escape the curse of having abundant natural resources, an obstacle to broad growth in other countri e s that lies at the heart of the separatist movements in Aceh and Papua? Pessimism about Indonesia stems largely from the government’s inability since the financial crisis to push the gdp growth rate back above 5 percent in order to match the rapid pace maintained throughout most of the Suharto era. Consequently, a third of the labor force—40 million people—remains underemployed, and that number is growing.

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L ex Rief f el Most analysts blame Indonesia’s sub-par growth on impediments to domestic and foreign investment, and they stress the government’s slow and inconsistent approach to removing such impediments. In the near term, economic progress will depend on Indonesia’s success in tackling three devils: an unreliable judicial system, a weak banking system, and corruption. Fortunately, the starting point for the next government is further advanced in each of these areas than daily news reports suggest. Reformasi promised to replace Su h a rto’s system of con t ract enforc ement by fiat with enforcement by impartial judges. La cking a tra d i t i on of impartiality, com m e rcial court decisions are still often delive re d to the highest bidder. The saga of the Indonesian arm of the British i n s u rance com p a ny Prudential—declared bankrupt based on an absurd claim—is just the latest of dozens of egregious rulings since 1997. During the same period, however, most of the worst rulings have been overturned in higher courts, the judiciary has been separated from the government and has started to assert its independence, and a credible blueprint for judicial reform has been adopted. The banking system’s basic problem is that many leading Indonesian business groups defaulted on their loans and participated reluctantly in workout nego t i a t i ons with their creditors, including the Indonesian Bank Restructuring Agency (ibra), which inherited a huge stock of bad loans when it recapitalized the insolvent banking system. As long as they were in workout mode, these business groups were unable to obtain new financing to expand their activities. The banks are being kept afloat with the interest being paid on the recapitaliza t i on bonds they received from the government in exchange for the loans that went into default in the 19 9 7 – 98 crisis. Although the workout process has been far from satisfactory from a broad social perspective, it has come to an end. I b ra was shut down in March. The corp o ra t e sector and the banking system are now positioned to engage in job-generating investment. In the 1990s, corruption was particularly rampant; since Reformasi began, it has become more diªuse. The electorate cl e a rly demonstrated its intolerance of corruption in the April election by defecting from Megawati’s party and staying away from Golkar in favor of S.B.Y’s pd and the “clean” pks. Institutional improvements re c e n t lyimplemented [108]

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Indonesia’s Quiet Revolution i n clude the creation of an anticorruption commission. More significa n t is the fact that Indonesia’s exceptionally vibrant press and dynamic nongovernmental organiza t i ons are learning how to expose corru p t i on and propose sensible remedies. Decentralization may have increased corruption initially, but it represents a giant step tow a rd accountability. The direct election of re g i onal leaders, due to begin soon, will be another important step. It is unrealistic to think that the momentum of recent reforms will ove rc ome these fundamental problems quickly. Hard work over a d e cade or more will be re q u i red for Indonesia to ach i eve an investment climate comparable to Malaysia’s or Thailand’s. Much of the groundwork has been laid, however, and the country may not be far from a tipping point at which the reform process and business confidence become mutually reinforcing. b eyond terror I n don esia has attracted attention from abroad in recent years p ri m a ri ly in the context of the war on terro rism. But whereas Am e ricans a re preoccupied with the global terrorist threat, Indonesians a re not. In a June survey, less than one percent of respondents listed t e r ro rism as a priority for the next government. From the U.S. perspective, Indonesian support for the war on terrorism has been half-hearted. Am e ri cans would be wron g, how ever, to condemn the I n d onesian government for a lack of coopera t i on. In the context of the country’s historical experience and the population’s current attitudes, the Megawati government has moved more aggre s s i vely against terrorists than could be expected, and the next government is likely to do even more to prevent foreign terro rist organiza t i on s from operating in Indonesia. Violence against innocent civilians has been a feature of political life in Indonesia since its struggle for independence against the Du t ch. It has been committed by secessionist movements in Su m a t ra and elsewhere, by Christian and Muslim fanatics, by indigenous people threatened by migrants, and by the tni in numerous operations to quell dissident forces. Hundreds of thousands of unarmed civilians were slaughtered by ideologically driven mobs during the mayhem

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L ex Rief f el following the failed September 1965 coup that led to the demise of the Su k a rno regime. For most Indonesians, the Bali bombings in October 2002 and the Marriott Hotel bombing in August 2003 were background noises, not burning issues. The secessionist sentiments in Aceh, Papua, and elsewhere, which are seen as threats to the nation’s territorial integrity, are of much greater concern. Nevertheless, terrorism could derail the political and economic transformations currently underway. With the train bombings in M a d rid fresh in mind, the risk of a major attack may be greatest in the weeks leading up to the presidential runoª election on September 20. If there is an incident, the instinct in the West will be to point the finger at Jemaah Islamiyah and its sympathizers. The perpetrator, however, is just as likely to be a nonreligious group, such as a military faction. Its objective could be to tip the balance in the September runoª in favor of the candidate who is more inclined to maintain the status quo or let the country slide back toward authoritarian rule. Seve ral ch a llenges just as gra ve as terro rism will face Indonesia’s next government. The massive damage being done to Indonesia’s tropical forest and ocean resources belongs at the top of the list. Others are piracy in the St rait of Malacca and nearby waters, worri s ome trends in educa t i on and health, and a bevy of human rights problems. Fo rt u n a t e ly, each of these is recognized as a cri t i cal problem by the country’s leaders, and domestic constituencies advocating essential policy re f o rms are gaining strength. Thanks to the bri lliance of the recent political restructuring, the odds are good that Indonesia’s transformation will proceed smoothly. It is worth bearing in mind, howeve r, that Indonesia’s first experiment with constitutional democracy failed in 1957, after seven years of bickering among politicians and escalating protests in the streets. The current experiment is now six years old, and it has a better record. But if the next government is unable to deliver more employment o pp o rtunities and to reduce corruption and senseless violence, Indonesia’s political transition could stall and slip into reverse—a prospect that should be equally troubling to Indonesia’s people and to the rest of the world.∂

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