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Promoting Democracy and Economic Reform in Indonesia

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Promoting Democracy and Economic Reform in Indonesia No. 1291 June 4, 1999 PROMOTING DEMOCRACY AND ECONOMIC REFORM IN INDONESIA JOHN T. DORI Indonesia is important to the safety, stability, government’s ineffective response to the effects of and prosperity of Southeast Asia. The world’s the economic crisis. They took to the streets in fourth most populous country, Indonesia controls violent demonstrations that strategic sea-lanes through which pass 40 percent killed over 1,000 and cul- Produced by of the world’s commerce, including 80 percent of minated in the May 1998 The Asian Studies Center Japan’s oil supply and 70 percent of South Korea’s. resignation of President Before falling victim to the effects of the Asian eco- Suharto, who had ruled Published by nomic crisis in August 1997, Indonesia’s economy with an iron grip for 32 The Heritage Foundation had averaged 7 percent growth over the previous years. 214 Massachusetts Ave., N.E. 25 years despite being riddled with corruption and Washington, D.C. inefficiency. The political system was 20002–4999 liberalized dramatically (202) 546-4400 The Asian economic crisis hit Indonesia harder http://www.heritage.org than any other country. The value of the currency under B. J. Habibie, plummeted from around 2,450 to the dollar before Suharto’s successor as pres- the crisis to 17,000 to the dollar at the worst point. ident. Habibie has released Interest rates soared to over 50 percent in 1998, political prisoners, relaxed and inflation to over 77 percent. Because of the restrictions on the press, tremendous depreciation in the value of the cur- and allowed the free forma- rency, businesses were unable to repay their debts tion of political parties. The and insolvent banks were unable to extend credit. president’s tenure was fixed The Indonesian economy eventually would shrink at two five-year terms. by 13.7 percent in 1998. Important parliamentary elections were set for June 1999, with selection of This tremendous economic hardship led the next president to follow in November. In a sur- quickly to major changes in the political system. prise development, Habibie announced that the Indonesians had seemed willing to tolerate politi- restive Indonesian province of East Timor, invaded cal repression during economic good times; they and annexed by Jakarta in the mid-1970s, would were not so tolerant toward what they saw as their be given the opportunity in August 1999 to decide No. 1291 June 4, 1999 between independence and greater autonomy Although Indonesians ultimately are responsible within Indonesia. for their own political and economic fate, there are steps that Washington can take to facilitate Indo- This major political development has been nesia’s transformation to a more open economic marred, however, by Indonesian military support and political system: for pro-Jakarta militias in East Timor which have been killing and intimidating supporters of inde- •OOOffffffeeerr assistance to appropriate non-govern- pendence. Indonesian military support for these mental organizations to help assure that Indo- militias is particularly disturbing because violence nesia’s three major votes during 1999 are of any kind makes investors wary of Indonesia. conducted peacefully and credibly, and con- The peaceful and credible conduct of the referen- tribute to the strengthening and consolidation dum on East Timor and Indonesia’s other major of democracy. elections in 1999 would be a significant milestone •DDDecececllllaaarrree that the United States and the world in the re-establishment of investor confidence. will be watching the process and outcome of Indonesia’s votes in 1999. Indonesia’s record on much-needed economic reform also undermines investor confidence. •AAAvvvoooiiiidd peacekeeping commitments in East Jakarta has been slow to implement the kinds of Timor, which would be more likely to freeze reforms needed to restore the economy. These the conflict in place than to solve the underly- include pruning and restructuring the bloated and ing differences between the parties. crippled financial sector, implementing meaning- ful bankruptcy reform, and reducing barriers to •PPPrrreeessss Indonesia to implement badly needed trade and investment. These reforms are the mini- economic reforms and not rely on Interna- mum required to regain the faith of international tional Monetary Fund assistance to solve its investors. economic problems. Indonesia’s economic and political challenges go •PPPrrrooommmoootttee reforms in Indonesia’s military and hand in hand. An Indonesia mired in economic consider rebuilding ties with the military if it stagnation is less likely to be able to settle its polit- acts responsibly during all three of Indonesia’s ical differences peacefully and more likely to be votes during 1999. Restoration of Indonesia’s beset by ethnic, religious, and sectarian violence. participation in the International Military Edu- This harms Indonesia’s future economic prospects, cation and Training program could help move the Indonesian military toward greater profes- creating a vicious cycle of economic and political sionalism, civilian control, and respect for degeneration that threatens the stability of the human rights. Southeast Asia region. America’s interest in a peaceful and prosperous With important economic and security interests Southeast Asia requires that it assist Indonesia’s in Southeast Asia, the United States has a stake in further evolution toward democracy and free-mar- preventing Indonesia’s devolution into chaos. ket economics. An Indonesia restored to economic Chaos in Indonesia could threaten nascent eco- growth and progressing toward genuine democ- nomic recoveries underway elsewhere in the racy is in the interest of Indonesians and Ameri- region. It also could put at risk the critically cans alike. important sea-lanes under Jakarta’s control, jeop- ardizing the commercial interests of the United —John T. Dori is a Research Associate in The Asian States, the world’s largest trading power. Studies Center at The Heritage Foundation. No. 1291 June 4, 1999 PROMOTING DEMOCRACY AND ECONOMIC REFORM IN INDONESIA JOHN T. DORI Indonesia is important to the safety, stability, If Indonesia can commit itself to overcoming the and prosperity of Southeast Asia. Composed of forces that in recent years have threatened to tear it more than 13,000 islands and possessing the apart, it stands a chance of world’s fourth largest population, Indonesia con- evolving into a peaceful, Produced by trols some of the most strategically and commer- stable, and prosperous The Asian Studies Center cially important sea-lanes in the world. Before country. However, this falling victim to the effects of the Asian economic requires a firm determina- Published by crisis in August 1997, it boasted an impressive tion to remedy the effects The Heritage Foundation record of economic growth dating back a quarter of more than three decades 214 Massachusetts Ave., N.E. century, despite an economic system burdened by of political repression and Washington, D.C. endemic corruption. backward economic poli- 20002–4999 cies. It also requires a com- (202) 546-4400 http://www.heritage.org The instability wrought by the Asian economic mitment to do this crisis has brought rapid political and economic peacefully so that interna- change to Indonesia. The severe effects of the crisis tional confidence in Indo- led to violent rioting which resulted in the resigna- nesia can be restored. If tion of President Suharto in May 1998 after 32 Indonesia is unable to do years in power. Despite a $50 billion assistance this, it likely will remain package from the International Monetary Fund mired in economic malaise (IMF), Indonesia still is struggling to overcome the and sectarian violence. In effects of the crisis. Ethnic, religious, and sectarian time, it even could split violence is widespread, threatening the stability of violently into a host of the region and making investors reluctant to take a independent regions of greater and lesser viability, chance on Indonesia. This violence and the under- which would threaten the stability of Southeast lying divisions in Indonesian society that it repre- Asia. sents also threaten the success of three elections to be held this year—elections that will play an With its important economic and security inter- important part in determining Indonesia’s future. ests in Southeast Asia, the United States has a stake No. 1291 June 4, 1999 in preventing Indonesia’s devolution into chaos THREE CRITICAL ELECTIONS and assisting Indonesia’s renewed progress toward political and economic openness and liberaliza- Indonesia is in the midst of an ongoing demo- tion. cratic transition. This year, it will hold three criti- cal votes that will determine its future course. Although Indonesians ultimately are responsible These will include parliamentary elections on June for their own political and economic future, there 7, a referendum on the independence of the prov- are some steps the United States can take to assist ince of East Timor on August 8, and the selection them on their path. of Indonesia’s next president by the People’s Con- sultative Assembly in November. It is critical to •FFFiiiirrrsssttt,,,, the United States should support and U.S. interests that stability in Indonesia come as a encourage the peaceful and credible conduct result of successful democratic and economic of Indonesia’s three elections this year, the sine reform. qua non of Indonesia’s eventual evolution toward economic renewal and greater political Parliamentary Elections freedom. The first vote, scheduled for June 7, is to deter- •SSSeeecccooonnnddd,,,, the United States should encourage mine the makeup of the 500-seat Indonesian Par- Indonesia to implement further political liament, or DPR. The only nationwide poll of the reforms that consolidate and build on recent three, it will be a monumental undertaking. More democratic gains. than 130 million registered voters from 300 ethnic groups will cast ballots at 250,000 polling places •TTThhhiiiirrrddd,,,, the United States should urge Indonesia spread across three time zones and 6,000 inhab- to adopt free-market economic reforms, which ited islands.
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