The Indonesian debacle: what Americans need to know and do.

AuthorMacIntyre, Andrew

Something very important is happening in Southeast Asia, but its significance has yet to register fully in America. Indonesia, the Brazil of Southeast Asia, is in very deep trouble. It has often been said that, as the world's fourth-largest country, Indonesia is the important country America least understands. The last time the United States paid serious attention to it was in the mid-1960s when, as the Cold War gripped Southeast Asia, Indonesia came very close to imploding. For roughly a quarter century after that, the country was a low profile economic success story, and the anchor of regional stability in Southeast Asia.

This year Indonesia has been thrown into a very deep crisis. Having made truly extraordinary economic progress and become a model of developmental rectitude for the World Bank, it is now experiencing economic devastation. Indonesia's economy has yet to bottom out, and the task of rehabilitation will be very difficult. To compound its problems, Indonesia is now also having to grapple with the task of constructing a new political system following the collapse of the deeply entrenched authoritarian regime of the long-serving strongman, Suharto. The country's political life is today changing rapidly, with the rise of a politicized Islam and other groupings in preparation for the expected reworking of the country's political framework.

There is much at stake in Indonesia today. If the economy is laid low for a long period, not only will there be major human suffering but democracy will have little chance of taking hold. The ensuing troubles would affect the well-being of Southeast Asia more generally. Indonesia stands at a threshold: this could be a transitional point at which its political and economic institutions mature, or it could just as easily slide backwards into a truly frightening abyss. How the United States responds to Indonesia's current crisis may well have long-lasting consequences. It is time for America to start paying serious attention again.

From Bust to Boom

Before turning to the questions of what has gone wrong in Indonesia and where the country is now headed, some history. Suharto's so-called New Order regime was born amidst economic and political chaos even greater than that which now grips the country. Under the erratic socialist-style economic management of his predecessor, Sukarno, the economy limped through the early 1960s before suffering a complete breakdown in 1965 as hyperinflation spiraled out of control. Intertwined with the country's worsening economic plight were mounting tensions between the very large and active Indonesian Communist Party on the Left, and the army together with Muslim groups on the Right.

The spark that finally set this combustible situation ablaze was an abortive coup attempt by disaffected military officers at the beginning of October 1965. In the ensuing confusion, Sukarno was discredited and pushed aside as Major General Suharto moved to put down the coup, link it to the Communist Party, and assume increasing control of government. What followed was a year of bloody chaos and a fundamental realignment of national politics. As the pendulum swung from left to right, the Communist Party was outlawed and a tidal wave of killing swept the country, with somewhere between one hundred thousand and one million Indonesians slaughtered in an uncontrolled anti-communist pogrom.

Backed by the military and, initially at least, a broad coalition of civilians, Suharto vowed to re-establish order and to revive the economy. This he certainly did. On the economic front he and his advisers engineered a dramatic re-orientation. A stiff stabilization program was put in place and accompanied by a range of measures to open the economy. In return, a large consortium of creditors comprising the IMF, the World Bank, the United States, and an array of other industrial countries agreed to extend Indonesia large-scale financial assistance. This proved to be one of the most successful emergency stabilization efforts ever attempted in the developing world. Hyperinflation was quickly brought under control, local Indonesian Chinese investors returned, and foreign capital began to flow in (primarily U.S. oil and mining companies and Japanese manufacturers). Indonesia's economy started to pick up very quickly.

Indonesia was also a beneficiary of the OPEC-led oil price revolution. Inevitably, a substantial portion of this bonanza was squandered or pilfered. More remarkable, however, was the fact that some of it was well used. By comparison with most other oil-rich developing countries, Indonesia was able to contain macroeconomic distortions and to ensure that a decent share of the revenue was invested in public education, health systems, and other public infrastructure. One notable by-product of the oil boom was that it reduced the country's dependence on foreign capital and encouraged a resurgence of economic nationalism. Although less open to the global economy, Indonesia continued to grow very rapidly through the 1970s on the basis of domestically oriented manufacturing and service industries and natural resource exports.

Most of the firms that prospered during this period were controlled by Chinese Indonesians. A small minority (3-5 percent of the population) and long subject to popular resentment, Chinese Indonesian business people typically got ahead by hitching their fortunes to the most influential bureaucrat or military officer they could afford, exchanging economic favors for preferential treatment and political protection. The more powerful and enduring the patron, the more successful the firm.

But not all the main economic action was taking place in the corporate sector; also critical during this first decade of rapid growth were the truly remarkable gains made in rice productivity. Where Indonesia had struggled to feed itself and had hitherto been the world's biggest importer of rice, by the early 1980s self-sufficiency in rice had been achieved.

Indonesia's economic success story underwent a fundamental change in the mid-1980s when the country was hit by a severe balance of payments crisis as a result of collapsing oil prices and the realignment of the dollar-yen relationship. In a radical restructuring exercise, the government moved to deregulate the financial sector and cut back the plethora of trade and investment restrictions that had accumulated through the oil-boom years and which prevented Indonesia from being internationally competitive. These reforms, together with a flood of foreign capital from Japan, Korea, and Taiwan in the late 1980s, saw Indonesia shift to a much more export-oriented footing as labor-intensive manufactures began to take off and surpass traditional natural resource exports. Indonesia was away on the next phase of its economic success story, which continued unabated until the crash of 1997-98.

Fundamental change occurred in the political sphere as well, though this produced international criticism rather than acclaim. The swing to authoritarian politics in Indonesia actually began as far back as 1957, when Sukarno and the army declared martial law to end the fledgling republic's short and messy experiment with parliamentary democracy. However, it was under Suharto's New Order that a stable and systematic pattern of authoritarian rule evolved. Having eliminated the Left, Suharto moved to consolidate his grip on the armed forces and the bureaucracy. Military officers were placed in oversight positions throughout the national bureaucracy and through sub-national official structures, reaching right down to the village level.

Along with tightening its grip on the state apparatus, the government worked to limit and control autonomous political activity within Indonesian society. Political parties were emasculated and became pliant instruments of the government. Interest groups were co-opted in a vast yet indolent corporatist network organized beneath the umbrella of the state political party, GOLKAR. While the electoral process was not subject to gross fraud or machine guns at the ballot box, it was nonetheless a carefully choreographed exercise that was systematically weighted in GOLKAR'S favor. As this system of political control and demobilization solidified, and with the economy continuing to boom, the position of the president became both secure and all-powerful. Every five years he was elected unopposed by the Peoples' Consultative Assembly, a tame body comprising the House of Representatives and an equal number of appointees.(1)

Employing both carrots and sticks, Suharto's New Order regime functioned smoothly for a remarkably long time. The great majority of the population enjoyed impressive economic advancement, with people in positions of importance - especially key supporters - having opportunities to capture great wealth. Still, when faced with acts of political defiance or organized dissent - whether from alienated and pious Muslims or angry and unco-opted labor activists - security forces did not hesitate to crush opponents.

Within Indonesia, the primary complaints against the regime centered on political restrictions and corruption. Internationally, the focus of political criticism centered not so much on mainstream political dissent as on human rights abuses in the treatment of separatist movements in two provinces on the eastern fringe of the archipelago: Irian Jaya and East Timor. Both territories were incorporated into the republic under the New...

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