The Indonesian Debacle: What Americans Need to Know and Do

September 1, 1998 Topic: Economics Regions: Asia Tags: MuslimYugoslavia

The Indonesian Debacle: What Americans Need to Know and Do

Mini Teaser: The implications of Indonesia's internal problems go well beyond its boundaries.

by Author(s):  Andrew MacIntyre

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. Hyperinflationwas 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

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 exercisethat 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.

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 Order. Irian Jaya became part of Indonesia
as a result of a dubious self-determination exercise in 1969 after
being prized loose from the Dutch with U.S. support. East Timor was
annexed militarily by Indonesia in 1976, following Portugal's
abandonment of its former colony and the outbreak of civil war there.

The resistance to Indonesian rule has been stronger in East Timor,
with the Free Papua Movement in Irian Jaya being a much smaller and
more divided grouping than Fretilin, its counterpart in East Timor.
In addition to pumping large sums of money into East Timor, Indonesia
has relied heavily on its armed forces to overcome the opposition.
This strategy has been a failure. Along with a very high death toll,
demands for independence in East Timor have continued unabated and
Jakarta has had to endure constant international condemnation in the
name of a cause that commands little public support elsewhere in the
country. With Indonesia in deep economic crisis and political flux,
and another upsurge of separatist activity in East Timor now
underway, there is a real possibility that the military's
determination to keep East Timor as part of the Republic will
dissipate, clearing the way for a separation. Ironically, while this
would eliminate a major problem for Indonesia, it would be unlikely
to bring calm to East Timor.

Essay Types: Essay