Indonesia's Quiet Revolution

Lex Rieffel

From Foreign Affairs, September/October 2004

Summary:  Beyond headlines dominated by terrorist cells and separatist insurgencies, the world's largest majority-Muslim country has undergone a profound transformation in recent years. Reformers have quietly but brilliantly overhauled the country's long-intractable political system. The government that takes office in October will be the people's choice more than ever before-and will have an unprecedented opportunity to set Indonesia on the road to good governance and economic prosperity.

Lex Rieffel is a Visiting Fellow at the Brookings Institution.

Reformasi promised to replace Suharto's system of contract enforcement by fiat with enforcement by impartial judges. Lacking a tradition of impartiality, commercial court decisions are still often delivered to the highest bidder. The saga of the Indonesian arm of the British insurance company 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 negotiations 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 recapitalization bonds they received from the government in exchange for the loans that went into default in the 1997-98 crisis. Although the workout process has been far from satisfactory from a broad social perspective, it has come to an end. IBRA was shut down in March. The corporate 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 diffuse. The electorate clearly 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 recently implemented include the creation of an anticorruption commission. More significant is the fact that Indonesia's exceptionally vibrant press and dynamic nongovernmental organizations are learning how to expose corruption and propose sensible remedies. Decentralization may have increased corruption initially, but it represents a giant step toward accountability. The direct election of regional leaders, due to begin soon, will be another important step.

It is unrealistic to think that the momentum of recent reforms will overcome these fundamental problems quickly. Hard work over a decade or more will be required for Indonesia to achieve 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.

BEYOND TERROR

Indonesia has attracted attention from abroad in recent years primarily in the context of the war on terrorism. But whereas Americans are preoccupied with the global terrorist threat, Indonesians are not. In a June survey, less than one percent of respondents listed terrorism as a priority for the next government. From the U.S. perspective, Indonesian support for the war on terrorism has been half-hearted. Americans would be wrong, however, to condemn the Indonesian government for a lack of cooperation. In the context of the country's historical experience and the population's current attitudes, the Megawati government has moved more aggressively against terrorists than could be expected, and the next government is likely to do even more to prevent foreign terrorist organizations from operating in Indonesia.

Violence against innocent civilians has been a feature of political life in Indonesia since its struggle for independence against the Dutch. It has been committed by secessionist movements in Sumatra 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 following the failed September 1965 coup that led to the demise of the Sukarno 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 Madrid fresh in mind, the risk of a major attack may be greatest in the weeks leading up to the presidential runoff 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 runoff in favor of the candidate who is more inclined to maintain the status quo or let the country slide back toward authoritarian rule.

Several challenges just as grave as terrorism 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 Strait of Malacca and nearby waters, worrisome trends in education and health, and a bevy of human rights problems. Fortunately, each of these is recognized as a critical problem by the country's leaders, and domestic constituencies advocating essential policy reforms are gaining strength.