Introduction

On 31 October 2001 Jakarta's mass media were full of negative assessments about the performance of President Megawati in the first 100 days. An exception was Arief Budiman from Melbourne University (known to be somewhat left-of-centre), who recognized three achievements of Megawati. First, she restored normal relations with the International Monetary Fund (IMF); second, she cultivated good relations with the military; and third, she appeased the Muslim community with her statement opposing the war in Afghanistan.

Representing the economic Cabinet, Dorodjatun Kuntjoro-Jakti, Co-ordinating Minister of Economics, could probably make the complaint that the criticisms have not been completely fair to him as well as the rest of the Cabinet members, who were all inaugurated on 10 August 2001, after more than two weeks of pondering by Megawati over the formation of her Cabinet. For them, the first 100 days would have been on 19 November, although Megawati was inaugurated on 23 July 2001.

Would this brief interlude make much difference for the economic co-ordinating minister? Perhaps he might hope it could, or would. Because, within about two weeks of the Cabinet's inauguration, on 7–8 November 2001, there was to be the Consultative Group on Indonesia (CGI) donors’ conference in Jakarta. If that conference concluded well under the very difficult circumstances, including the perceived safety of visiting foreign diplomats, and the aid consortium accepted the progress reports of the Indonesian Government and pledged aid disbursement for 2002 according to the perceived needs of the government, it might have a positive impact on the government score card. Immediately after the CGI conference, the IMF would review the implementation of the third Letter of Intent (LoI), and the draft for a fourth, containing commitments for 2002; if that process went well, it might add to the confidence of the market and strengthen, or at least not further weaken, the rupiah.

Introduction

The economic crisis in 1997 has led to massive public and private debts in Indonesia. Total public debt tripled from about $55.2 billion in 1996 to $152 billion in 2000, before declining slightly to $141 billion in 2001 (see Table 11.1). Much of this increase is mainly due to the unprecedented increase in domestic debt (Rp 700 trillion, or roughly $70 billion) in the form of bond issuance to cover the rising cost of banking bail-out and restructuring.

While a massive public debt is highly problematic, mounting private debt has also created other complications. The private foreign debt increased very rapidly from less than $19 billion in 1990 to about $55 billion in 1996. However, the private debt is often underestimated given the lack of proper data. In 1997 private foreign debt increased very sharply by about 50 per cent to $82 billion, but this was mainly because of better debt recording. In 2000 the private foreign debt remained high at almost $67 billion, while the private domestic debt was $60 billion — but this amount included the non-performing loans transferred to the government as part of the bank recapitalization programme of around $40 billion.

Figure 11.1 illustrates the size of Indonesia's external debt in terms of GDP, and it is clear that both private and public external debts have increased markedly during the crisis. There was a spike in 1998, mainly because of the massive currency depreciation and a sharp GDP contraction. The foreign debt/GDP ratio has declined since then but it remains high at more than 90 per cent of the GDP. Figure 11.2 illustrates the size of the public debt in terms of the GDP, which clearly shows the huge increase in domestic debt since 1998.

Public debt service payments accounted for around 25–26 per cent of the government's domestic revenue in 2001 and 2002, and this is just for interest alone. Domestic interest payments are expected to be at least twice as large as external interest payments, and the future stream of principal payments on both the external and domestic debts looks like a time bomb waiting to explode.

Introduction

The anticipation of regional autonomy and fiscal decentralization in Indonesia, especially during the period between the parliament's ratification of laws 22/1999 and 25/1999 and the end of 2000, finally became reality when the new millennium started. When the two laws were ratified in June 1999, the implementation of those laws was estimated to be two years from that date, and it meant that regional autonomy and fiscal decentralization would formally start in May 2001. However, the change in national leadership from Habibie to Abdurrahman Wahid and the change in fiscal year from 1 April–31 March to 1 January–31 December forced the earlier implementation of the most important agenda in Indonesia — perhaps only secondary in importance to national independence itself. From the point of view of the regional governments, the earlier implementation was what most of them wanted from the central government. Despite the question marks over the capabilities of the local governments to handle autonomy and fiscal decentralization, only a few local governments raised doubts about their own capabilities. Regional autonomy and fiscal decentralization have been a crucial political agenda item for both the central and local governments.

Law 25/1999 deals with the fiscal decentralization process that will create a new intergovernmental transfer scheme between the central government and the local governments. Some items in the law are new, such as the natural resource revenue sharing and the general purpose grant called the general allocation fund (Dana Alokasi Umum, DAU). The natural resource revenue sharing exists mostly to compensate for the central government's overexploitation of resource-rich, but troubled, regions such as Papua, Aceh, Riau, and East Kalimantan. On the other hand, the DAU was designed to equalize the fiscal capacity among the regions. Since it is a general purpose grant, the local governments have full freedom in spending it. This grant is totally different from the old scheme, which clearly showed the domination of the central government in determining the spending priorities of the local governments.

Introduction

On 12 October 2002 a bomb blast destroyed the Sari Club in Bali, resulting in almost 200 deaths, including around 100 Australian tourists to the fabled holiday island. This attack was the single most devastating terrorist attack since the infamous 11 September attacks against targets on the American mainland. No group has claimed responsibility for the attack in Bali, but even before all the evidence is gathered, it is probably not premature to assume that a radical Islamist group was behind it. A threat by Osama bin Laden to Australia in late 2001,1 due to Australia's involvement in East Timor, adds strongly to the suspicion that Al-Qaeda was behind the attack. Discussions about Southeast Asia as the “second front” in the global war on terrorism by Western officials and media sources have generally been rejected as alarmist by the Indonesian Government itself. Does the Bali blast signal that Indonesia is now a home for terrorism linked to Al-Qaeda? In a sense Indonesia's denial of the presence of an international terrorist element within its borders, and its resulting failure to act against it, has been dramatically undermined by the bombing. Although it remains unknown exactly who planted the bomb, and for what purpose, the Bali explosion has a number of ramifications for Indonesia. A statement by the Indonesian Government that this was the work of Al-Qaeda is an important turning point as it is an admission that Indonesia may be home to a radical fringe. The Bali blast will change, irrevocably, the image of Southeast Asia as a potential home to Islamic radicalism. While the majority of Indonesia's Muslims have demonstrated a commitment to either a secular state or moderate forms of Islamic governance, there exists a tiny minority element that seems sympathetic to Al-Qaeda's goals.

Outside of the immediate threat of violence, it seems unlikely that radical versions of political Islam can seize political power through legitimate political processes (refer to Azyumardi Azra's chapter in this volume).

Indonesia faces challenges on many fronts, or, as it is commonly said in Indonesia itself, the country continues to face a “multidimensional crisis”. Paralysis gripped the political structure from early 2001, as the Abdurrahman Wahid administration became virtually moribund and was unable to provide leadership on any issue. When Megawati Sukarnoputri acceded to the presidency, speculation was rife about what sort of government she would lead. Her strong Cabinet line-up immediately raised expectations that this would be an executive that would face up to the myriad problems facing Indonesia, and this was evident from the dramatic strengthening of the rupiah immediately after the announcement. However, within months disillusionment with the leadership of the executive was evident once more. To make matters worse, the recent Bali bombing dramatically demonstrated that international terrorism had come to Indonesia. Not only does terrorism add to an already overcrowded agenda, it could very well be the greatest challenge for Megawati's government.

This volume features a series of chapters that explore some of the major issues that confront the Megawati administration. This book largely stems from a public forum entitled “The First 100 Days of President Megawati: Political and Economic Perspectives”, jointly hosted in Singapore by the Institute of Southeast Asian Studies (ISEAS) and the Centre for Strategic and International Studies (CSIS) on 1 November 2001. Addresses given at this forum by Todung Mulya Lubis, Jusuf Wanandi, Azyumardi Azra, Mohammad Sadli, Anggito Abimanyu, and J. Soedradjad Djiwandono are included in this volume. New chapters have also been added to supplement the original seminar papers. The forum brought together a group of individuals who can claim to be academics and practitioners. The idea behind the forum on 1 November 2001 was to assess the general direction, and the prospects, of the Megawati administration after its first 100 days. It was generally agreed that this time period is too short in which to evaluate any administration, although some broad trends may be discernible. Rather than an assessment of the presidency itself, the chapters in this volume all assess some of the key issues that will confront the Megawati administration.

After fifty-six years of independence, it is reasonable for Indonesians to question whether they have learned from their long history, be it from the tumultuous pre-independence period, or the independence struggles. Many say that Indonesia is a relatively young nation, and it is highly unlikely that it will be able to achieve nationhood without a long arduous process of nation building. Even the United States took several centuries to attain the national coherence that it enjoys today. Yet many Indonesian citizens are increasingly disappointed in the democratic process, which has been undermined by many crises, be it in the economic, political, social, legal, or cultural arena. After the political ascendancy of the Gus Dur–Megawati government in 1999, there were renewed hopes that Indonesia had, once again, a dwi-tunggal (dual team), a duo that would be able to work together to foster national development and strengthen national interests. During the immediate post-Soeharto period, reforms seemed to have gained momentum and there was growing optimism about the future of the country. Unfortunately, such optimism was very short-lived as political rivalry set in and tragically, the dwi-tunggal disintegrated. The tragedy of dwi-tunggal Soekarno–Hatta was repeated by the failure of the dwi-tunggal of Gus Dur–Megawati.

In the months following the resignation of Soeharto, the optimism shared by many Indonesians was not unjustified. The new government forced the military to retreat from its “dual function”, upheld civilian supremacy, removed virtually all press restrictions, initiated reconciliation with regional opposition, and opened the door for the development of civil society. If opinion polls had been taken at that time, there would be every indication that public support for the government would have been strong. These domestic developments were also supported by the international community, which considered these reforms in Indonesia as a victory for democracy.

Introduction

The issues and challenges facing President Megawati's government, with respect to its dealings with the International Monetary Fund (IMF), originated from the previous governments. An evaluation of the relationship between the Indonesian Government and the IMF should begin with the latter's early efforts to address the Indonesian crisis through its programmes under the stand-by arrangement.

Prior to the 1997 financial crisis, the IMF's engagement with Indonesia was occasioned by the balance of payments' problems experienced by the country in the late 1960s and early 1970s. After that, for more than two decades, Indonesia had enjoyed a very good working relationship with the IMF without a need for any stand-by loans.

Faced with the financial shocks that struck Indonesia in July 1997, the government of Indonesia initially reacted by widening the intervention band for the rupiah and then replacing the band with a flexible exchange rate management system. This was supported by other prudent fiscal and monetary policies. Unfortunately, this did not restore market confidence in the Indonesian economy. In the end the Soeharto government decided to seek the IMF's help, requesting the use of its facility. In October 1997 the Indonesian Government signed the first Letter of Intent (LoI), which was approved by the IMF board of executive directors a month later. This arrangement triggered an active involvement of the IMF in the adjustment programmes that the Indonesian Government had to adopt to address the financial crisis.

This chapter describes the nature of the IMF's involvement in Indonesia's efforts to resolve the financial crisis confronting the nation, its relationship with the Indonesian Government, as well as the likely prospects for the near future. It also gives an assessment of why certain steps were taken while others were not. It is hoped that this will shed some light on the lessons to be learned by both the Indonesian Government and the IMF in resolving the crisis and paving the way towards recovery.

Introduction

The success or failure of the Megawati government will depend heavily on whether her “dream team” economic Cabinet can deliver a sustained economic recovery through to 2004. Accomplishing this will require success on a wide range of policy reforms. However, an issue that could derail the entire process is fiscal sustainability, that is, the ability of the Indonesian Government to finance its expenditures within a specified timeframe. For much of the past thirty years, few observers questioned the sustainability of the Indonesian Government's finances. But the economic crisis changed everything. Honouring the deposit guarantee that was issued in early 1998 and covering the liquidity support given to the banking system by Bank Indonesia have created over Rp650 trillion in domestic debt (well over 40 per cent of GDP) that must be serviced each year. The depreciation of the rupiah has substantially increased the value of the government's foreign debt, putting further stress on the government budget.

The implementation of fiscal decentralization in response to demands for greater regional autonomy has also created significant new demands for expenditures. The Megawati government must decide how to balance these demands for new and expanded spending with the limited fiscal resources that it has at its disposal.

This is a significant challenge for the new administration. But fortunately, President Megawati Sukarnoputri has already shown that she can make the tough decisions that are necessary to ensure fiscal sustainability. Even before assuming the presidency, the then Vice-President was able to break the bureaucratic logjam that placed the 2001 budget in jeopardy. When the 2001 budget was passed in late 2000, it was believed that the budget deficit could be kept within the limits of available financing. However, as the 2001 calendar year progressed, concerns arose that the budget might be spiralling out of control. One early problem was the cancellation of certain programme loans that deprived the budget of some of its financing.

Introduction

The implementation of foreign policy is closely related to the concept of national interests. An effective foreign policy would be one that achieves the objectives laid down by the country concerned in pursuance of its national interests. Without discounting the idiosyncrasies of particular leaders in the formulation and implementation of a country's foreign policy, the analysis of national interests will help to clarify the purpose, dynamism, and direction of foreign policy. Although there are disagreements on the nature of national interests — objective and permanent or subjective and changeable — there is little doubt that national survival and economic well-being constitute the core of any nation's interests. The content of a country's foreign policy, and how it conducts itself beyond its national borders, is primarily determined by its relative power in the international community. While some countries with superior military and economic strength have ambitions to exercise regional or even global dominance, others only wish to focus on their internal problems.

Despite their heterogeneity, developing countries on the whole share a basic similarity in their national interests, and hence foreignpolicy objectives. For these countries, the demands of nation building tend to overwhelm all other considerations. As R.C. Good argues, “the foreign policy of a new state cannot be understood exclusively in the light of domestic necessities; but unless the omnipresent task of state-building is allowed to illuminate the objectives and motives of foreign policy, it cannot be understood at all”. As such, for a new state, foreign policy is mainly — though not exclusively — a response to domestic conditions, not to external problems.

As most developing countries have suffered from colonialism and imperialism, preservation of national sovereignty is usually one of the most important foreign policy objectives. Developing countries are often extremely sensitive to any moves, particularly those coming from the developed world, which could be construed as interference in their internal affairs. Related to national sovereignty is territorial integrity, for many developing countries are still nation states in the making, with regions within each country struggling for separatism.

Introduction

Two and a half years have passed since an overwhelming majority of the East Timorese opted for separation from Indonesia at the United Nations (UN)-supervised ballot. East Timor is now preparing itself under the supervision of the UN to become an independent nation. Although not travelling an easy path, it has made steady progress towards establishing self-government.

In assessing the relations between Indonesia and East Timor, however, two crucial problems remain: the identification and punishment of individuals responsible for human rights violations in East Timor and the treatment of the East Timorese refugees still in West Timor. This chapter examines one of these two residual problems — specifically, the Indonesian Government's responses to domestic and international pressures to identify and punish those responsible for human rights violations that occurred prior to and immediately after the ballot. This chapter will have a special focus on the politics behind the two phases of the national investigation into the case, and briefly observe the preparation for the trials, which are still in progress.

The first phase of investigation was a preliminary inquiry (penyelidikan) conducted by the Commission of Inquiry for Human Rights Violations in East Timor (Komisi Penyelidikan Pelanggaran Hak Asasi Manusia di Timor Timur, KPP-HAM Timtim), which was formed by the Indonesian National Commission of Human Rights (Komnas HAM). This was followed by an investigation (penyidikan) conducted by the Joint Investigation Team (Tim Penyidik Gabungan, TPG) formed by the Attorney General's Office (AGO). The preparation for the trials has involved many governmental actors, but the AGO, the Supreme Court, and the Ministry of Justice and Human Rights are the main ones.

KPP-HAM's work gained high marks from the international community. Despite initial doubts, the commission showed integrity and independence as a team, finally issuing a groundbreaking report which included a list of names of the high-ranking military and police officers and their civilian backers considered responsible for gross human rights violations in East Timor. In contrast, the follow-up investigation by the AGO received little praise, either domestically or internationally.

Introduction

Since Indonesia's independence in August 1945, the province of Aceh in northern Sumatra has often been described as a centre of resistance against the central government in Jakarta. Led by an influential ulama (religious leader), Tengku Muhammad Daud Beureueh, Aceh officially launched a rebellion against the central government in 1953. This movement, known as Darul Islam (DI), aimed to create a Negara Islam Indonesia (NII, Islamic State of Indonesia) as part of a wide movement in Indonesia, notably in West Java and South Sulawesi. This clearly demonstrates that Aceh's DI rebellion was never meant to seek a separate independent state outside of Indonesia. Its original goal was only to impose dramatic changes in the nature of the state within the existing state structure, namely the Islamization of the Indonesian state. When the rebellion was finally brought to an end in 1962, it had failed to achieve that goal.

As a result of negotiation between the central government and Aceh rebel forces, the province was, however, given a daerah istimewa (special region) status and promised a broad autonomy in the fields of religion, adat (customary law), and education. It was expected at the time that the compromise would eliminate sources of discontentment within the Acehnese society against the central government in Jakarta. However, this promise was never fulfilled by the central government. Consequently, a subsequent rebellion against Jakarta, which took the form of a secessionist movement, led by Gerakan Aceh Merdeka (GAM, Free Aceh Movement), resurfaced in 1976. Since then, Aceh has continued to pose a serious challenge to the territorial integrity of Indonesia during the New Order period and beyond.

Indeed, the protracted conflict in Aceh, which has escalated since the downfall of President Soeharto's New Order government in May 1998, constitutes one of the bloodiest conflicts in contemporary Southeast Asia. Various attempts by the main parties to the conflict — the Indonesian Government and GAM — to seek a peaceful solution through negotiation have not made significant progress. Several agreements to reduce the violent confrontations between the government of Indonesia and GAM failed to achieve results.

Introduction

To understand changes in the Indonesian military (Tentara Nasional Indonesia, TNI), particularly its political role, it is necessary to consider the wider political reforms in Indonesia, since reform in the TNI is only a part of the political reforms. Indonesia today is in a difficult period of transition following forty years of authoritarian rule under Soekarno (eight years) and Soeharto (thirty-two years). Therefore, the pendulum of social and political development tends to swing to the other extreme, creating a transition period characterized by fluidity and uncertainty.

The Indonesian crisis is a deep one, encompassing political, economic, social, and even cultural aspects. It is so complex because the economic crisis was followed by a change of leadership in an environment of globalization that has significant effects upon values and identities. Therefore, it will take some years before things settle down and the crisis can be considered to have been overcome. Economic restructuring will take some time to be completed because of the huge magnitude of restructuring, and especially when the team of economic ministers remains less than active. In the political field a process of democratization has been unleashed. To a certain extent, this will be accompanied by some destabilizing factors. In the midst of this, the armed forces, and their prospects, loom large over Indonesia. Professionalization of the army has only just begun, and will take some time to materialize. The military were for so long Soeharto's “praetorian guard”, and thus completely corrupted — now they are also completely demoralized. This has weakened their capability to maintain law and order, resulting in a severely deteriorating security environment.

The challenge for Indonesia is to maintain some sense of identity and its values and culture. In the meantime, there has been a backlash against globalization. Efforts to overcome this are very important. It is perhaps a natural reaction for the people to revert to their traditional values, to their religion, and to their ethnic communities in their search for an anchor.

Introduction

The Megawati government was only about five months old at the time of writing. It seems rather unfair to pass judgment on the performance of a new government within a year. This is particularly so in the case of Indonesia, a large country and one rather difficult to govern, one that is faced with huge problems in almost every aspect of life. Megawati inherited difficult and complex problems that she must try to resolve within a political environment that is fragile, experimental, uncertain, and often bordering on anarchy. But the performance of the government should not be measured only by what it has delivered. The informed public does not expect Megawati to perform miracles. In fact, the general expectation has been rather modest in terms of what this government can deliver.

Megawati's first hundred days almost coincided with the annual session of the People's Consultative Assembly (Majelis Permusyawaratan Rakyat, MPR), held from 1 to 9 November 2001. The MPR is the highest political body that elects the President (and Vice-President) and formulates the broad outlines of state policy to be implemented by the government. In the past the MPR met only once in five years. The annual session was introduced after the fall of Soeharto, as part of a political reform. While an accountability speech by the President will be given only at the end of the five-year term, the annual sessions of the MPR require the President to provide a progress report. There was not much that Megawati could report on at the November 2001 session.

Megawati's humble approach, by admitting that there was little progress, was well received by most factions in the MPR. The report was rather well-crafted in terms of outlining the main problems that Indonesia faced, but it lacked details on concrete plans and timetables for resolving them.

Introduction

It is a fact that Indonesia's economic performance in the first thirty years of the New Order government had been fairly impressive. In 1969, Indonesia's per capita income was only about US$70. By 1996, the per capita income had increased more than tenfold to US$1080. The continued economic growth in the thirty years of the New Order period had transformed the structure of the economy. Using Chenery and Syrquin's (1975) terms, structural change takes place as per capita income rises.

Booth (1998) has stated that the years from the mid-1960s to the early 1980s were notable ones in Indonesian economic history. The average annual rate of growth of GDP accelerated to more than 7 per cent per annum. This period also coincided with a significant improvement in the country's terms of trade.

However, Indonesia was confronted with a series of problems in the 1980s. The decline in oil prices after 1982 sharply reduced export earnings and budget revenues. At the peak of the oil-boom years, 80 per cent of export earnings and 70 per cent of budget revenue came from oil. As a result, the large decline in oil prices severed Indonesia's balance of payments. The government undertook some adjustment programmes to increase economic efficiency and altered its trade regime to be more outward-looking, making the development of non-oil and gas exports a top priority. During 1983 to 1995, the government introduced no less than twenty-four packages of economic reforms aimed at increasing economic efficiency and encouraging investment as well as non-oil exports. Along with this change of orientation, the government also shifted its investment policy from investment control to investment encouragement.

This adjustment programme commenced in 1983 and was intensified following the dramatic drop of oil prices in 1986. In 1983, the government cut public investment, initiated a major re-phasing of large capital-intensive projects, devalued the rupiah, and undertook financial reforms to remove interest-rate controls and credit ceilings. In 1984-86, tax reforms were introduced to mobilize domestic resources. Finally, various trade reforms were launched to improve the trade and industrial policy regime.

In 1997, however, Indonesia faced the most serious problem in its economic history.

Introduction

An unprecedented reversed stream of population movement characterizes the pattern of Indonesia's demographic configuration today. Thousands of migrant families were forced to leave their homes as rampant conflict erupted in several provinces that were previously major destination areas of the state's transmigration policy. Social conflicts, among others, were manifested in the form of violence between migrants and the local population, apparently marking the shattering of the New Order's political order. Soeharto himself, the New Order's main pillar, was hesitantly pushed down, after more than three decades at the apex of power. The interconnection of population and conflict is not a new phenomenon, as Choucri (1984) has argued, “…conflict is a central feature of all political behavior, at all levels of human interaction, and the prominence of population variables in shaping political behavior places population issues and conflict in close proximity”. The incidence of social conflicts in Indonesia in 1999 and 2000 shows that, given the archipelagic nature of the country and its ethnic and religious plurality, the most serious population variable that has a strong link with social conflict has been geographical population mobility. As the conflict is often strongly loaded with an ethnic tone, the lack of information on the ethnic background of the migrants has resulted in difficulties for social demographers and social scientists in general to comprehend the conflict.

The demography of Indonesia has long been the object of the ruling élite's engineering schemes that have resulted in the establishment of current political-demographic construction. Besides its explicit social and economic objectives, strategic and political goals have always been at the centre of the state's demographic engineering practices. Populating the empty areas in the outer islands through colonial emigration policy and post-colonial transmigration policy has been a major demographic engineering initiative for almost a century. After independence, national integration was the ultimate goal perceived by the national leaders as the major justification to continue engineering the country's demographic configuration.