Indonesia - Council on Foreign Relations

Indonesia - Council on Foreign Relations



Political and Economic Lessons From Democratic Transitions

Joshua Kurlantzick

June 2013

Civil Society, Markets, and Democracy Initiative

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Since the Asian financial crisis precipitated Major General Suharto’s fall in 1998, ong>Indonesiaong> has

adopted a more inclusive political system, reduced the military’s authority, empowered local jurisdictions,

achieved stability across the archipelago, and sustained strong economic growth. Yet these remarkable

successes may have reached their limit, and daunting economic and political challenges remain.

After ong>Indonesiaong>’s independence from the Netherlands in 1949, founding father Sukarno presided

over political instability and slow growth. The tenets of his “guided democracy” (actually a precarious

authoritarianism) included the use of the ong>Indonesiaong>n language and the concept of pancasila, a mix of

nationalism, support for different types of monotheism, and socialism employed to enhance Sukarno’s

power and limit the strength of Islamists.

Suharto seized power from Sukarno in 1967. His one-party developmental state brought three

decades of sustained growth but also political slumber. Though authoritarian, Suharto’s technocratic

regime invested in infrastructure, education, health, and agriculture. He shifted the country from an

agrarian base to low-end export-oriented manufacturing. Economic growth averaged over 7 percent

between 1985 and 1997, and the poverty rate fell from almost 60 percent in 1968 to 13 percent in


Nonetheless, Suharto’s economic policies had weaknesses, including unsustainable foreign debt,

poor corporate governance and financial regulation, and massive corruption. Estimates of his and his

family’s alleged take from the treasury range as high as $35 billion.

The Asian financial crisis, which began in 1997, exposed these weaknesses. As it intensified, ong>Indonesiaong>n

companies—many controlled by Suharto and his allies—could not service their debts. Investors

fled, depressing the rupiah. Scores of banks collapsed, wiping out savings. The price of oil, one of

ong>Indonesiaong>’s chief exports, reached record lows even as China was challenging ong>Indonesiaong>’s advantage

in low-end manufacturing.

The economy shrank by 13 percent in 1998, and an additional 10 percent of ong>Indonesiaong>ns fell into

poverty between 1998 and 2000. Suharto was forced to seek a rescue package from the International

Monetary Fund (IMF). At its direction, the government broke up several monopolies and consolidated

banks, though the reforms were limited. The image of then–IMF chief Michel Camdessus towering

over Suharto made the dictator look weak and inept.

Protests mounted in Jakarta and elsewhere as citizens lost their fear of Suharto’s security forces. In

1998, Suharto stepped down, handing power to his vice president, B. J. Habibie. An accidental

change agent, Habibie was surprisingly open to real reform. He allowed free legislative elections in

1999, which, contrary to many predictions, were largely peaceful. He also allowed East Timor to

leave the country and initiated political and economic decentralization that proved critical to ong>Indonesiaong>’s


Following Habibie, ong>Indonesiaong> suffered through the short, weak presidencies of Abdurrahman

Wahid and Megawati Sukarnoputri. However, the country’s reform process has accelerated since

2004. After winning that year’s presidential election, former general Susilo Bambang Yudhoyono

made fighting corruption a centerpiece of his administration. He also bolstered infrastructure and

advanced business-friendly reforms. Foreign investors returned to ong>Indonesiaong> and growth accelerated

to more than 6 percent per year, although Yudhoyono has slowed his commitment to reforms since

his reelection in 2009.

Pathways to Freedom: Political and Economic Lessons From Democratic Transitions, a new book from

the ong>Councilong> on Foreign Relations, explores ong>Indonesiaong>’s progress and challenges in six areas of economic,

political, and social development.



Inequality helped spark the 1997–98 unrest that presaged ong>Indonesiaong>’s transition. Although Suharto’s

policies vastly improved citizens’ lives, he and his cronies amassed wealth ostentatiously. Many believed

he privileged ethnic Chinese industrialists and excluded non-Javanese from senior positions.

These perceptions—though rooted primarily in racism—led to broad anti-Chinese violence and contributed

to the chaotic atmosphere of the late 1990s.

After Suharto’s fall, income inequality widened significantly as the economic downturn fell hardest

on the poor. Governments in the 2000s expanded transfer programs and subsidies for rice,

healthcare, and education. These efforts, combined with strong growth, have reduced poverty. But

inequality remains a problem. Wages in low-income fields such as agriculture and apparel manufacturing

are stagnant even as educated ong>Indonesiaong>ns command high salaries in areas such as finance and

information technology. ong>Indonesiaong>n leaders have failed to manage expectations that democracy

would immediately bring prosperity, and some elites worry that if ong>Indonesiaong> democratizes without

significantly reducing poverty, populism might take hold.


ong>Indonesiaong> has recently benefited from a resumption of strong economic growth. Although rising

commodity prices have helped, the country is diversifying away from resource extraction. Leaders

have worked to tackle corruption and strengthen regulation and corporate governance while maintaining

pro-growth macroeconomic policies. The country’s GDP surpassed $1 trillion in 2010 for

the first time.

Still, economic challenges remain. Greater local control and improved practices by foreign firms

have cooled public anger over resource extraction, but tensions persist, especially in mineral-rich Papua.

The Yudhoyono government has passed laws designed to nationalize part of many extraction

ventures, and in the past year economic nationalism has spiked significantly. While popular, this

could deprive ong>Indonesiaong> of technology and expertise. Graft, poor government coordination, and protectionist

policies also present obstacles. Foreign investment is rising sharply, but ong>Indonesiaong> still attracts

less U.S. investment than Belgium. Finally, the economy has struggled to ascend the valueadded

scale and make its resource exploitation more sustainable. As decentralization has given them

a greater share of resource income, local leaders have shown little interest in environmental protection.



The street protests of 1997–98 and massive participation in the 1999 election made ong>Indonesiaong>ns feel

that popular mobilization had been critical to the transition. This made them willing to endure the

period of economic and political uncertainty that followed. The media also helped poke holes in Suharto’s

fading regime and generate support for the transition.

Building on this shift, ong>Indonesiaong>n media flourished in the 2000s. Local radio stations, newspapers,

and Web outlets helped citizens understand the devolution of new powers to local authorities and

became essential to holding them to account. Mobile phones, the Internet, and low-cost airlines also

helped knit the country together. In 2011, ong>Indonesiaong> had the world’s third-highest number of Facbook


In the civil society sphere, ong>Indonesiaong>’s moderate Islamic organizations, some of which count tens

of millions of members, were critical in ensuring a peaceful transition that led to secular democracy.

Their leaders helped uphold the concept of a nation that is Muslim-majority, but not Muslim-only.

Still, radicalism remains a problem. Political decentralization has allowed harder-line Islamic parties

to dominate some local politics, and schools formed by Jemaah Islamiah (JI) and other militant

groups became effective recruiting grounds. President Yudhoyono has used speeches, a television

campaign featuring former militants, and a deradicalization effort to combat militancy. By the late

2000s, the government had effectively dismantled JI, though militant attacks against religious minorities

are on the rise.



A major priority since ong>Indonesiaong>’s transition has been corruption. President Yudhoyono has supported

the Corruption Eradication Commission (KPK) created in 2002, defending its independence

and saying that no one, including his family, should be outside its reach. ong>Indonesiaong>’s global ranking in

perceptions of corruption has improved, but some activists believe the KPK is too cautious. Moreover,

though Yudhoyono is regarded as personally clean, graft scandals have ensnared senior officials

in his party.

ong>Indonesiaong> has also failed to address serious human-rights abuses, particularly by military leaders.

During the transition, civilian leaders made clear to senior officers that if they accepted political

change, the government would not prosecute officers for abuses in Timor, Aceh, or Papua, or against

Suharto’s political opponents. Special courts created after Suharto to address abuses have produced

no convictions. This whitewashing may have been necessary to persuade the military to relinquish

political power. However, it perpetuated a climate of impunity that many believe has contributed to

continuing abuses in places where the military retains substantial power, such as Papua.


Amid concern over restive regions in the late 1990s, Jakarta’s elites came to see devolution of power

away from the central government as the least-worst solution to keeping ong>Indonesiaong> unified, preserving

secular government, avoiding more violence, and jump-starting the economy. The process allowed

subnational governments to keep and use a greater percentage of tax and natural-resource revenues,

brought public services closer to the people, and increased the scope and frequency of local

and provincial elections. Some regions also gained special rights that allowed them to incorporate

some political traditions into the modern day. Devolution helped cool separatist sentiments, improve

services, boost budget transparency, and consolidate a democratic culture. However, it decentralized

graft as well.

ong>Indonesiaong>’s transition also brought the civilianization of the armed forces. Under Suharto, military-controlled

corporations operated with minimal civilian oversight and committed massacres in

outlying regions. Officers faced no public accountability and enjoyed a constitutionally guaranteed

political role. Successive civilian governments convinced military leaders that a divorce from politics

would preserve the military’s positive reputation, which was endangered by human-rights abuses.

Governments also essentially offered senior officers financial incentives, including pensions and an

increased military budget, to leave the political sphere.


Nearly 60 percent of ong>Indonesiaong>ns are younger than thirty. This youthful population constitutes a major

economic advantage. But to capitalize on it, ong>Indonesiaong> must improve its education system. Few

schools have Internet connections and other technology, and, despite increasing budgets, many are

forced to collect fees from parents. Decentralization was supposed to help the education system by

opening local politicians to parental pressure, but these politicians have not generally prioritized

schools. As a result, ong>Indonesiaong>’s economy depends too heavily on lower-skilled resource extraction

and agriculture.

Urbanization is another critical trend. In the 1960s, Suharto and his security forces used ong>Indonesiaong>ns’

isolation to spread disinformation. By the 1990s, growing urbanization and expanding communications

technology made this more difficult. The country’s young and increasingly urban population

has caused significant tension in recent years as a growing disconnect emerges between young,

educated ong>Indonesiaong>ns and political elites, who have not absorbed young activists into their senior




ong>Indonesiaong> has much to be proud of, especially given its perilous state in the late 1990s and early

2000s. However, security forces continue to act brutally in some regions, schools are not producing

knowledge workers and entrepreneurs, and the successful transition created high expectations that

elected politicians are struggling to meet. Leaders will have to deliver freer politics and more inclusive

growth to preserve and extend ong>Indonesiaong>’s gains.



1949: ong>Indonesiaong> Gains Sovereignty, Sukarno Becomes President

After years of struggle for independence from the Netherlands, its longtime colonial master,

ong>Indonesiaong> becomes a sovereign country on December 27, and Sukarno becomes its first

president. In 1957, he institutes a policy of “guided democracy” that is, in effect, a precarious

authoritarianism. Sukarno promotes secularism by encouraging the speaking of ong>Indonesiaong>n

throughout the archipelago, instead of or in addition to local languages. Secularism also rests

on the concept of pancasila, a mix of nationalism, monotheism, and socialism that Sukarno

uses to fend off efforts by Islamic parties to make ong>Indonesiaong> an officially Muslim state.

1966: General Suharto Takes Power

After years of politically charged and sometimes violent politics, an anarchic situation leads

to the death of some one million ong>Indonesiaong>ns in the mid-1960s. During this tumultuous period,

Major General Suharto seizes power from Sukarno on March 11. The transfer marks

the beginning of Suharto’s pro-Western “New Order” regime, an authoritarian, technocratled

developmental state that lasts until 1998. It brings ong>Indonesiaong> strong economic growth

and socioeconomic gains, with growth averaging over 7 percent per year between 1985 and

1997 and poverty falling from almost 60 percent in 1968 to 13 percent in 1997. However,

this economic miracle comes at a significant cost in debt, corruption, and other problems

that become apparent in the late 1990s.

1975: ong>Indonesiaong> Battles Separatists in Outlying Regions

ong>Indonesiaong> invades East Timor after the latter declares independence from Portugal. ong>Indonesiaong>n

forces are accused of gross repression and human rights violations during an occupation

of more than two decades as they struggle to counter East Timorese demands for independence.

Separatist movements also arise in other outlying regions, including Papua, site of the

world’s largest gold mine and third-largest copper mine, and Aceh, where an insurgency

breaks out in 1976. Eventually, East Timor becomes independent and the conflict in Aceh is

resolved, but separatist sentiment remains extremely strong in Papua, and ong>Indonesiaong>n security

forces continue to commit abuses there.

1997: Asian Financial Crisis Hits ong>Indonesiaong>

The Asian financial crisis, the critical inflection point in ong>Indonesiaong>’s modern history, hits ong>Indonesiaong>

in the summer. It exposes the weaknesses of Suharto’s economic policies, destroying

the value of the rupiah and wiping out savings accounts as banks collapse. ong>Indonesiaong>’s economy

shrinks by 13 percent in 1998 and investors flee. Meanwhile, prices for staple goods

rise as the rupiah’s value plunges, and an additional 10 percent of the population falls below

the poverty line between 1998 and 2000. Suharto is forced to seek a rescue package from the

IMF. The economic damage from the crisis and the image of Suharto appearing to cater to

the IMF deeply damage the longtime ruler, leading to rising protests in the streets.


1998: Suharto Ends Presidency

After months of violent antigovernment protests and riots, Suharto resigns on May 21, ending

his thirty-two-year presidency. Vice President B. J. Habibie takes over as president.

Habibie, a somewhat accidental change agent, turns out to have relatively reformist instincts.

He initiates a process of political and economic decentralization that proves critical to the

country’s survival and oversees the first truly open parliamentary elections in 1999.

1999: Devolution of Power Begins

Relatively soon after the transition from the Suharto era, successive governments begin to

devolve significant power to provinces and cities. Subnational governments are allowed to

keep and use a greater percentage of revenues captured from local natural resources and taxation,

and they are given more responsibility for essential services. Local and provincial elections

are also increased. Along these lines, ong>Indonesiaong>’s government signs a peace agreement

in 2005 to end a long-running separatist conflict in Aceh province. The main rebel group relinquishes

its demands for secession, and the government allows rebels to form political parties

and contest elections in the province. It also lets Aceh keep 70 percent of local natural resource

revenues. By the early 2010s, it is clear that decentralization has helped cool separatist

sentiment in most regions, increased satisfaction with public services and infrastructure,

and improved budget transparency.

1999: Wahid Becomes President

Following parliamentary elections in June, Abdurrahman Wahid is named president by the

parliament in November. Wahid is a progressive and thoughtful leader who supports decentralization

and takes measures to civilianize the military. However, his presidency is disorganized

and chaotic, in part because of his poor health. Wahid is forced to step down in July

2001 after threats of indictment, and his vice president, Megawati Sukarnoputri, becomes


2000: Civilianization of Armed Forces

In August, ong>Indonesiaong>’s parliament issues two decrees that begin to reform the role of the

long-dominant military and bring it under civilian control. The decrees split the armed forces

from the police, and the parliament decides that the military should relinquish its reserved

seats in the House of Representatives, the most important entrenched privilege it enjoyed.

Along with these measures, civilian leaders essentially offer senior officers financial incentives

to leave the political sphere, downsize the armed forces, and take a more narrow role

focused on national defense.

2002: Extremist Groups Mount Attacks

On October 12, terrorists from the extremist Islamic group Jemaah Islamiyah bomb a nightclub

on the island of Bali, killing 202 people, mainly foreign tourists. The ong>Indonesiaong>n government

initiates counterradicalism programs to take the militants on and discredit them in

society. In addition to security measures, the government uses high-level speeches to make

the point that militancy is not a Western import but a real threat to ong>Indonesiaong>ns, and it uses

former militants on television to show the destructive impact of terrorist attacks on the

country. A high-profile deradicalization campaign, though of mixed utility in actually deradicalizing

militants, makes the battle against militancy appear humane and lawful, which is

critical to winning over public opinion. By the late 2000s, ong>Indonesiaong> effectively dismantles

Jemaah Islamiyah, but the country continues to face some extremist attacks.


2004: Yudhoyono Wins First Direct Presidential Election

Retired general Susilo Bambang Yudhoyono defeats incumbent president Megawati

Sukarnoputri in a runoff election on September 20. Realizing that corruption and insufficient

rule of law are depressing investment, Yudhoyono makes fighting corruption a centerpiece

of his administration. Growth and foreign investment rise strongly, and Yudhoyono is

reelected by a large margin on July 8, 2009. In his second term, he is less reformist, with

some of his natural tendency toward consensus overwhelming the desire for change.

2010: GDP Surpasses $1 Trillion

ong>Indonesiaong>’s GDP exceeds $1 trillion for the first time in its history. GDP per capita exceeds

$3,000, and foreign investment reaches $19 billion the next year. ong>Indonesiaong> has posted some

of the highest recent growth rates in the world, though it remains primarily dependent on

export-oriented agriculture and natural resource extraction. Between 2007 and 2011, the

percentage of ong>Indonesiaong>’s population living in poverty falls from 16.6 percent to 12.5

percent. Inequality, however, remains a problem and in some ways is exacerbated by



Further Reading

Archive of reports on Jemaah Islamiyah. Brussels: International Crisis Group.

An ongoing series of reports offering background and analysis on Jemaah Islamiyah and other

ong>Indonesiaong>n security issues.

Barton, Greg. Gus Dur: The Authorized Biography of Abdurrahman Wahid. Jakarta: Equinox Publishing,


A biography of Abdurrahman Wahid, who was elected president of ong>Indonesiaong> in 1999 and

forced from office amid scandal in 2001.

Bresnan, John, ed. ong>Indonesiaong>: The Great Transition. Lanham, MD: Rowman & Littlefield Publishers,


An edited volume exploring the background and challenges of ong>Indonesiaong>’s economic and political

transition, which began in the late 1990s.

Dhume, Sadanand. My Friend the Fanatic: Travels with a Radical Islamist. New York: Skyhorse Publishing,


A book recounting a journey across ong>Indonesiaong>, with a focus on the rise of extreme strains of


Friend, Theodore. ong>Indonesiaong>n Destinies. Cambridge, MA: Belknap Press, 2003.

A book offering a history and personal narrative of ong>Indonesiaong>, spanning from the country’s

emegence from Dutch rule to the post-9/11 era.

The ong>Indonesiaong>n Quarterly. Jakarta: Centre for Strategic and International Studies.

An English-language journal of policy-oriented work on ong>Indonesiaong>.

Paris, Jonathan, and Adam Schwarz, eds. The Politics of Post-Suharto ong>Indonesiaong>. New York: ong>Councilong> on

Foreign Relations Press, 1999.

A collection of essays on the issues facing ong>Indonesiaong> after Suharto’s fall, including economic, religious,

political, and military-related challenges.

Percival, Bronson. The Dragon Looks South: China and Southeast Asia in the New Century. Westport,

CT: Praeger Security International, 2007.

A book analyzing the recent evolution of China’s relationship with the countries of Southeast


Pringle, Robert. Understanding Islam in ong>Indonesiaong>: Politics and Diversity. Honolulu: University of Hawaii

Press, 2010.

A book on the history and modern practice of ong>Indonesiaong>n Islam and the role of Muslim groups

in the country’s political scene.


Robinson, Geoffre. If You Leave Us Here, We Will Die: How Genocide Was Stopped in East Timor.

Princeton, NJ: Princeton University Press, 2009.

A book recounting the abuses committed in East Timor after ong>Indonesiaong>’s 1975 invasion and

again after East Timor’s referendum on independence in 1999.

Schwarz, Adam. A Nation in Waiting: ong>Indonesiaong>’s Search for Stability.

2nd ed. Boulder, CO: Westview Press, 1999.

A book analyzing ong>Indonesiaong>’s economic and political development under Suharto, the crisis of

the late 1990s, and the consequences of Suharto’s fall.

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