Day 1: Governance and Economic Crisis -The Case of Indonesia-


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Graduate School of Asia and Pacific Studies
Waseda University, 13 February 2007

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Day 1: Governance and Economic Crisis -The Case of Indonesia-

  1. 1. Governance and Economic Crisis -The Case of Indonesia- Indonesia- Day 1 Graduate S h l f A i G d t School of Asia and Pacific Studies d P ifi St di Waseda University, 13 February 2007
  2. 2. Class Introduction Course : Governance and Economic Crisis, the Case Title of Indonesia Lecturer : Prof. Ginandjar Kartasasmita Office : Tuesday-Saturday, 15.00-17.00 Hours Faculty Room Waseda University GSAPS 7th Fl. Email : Website : Assistants : Dadang Solihin, HP 08034338627 email: website: GSAPS-2007-Day1 2
  3. 3. Background The Asian economic crisis of 1997 1998 was a singular 1997-1998 and most dramatic event in the region’s postwar economic history. Countries, which had enjoyed rapid economic growth in the preceding decades, which were affected by the crisis, set their developments back several y p years. These countries responded to the economic crisis in different ways. This course will look into the fundamental changes brought on by the economic crisis with Indonesia as the case study. GSAPS-2007-Day1 3
  4. 4. Background . . . i It is widely accepted th t I d id l i ’ t d that Indonesia’s crisis was th most i i the t severe. What factors influenced the ferocity of the crisis? How has the economic crisis interacted with political reforms? What are the prospects of consolidation of the economic and political reforms in term of the short and medium run? GSAPS-2007-Day1 4
  5. 5. The aim The aim of this course is to discuss issues in order to enhance understanding of the political economy of changes set upon by economic crisis. We ill discuss th causes and consequences, and th W will di the d d the national responses to the economic crisis. We will analyze the interaction between economic crises y and political reforms. The course will attempt to discover what lessons are to be learned from the crisis and what are the prospect crisis, and challenges to the consolidation of democratic governance and sustainable growth. In the final parts, this course will disc ss the iss es of parts co rse ill discuss issues governance as the important element that will ensure the endurance of democratic form of government. GSAPS-2007-Day1 5
  6. 6. Method The course will be conducted through a combination of lectures and class discussions. The main requirements are attendance, completion of q p assignments, and active participation in class discussion and debate. Accordingly, Accordingly grading will be based on 30% class attendance and participation, 35% class assignments and papers, and 35% final paper. Students are expected to come to the class prepared with the subject to be discussed at the respective session. The day will typically start and end with class discussions. GSAPS-2007-Day1 6
  7. 7. Method . . . On the final day, the class will turn into a seminar to hear, and comments on, the presentation to be given by each group group. GSAPS-2007-Day1 7
  8. 8. Course material The course will draw its materials basically from a monograph: REINVENTING INDONESIA Students are required to read the basic materials as the course sessions will be conducted around the monograph monograph. Students are also encouraged to look at other sources, among others (but not limited to) as listed in the selected bibliography of the monograph monograph. GSAPS-2007-Day1 8
  9. 9. Reinventing Indonesia Economic Crisis and Political Change Dawn of a New Era • E i Ci i dD ti Economic Crisis and Democratic • O the Road to Democracy On th R d t D Transition in Indonesia • Democratic Reversal • Indonesia Under the New Order • Constitutional reform • The Crisis • Practicing Democracy • E l i i the Demise Explaining th D i The Challenges Ahead Indonesia Rebounds • Improving economic performance Macroeconomic Development • Strengthening the political Outlook 2007 institutions Policy Reform Initiatives • Keeping the country together Governance • Good Governance • Administrative Reform • Debureaucratization GSAPS-2007-Day1 9
  10. 10. Class Schedule No Date Time Topics 1 Day-1 09:10-10:30 • Course Introduction • Economic Crisis and Democratic Transition in Indonesia 2 10:40-12:10 • Indonesia Under the New Order • The Crisis 3 13:00-14:30 Explaining the Demise 4 Day-2 09:10-10:30 On the Road to Democracy 5 10:40-12:10 Continued 6 13:00-14:30 3 00 30 Democratic Reversal e oc at c e e sa GSAPS-2007-Day1 10
  11. 11. Continued . . Continued. No Date Time Topics 7 Day-3 09:10-10:30 Presentation of individual mid-term paper 8 10:40-12:10 Continued 9 13:00-14:30 • Constitutional Reform • Practicing Democracy 10 Day-4 09:10-10:30 Indonesia Rebounds 11 10:40-12:10 Challenges Ahead 12 13:00-14:30 Continued 13 y Day-5 09:10-10:30 Governance 14 10:40-12:10 Discussion of the Final Paper 15 13:00-14:30 Conclusion GSAPS-2007-Day1 11
  12. 12. Reinventing Indonesia Introduction
  13. 13. Reinventing Indonesia Economic Crisis and Democratic Transition in Indonesia
  14. 14. Introduction Why after 32 years of continuous and seemingly successful rule, the Soeharto’s government fell? Before attempting to answer these questions questions, one may find the following a useful starting point: Politics in pre-Crisis Indonesia What is the nature of the Indonesian system of government under th New O d and t d the N Order, d How did those in power justify their rule? GSAPS-2007-Day1 14
  15. 15. Reinventing Indonesia Politics i pre-Crisis I d P liti in pre-C i i Indonesia i
  16. 16. The Indonesian Archipelago • a country of 242 million (2005 est.), • an archipelago strung 5000 kilometers along the equator equator. • more than 13,000 islands, 5,000 are inhabited. • more than 200 ethnic groups and 350 languages and dialects. • 85 t 90% are M li to Muslims. GSAPS-2007-Day1 16
  17. 17. Birth of a nation All th necessary elements f an i d the l t for independent nation d t ti had already existed when the Japanese surrendered to the Allied powers. p August 17 1945, Sukarno and Hatta on behalf of the people, proclaimed the independence of Indonesia. August 18, 1945: The promulgation of the 1945 Constitution, and the establishment of government with Sukarno as President and Hatta as Vice President President. Indonesia under the 1945 Constitution: A nationalist non- sectarian, unitarian republic with a p p presidential system of y government. GSAPS-2007-Day1 17
  18. 18. War of Independence 1945 - 1949 The Dutch refused to recognize the independence of their former colony colony. Assisted by their allies put an attempt to reestablish control. t bli h t l The fledgling nation had also to face domestic challenges: Muslim extremists and communist revolt in 1948. GSAPS-2007-Day1 18
  19. 19. Recognition of Independence In December 1949, the Dutch finally recognized the independence of Indonesia in the form of a federated republic. republic August l950 the federal state was abolished and the unitarian Republic of Indonesia reestablished. Provisional Constitution of 1950: a parliamentary system of government headed by a Prime Minister responsible to a parliament, while the President was only the head of state and had almost no political power. GSAPS-2007-Day1 19
  20. 20. An Attempt at Liberal Democracy In 1955 a free and fair multiparty election in the first general election to elect the Parliament and the election, Constitutional Assembly (Konstituante). The weak short-lived governments created a leadership g p vacuum and indecisiveness at time when strong leadership was needed. In 1957 the government declared a state of emergency The Konstituante failed to reach the necessary majority to get an agreement on a new constitution. O July 5th, l959 th P id t S k On J l l959, the President Sukarno didissolved th l d the Parliament and Konstituante with a Presidential Decree and restored the 1945 Constitution. Sukarno declared that liberal democracy, had failed in Indonesia and had brought only disunity and misery to the people. GSAPS-2007-Day1 20
  21. 21. The Turbulent Years Central authority being challenged by separatist movements in the regions. The Darul Islam continued to pose security problems Th D l I l i d i bl Conflict with the former colonial master had resumed, as the Dutch kept their hold on West Irian Irian. Since most western countries supported the Dutch p position on the West Irian issue, Indonesia turned to the , Eastern Bloc to procure the military equipment. The rise of the military role in politics: the dual functions of military. f ilit GSAPS-2007-Day1 21
  22. 22. Guided Democracy Sukarno proclaimed “G id d D S k l i d “Guided Democracy” as th suitable ” the it bl system for Indonesia. The Provisional MPR conferred upon Sukarno the title of the Great Leader of the Revolution, which in effect carried more power than what the mere title may suggest. Sukarno ended Indonesia’s first attempt at democracy. Indonesia now joined the group of countries to reverse from democracy to authoritarianism. authoritarianism GSAPS-2007-Day1 22
  23. 23. The Confrontation Against the West P id t S k President Sukarno was opposed t th establishment of d to the t bli h t f a new Malaysian state, and accused it as no more than a western neocolonial ploy. p y To undertake military confrontation, Indonesia became more dependent on economic and military aid from the S i t Bl Soviet Bloc. Sukarno developed the idea of forming the New Emerging Force as a counterweight to western- dominated international politics. Isolation from the rest of the world reached its peak p when Sukarno announced Indonesia’s withdrawal from the United Nations in January l965. GSAPS-2007-Day1 23
  24. 24. Sukarno: The Romantic Revolutionary The ordinary Indonesian people loved Sukarno. He was a man of vision, an ardent nationalist albeit a romantic idealist. ti id li t He imbued among the people the pride of being Indonesian and spent all his adult life projecting the dignity of a nation with long history, culture, and tradition. He was regarded in many parts of the world as a great leader and a world statesman. GSAPS-2007-Day1 24
  25. 25. Sukarno: The Romantic Revolutionary . . . Indonesia under Sukarno took a leading role in Asian African countries solidarity and fight against colonialism. Sukarno together with third world leaders initiated the Non-aligned movement, which until today still exists. But his misguided economic policies based on the notion of a “guided economy” brought chaos to the economy and increased suffering for the common people people. GSAPS-2007-Day1 25
  26. 26. The End of Guided Democracy and the Rise of the New Order On September 30th 1965, an aborted coup d’etat was allegedly staged by the communist p y g y g y party. Two military figures escaped from the assassination attempt, General Nasution and Mayor General Suharto. Proceeded to mobilize the loyal military forces, and neutralized the units that were involved in the mutiny. The rift of President Sukarno and the military came into the open. GSAPS-2007-Day1 26
  27. 27. The End of Guided Democracy and the Rise of the New Order . . . On May 11th 1966 President Sukarno, under pressure from the military and the public issued a Letter of public, Instruction to accede authority of day-to-day government to General Suharto. In the 1968 the Provisional MPR dismissed Sukarno as President and appointed General Suharto as his successor, successor hence rise of the New Order Order. GSAPS-2007-Day1 27
  28. 28. Reinventing Indonesia Indonesia Under the New Order
  29. 29. Political Stability Political Stability P liti l St bilit was relentlessly pursued and l tl l d d successfully maintained. The military, the bureaucracy and Golkar (the military government party) constituted the political pillars of the New Order. The floating mass depoliticizing of the masses, constituted an important aspect of the political strategy to sustain long-term political stability stability. The political system had produced the intended result: p political stability that had endured for three decades, y sustaining economic growth which in turn further reinforced its claim to legitimacy. GSAPS-2007-Day1 29
  30. 30. Economic Development Political t bilit P liti l stability assured, and with uniformity of d d ith if it f purpose and method the New Order earnestly embarked on economic development, which was widely considered as successful using various standard of measurements. Development Trilogy: Stability Growth Equity GSAPS-2007-Day1 30
  31. 31. East Asian Miracle The economic performance of pre-crisis Indonesia could pre crisis be seen as part of a general pattern of successful economic development in Asia. HPAEs are: Japan (The Leader) Hong Kong, the Republic of Korea, Singapore and Taiwan (The Four Tigers ) ). Indonesia, Malaysia and Thailand (Newly Industrializing Economies of Southeast Asia / NIE). Since 1960 the HPAEs have grown more than: twice as fast as the rest of East Asia. three times as fast as Latin America and South Asia. GSAPS-2007-Day1 31
  32. 32. Characteristics High Hi h average rate of economic growth t f i th Declining income inequality. Rapid productivity growth growth. High rates of growth of manufactured exports. Declines in fertility fertility. High growth rates of physical capital, supported by high rates of domestic savings and investment. g High initial levels and growth rates of human capital. GSAPS-2007-Day1 32
  33. 33. Indonesia’s Economic Liberalization In the early stage of development, Indonesia depended on oil income and fforeign assistance. 1980: Indonesia embarked on various economic reforms to embrace globalization. Elements of economic liberalization pre-1980. Adoption of an open capital account. The b l Th balanced budget policy. d b d t li Competitive real exchange rate with periodic adjustments. Elements of economic liberalization post-1980: p Deregulation of foreign trade. Reduction and removal of restrictions on foreign direct investment. Liberalization of financial sector. Adoption of a modern, simplified tax system. GSAPS-2007-Day1 33
  34. 34. The Outcomes Rising per capita income. Decreasing rate of inflation. Increasing food supplies and the attainment of rice self- sufficiency. A rising share of manufacturing output in GDP. i i h f f t i t t i GDP Sharply declining levels of poverty. GSAPS-2007-Day1 34
  35. 35. Rising Per Capita Income Over the period 1965-95 real GDP per capita grew at an annual average rate of 6.6%. In th I the mid l960 I d id l960s Indonesia was poorer th I di i than India. By mid 1995, Indonesia’s GDP per capita exceeded $ 1 000 over 3 times India’s 1,000, India s. GSAPS-2007-Day1 35
  36. 36. Decreasing Rate of Inflation The very high levels of inflation seen in the mid- to late- 1960s were brought under control. In th I the years immediately preceding th crisis, I d i di t l di the i i Indonesia i had managed to keep inflation in the single digit range. GSAPS-2007-Day1 36
  37. 37. Increasing food supplies and the attainment of rice self-sufficiency self- Market interventions that helped reduce price instability and inflation, combined with strategic investments that increased agricultural p g productivity, resulted in rising rural y, g incomes and welfare, and reasonably stable rice prices. GSAPS-2007-Day1 37
  38. 38. A rising share of manufacturing output in GDP The share of the manufacturing sector in GDP rose from 7.6% 7 6% in 1973 to nearly 25% in 1995 1995. This was driven by the rapid growth of manufactured exports. Non-oil exports, which were predominantly manufactured products, grew by roughly 22% per annum over the decade from 1985, when trade liberalization was first 1985 implemented, to 1995; a rate four times faster than the growth of world trade. GSAPS-2007-Day1 38
  39. 39. Sharply declining levels of poverty The proportion of the population living below the national poverty line fell from around 60% in 1970 to 40% in 1976 to 15% in 1990 and to 11.5% in 1996. The Proportion of the Population Living Below the National Poverty Line 80% 60% 40% 20% 0% 1970 1976 1990 1996 GSAPS-2007-Day1 39
  40. 40. Indonesia’s broad based, labor-oriented growth strategy, Indonesia s labor oriented backed by a strong record in human resource development, brought about one of the sharpest reductions in poverty in the developing world. At the same time, this strategy resulted in real wages rising about as fast as per-capita GDP and, among others, others benefited women by providing them with rapidly growing paid employment in the formal sector, that allowed them to switch out of unpaid work in the rural sector. sector Social indicators, such as infant mortality, fertility and school enrollments, also showed significant g improvement. World Bank document (l997) GSAPS-2007-Day1 40
  41. 41. Indonesia in year 2005 It was predicted that by the year 2005 Indonesia’s GDP di t d th t b th 2005, I d i ’ would have reached $2,300, and Indonesia would have become a middle income industrialized country. y By then, the incidence of poverty would have been reduced to less than 5%, which would be about the same llevel as other newly i d t i li d countries. l th l industrialized ti GSAPS-2007-Day1 41
  42. 42. Reinventing Indonesia The Crisis
  43. 43. The Unexpected Thunderstorm The depth and duration of the economic crisis in Indonesia were arguably unique. F to 1996 l From 1989 t 1996, annual real GDP growth averaged 8 l th d percent, spurred by strong investment behavior. The overall fiscal balance was in surplus after 1992. p Public debt fell as a share of GDP, the government used privatization proceeds to repay large amounts of foreign debt. debt Inflation was below 10%. GSAPS-2007-Day1 43
  44. 44. The Crisis Unfolds On 2 July 1997, the central bank of Thailand was forced to abandon its fixed exchange rate regime and the baht immediately depreciated by almost 20%20%. As questions began to be raised about the structural soundness of the East Asian economies there was a sudden and dramatic reversal of capital flows as inflows turned into massive capital outflows and banks that were once eager to lend to nearly any Asian investor suddenly refused to renew short term credit lines short-term lines. GSAPS-2007-Day1 44
  45. 45. The Crisis Unfolds . . . During the three months b t D i th th th between J l and July d September 1997, the Asian financial crisis gathered full force and began to affect Indonesia despite continued expressions of confidence that the soundness of its economic fundamentals and management would see it through with little damage. GSAPS-2007-Day1 45
  46. 46. The Initial Responses Mid July 1997 widening the intervention margins of the crawling peg regime August 1997 free floating the rupiah Raised interest rates and tightened liquidity by g q y y transferring a large amount of public sector deposits out of commercial banks September 1997 “ten policy measures covering the 1997, ten policy-measures” financial, monetary and banking sectors, as well as the real sector. In the banking sector two important decisions were made: 1) To bail out healthy banks facing temporary liquidity difficulties, and 2) Unhealthy banks should be merged with other banks or be liquidated. GSAPS-2007-Day1 46
  47. 47. The Initial Responses . . . The decision also included the postponement of the implementation of large projects (projects with a total cost of $13 billion) that needed overseas loans. And even though the government had announced further economic reforms and deregulation measures in early September, including a commitment to renewed efforts toward strengthening and enforcing bank prudential regulations, the initial announcement were not followed by implementation measures, providing further evidence that the government was no longer unified on measures needed to stem the impact of the crisis. GSAPS-2007-Day1 47
  48. 48. The Initial Responses . . . The markets now realized that the deregulation program would not regain its dynamism any time soon soon. Analysts now questioned whether the government had the political will to carry through on the needed reforms. p y g GSAPS-2007-Day1 48
  49. 49. The Initial Responses . . . The currency continued to depreciate and by early depreciate, September had moved beyond 3000 per dollar October l997 the Indonesian government turned to the g IMF for assistance. The initial IMF program was based on the assumption that the crisis was essentially a moderate case of contagion—an overshoot of the exchange rate (IMF, 2003: 78)—and designed a program that was standard and conventional for such a “mild” crisis mild crisis. GSAPS-2007-Day1 49
  50. 50. The Initial Responses . . . The program focused on allowing for a heavy emphasis on tightening money supplies in order to raise interest rates and prevent capital from fleeing and attracting the already fl i capital b k i t th country. l d fleeing it l back into the t Misjudgment by both the government and the IMF of the depth and nature of the crisis. p GSAPS-2007-Day1 50
  51. 51. Criticism Against the IMF Paul Volker criticized the IMF imposed structural conditionality as irrelevant to financial stabilization, cynically calling the conditions on market regulations in cloves, oranges and other foodstuffs as a “recipe”. There is some speculation that the negative assessment on the IMF package coming from a person with such distinguished background may have influenced President Suharto’s attitude towards subsequent IMF programs. GSAPS-2007-Day1 51
  52. 52. Criticism Against the IMF . . . Joseph Stiglitz critized the IMF for applying the Latin American case to the Asian crisis resulting in wrong diagnosis which led to the wrong --and in Indonesia’s g g case fatal-- prescription in the handling of the crisis. He maintained that in the highly inflationary environment of Latin America, what was needed was a decrease in demand; while in the case of East Asia, the problem was not excess demand but insufficient demand demand. GSAPS-2007-Day1 52
  53. 53. The Economic Crisis The exchange rate drops from 2,400 Rp/$ (July 1997) to 16 000 R /$ (J 16,000 Rp/$ (June 1998) 1998). 1998: GDP Growth: -13.6%. 13 6% Inflation: 77.6%. Collapse of the banking system: Cost of restructuring the p g y g banking system: Rp. 650 trillion (US$65 billion). Total external debt (1999): $148 billion, or 104% GDP. $ Half of it private sector’s. + $ 30 billion short term. GSAPS-2007-Day1 53
  54. 54. The Economic Crisis . . . Non-oil exports growth: 1998: + 9,9% 1999: - 7 2% 7,2% Millions of individuals lost their jobs. Children left school school. Poverty increased. In May 1998 riots erupted against the Chinese 1998, Chinese. community. This led to massive capital flight and the breakdown of the distribution system. GSAPS-2007-Day1 54
  55. 55. A renewed mandate: wasted opportunity for change In July 1997 the sixth general elections under the New Order were held in which the government party Golkar returned with an overwhelming majority. Voting followed a fierce and violent election campaign which numerous casualties, a portent of the growing restlessness among the polity and reflecting mounting opposition against the Government and Golkar Golkar. GSAPS-2007-Day1 55
  56. 56. A renewed mandate … Reflected in the general election of 1997, Suharto still held a strong grip on the political system system. He was ready to step down and spent the rest of his life in religious pursuit if the people really did not want him anymore. March 11th, 1998 Suharto was indeed re-elected for another five-year term by the MPR five year MPR. Past performances of development was no longer seen as a panacea, while a growing number, including many p , g g , g y who were in the government, were already looking for an alternative to the existing system. GSAPS-2007-Day1 56
  57. 57. A renewed mandate: The time had come for political reforms, but changing the leadership at the time of crisis was not regarded as a good idea. Suharto’s choice of Habibie as his Vice President, appointment of his daughter and some cronies to the cabinet was met with wide spread criticism and accusation of nepotism nepotism. An opportunity for a renewed start to rebuild the confidence of the people and engaged in concerted efforts to regain control of the economy was wasted. GSAPS-2007-Day1 57
  58. 58. Efforts at economic recovery Disregarding the political controversies the new economic team set out to get the economy moving again. Major Policy Initiatives: repairing the relations with the international community, and restoring market confidence. All the major creditor countries were ready to give support to Indonesia’s efforts at recovery, through or in cooperation with th IMF ti ith the IMF. GSAPS-2007-Day1 58
  59. 59. Efforts at economic recovery. . . The first priorities were directed at both the restructuring of the fi f h financial and b ki system and resolving the i l d banking d l i h corporate debt problem. The government economic team immediately re re- established dialogue with the IMF to work on a renewed program. Structural reforms were embraced by the economic team as their own. The need to protect the poor from the worst of the crisis. Closing insolvent banks to stop the bleeding of the g p g financial system. GSAPS-2007-Day1 59
  60. 60. Efforts at economic recovery . . recovery. Strengthened the efforts to deal with corporate debt problem which had actually began in 1997. Note: It was not easy for the economic team to get the reform program through the various government agencies. agencies They also had to go around the President’s reluctance at g some of the reform agenda. Result: Although inflation was still high, the rupiah exchange rate was strengthened from 10,000 at the start of the new cabinet t 7,500 by mid April and remained f th bi t to 7 500 b id A il d i d below 8,000 until the May troubles occurred. GSAPS-2007-Day1 60
  61. 61. The flash point While the Whil th economy showed same i h d improvement, i th t in the political front, the situation deteriorated. Suharto had no intention to undertake reforms as the political and economic situation demanded. However, the elites and leaders of the various reform movements were still wary of Suharto’s power. The hike in fuel prices changed everything. The l i i Th culmination of political confrontation was reached f li i l f i h d when in early May 1998 under strong pressure from the IMF, the government announced a rise in fuel prices, with the accompanying consequences of a rise in public transportation fares. GSAPS-2007-Day1 61
  62. 62. The flash point . . . During the confrontation between the security apparatus and the student on May 12, four students were shot to dead (Trisakti Incident). The flash point was reached on May 14th 1998, in what was then known as the May riots. The May 1998 riot had a particular significance aside from the intensity of the violence. The riots had devastating effects on the Suharto government. government It set the stage for the endgame of the political drama. GSAPS-2007-Day1 62
  63. 63. The final curtain May 17th 1998 the students had practically occupied the parliament building to pressure parliament to act. The call for reform and for the resignation of the g President grew louder and was joined by a wider circle. The support from the military, which up to now had been the foundation of President Suharto’s political power Suharto s power, had also begun to crack. May 18th1998 the leadership of the Parliament announced their collective opinion that Suharto had to resign. GSAPS-2007-Day1 63
  64. 64. The final curtain . . curtain. On May 19th after meeting with the moderate Muslim leaders President Suharto told a press conference about calling an earlier general election that would facilitate his earlier resignation, of repealing the political laws that had been the target of many of the reformers’ demands and the creation of a Reform Committee. He also stated his intention to reshuffle the cabinet and form a Reform Cabinet. f R f C bi GSAPS-2007-Day1 64
  65. 65. The final curtain . . curtain. Some ministers realized that the status quo could not be maintained any longer. May 20th 1998 the economic ministries met: To T review th economic situation and th political i the i it ti d the liti l complications, and decided that the President should be made aware of the grave g situation if a political solution could not be reached within a week the economy would collapse forming a new cabinet would not solve the problem they would unanimously decline to join in the new (reform) cabinet. GSAPS-2007-Day1 65
  66. 66. The final curtain . . curtain. Suharto also failed to get the support from parliament leaders on establishing the reform committee. Losing the support of the military, the cabinet, the g pp y parliament, and the failure to establish the Reform Committee, on May 21st 1998 President Suharto resigned his presidency. p y Vice President BJ Habibie assumed the presidency. Thus ended the era of the New Order. GSAPS-2007-Day1 66
  67. 67. Reinventing Indonesia Explaining the Demise
  68. 68. The Political System under the New Order The New Order regime relied heavily on a set of structures of ideas based on Indonesian cultures, especially Javanese culture culture. The New Order carried over the “guided democracy” principles of the preceding regime, through a more refined and subtle method. fi d d btl th d The communists and their ideology became “public enemy number one”; Islamic extremism ranked second. one ; The New Order tried to define its political ideology between “western” individualism and “eastern” collectivism. collectivism GSAPS-2007-Day1 68
  69. 69. The Political System under the New Order Order... In the “Pancasila democracy” system, the western idea of opposition was rejected rejected. The Suharto regime went to great lengths to establish democratic institutions such as political parties general parties, elections, and elected parliament. GSAPS-2007-Day1 69
  70. 70. To what extent was Indonesia a democracy ? Golkar, the ruling ‘party’, was established in 1964 originally as an extended arm of the military to combat the communist party ( p y (PKI) through p ) g political means. The first election under the New Order was held in 1971 participated by nine political parties and Golkar. In 1973 the “fusion” was completed in which the Islamic fusion completed, parties merged into PPP, and the nationalist and Christian parties “fused” into PDI. In every general election f from 1977 to 1997 was contested by these three parties. Golkar unfailingly winning every election, garnering at least two third of the votes. GSAPS-2007-Day1 70
  71. 71. “Fusion of Political Party (1973) Fusion” GOLKAR PPP: PDI: NU PNI Parkindo Parmusi K t lik Katolik PSII IPKI Perti Murba GSAPS-2007-Day1 71
  72. 72. Democratic or Non-democratic? Non- The Th way the system worked d i th N th t k d during the New O d Order obviously did not meet the basic principles required in a democracy in terms of political p y p parties, elections and , representation as argued by most scholarly literature. The existence of civic organizations and interest groups was hi hl regulated, and only th ones th t were highly l t d d l the that established or recognized by the government were a o ed o exist, ese c ud g e business, abo , allowed to e s , these including the bus ess, labor, journalist, youth, and women organizations. The absence of effective opposition is one of the essential arguments refuting the New Order’s claim ti l t f ti th N Od ’ l i to democracy. GSAPS-2007-Day1 72
  73. 73. What kept the regime in power so long? If Indonesia was not a true democratic system of I d i t t d ti t f government, what kept the system in power for so long and what was the source of its resilience? Pabottingi (1995: 225) reflecting the view of many analysts suggests that “…incumbents and supporters of th New O d argue it l iti the N Order its legitimacy on t two k grounds: key d political stability and economic development.” The endless political strife of the previous system of parliamentary democracy and guided democracy created acute political instability that rendered development ff t i ibl d efforts impossible and even th t threatened th survival of d the i l f the state. GSAPS-2007-Day1 73
  74. 74. What kept the regime in power so long long… Huntington argues that many authoritarian regimes initially justify themselves by what he calls a “negative legitimacy,” basing their claim of legitimacy on the failure of democratic systems and promising that the new regime is combating internal subversion, reducing social turmoil, reestablishing law and order, eliminating corruption and venal civilian politicians and enhancing politicians, national values. These were the exact rationales the New Order put forward when it emerged in 1966 with the support of students, intellectuals and various mass and religious organizations. And indeed those observations help explain why the New Order government under Suharto had been able to stay in power for so long: it delivered! y p g GSAPS-2007-Day1 74
  75. 75. What kept the regime in power so long long… At its inception the New O d considered it lf t b a it i ti th N Order id d itself to be reformist government supported by popular movements of students and intellectuals. Its drive had three main thrusts: a return to the 1945 Constitution; to create political stability; and to ameliorate the people’s suffering through economic development. development The New Order credo of “the Development Trilogy,” referred to po ca s ab y, eco o c g o e e ed o political stability, economic growth, a d , and equity. This became the battle cry of the New Order with everything else subordinated to it. And to fair degree th N A dt af i d the New O d achieved it goals. Order hi d its l GSAPS-2007-Day1 75
  76. 76. Development Trilogy Stability Growth Equity GSAPS-2007-Day1 76
  77. 77. Political stability The political system had p p y produced the intended result: political stability that had endured for three decades, sustaining economic growth which in turn further reinforced its claim to legitimacy. f GSAPS-2007-Day1 77
  78. 78. Economic growth and equity Political stability assured, and with uniformity of purpose and method the New Order earnestly embarked on economic development, which was widely considered as development successful using various standard of measurements. Average annual growth in excess of 7% led to a more than 10-fold rise in Indonesians’ per capita income and a decline in the number of people in poverty from an estimated 70% of the population in the l960s to around 11% by the mid-1990s. GSAPS-2007-Day1 78
  79. 79. Economic growth and equity . . . Life expectancy rose and infant mortality declined y dramatically. Eight out of ten of the population had access to health care and two out of three to safe drinking water, self- sufficiency in rice production. GSAPS-2007-Day1 79
  80. 80. What went wrong? Huntington (1991: 54-55) H ti t (1991 54 55) makes the point that the k th i t th t th legitimacy of an authoritarian regime might be undermined even if it does deliver on its promises. p “By achieving its purpose, it lost its purpose. This reduced the reasons why the public should support the regime, given other costs ( i i th t (e.g. l k of f d ) lack f freedom) connected with the regime”(1991: 55). He posits that economic development provided the basis for democracy. GSAPS-2007-Day1 80
  81. 81. What went wrong? . . . He cites the famous—albeit much contested-- Lipset famous albeit contested hypothesis concerning the relationship of wealth and democracy: the wealthy countries are democratic and the most democratic countries are wealthy. He argues that: “in poor countries democratization is unlikely; in rich countries it has already occurred. In b t th i I between there is a political t liti l transition zone; countries iti ti in that particular economic stratum are most likely to transit to democracy and most countries that transit to democracy will b i th t stratum.” (1991 60) d ill be in that t t ” (1991: 60). GSAPS-2007-Day1 81
  82. 82. What went wrong? wrong?... He maintains that a social scientist who wished to predict future democratization “would have done reasonably well if he simply fingered the non democratic countries in the non-democratic $1,000-$3,000 (GNP per capita) transition zone” (1991: 63).) Further studies, in particular an extensive quantitative research and analysis done by Przeworsky (2000: 92) has lent support to Huntington’s threshold argument. GSAPS-2007-Day1 82
  83. 83. What went wrong? wrong?... In hi I his accountability speech t th MPR on M h 1 t bilit h to the March 1, 1998, President Suharto (1998: 16) reported that in1996, the year before the economic crisis swept Indonesia, its y p , GNP per capita had reached $1,155. According to Huntington’s theory, at that stage Indonesia had t d the transition zone, which meant th t h d entered th t iti hi h t that eventually sooner or later political change would happen. GSAPS-2007-Day1 83
  84. 84. What went wrong? wrong?... Three decades of development had significantly increased the level and reach of education across the nation and social classes. With education came enlightenment and emancipation from cultural restriction, freeing people from the shackles of old inhibitions and traditions. With education people recognized that there were more needs than just primary needs of food, clothing and shelter. shelter GSAPS-2007-Day1 84
  85. 85. What went wrong? wrong?... I t ti l International commerce b brought about the opening up ht b t th i not of only the Indonesian market to foreign goods but also the Indonesian society to foreign ideas. y g With globalization came not only the integration of markets but also the introduction and eventual integration of ideas. i t ti f id With the improvement of living standard resulting from widespread benefit of economic development and education a strong middle class had been formed soon to become the back bone of the forces for political emancipation and reform. i ti d f GSAPS-2007-Day1 85
  86. 86. What went wrong? wrong?... The supposed ultimate victory of democracy against all other systems of government (see Fukuyama, 1992) has changed the people’s political attitudes, or at least the elite’s perception, of lib l d lit ’ ti f liberal democracy as an evil system. il t Thousands of Indonesians who studied at foreign universities, universities most of them in western countries learned countries, first hand the socio-cultural values that has been the driving force behind the scientific and technological advances th t resulted i th affluence of the western d that lt d in the ffl f th t societies. They returned home imbued with the spirit of freedom freedom, which was a potent source of inspiration and motivation to change. GSAPS-2007-Day1 86
  87. 87. What went wrong? wrong?... The b kd fb i to Th breakdown of barriers t communication, th main i ti the i force behind globalization and the drive toward a higher degree of civilization, swept Indonesia with readily g , p y available and up to date information. It freed the individuals from the constraints of time and space. Censorship was no longer relevant, because one could access information through the Internet CNN or cable Internet, TV, or just travel. The diffusion of democratic ideals by the end of the 20th y century was unstoppable. The information Berlin wall was crumbling down. GSAPS-2007-Day1 87
  88. 88. What went wrong? wrong?... When the Government closed down the popular Indonesia magazine, Tempo, because of it critical tone, it simply resurfaced as an Internet website website. People closely followed the fall of non-democratic systems of government in the former communist countries, the Philippines and Korea. GSAPS-2007-Day1 88
  89. 89. What went wrong? wrong?... At the height of the praise for the New Order achievement, many Indonesian scholars and critics noted the lack of distributive justice as one of the major criticism of th N iti i f the New O d Order. They argued that the Indonesian economic success had benefited the urban and industrial sector while (relatively) marginalizing the rural and traditional sectors. An Indonesian social scientist, Pabottingi, noted that New Order economic policies and practices that had resulted in “inordinate dominance of the non-pribumi in the national economy, particularly in the urban and modern sector”, and offers a prediction that the sector antagonism between the pribumi and the non-pribumi “could well be the Achilles heel of the New Order”. GSAPS-2007-Day1 89
  90. 90. What went wrong? wrong?... The tightening control over policies and decision making processes in the hands of the President had not only strengthened the forces of change within society but also disillusioned his original and traditional supporters, even those within the government. g While economically the government was committed to and intently pursuing open policies, politically the government kept a tight a grip. GSAPS-2007-Day1 90
  91. 91. What went wrong? wrong?... The emerging role of Islam as a force of change should also not be underestimated. Uhlin (1997:82) Uhli (1997 82) agues th t many I d that Indonesian pro- i democracy activists are more than nominally Muslim and they often use Islamic discourses to motivate the struggle for democracy. GSAPS-2007-Day1 91
  92. 92. What went wrong? wrong?... Among the social forces that were poised against the New O Order, the most consistent and militant were the students. In the history of the nation, even before independence, the Indonesian youth and students played pivotal role. They participated in every important event in the nation course of history history. GSAPS-2007-Day1 92
  93. 93. What went wrong? wrong?... There is no major political change in Indonesia that did not involve the youth and students. By the 1970s, student activism had been directed against the New Order government. In 1974 students staged huge demonstrations, against corruption and against Japanese foreign investment; many of the leaders of the incident known as Malari were tried and jailed. GSAPS-2007-Day1 93
  94. 94. What went wrong?... In l978 there was again a wave of student protests. Student activism continued into the 1980s and 1990s some taking up national issues like corruption, human rights and democracy, others local issues, such as eviction of people from areas designated for development projects, and environmental and labor issues related t th i area. i l t d to their GSAPS-2007-Day1 94
  95. 95. What went wrong?... Although the student movements most of the time were widely scattered, unfocused and un-coordinated and were isolated from broad popular support, they were successful in galvanizing the silent majority to be concerned about current political issues confronting the nation. Uhlin notes that the student activism of the late 1980s and early 1990s has contributed to a radicalization of the democratic opposition in Indonesia. GSAPS-2007-Day1 95
  96. 96. What went wrong? wrong?... With all th changing social structures and norms, and ll the h i i l t t d d the forces arrayed against the New Order, from outside and within its own rank, it was only a matter of time , y before Huntington’s prediction would be realized. It would, however, still need a catalyst to quicken the pace of change. f h The economic crisis was the trigger that would set the chain of events that eventually lead to the political change. Empirical observations led Huntington ( p g (1991: 59) to ) believe that crises produced by either rapid growth or economic recession weakened authoritarianism. GSAPS-2007-Day1 96
  97. 97. What went wrong? wrong?... Events leading t th f ll of th N E t l di to the fall f the New O d h d shown Order had h the symptoms observed by Haggard and Kaufman ( (1999: 76) that economic crises undermine the ) ‘authoritarian bargains’ forged between rulers and key sociopolitical constituents. Th f il The failure of President S h t t salvage hi f P id t Suharto to l his government and to withdraw voluntarily followed their ge e a observation a general obse a o that “the resulting isolation (o a e esu g so a o (of an economic crisis) tends to fragment the ruling elite further and reduce its capacity to negotiate favorable terms of exit (ibid.). exit” (ibid ) GSAPS-2007-Day1 97
  98. 98. What went wrong? wrong?... However, it was not the first time that the New Order was H t th fi t ti th t th N Od faced with serious crises. Although arguably the 1997/98 crisis was the severest and the most devastating in terms of its impact on the general populace --the negative growth of almost –15% resulting i th reduction of real i lti in the d ti f l income and i d increase i in poverty and unemployment-- still other non-democratic (by western liberal de oc acy s a da ds) regimes in the es e be a democracy standards) eg es e same geographical region such as Malaysia and Singapore could weather the crisis and their regimes survived and outlasted the crisis crisis. GSAPS-2007-Day1 98
  99. 99. What went wrong? wrong?... Many of the opposing forces identified above were long present, latent in the undercurrent of Indonesian politics for years. By themselves however, they did not present a sufficient challenge capable of ending Suharto’s rule. The New Order’s centralized power structure and careful Order s control of political competition would have ensured the security of the President position. The social contract, in this view has certain inertia contract view, inertia. GSAPS-2007-Day1 99
  100. 100. What went wrong? wrong?... But the New O d did f ll B t th N Order fall. Many studies have been undertaken thereafter, attempting to find the answer to the question of why President Suharto failed to overcome this particular crisis. Many observers agree that for President Suharto, who y g rested his claim to rule on his ability to deliver economic growth, the economic crisis deeply undermined his legitimacy and left him after so many years in power at power, last, vulnerable to credible challenge for power. GSAPS-2007-Day1 100
  101. 101. What went wrong? wrong?... During the 1997/98 crisis President Suharto was deliberating between policy actions, and his indecisiveness had caused the crisis to deepen and eventually l d t hi f ll t ll led to his fall. It was in contrast with the decisiveness shown by Malaysia’s Mahathir and the leaders of Singapore in y g p dealing with the financial crisis in their respective countries. Bresnan (1999) for one remarks that the President “who President, who had made many hard decisions over the previous three decades, was unable to do so in 1998.” GSAPS-2007-Day1 101
  102. 102. What went wrong? wrong?... Ob i Obviously th ti l dimension t th international di l there was an i t i to the political and economic crisis occurring in Indonesia in 1998. The US and IMF had often been blame for the prolonged crisis that eventually led to the fall of President Suharto. Many observers have argued that the West had done their best in assisting the Indonesian government in fighting the crisis. crisis GSAPS-2007-Day1 102
  103. 103. What went wrong? wrong?... Some analysts however would not discount the role the analysts, US play in the downfall of Suharto. Although for many y g y years Indonesia --as a staunch anti communist nation-- had always been able to count on the support of the West, by the mid 90’s Indonesia’s relations with the West had somewhat soured. After the Cold War ended, without a communist threat western donor countries were increasingly less concerned about bailing out in inefficient foreign economies especially that are facing social and political problems. GSAPS-2007-Day1 103
  104. 104. What went wrong? wrong?... M ti iti i Mounting criticism on th way I d the Indonesia h dl d th i handled the East Timor question and the allegations of human rights abuses had precipitated stringent calls in the US p p g Congress to link aid and assistance to human rights records. B f th l d forces, i f i i there were already f Before the crisis th in favor of f political change, arrayed against the New Order regime. GSAPS-2007-Day1 104
  105. 105. What went wrong? wrong?... However in the absence of the necessary catalyst those elements were inert, and even if change should happen it could take a long while, such as when Suharto pass away or S h t became physically i Suharto b h i ll incapable t l d bl to lead. The financial crisis provided the catalyst that set off a p process of change.g The halving of per capita income translated into social misery: unemployment, hunger, riots, and death. GSAPS-2007-Day1 105
  106. 106. Conclusion While the economic crisis undoubtedly was the immediate cause of the political unrest that ended Suharto’s long reign, the failure of the New Order government to deal with th political weaknesses of th t t d l ith the liti l k f the society contributed to its demise. Suharto, who had shown considerable flexibility in , y agreeing to numerous economic reforms, although admittedly not all were fully implemented, showed little inclination to follow through o a pa a e rebuilding o the c a o o o o oug on parallel ebu d g of e political system. Whether Suharto could have weathered the economic crisis if the New Order regime had evolved into a more representative and open political system will never be known. GSAPS-2007-Day1 106
  107. 107. Conclusion Conclusion… But there is little doubt that the failure to create channels for political dissent laid the groundwork for the desire to see the New Order regime end, even if that entailed a i k f risk of open conflict b t i il fli t between civil society and th armed i t d the d forces. The cracks in the ranks of the New Order had come to the surface, as the New Order supporters within and outside the government, including those in the military had grown a e a ed by the way he handled the c s s, ad g o alienated e ay e a d ed e crisis, and by his inability to recognize the weaknesses in the government’s policies and institutions and the urgent need to embark on reforms. GSAPS-2007-Day1 107
  108. 108. Conclusion Conclusion… It is evident that the inability of P id t S h t t i id t th t th i bilit f President Suharto to bring Indonesia out of the crisis, combined with the g growing domestic and international awareness that his g response to the crisis—economic as well political-- was digging the country into a deeper abyss, destroyed the Hobbesian compact that had kept the country united and politically stable on the path of development. The co c us o c s s forced a rewriting o the soc a e conclusion: crisis o ced e g of e social contract. GSAPS-2007-Day1 108
  109. 109. どうもありがとうございました Terima Kasih GSAPS-2007-Day1 109