III. Managing Transformation 2017

The Case of Indonesia
G-Cube and Young Leaders Programs
National Graduate Institute for Policy Studies, Tokyo, Japan
2017
Course Title : Governance and Leadership: Leading a Nation in
the Changing World
Professor : Ginandjar Kartasasmita
jgkar@cbn.net.id, www.ginandjar.com
Assistant Professor : Gatot Sudaryono
gatot.sudariyono@gmail.com
GRIPS_2017 2
 The largest archipelagic country in
the world.
 A country of 252.20 million people
(as of June, 2015).
 An archipelago strung 5110
kilometers along the equator.
 Three time zones
 More than 17,000 islands, 5,000 are
inhabited.
 More than 200 ethnic groups and
350 languages and dialects.
 85 to 90% are Muslims.
www.slideshare.net/Ginandjar

I.REGIME CHANGE
GRIPS_2017 3www.slideshare.net/Ginandjar
 I WILL USE AS REFERENCE THE
COUNTRY’S PRESIDENTS SUCCESSIVELY
AS POLITICAL PERIODS REFLECTING THE
VARIOUS STAGES OF TRANSFORMATION.

STATE
BUILDING
1966-1998
First stage of
development
SUHARTO
TRANSITION:
1998 – 2004
Political Reform
II
Constitutional Amendments
HABIBIE
ABDURAHMAN
WAHID
MEGAWATI
CONSOLIDATION:
2004 – 2014
SUSILO
BAMBANG
YUDHOYONO
DEMOCRACY
Second stage of
development
2014 – 2019
JOKO
WIDODO
REGIME CHANGES IN INDONESIA
New Era
NATION
BUILDING
1945-1966
Father of
Independence
SUKARNO
VARIOUS STAGES OF
TRANSFORMATION
 IN 68 YEARS AS AN INDEPENDENT STATE INDONESIA
HAS HAD ONLY 7 PRESIDENTS.
 FOR A LARGE PART OF IT, 53 YEARS, THERE WERE ONLY
TWO PRESIDENTS, SUKARNO AND SUHARTO, BOTH
AUTHORITARIAN RULERS. THE SUCCEEDING THREE
PRESIDENTS GOVERNED FOR ONLY 6 YEARS.
 TWO OF THE PRESIDENTS WERE IMPEACHED,
SUKARNO AND ABDURAHMAN WAHID. ONE STEPPED
DOWN UNDER POPULAR PRESSURE (SUHARTO).
 THE LAST PRESIDENT COMPLETED HIS SECOND 5-
YEARS TERM.

SUKARNO 1945-1966
 SUKARNO LED THE COUNTRY TO INDEPENDENCE
(IN 1945) AND PRESIDED OVER THE COUNTRY’S
NATION BUILDING AFTER INDEPENDENCE. HE WAS
A TYPICAL POST-COLONIAL CHARISMATIC BUT
AUTHORITARIAN RULER, LIKE MANY OTHERS
DURING THAT PERIOD.
 TRANSITION FROM SUKARNO TO SUHARTO WAS
THE FIRST ATTEMPT AT POLITICAL REFORM IN THE
COUNTRY’S HISTORY.
 SUHARTO TOOK OVER FROM SUKARNO A
COUNTRY DEEP IN POLITICAL TURMOIL RESULTING
FROM FIERCE IDEOLOGICAL CONFLICTS AND
ECONOMIC MISMANAGEMENT.
 THOSE WERE THE REASONS FOR SUKARNO’S
IMPEACHMENT.

 WHEN SUHARTO TOOK OVER THE
GOVERNMENT IN 1966, IT WAS WITH A
PROMISE TO RESTORE POLITICAL STABILITY
AND INITIATE ECONOMIC DEVELOPMENT. HE
NAMED HIS GOVERNMENT THE NEW ORDER.
SUHARTO: 1966-1998
 SUHARTO HAD ACTUALLY DELIVERED THE
PROMISE.
 UNDER HIS LEADERSHIP, INDONESIA WAS BEING
TRANSFORMED FROM AMONG THE POOREST,
MOST BACKWARDED COUNTRIES IN THE WORLD
TO A MODERN MIDDLE INCOME COUNTRY.

 THE ECONOMY GREW ON AVERAGE OF 7% ALL
THROUGH 30 YEARS OF HIS RULE. INDONESIA WAS
MENTIONED AS ONE OF THE ECONOMIC TIGERS
AMONG THE EAST ASIAN MIRACLE IN THE 1993
WORLD BANK REPORT.
 I WAS VERY MUCH INVOLVED IN THE PROCESS
HAVING 3 MINISTERIAL PORTFOLIOS DURING
THOSE TIMES:
→ JUNIOR MINISTER OF DOMESTIC PRODUCTION
CONCURRENTLY HEAD OF INVESTMENT BOARD
(1983-1988),
→ MINISTER MINES AND ENERGY (1988-1993),
AND
→ MINISTER OF PLANNING (1993-1998).
→ COORDINATING MINISTER FOR THE ECONOMY,
FINANCE AND INDUSTRY (1998)

 BUT THE ECONOMIC SUCCESSES WERE AT THE
COST OF POLITICAL FREEDOM, AND RESPECT
FOR HUMAN RIGHTS.
 THUS BEFORE THE 1997/1998 ECONOMIC
CRISIS THERE WERE ALREADY FORCES, IN FAVOR
OF POLITICAL CHANGE, ARRAYED AGAINST THE
SUHARTO’S NEW ORDER REGIME.
 SUHARTO WAS LEADING A DE FACTO MILITARY
DOMINATED GOVERNMENT ALSO NOT UN-
TYPICAL OF HIS ERA, ALTHOUGH HE KEPT A
FACADE OF DEMOCRACY, ALLOWING 3
POLITICAL PARTIES TO EXIST, AND GENERAL
ELECTIONS EVERY FIVE YEARS, ALBEIT AS
CRITICS SAID, ONLY TO ASSURE HIS
REELECTION AND THE EXISTENCE OF A RUBBER
STAMP PARLIAMENT.

 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
PASSED AWAY OR HE BECAME PHYSICALLY
INCAPABLE TO LEAD.
 THE 1997/1998 ASIAN FINANCIAL CRISIS
PROVIDED THE CATALYST THAT SET OFF THE
PROCESS OF CHANGE.
 THE HALVING OF PER CAPITA INCOME,
CAUSED BY THE ECONOMIC CRISIS
TRANSLATED INTO SOCIAL MISERY:
UNEMPLOYMENT, HUNGER, RIOTS, AND EVEN
DEATH, THAT FINALLY FORCED SUHARTO TO
STEP DOWN IN MAY 1998.

ASIAN ECONOMIC CRISIS 1997-1998
REVISITED
The Indonesian Case
PRE-CRISIS INDONESIA’S
ECONOMY

 THE ECONOMIC PERFORMANCE OF PRE-
CRISIS INDONESIA COULD BE SEEN AS PART
OF A GENERAL PATTERN OF SUCCESSFUL
ECONOMIC DEVELOPMENT IN ASIA, IN
PARTICULAR (SOUTH EAST AND) EAST ASIA.
EAST ASIAN MIRACLE, 1993
EAST ASIAN MIRACLE: HPAE
HPAES ARE:
 JAPAN (THE LEADER)
 HONG KONG, THE REP. 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.
 FIVE TIMES FASTER THAN SUB-SAHARAN
AFRICA.
EAST ASIAN MIRACLE:
INDONESIA
CHARACTERISTICS:
1. HIGH AVERAGE RATE OF ECONOMIC
GROWTH
2. DECLINING INCOME INEQUALITY.
3. RAPID PRODUCTIVITY GROWTH.
4. PROMOTION OF HIGH RATES OF
GROWTH OF MANUFACTURED
EXPORTS.

CHARACTERISTICS (CONTINUED):
5. DECLINES IN FERTILITY.
6. HIGH GROWTH RATES OF PHYSICAL
CAPITAL, SUPPORTED BY HIGH RATES OF
DOMESTIC SAVINGS AND INVESTMENT.
7. HIGH INITIAL LEVELS AND GROWTH
RATES OF HUMAN CAPITAL.
1960's-1970's 1980's 1990's
Stability Growth Equity
Growth Stability Growth
Equity Equity Stability
Development Creed:
Trilogy of Development

 IN THE EARLY STAGE (1960-1970) OF
DEVELOPMENT, INDONESIA DEPENDED
ON OIL INCOME AND FOREIGN
ASSISTANCE.
 1980: INDONESIA EMBARKED ON
VARIOUS ECONOMIC REFORMS TO
EMBRACE GLOBALIZATION.
 ELEMENTS OF ECONOMIC
LIBERALIZATION PRE-1980.
1. ADOPTION OF AN OPEN CAPITAL ACCOUNT.
2. THE BALANCED BUDGET POLICY.
3. COMPETITIVE REAL EXCHANGE RATE WITH
PERIODIC ADJUSTMENTS.

 ELEMENTS OF ECONOMIC LIBERALIZATION
POST-1980.
1. DEREGULATION OF FOREIGN TRADE.
2. REDUCTION AND REMOVAL OF RESTRICTIONS ON
FOREIGN DIRECT INVESTMENT.
3. LIBERALIZATION OF FINANCIAL SECTOR.
4. ADOPTION OF A MODERN, SIMPLIFIED TAX SYSTEM.
 MACROECONOMIC STABILITY
 DECREASING RATE OF INFLATION, SINGLE
DIGIT RANGE.
 RISING PER CAPITA INCOME
 1965-95: REAL GDP PER CAPITA GREW AT AN
ANNUAL AVERAGE RATE OF 6.6%.
 IN 1967 PER CAPITA INCOME WAS LESS THAN
$100 AND BY 1995 HAD EXCEEDED $1,200,
MAKING INDONESIA A MIDDLE INCOME
COUNTRY.
THE OUTCOMES

 INCREASING FOOD SUPPLIES AND THE
ATTAINMENT OF RICE SELF-SUFFICIENCY.
 THE SHARE OF THE MANUFACTURING
SECTOR IN GDP: ROSE FROM 7.6% IN
1973 TO NEARLY 25% IN 1995.
0 %
10%
40%
30%
20%
60%
50%
1970 19961976 1990
Source: Badan Pusat Statistik, Indonesia
The proportion of the population
living below the national poverty
line

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%, STARTING A STAMPEDE KNOWN AS THE
ASIAN FINANCIAL CRISIS.
 THE DEPRECIATION OF THE BAHT FANNED
FEARS THAT EVEN THE RAPIDLY GROWING
EAST ASIAN ECONOMIES WERE NOT IMMUNE
TO THE TYPE OF ECONOMIC COLLAPSE THAT
TOOK PLACE IN LATIN AMERICA AND SOME
ANALYSTS NOW BEGAN TO WONDER IF THE
MUCH HERALDED “ASIAN MIRACLE” HAD BEEN
OVERSOLD.

 THE CRISIS SOON SPREAD FROM THAILAND,
TO MALAYSIA, THE PHILIPPINES, AND THEN TO
INDONESIA, WHERE IT WOULD HIT THE
HARDEST, AND THEN TO KOREA AND OTHER
COUNTRIES.
 QUITE SUDDENLY THE UNBOUNDED
OPTIMISM ABOUT THE EAST ASIAN
ECONOMIES WAS REPLACED BY A DEEP
SKEPTICISM ABOUT THEIR HEALTH, THE
EXTENT OF CORRUPTION, AND THE LACK OF
WELL DEVELOPED AND WELL MANAGED
FINANCIAL, LEGAL AND POLITICAL
INSTITUTIONS.

 FEARS THAT OTHER ASIAN ECONOMIES MIGHT
NOW ALSO COLLAPSE LED TO MASSIVE
CAPITAL OUTFLOWS FROM THE REGION.
FOREIGN BANKS THAT WERE ONCE EAGER TO
LEND TO NEARLY ANY ASIAN INVESTOR
SUDDENLY REFUSED TO RENEW SHORT-TERM
CREDIT LINES
 DURING THE THREE MONTHS BETWEEN JULY
AND 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.

 INITIALLY, THE FINANCIAL CRISIS IN INDONESIA
SEEMED TO BE CONTAINABLE.
 NEITHER THE INDONESIAN PUBLIC, THE
BUSINESS COMMUNITY, NOR THE
GOVERNMENT MONETARY AUTHORITY TOOK
THE FINANCIAL CRISIS IN THAILAND SERIOUSLY
AS MOST OF THE VITAL ECONOMIC FIGURES
INDICATED SOUND FUNDAMENTALS IN
INDONESIA.
 FROM 1989 TO 1996. ANNUAL REAL GDP
GROWTH AVERAGED 8%, SPURRED BY STRONG
INVESTMENT BEHAVIOR.
 THE OVERALL FISCAL BALANCE WAS IN SURPLUS
AFTER 1992, AND PUBLIC DEBT FELL AS A SHARE
OF GDP AS THE GOVERNMENT USED
PRIVATIZATION PROCEEDS TO REPAY LARGE
AMOUNTS OF FOREIGN DEBT.

 INFLATION, WHICH HOVERED AROUND 10%,
WAS A LITTLE HIGHER THAN THAT OF OTHER
EAST ASIAN ECONOMIES, BUT WAS STILL
LOW BY DEVELOPING COUNTRY STANDARDS.
 INDEED, FURMAN AND STIGLITZ (1988)
FOUND THAT INDONESIA’S CRISIS WAS THE
LEAST PREDICTABLE FROM AMONG A
SAMPLE OF 45 TROUBLED COUNTRIES.

 ALTHOUGH THE GENERAL CHARACTERISTICS
OF THE CRISIS WERE SIMILAR IN THOSE
COUNTRIES HIT BY THE CRISIS, THE DEPTH
AND DURATION OF THE ECONOMIC CRISIS IN
INDONESIA WAS ARGUABLY UNIQUE.
 THE EXCEPTIONAL SEVERITY OF THE
INDONESIAN CRISIS WAS DUE TO THE
CONFLUENCE OF ECONOMIC AND POLITICAL
CRISES.
 IT SERVES TO ILLUSTRATE HOW ECONOMIC AND
POLITICAL FORCES CAN REINFORCE EACH OTHER
IN TIMES OF CRISIS.
 THAT IS THE IMPORTANT LESSON ONE CAN
DRAW FROM THE CATASTROPHE.

THE ECONOMIC IMPLOSION
 THE EXCHANGE RATE DROPS FROM
2.400 RP/$ (JULY 1997) TO 16.000 RP/$
(JUNE 1998)
 1998:
GDP GROWTH : -13.6%
INFLATION : 77.6%.
 COLLAPSE OF THE BANKING SYSTEM:
COST OF RESTRUCTURING THE 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

 NON-OIL EXPORTS GROWTH:
– 1998 : + 9.9%
– 1999 : - 7.2%
 MILLIONS OF INDIVIDUALS LOST THEIR JOBS
 CHILDREN LEFT SCHOOLLOST GENERATION
 POVERTY INCREASED: 11.9% (1966) TO 18.2%
(1999)
 IN MAY 1998, 4 STUDENTS WERE KILLED IN
DEMONSTRATION AGAINST INCREASE IN
FUEL PRICES KNOWN AS “TRISAKTI
INCIDENT”.
 THEN RIOTS ERUPTED MOSTLY DIRECTED
AGAINST THE CHINESE COMMUNITY. THIS
LED TO MASSIVE CAPITAL FLIGHT AND THE
BREAKDOWN OF THE DISTRIBUTION
SYSTEM.

 DESPITE EFFORTS TO STEM THE CRISIS,
WITH THE SUPPORT OF THE
INTERNATIONAL COMMUNITY, THE
CURRENCY CONTINUED TO DETERIORATE
PUSHING THE ECONOMY DOWN IN A
TAILSPIN.
INTERNATIONAL DIMENSION
 OBVIOUSLY THERE WAS AN INTERNATIONAL
DIMENSION TO THE POLITICAL AND
ECONOMIC CRISES 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.

 ALL THE MAJOR CREDITOR COUNTRIES
INDICATED EARLY ON THAT THEY WERE READY
TO LEND SUPPORT TO INDONESIA’S EFFORTS
AT RECOVERY.
 THEY HAD ENTRUSTED THE IMF WITH THE
LEADING ROLE IN THE INTERNATIONAL
COMMUNITY’S EFFORTS TO HELP INDONESIA
IN OVERCOMING THE CRISIS.
 THE US DEPUTY SECRETARY OF TREASURY
LAWRENCE SUMMERS WAS THE FIRST TO
OFFER THE NEW GOVERNMENT THE
ASSISTANCE OF THE US GOVERNMENT.
 AS FOLLOW UP SENIOR OFFICIALS FROM THE
US, JAPAN AND GERMANY ARRIVED SOON.

 THEY WERE JOINED BY AN IMF TEAM HEADED BY
STANLEY FISCHER HIMSELF.
THE US WAS REPRESENTED BY UNDERSECRETARY FOR
INTERNATIONAL AFFAIRS AT THE DEPARTMENT OF
TREASURY DAVID LIPTON,
JAPAN BY VICE MINISTER OF FINANCE EISUKE
SAKAKIBARA
AND GERMANY BY DIRECTOR GENERAL IN THE
MINISTRY OF FINANCE KLAUS REGLING.
 THEY WERE KNOWN AS THE THREE
MUSKETEERS.
 INTERNATIONAL COOPERATION
SUPPORTING INDONESIA’S EFFORTS AT
RECOVERY WAS CHANNELED THROUGH
MULTILATERAL VENUES: IMF, CGI, AND
THE PARIS CLUB.

 THE IMF PROVIDED FINANCIAL SUPPORT
UNDER A STAND-BY ARRANGEMENT (SBA)
THAT WAS LATER REPLACED BY A MORE
CONCESSIONARY EXTENDED FUN FACILITY
(EEF).
 CGI WAS A FORUM FOR WORLD BANK AND
BILATERAL AND REGIONAL DONORS PLEDGING
FINANCIAL AND DEVELOPMENT SUPPORT.
 ABOUT ONE THIRD OF THE PLEDGES CAME
FROM WORLD BANK ANOTHER THIRD FROM
JAPAN AND THE REST FROM OTHER DONORS.

 ANOTHER MEETING ALSO HELD IN PARIS
WAS TO RESCHEDULE INDONESIA’S
SOVEREIGN DEBT UNDER THE AEGIS OF THE
“PARIS CLUB.”
THE FIRST FAILED ATTEMPT
 THE IMF 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 FLEEING CAPITAL
BACK INTO THE COUNTRY,
 ACCOMPANIED BY A SEVERE STRUCTURAL
CONDITIONALITY.

 IN NOVEMBER 1997, AS PART OF THE IMF
PROGRAM, THE GOVERNMENT CLOSED 16
BANKS THAT WERE FACING SERIOUS LIQUIDITY
PROBLEMS.
 THE BANKS WERE CLOSED IN THE MIDST OF
VERY VOLATILE CAPITAL WITHDRAWALS
WITHOUT A FINANCIAL AND BANKING
RESTRUCTURING SCHEME AND DEPOSIT
INSURANCE IN PLACE, SPREADING PANIC AND
DEEPENING THE FINANCIAL CRISIS (SACHS AND
WOO, 2000).
 THIS POLICY HAS BEEN SEEN BY OBSERVERS
AS MISJUDGMENT BY BOTH THE
GOVERNMENT AND THE IMF OF THE DEPTH
AND NATURE OF THE CRISIS.
 DESPITE IMF SUPPORTS THE ECONOMY
CONTINUED TO NOSE DIVE.

 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 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.
 THE CONFUSION OF PROJECTIONS ON
GROWTH:
 THE NOVEMBER IMF PROGRAM PROJECTED
GROWTH OF 5% FOR 1997/98 AND 3% FOR
1998/99, WHICH WAS RECEIVED AS
UNREALISTIC BY THE MARKET.
 IN THE JANUARY PROGRAM THE 1998/99-
GROWTH PROJECTION WAS REVISED AND
REDUCED TO ZERO, WHILE IN REALITY THE
1998/1999 GDP ACTUALLY DECLINED BY -
13%

 PAUL VOLKER CRITIZED 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 “KITCHEN
RECIPE”.
“GUERRILLA WAR”
 WHEN THE GOVERNMENT SERIOUSLY
CONSIDERED ADOPTING A CURRENCY
BOARD SYSTEM (CBS), THE PRESIDENT AND
THE IMF RELATIONSHIP HAD COME TO A
NEW LOW.
 THE PRESIDENT DREW AN ANALOGY OF HIS
DEALING WITH IMF WITH A “GUERRILLA
WAR”

 MARCH 6TH 1998, FRUSTRATED BY THE LACK
OF PROGRESS ON THE JANUARY LOI
PROGRAM, THE IMF ANNOUNCED THAT IT
WAS DELAYING A $3BILLION INFUSION
SCHEDULED TO BE DISBURSED ON MARCH
15TH.
 IT WAS A SEVERE BLOW TO THE
GOVERNMENT AND SEEN BY THE MARKET AS
LOSS OF CONFIDENCE OF THE
INTERNATIONAL COMMUNNITY IN
INDONESIA
 THE MOST DIFFICULT ISSUES IN THE
NEGOTIATION BETWEEN THE ECONOMIC
TEAM AND THE IMF WAS ABOUT SUBSIDIES,
IN PARTICULAR FUEL SUBSIDIES.
 IN PRINCIPLE IT WAS AGREED THAT FUEL
SUBSIDIES, AS ANY OTHER SUBSIDY, SHOULD
GRADUALLY BE REDUCED AND EVENTUALLY
ELIMINATED.

 THE QUESTION WAS HOW GRADUAL AND
WHAT THE RIGHT TIMING WAS. THE IMF
DEMANDED AN IMMEDIATE INCREASE, AT
THE END OF APRIL OR EARLY MAY 1998.
 WHEN THE GOVERNMENT, BOWING TO IMF
PRESSURE, INCREASED OIL PRICES IN EARLY
APRIL IT SET OUT A CHAIN OF EVENTS THAT
FINALLY BROUGHT DOWN SUHARTO’S
REGIME TO ITS KNEES.
ASIDE FROM THE IMF SOME ANALYSTS, DO NOT
DISCOUNT THE ROLE THE US PLAYED IN
SUHARTO’S DOWNFALL.
AS A STAUNCH ANTICOMMUNIST ALLY, INDONESIA
FOR MANY YEARS HAD ALWAYS BEEN ABLE TO
COUNT ON THE WEST’S SUPPORT, BUT BY THE
MID-1990S RELATIONS WITH THE WEST HAD
SOMEWHAT SOURED.

WITH THE END OF THE COLD WAR AND THE
COMMUNIST THREAT, WESTERN DONOR
COUNTRIES WERE INCREASINGLY LESS CONCERNED
ABOUT BAILING OUT INEFFICIENT FOREIGN
ECONOMIES ESPECIALLY THAT ARE FACING SOCIAL
AND POLITICAL PROBLEMS.
 MOUNTING CRITICISM OF THE WAY
INDONESIA HANDLED THE EAST TIMOR
QUESTION AND THE ALLEGATIONS OF
HUMAN RIGHTS ABUSES HAD PRECIPITATED
STRINGENT CALLS IN THE US CONGRESS TO
LINK AID AND ASSISTANCE TO HUMAN
RIGHTS RECORDS, LEADING TO A US ARMS
EMBARGO AND THE CURTAILMENT OF
TRAINING FOR THE MILITARY.

 TO SOME ANALYSTS THE US
ADMINISTRATION’S SUPPORT TO THE
ECONOMIC RECOVERY EFFORTS WAS
FOUNDED MORE ON CONCERN ABOUT THE
CONFLAGRATION OF THE FINANCIAL CRISIS
AND WORRY ABOUT FURTHER CONTAGION
AND ITS EFFECT ON THE REGIONAL AND
GLOBAL ECONOMY, RATHER THAN ABOUT
SUPPORTING SUHARTO’S GOVERNMENT.
 FINALLY, ON 20 MAY 1998 IN A SPEECH (GIVEN
AT THE US COAST GUARD ACADEMY
GRADUATION CEREMONY), THE DAY BEFORE
SUHARTO’S RESIGNATION, SECRETARY OF STATE
MADELEINE ALBRIGHT SAID OF PRESIDENT
SUHARTO: “NOW HE HAS THE OPPORTUNITY
FOR AN HISTORIC ACT OF STATESMANSHIP—
ONE THAT WILL OBSERVE HIS LEGACY AS A MAN
WHO NOT ONLY LED HIS COUNTRY, BUT WHO
HAD PROVIDED FOR ITS DEMOCRATIC
TRANSITION.”

 ALTHOUGH THE STATEMENT WAS COUCHED
IN A SUBTLE AND DIPLOMATIC TONE, IT WAS
WIDELY SEEN AS A CALL FOR SUHARTO TO
STEP DOWN.
 THE LESSON TO BE LEARNED IS THAT BASIC
MACROECONOMIC INDICATORS OFTEN FAIL
TO REFLECT THE GROWING WEAKNESSES OF
THE NATIONAL POLITICAL AND SOCIAL
INFRASTRUCTURE THAT PROVIDE THE
ESSENTIAL FRAMEWORK FOR SUSTAINED
ECONOMIC GROWTH.

 THE COLLAPSE OF THE INDONESIAN ECONOMY
ILLUSTRATES THE NEED FOR COMBINING
MEASURES OF GLOBALIZATION AND
INTERNATIONAL INTEGRATION WITH A
CONCERTED EFFORT TO STRENGTHEN
INSTITUTIONAL FRAMEWORKS, SUCH AS AN
INDEPENDENT AND REASONABLY COMPETENT
JUDICIARY, STRENGTHENED CORPORATE
GOVERNANCE AND BANKING SECTOR
OVERSIGHT, AS WELL AS A POLITICAL SYSTEM
OPEN TO CHANGE.
 INDONESIA’S EARLY PROGRESS IN
REFORMING ITS ECONOMIC STRUCTURE
BLINDED MANY GOVERNMENT OFFICIALS
AND OBSERVERS TO ITS FAILURE IN
IMPROVING THE POLITICAL, ECONOMIC AND
INSTITUTIONAL BASE THAT IS A PREREQUISITE
FOR SUSTAINED ECONOMIC GROWTH.

 THE EXTERNAL FACTORS CERTAINLY WEAKENED
THE NEW ORDER, YET WHEN THE CRISIS
DEEPENED, THE PROBABILITY OF SUHARTO’S
DOWNFALL WAS HIGH, EVEN IF RELATIONS
WITH THE WEST WERE BETTER.
 BUT THE RAPIDLY DETERIORATING RELATIONS
BETWEEN SUHARTO AND THE WEST MAY
CONTRIBUTE TO ACCELERATION OF SUHARTO’S
DOWNFALL.
THE FALL OF SUHARTO
 THE ECONOMIC CRISIS WAS THE CATALYST THAT
CAUSED THE VARIOUS FORCES THAT WANTED
POLITICAL REFORM TO COME TOGETHER.
 INDEED, THERE IS SOMETHING NOBLE COMING
OUT OF THE FINANCIAL CRISIS: THE FALL OF AN
AUTHORITARIAN REGIME THAT HAD BEEN IN
POWER FOR 30 YEARS AND THE RISE OF A NEW
DEMOCRATIC GOVERNANCE.
 SUHARTO RESIGNED ON MAY 21, 1998, AND
VICE PRESIDENT B.J. HABIBIE SUCCEEDED HIM.

B.J. HABIBIE: 1998-1999
 HABIBIE, A GERMAN EDUCATED ENGINEER,
BECAME PRESIDENT BY ACCIDENT.
 AFTER THE RESIGNATION OF SUHARTO,
UNDER PRESIDENT HABIBIE, WHO WAS
SUHARTO’S VICE PRESIDENT, POLITICAL
REFORM WAS INITIATED, ALONGSIDE EFFORTS
AT ECONOMIC RECOVERY.
 UNDAUNTED BY THE SURROUNDING POLITICAL
CONTROVERSY, THE NEW GOVERNMENT’S
ECONOMIC TEAM IMMEDIATELY EMBARKED ON
A SERIES OF MEASURES TO HALT THE
DETERIORATION AND RESTART THE RECOVERY
OF THE ECONOMY.

 I WAS RESPONSIBLE IN OVERSEEING THIS
PROCESS AS CHIEF ECONOMIC MINISTER
(COORDINATING MINISTER FOR THE ECONOMY,
FINANCE AND INDUSTRY) DURING THAT TIME.
THE ECONOMIC RECOVERY AGENDA
CONSISTED OF FIVE MAIN PROGRAMS:
1) RESTORING MACROECONOMIC STABILITY;
2) RESTRUCTURING OF THE BANKING SYSTEM;
3) RESOLUTION OF CORPORATE DEBT;
4) INCREASING THE PACE OF STRUCTURAL
REFORMS;
5) STIMULATING DEMAND AND REDUCING THE
IMPACT OF THE CRISIS ON THE POOR THROUGH
THE SOCIAL SAFETY NET

ON THE CUSP OF RECOVERY
 BY THE END OF HABIBIE’S PRESIDENCY,
INDONESIA WAS EMERGING FROM THE CRISIS
AND ON ITS WAY TO RESUME GROWTH.
 THE EXCHANGE RATE, INFLATION AND INTEREST
RATE HAD RESPONDED WELL TO THE
GOVERNMENT’S ECONOMIC RECOVERY
POLICIES.
 THE GRADUAL RETURN OF MARKET AND INVESTOR
CONFIDENCE, REVITALIZING THE STOCK MARKET
AND RESTARTED EXPORTS.
 THE NUMBERS IN POVERTY HAD ALSO STOPPED
RISING.
 THE PROGRESS TOWARD RECOVERY HAD REACHED
THE STAGE WHERE IN FISCAL POLICY THE
GOVERNMENT HAD SHIFTED ITS FOCUS FROM
FISCAL STIMULUS TO FISCAL SUSTAINABILITY.

LAYING OUT THE FOUNDATION FOR
DEMOCRACY
 IT WAS DURING HABIBIE’S ADMINISTRATION
THAT MOST OF THE INITIATIVES THAT
SIGNIFICANTLY ACCELERATED INDONESIA’S
DEMOCRATIZATION WERE INITIATED.
 THE FUNDAMENTAL POLITICAL CHANGES
WERE LATER CONSTITUTED THROUGH A
SERIES OF AMENDMENTS TO THE COUNTRY'S
CONSTITUTION.
 THE PROCESS OF DEMOCRATIZATION HAD
BEEN IN CONJUNCTION WITH THE PROCESS
OF ECONOMIC RECOVERY, ONE
REINFORCING THE OTHER ON THE WAY UP,
IN CONTRAST WITH THE SITUATION WHEN
THE CONFLUENCE OF ECONOMIC AND
POLITICAL CRISES HAD BROUGHT THE
COUNTRY DOWN DEEPER INTO THE ABYSS.

 THE MOST IMPORTANT POLITICAL REFORM WAS
THE MULTIPARTY PARLIAMENTARY ELECTION HELD
IN 1999, THE FIRST SINCE 1955 (45 YEARS).
 THE PROCESS OF TRANSITION TO DEMOCRACY
TOOK PLACE DURING THE PRESIDENCIES OF
HABIBIE, ABDURAHMAN WAHID, AND MEGAWATI
SUKARNOPUTRI, THE DAUGHTER OF SUKARNO.
 ONE NOTEWORTHY LEGACY OF HABIBIE WAS
THE REFERENDUM THAT HE GRANTED EAST
TIMORESE, RESULTING IN ITS INDEPENDENCE
IN 1999.
EAST TIMOR

ABDURAHMAN WAHID:
1999-2001
ABDURAHMAN WAHID, AN ALMOST BLIND
ISLAMIC CLERIC, GOT INTO THE PRESIDENCY AS
A RESULT OF POLITICAL BARGAINING.
WHEN HIS RELATIONS WITH THE PARLIAMENT
HAD GONE SOUR BECAUSE OF ALLEGED
CORRUPTION BY THE PRESIDENT, HE DECREED
THE DISSOLUTION OF THE PARLIAMENT AND
THE CONSTITUTIONAL ASSEMBLY WHICH
ELECTED HIM.
FOR THESE CONSTITUTIONAL VIOLATIONS HE
WAS IMPEACHED, AND THEN MEGAWATI,
WAHID’S VICE PRESIDENT, WAS ELECTED AS
PRESIDENT.

MEGAWATI SUKARNOPUTRI:
2001-2004
AT THE HEART OF POLITICAL REFORM
WAS A PROCESS OF CONSTITUTIONAL
AMENDMENTS THAT TOOK PLACE
BETWEEN 1999-2002.
AMONG THE MOST SIGNIFICANT OF THE
CONSTITUTIONAL REFORMS WERE:
 REAFFIRMATION OF CHECKS AND BALANCES:
—STRENGTHENING THE ROLE AND POWER OF
PARLIAMENT,
 SECOND LEGISLATIVE CHAMBER EQUIVALENT
TO THE US SENATE,
 DIRECT PRESIDENTIAL ELECTION,
 LIMITING THE PRESIDENCY TO TWO TERMS,
 JUDICIAL REFORMS (IE. ESTABLISHING THE
CONSTITUTIONAL COURT),

 HUMAN RIGHTS (ADOPTING THE UN
DECLARATION OF HUMAN RIGHTS ALMOST
WHOLLY),
 MULTI-PARTY PARLIAMENT,
 FREEDOM OF EXPRESSION AND ASSOCIATION,
AND
 TERMINATING THE ROLE OF THE ARMED
FORCES IN POLITICS, SEPARATING THE
MILITARY FROM THE POLICE, AND PUTTING
THE MILITARY UNDER CIVILIAN CONTROL.
 I WAS INVOLVED IN THIS PROCESS OF LAYING
DOWN THE FOUNDATION OF DEMOCRATIC
GOVERNANCE AS VICE CHAIRMAN OF THE
PEOPLE’S CONSULTATIVE ASSEMBLY (MPR), THE
HIGHEST CONSTITUTIONAL BODY HAVING THE
AUTHORITY TO ELECT (AND IMPEACH) THE
PRESIDENT, AMMEND THE CONSTITUTION AND
SET THE STATE GUIDELINES. I WAS IN CHARGE
TO OVERSEE THE CONSTITUTIONAL
AMENDMENTS.

 ONE IMPORTANT ASPECT OF POLITICAL REFORM IS
DECENTRALIZATION (POLITICAL, ECONOMIC,
ADMINISTRATIVE DEVOLUTION), WHICH HAS
STRENGTHENED THE UNITY OF THE NATION AND
PROVIDED POLITICAL STABILITY, SPREADING
DEVELOPMENT MORE EVENLY THROUGHOUT THE
COUNTRY
Special autonomy status to Aceh and
Papua
 ON THE BASIS OF THE NEWLY AMANDED
CONSTITUTION, IN 2004 A MULTI-PARTY
PARLIAMENTARY ELECTION WAS HELD (A SECOND
IN THE NATION HISTORY), FOLLOWED BY THE
FIRST DIRECT PRESIDENTIAL ELECTION.
 SUSILO BAMBANG YUDHOYONO, A RETIRED
GENERAL BECAME THE FIRST POPULARLY ELECTED
PRESIDENT IN THE NATION HISTORY.
SUSILO BAMBANG
YUDHOYONO: 2004-2014

IT CAN BE SAID THAT FROM 2004 ON
DEMOCRATIC CONSOLIDATION IS UNDER
WAY.
IN 2009, SUSILO BAMBANG YUDHOYONO
WAS REELECTED WITH A HUGE MAJORITY.
UNDER HIS PRESIDENCY INDONESIA
EMBARKED ON A SECOND STAGE OF
DEVELOPMENT.
 INDONESIA NOW HAS A PRESIDENT WHO
CAME FROM A HUMBLE BACKGROUND AND IS
NOT BURDENED BY THE PAST. HE IS LITERALLY
PRESIDENT OF THE COMMON PEOPLE.
 HE INTRODUCED A NEW STYLE OF LEADERSHIP,
A UNIQUE WAY OF CAMPAIGNING AND SMART
WAY OF GETTING THE SUPPORT OF THE
PEOPLE.
JOKO WIDODO:
2014-2019
JOKO WIDODO:
2014-2019

 JOKOWI WAS ELECTED NOT MERELY BECAUSE
OF THE SUPPORT OF POLITICAL PARTIES OR
POLITICAL ELITES, BUT HE OWES HIS ELECTION
TO THE SUPPORT OF ORDINARY, MOSTLY
YOUNG PEOPLE WHO CAMPAIGNED FOR HIM
VOLUNTARILY, BOTH IN THE GRASS ROOTS AS
WELL AS, AND PARTICULARLY EFFECTIVE,
THROUGH THE SOCIAL MEDIA.
 JOKOWI’S CAMPAIGN COULD BE A POLITICAL
WATERSHED SETTING UP THE TREND FOR
FUTURE POLITICAL CONTESTATIONS IN
INDONESIA.

 MANY PEOPLE IN INDONESIA ARE INTRIGUED BY
THE UNORTHODOX APPROACH OF THE NEW
LEADERSHIP AND EXPECT IT TO OPEN UP NEW
HORIZONS, OPPORTUNITIES AND PROSPECTS IN
THE YEARS AHEAD.
 IN A BOLD ATTEMPT TO MAKE HIS CABINET
CLEAN, HE SENT THE LIST OF CANDIDATES FOR
MINISTERS TO THE ANTI CORRUPTION
COMMISSION. ONLY AFTER RECEIVING
FEEDBACK HE FORMED HIS CABINET. THIS MAY
BECOME A TRADITION FOR FUTURE
GOVERNMENTS IN FORMING THEIR CABINET.
 DURING HIS CAMPAIGN, JOKOWI
INTRODUCED FRESH IDEAS, SUCH AS MAKING
INDONESIA AN EFFECTIVE MARITIME
CONTINENT. THE IDEA BEHIND IT IS THAT THE
FACT THAT INDONESIA IS A COUNTRY OF
ISLANDS SHOULD NOT IMPEDE ITS
DEVELOPMENT, BUT ON THE CONTRARY
SHOULD STRENGTHEN IT.

MARITIME CONTINENT
• NUMBER OF ISLANDS : 14,000
• COASTLINE : 5,000 KM (2nd AFTER CANADA)
• ECONOMIC ZONE : 200 NAUTICAL MILES
• INLAND WATERS : 93,000 SQUARE KILOMETERS
EXPORT FISHERY PRODUCTS
(ANNUAL)
INDONESIA US$ 4,2 BILLION
VIETNAM US$ 5,7 BILLION
THAILAND US$ 7,2 BILLION
INDONESIA LOST FROM ILLEGAL FISHING:
US$ 20 BILLION ANNUALLY

 THE NEW GOVERNMENT HAS INHERITED NOT
ONLY A FUNCTIONING DEMOCRACY, BUT
ALSO A COUNTRY THAT HAS REAFFIRMED ITS
INTEGRITY, A DIVERSE BUT UNITED NATION.
IN SUMMARY:
 IN THE LAST DECADE INDONESIAN PEOPLE
HAVE BEEN ENJOYING PEACE AND STABILITY.
 THE PAST DECADE OF SOLID GROWTH HAS
ALSO CONTRIBUTED TO CONSIDERABLE
DEVELOPMENT OUTCOMES.
 INDONESIA’S ECONOMY HAS SURVIVED,
RELATIVELY INTACT, THE GLOBAL RECESSION
THAT HAS SET BACK THE ECONOMY OF MANY
COUNTRIES.

 WITH STABLE BUT VIBRANT DEMOCRACY
AND ROBUST ECONOMY SUPPORTED BY
GROWING MIDDLE CLASS, INDONESIA IS
WELL POSITIONED TO REACH HIGHER LEVEL
OF GROWTH, WELFARE AND PROSPERITY.

III. Managing Transformation 2017

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III. Managing Transformation 2017