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

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

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 : jgkar@cbn.net.id
Website : www.ginandjar.com
Assistants : Dadang Solihin, HP 08034338627
email: dadangsol@yahoo.com
website: www.dadangsolihin.com
GSAPS-2007-Day1 www.ginandjar.com 2

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.


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?


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.

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.


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.


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.


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


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


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



Introduction


Economic Crisis and Democratic
Transition in Indonesia

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?



Politics i pre-Crisis I d
P liti in pre-C i i Indonesia
i

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.

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.


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.


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.


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.

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


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


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.


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.


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.


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.


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.



Indonesia Under the New Order

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.


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


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.


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.


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.


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.


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.


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.


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.


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.


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


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)


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



The Crisis

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%.


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.


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.


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.


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.



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



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.



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


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.


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.


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.


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.


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.


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.


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.


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.


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.


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.


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.


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.


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.


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


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.


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.



Explaining the Demise

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


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.


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.


“Fusion of Political Party (1973)
Fusion”

GOLKAR

PPP: PDI:
NU PNI
Parkindo
Parmusi
K t lik
Katolik
PSII IPKI
Perti Murba


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.


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.


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

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


Development Trilogy

Stability

Growth Equity


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


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.


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.


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.


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).


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 et.al. (2000:
92) has lent support to Huntington’s threshold argument.


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.


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


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


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.


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.


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.


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”.


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.


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.


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.


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.


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


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.


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.


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 )


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.


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.


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.


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.”


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


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.


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.


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.


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.


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.


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.


どうもありがとうございました

Terima Kasih


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

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