Governance in Indonesia : Challenges Facing the Megawati Presidency 9789812301949, 9812301941, 9789812305213, 9812305211

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Reproduced from Governance in Indonesia: Challenges Facing the Megawati Presidency, edited by Hadi Soesastro, Anthony L Smith and Han Mui Ling (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available from < http://bookshop.iseas.edu.sg >

The Institute of Southeast Asian Studies (ISEAS) in Singapore was established as an autonomous organization in 1968. It is a regional research centre for scholars and other specialists concerned with modern Southeast Asia, particularly the many-faceted problems of stability and security, economic development, and political and social change. The Institute’s research programmes are the Regional Economic Studies (RES, including ASEAN and APEC), Regional Strategic and Political Studies (RSPS), and Regional Social and Cultural Studies (RSCS). The Institute is governed by a twenty-two-member Board of Trustees comprising nominees from the Singapore Government, the National University of Singapore, the various Chambers of Commerce, and professional and civic organizations. An Executive Committee oversees day-to-day operations; it is chaired by the Director, the Institute’s chief academic and administrative officer.

© 2003 Institute of Southeast Asian Studies, Singapore

First published in Singapore in 2003 by Institute of Southeast Asian Studies 30 Heng Mui Keng Terrace, Pasir Panjang Singapore 119614 E-mail: [email protected] Website: www.iseas.edu.sg/pub.html All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies. © 2003 Institute of Southeast Asian Studies, Singapore. The responsibility for facts and opinions in this publication rests exclusively with the editors and contributors and their interpretations do not necessarily reflect the views or the policy of the Institute or its supporters. ISEAS Library Cataloguing-in-Publication Data Governance in Indonesia : challenges facing the Megawati presidency / edited by Hadi Soesastro, Anthony L. Smith, Han Mui Ling. 1. Indonesia—Politics and government—1998– 2. Sukarnoputri, Megawati, 1947– 3. Fiscal policy—Indonesia. 4. Indonesia—Economic policy. I. Soesastro, Hadi. II. Smith, Anthony L. III. Han, Mui Ling. DS644.5 G72 2003 sls2002026328 ISBN 981-230-194-1

The photograph of Megawati Sukarnoputri on the front cover is reproduced with the kind permission of PT Tempo Inti Media, Jakarta. Typset by Superskill Graphics Pte Ltd Printed in Singapore by Seng Lee Press Pte Ltd

© 2003 Institute of Southeast Asian Studies, Singapore

Contents Preface

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Contributors

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Chapter 1

Introduction: Indonesia under Megawati Hadi Soesastro

Chapter 2

Abdurrahman Wahid’s Presidency: What Went Wrong? Paulo Gorjão

13

The Megawati Presidency: Challenge of Political Islam Azyumardi Azra

44

Megawati’s Search for an Effective Foreign Policy Dewi Fortuna Anwar

70

Challenge of the TNI and Its Role in Indonesia’s Future Jusuf Wanandi

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Chapter 3

Chapter 4

Chapter 5

Chapter 6

Constitutional Reforms Todung Mulya Lubis

Chapter 7

Indonesian Politics and the Issue of Justice in East Timor Kumiko Mizuno

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Chapter 8

Secessionist Challenge in Aceh: Problems and Prospects Rizal Sukma

Chapter 9

Economic Overview Mohammad Sadli

Chapter 10

Role of the IMF in Indonesia’s Financial Crisis J. Soedradjad Djiwandono

Chapter 11

Escaping the Debt Trap Tubagus Feridhanusetyawan

Chapter 12

Challenge of Fiscal Sustainability for the Megawati Government Anggito Abimanyu

Chapter 13

Fiscal Decentralization in Indonesia Bambang Brodjonegoro

Chapter 14

Epilogue: The Bali Bombing and Responses to International Terrorism Anthony L. Smith

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269

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Index

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The Editors

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© 2003 Institute of Southeast Asian Studies, Singapore

Preface Indonesia faces challenges on many fronts, or, as it is commonly said in Indonesia itself, the country continues to face a “multidimensional crisis”. Paralysis gripped the political structure from early 2001, as the Abdurrahman Wahid administration became virtually moribund and was unable to provide leadership on any issue. When Megawati Sukarnoputri acceded to the presidency, speculation was rife about what sort of government she would lead. Her strong Cabinet line-up immediately raised expectations that this would be an executive that would face up to the myriad problems facing Indonesia, and this was evident from the dramatic strengthening of the rupiah immediately after the announcement. However, within months disillusionment with the leadership of the executive was evident once more. To make matters worse, the recent Bali bombing dramatically demonstrated that international terrorism had come to Indonesia. Not only does terrorism add to an already overcrowded agenda, it could very well be the greatest challenge for Megawati’s government. This volume features a series of chapters that explore some of the major issues that confront the Megawati administration. This book largely stems from a public forum entitled “The First 100 Days of President Megawati: Political and Economic Perspectives”, jointly hosted in Singapore by the Institute of Southeast Asian Studies (ISEAS) and the Centre for Strategic and International Studies (CSIS) on 1 November 2001. Addresses given at this forum by Todung Mulya Lubis, Jusuf Wanandi, Azyumardi Azra, Mohammad Sadli, Anggito Abimanyu, and J. Soedradjad Djiwandono are included in this volume. New chapters have also been added to supplement the original seminar papers. The forum brought together a group of individuals who can claim to be vii © 2003 Institute of Southeast Asian Studies, Singapore

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academics and practitioners. The idea behind the forum on 1 November 2001 was to assess the general direction, and the prospects, of the Megawati administration after its first 100 days. It was generally agreed that this time period is too short in which to evaluate any administration, although some broad trends may be discernible. Rather than an assessment of the presidency itself, the chapters in this volume all assess some of the key issues that will confront the Megawati administration. Megawati started off with an enormous groundswell of practical and popular support after her predecessor quickly became unpopular with most political factions and the country at large. With this tangible advantage, Hadi Soesastro argues in the introductory chapter that Megawati will prove to be more able than Wahid to maintain political stability in Indonesia. While he predicts that Megawati will remain in power until the 2004 election, he is skeptical that she will abandon her inert political style and decisively implement thorny economic and judicial reforms. In other words, progress in structural reforms under Megawati is expected to be slow. Paulo Gorjão’s chapter on the failures of the Abdurrahman Wahid presidency gives the reader insights into the formidable challenges faced by the Megawati administration. Wahid’s inability to co-opt the political elite in Jakarta’s multi-party environment stands out as a sobering lesson for future administrations. Wahid also failed to tackle Aceh’s and Irian Jaya’s secessionist claims, deal with accountability demands concerning Soeharto’s regime and East Timor human rights violations, as well as manage civil– military relations in a consistent manner. He was also unable to deal with the accusations of corruption that tarnished his administration. These very same challenges that crippled Wahid’s presidency continue to remain issues to be confronted by the Megawati administration. Will Megawati succeed where her predecessor Wahid had failed? This is the very question the other contributors have tried to grapple with. The subsequent chapters in this book are structured around two critical challenges of the Megawati administration: institutional and economic reforms. In these two arenas, many felt that Megawati’s presidency could precipitate a stronger and radicalized

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challenge from political Islam, especially in the light of the 11 September terrorist attacks. Her gender and lack of Islamic credentials, under some scenarios, would give her Muslim political rivals an added edge. Azyumardi Azra, however, allays these fears by highlighting the largely tolerant nature of Indonesian Islam. He argues that the more radical Islamic groups do not pose a real threat to Megawati’s political position, given their fragmentary nature and lack of mass support. Some analysts suspect that Megawati may establish a modus vivendi with opposing political forces and the military. If so, she is less likely to implement key reforms affecting the armed forces, such as establishing an institutional basis for civilian political supremacy over the military, and dismantling the army’s politically oppressive territorial structure. Jusuf Wanandi argues that Megawati, being a more assertively nationalist leader, would probably be more reliant on the military to deal with the independence movements in Aceh and Irian Jaya. This reliance could slow down urgently needed reforms in the TNI (Indonesian Armed Forces). But he believes that Megawati has the ability to address this challenge, given her credibility with the military leadership and her belief that overhauling the military would boost her popularity significantly. Human rights activist Todung Mulya Lubis identifies the 1945 Indonesian Constitution as the main structural obstacle to peaceful democratization in Indonesia. He feels that the 1945 Constitution, a historical product of the political forces at the time, is no longer relevant to modern Indonesia. Several constitutional amendments were made, but these changes, in his view, were done without a clear vision of the future political structure of Indonesia. Ambiguity inherent in the 1945 Constitution has only contributed to higher levels of political conflict in the post-Soeharto years. Unless there is a new Constitution in place, Lubis argues, Indonesia’s political instability is likely to persist even under the Megawati administration. Contributions by Kumiko Mizuno and Rizal Sukma approach institutional reforms from a different angle. In order to improve political governance, Megawati needs to first address the issue of justice. Mizuno believes that East Timor is a critical test case for

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Indonesia. However, there is little in terms of a driving force that would push the Megawati government to end the legal impunity for human rights violations in East Timor. Instead, the issue of justice has become a political commodity between the various domestic political forces and the military. If the Megawati administration fails to settle human rights violations in East Timor, she is unlikely to be able to succeed in managing a similar challenge in another restive province — Aceh. In this sense Sukma shares Mizuno’s pessimism. He feels that the prospect for a peaceful resolution to the Aceh conflict under Megawati is increasingly uncertain. The chapter by Dewi Fortuna Anwar outlines the foreign policy challenges of the Megawati administration. While the international community, particularly Indonesia’s Southeast Asian neighbours, welcomed the appointment of Megawati, she feels that there is little chance that Indonesia under Megawati will resume the leading role it once exercised within the Association of Southeast Asian Nations (ASEAN). She notes, however, that Megawati has taken the first positive step by restoring normal dealings with international financial institutions such as the World Bank, the International Monetary Fund (IMF), and the Asian Development Bank (ADB). The initial positive market response to the Megawati administration was very short-lived. Today many see Megawati’s economic performance during the first 100 days of her administration as anything but good. Why is that so? Mohammad Sadli, a former Cabinet minister, influential policy-maker, and professor of economics, offers a rare “insider” perspective on the politics of economic policy-making in Indonesia. Specifically, he attributes Megawati’s poor showing to the “politics and personalities” of her economic Cabinet team and the effects on her government’s relationship with the IMF, the ADB, and the World Bank. His analysis complements the chapter penned by former Bank Indonesia governor, J. Soedradjad Djiwandono. In Soedradjad’s contribution he discusses, in greater detail, the nature of the IMF’s involvement with Indonesia since the 1997 crisis. He suggests that policy inconsistencies by both the IMF and the post-Soeharto Indonesian governments were partly responsible for delaying economic

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recovery in the country. The Megawati government, which made a sensible start by amending ties with the IMF, has been unable to follow up on the good start by accelerating the pace of economic reforms. The events of 11 September and the slow-down in the global economy have made her task even more daunting. The next few chapters on economic governance focus on issues of debt, fiscal policy, and government budget. Tubagus Feridhanusetyawan provides a comprehensive overview of the foreign debt problem in Indonesia. He warns of a pending debt crisis if the Megawati administration fails to negotiate for the third round of the Paris Club debt rescheduling. In fact, he sees a compelling need for Megawati to adopt a comprehensive and integrated debt-resolution approach (including a centralized debt management unit and a solid institutional and legal framework) in order to achieve some headway towards resolving Indonesia’s debt crisis. The contribution by Anggito Abimanyu, who holds the position of Expert Staff at the Ministry of Finance, presents a practitioner’s perspective on the issue of fiscal sustainability in Indonesia. His step-by-step description of the formulation and implementation of the financial year 2001 budget allows the reader to understand the conflicting demands placed on the limited finances of the Indonesian Government. The outcome of the 2001 budget and the preparation of the 2002 budget are crucial for the Megawati administration as they will help to ensure the soundness of her government’s fiscal position in the succeeding years. Bambang Brodjonegoro’s chapter discusses one of the Megawati government’s key challenges — fiscal decentralization. Bambang argues that the fiscal decentralization programme, a direct outcome of regional autonomy demands, has been implemented in an extremely haphazard fashion. Little thought is given to establishing a proper legal and financial infrastructure for local empowerment. To ensure good relations between the central and local governments and to prevent a widening regional disparity between resource-rich and -poor provinces, the Megawati administration has the unenviable task of coming up with an efficient, equitable, and politically acceptable intergovernment fiscal transfer formula.

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Anthony L. Smith’s epilogue discusses what the bomb blast in Bali means for Indonesia in the context of the emergence of political Islam and the administration’s hesitation in meeting headon the challenge of Islamist radicalism. This final chapter posits the argument that current political trends indicate that Indonesia is not headed towards the establishment of an Islamic state, and that secularism is accepted by the overwhelming majority of the population — Muslims and non-Muslims. Radical versions of Islamism, employing terrorism as a political tool, do not enjoy any support in Indonesia except within a tiny segment of the population. The great difficulty is that the Indonesian Government, and its security forces, have proved unable, or unwilling, to prosecute such groups, even when they are in clear violation of the law. Megawati has proved vulnerable to opponents using identity politics to attack her — with Megawati not wishing to demonstrate that she is against Muslim interests. Nonetheless, the Megawati administration has now taken steps, in the wake of the Bali blast, to rein in terrorist groups. Unfortunately, a perception is growing that Megawati has not provided the kind of leadership needed in this time of national crisis, and this weakens her in the run-up to the 2004 election. Generally, there is a sense from the contributors that the Megawati administration faces a formidable array of challenges. In a 2001 report for international donors titled The Imperative For Reform, the World Bank says: “In the 100 days since assuming office, the new [Megawati] administration has made little progress on structural and governance reforms — renewing nervousness in markets and worrying external markets and creditors.” This assessment might be unduly harsh given the magnitude of the problems plaguing Indonesia and it remains to be seen whether the Megawati administration can accelerate Indonesia’s protracted transition to democracy. The editors wish to thank ISEAS in Singapore, and in particular its director, Professor Chia Siow Yue, for institutional support to undertake the joint forum and the resulting publication. Appreciation also goes to CSIS in Jakarta for co-hosting the forum and sustaining the organizational aspects from the Indonesian side. The editors are also grateful to the ISEAS Publications Unit,

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and specifically, its managing editor, Mrs Triena Ong, for the publication of this volume. Thanks are also extended to Mrs May Wong of ISEAS for secretarial and administrative assistance.

Hadi Soesastro, Anthony L. Smith, and Han Mui Ling

© 2003 Institute of Southeast Asian Studies, Singapore

Contributors Anggito Abimanyu is an Expert Staff at the Ministry of Finance in Indonesia and a Professor of Economics at Gadjah Mada University in Yogyakarta, Indonesia. Dewi Fortuna Anwar is Associate Director for Research at the Habibie Centre; Research Professor at the Centre for Political and Regional Studies, Indonesian Institute of Sciences (PPW-LIPI); and a member of the Board of Directors of the Centre for Information and Development Studies (CIDES). Azyumardi Azra is a professor of history of Southeast Asian Islam and the President of the State University for Islamic Studies (Universitas Islam Negeri/UIN) in Jakarta, Indonesia. Bambang Brodjonegoro is the Vice Director for Research at the Institute of Economics and Social Research and the Director of Economics Graduate Programme, University of Indonesia. J. Soedradjad Djiwandono is a Senior Visiting Fellow at the Institute of Defence and Strategic Studies in Singapore. He is a former Senior Research Fellow at the Institute of Southeast Asian Studies in Singapore and a former governor of Indonesia’s central bank, Bank Indonesia. Tubagus Feridhanusetyawan is a senior economist at the Centre for Strategic and International Studies in Jakarta, Indonesia. Paulo Gorjão is a lecturer in the International Relations Department at Lusíada University in Lisbon, Portugal. xiv © 2003 Institute of Southeast Asian Studies, Singapore

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Todung Mulya Lubis is the Director of the Centre for Electoral Reform (CETRO) in Indonesia. Kumiko Mizuno is a Ph.D. candidate in the Department of Political and Social Change, Research School of Pacific and Asian Studies, Australian National University. Mohammad Sadli is Professor of Economics at the University of Indonesia and a former Cabinet minister. Anthony L. Smith is a Senior Research Fellow at the Asia-Pacific Center for Security Studies, Hawaii. Hadi Soesastro is the Executive Director of the Centre for Strategic and International Studies in Jakarta, Indonesia. Rizal Sukma is the Director of Studies, Centre for Strategic and International Studies in Jakarta, Indonesia. Jusuf Wanandi is a member of the Board of Directors of the Centre for Strategic and International Studies in Jakarta, Indonesia.

© 2003 Institute of Southeast Asian Studies, Singapore

Reproduced from Governance in Indonesia: Challenges Facing the Megawati Presidency, edited by Hadi Soesastro, Anthony L Smith and Han Mui Ling (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian INTRODUCTION: INDONESIA UNDER MEGAWATI 1 Studies. Individual articles are available from < http://bookshop.iseas.edu.sg >

1 Introduction Indonesia under Megawati Hadi Soesastro

Introduction The Megawati government was only about five months old at the time of writing. It seems rather unfair to pass judgment on the performance of a new government within a year. This is particularly so in the case of Indonesia, a large country and one rather difficult to govern, one that is faced with huge problems in almost every aspect of life. Megawati inherited difficult and complex problems that she must try to resolve within a political environment that is fragile, experimental, uncertain, and often bordering on anarchy. But the performance of the government should not be measured only by what it has delivered. The informed public does not expect Megawati to perform miracles. In fact, the general expectation has been rather modest in terms of what this government can deliver. Megawati’s first hundred days almost coincided with the annual session of the People’s Consultative Assembly (Majelis Permusyawaratan Rakyat, MPR), held from 1 to 9 November 2001. The MPR is the highest political body that elects the President (and Vice-President) and formulates the broad outlines of state 1 © 2003 Institute of Southeast Asian Studies, Singapore

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policy to be implemented by the government. In the past the MPR met only once in five years. The annual session was introduced after the fall of Soeharto, as part of a political reform. While an accountability speech by the President will be given only at the end of the five-year term, the annual sessions of the MPR require the President to provide a progress report. There was not much that Megawati could report on at the November 2001 session. Megawati’s humble approach, by admitting that there was little progress, was well received by most factions in the MPR. The report was rather well-crafted in terms of outlining the main problems that Indonesia faced, but it lacked details on concrete plans and timetables for resolving them. As such it was a pretty accurate reflection of Megawati’s first hundred days in power, during which she has managed to face with poise all of the crises affecting the country but without taking many proactive steps to improve things. What accounts for the mild and measured reactions on the part of members of the Assembly? First, Megawati had not antagonized members of the parliament (DPR), who are also members of the MPR, the way Abdurrahman Wahid did right from the beginning of his presidency. Second, the MPR appeared to have lost a lot of steam after going through the long and tiring process of impeaching President Wahid. Third, Megawati could not be accused of any wrongdoing in terms of KKN (korupsi, kolusi, nepotisme/collusion, corruption, and nepotism) practices. All in all, it appears that members of the MPR, and thus also members of the DPR, have given Megawati another twelve months to put things in order. The two big questions are: Can she achieve that, and can the economy wait? What indications are there to suggest that Megawati can, and will, change? Without a change in her style of leadership, can the economy improve in 2002?

The Megawati Factor The year-end 2001 evaluation of the Megawati government seems to conclude that its meagre performance originates with Megawati herself. Great disappointment has been expressed by the public

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and the media with the performance of her Cabinet. When the Cabinet was announced in early August, more than two weeks after Megawati’s election, the public was quite hopeful. Expectations were raised. There was talk about the economic team being a “dream team”. The process of forming the Cabinet itself, while slow, was also hailed as a demonstration of Megawati’s ability to make her own informed and independent judgment in the wake of the many pressures on her in selecting the Cabinet members. In the few months that followed, criticisms began to be aired as to the competence of the ministers and the lack of coordination within the Cabinet. The dream team became the “dreaming team” in the eyes of the public. Yet, more and more it became apparent that the key problem was lack of leadership. Megawati is now being dubbed the “do nothing” President. Some media commentators have called her the President who “just sits there quietly”. Megawati does indeed have a hands-off style of leadership. This should not come as a surprise. That was also the kind of leadership that she demonstrated for many years as chairperson of the Partai Demokrasi Indonesia–Perjuangan (PDI-P), the party that she created, and which became her political vehicle. However, the party never turned into a full-fledged political party that is well organized. In fact, the party draws its political strength from Megawati’s “charisma”. Megawati’s charisma, in turn, remains an enigma. Is it derived from Soekarno’s charisma, or is it because Megawati has been made a martyr by Soeharto by becoming the symbol of the oppressed? What does all this mean for Megawati’s leadership and her presidency? In fact, the big question is about her political survival. Will she last to the end of her term in 2004, and is she even preparing herself to run again for the presidency in 2004? These are important questions not only in political terms but also for the economy. The (politically rational) argument is as follows: If Megawati is eyeing 2004, and there are no reasons why she should not do so, then she will (rather sooner than later) begin to shape up and develop a more proactive leadership. That is because not much time is left. Megawati will have to begin to deliver in 2002, because in 2003 a lot of energies will be devoted to the elections in 2004. It also means that politically it will be

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more difficult for her to do things in 2003. This sense of political urgency should lead to great improvements in the governing of the country. In fact, optimists speculate about the coming of a breakthrough in 2002. However, Megawati’s behaviour may not be driven by such rational considerations. There is the view that Megawati sees her ascension to the presidency in 2001 as her destiny. She was the “winner” in the general elections in 1999 as PDI-P got the largest number of votes, and should have become the President that year. Wahid, who supported her during the campaigns, made himself available almost at the eleventh hour, and won. The support for Wahid’s candidacy came as it became clear that the competition between the incumbent Habibie and Megawati could lead to civil disorder. Religious reasons were used to oppose her candidacy. But in fact one could argue that Megawati lost her chance because having obtained the largest number of votes, she did not see any reason why she should make deals with other political parties to mobilize the necessary political support to become the President. Unfortunately, her 34 per cent share of the votes was far from sufficient to gain the presidency without forging coalitions with other parties. Megawati’s defeat by Wahid was rather humiliating. Only through Wahid’s persuasion was she willing to become the VicePresident. However, as Vice-President she was hesitant to assume any important leadership role to fill in Wahid’s shortcomings, including that of managing the country. Wahid made several offers, but Megawati did not take them. In the course of developments, when it became clear that Wahid was not fit to run the country, Megawati was most determined not to involve herself in any effort, either openly or overtly, to unseat Wahid and to take over the helm. She strongly believed that if she were meant to be President, it would be presented to her on a silver platter because of destiny. Megawati could have shortened the whole process of Wahid’s impeachment if she had been more proactive in the process. Many did advise her to do so. Some speculation had it that Megawati’s belief in karma prevented her from doing so. Soeharto had to pay dearly for what he did to Soekarno, her father. She did not want to do the same to Wahid for fear that

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karma would rebound on her. If this was also based on political calculation, it was a smart move. Megawati’s total disengagement from the political process to oust Wahid made her politically very strong when she assumed the presidency. Megawati made no political enemies. But she also owed nobody for her presidency and thus did not have to pay back any favours, including in the choice of Cabinet members. She brought in several candidates from a number of other political parties, not as a result of any bargaining but strictly on her own terms. Despite the lack of a political majority in the parliament, Megawati did not become hostage to the political parties the way Wahid was. Wahid’s problem was that he refused to accept that fact. Megawati’s problem, it appears now, is that she does not know how to capitalize on her strong political position to get governance moving. Amien Rais’ “New Year’s” criticism of Megawati was that she was not undertaking the necessary steps that she was politically able to take. Megawati may believe that her continued political strength will not come from performance. And that is, indeed, what destiny is all about. Soeharto also believed in destiny. However, he also seemed to have understood that his political legitimacy was derived from his performance in office. Soeharto was obsessed with development, particularly economic development. He may have believed that his destiny was to become the nation’s “father of development”. Megawati, on the other hand, appears to believe that her destiny is to become and remain the country’s President. Megawati does not appear to face a major political challenge in 2002. Her political power remains unchallenged and her position continues to be quite comfortable. There is growing criticism of her, but this is not likely to transform into a political threat, at least not in the immediate future. All the major political parties have been severely weakened by internal problems. Wahid’s Partai Kebangkitan Bangsa (PKB) is split, and the weaker faction under Matori (the current Minister of Defence) may be the one that will be given official (Megawati’s) blessing. Golkar is fighting for its survival because its chairman, Akbar Tandjung, is implicated in a major corruption scandal that may also implicate the party. Partai Persatuan Pembangunan (PPP), the party under the leadership of

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Vice-President Hamzah Haz, also faces internal challenges and the prospect of a split. Megawati has survived a major test to her presidency in the wake of the impact of 11 September when her stance in supporting the U.S.-led campaign against global terrorism was challenged by the radical Muslim groups in the country. She was slightly taken off balance as these groups captured the national agenda, but eventually that was corrected. However, the damage was done. In the eyes of international public opinion, Megawati’s image was tarnished for allowing that to happen. The cost to the country is a further, and very serious, deterioration in Indonesia’s attractiveness to foreign investment. While Megawati’s political survival is not (yet) at stake, the impact of 11 September on Indonesia demonstrated that she could be vulnerable to pressures from the radical Muslim groups. Megawati’s weak Islamic credentials are a major factor. The security apparatus (police) was ill-prepared to handle the situation on the ground. And the media was not helpful by giving prominent coverage to the campaigns by those radical groups. However, the next time a similar situation arises, a more immediate and strong counterbalance will come from mainstream Muslim groups like Muhammadiyah and Nahdlatul Ulama. They have made this clear, especially in the meeting of their leaders held on 2 January 2002 in Jakarta. Thus, while Megawati’s and her government’s response to such a situation may still be weak in the future, this will be compensated for by counter-reactions from members of the community themselves. They do this not to help Megawati but to help their own interests. Megawati, thus, still enjoys a comfortable and fortunate political situation. This could mean that there are no real political incentives for her to change and to adopt a more proactive leadership. In fact, her approach of “not rocking the boat” may continue. In turn this means slow or moribund reforms. What she will deliver is some kind of political stability without progress in political, economic, and judicial reforms. With this style of government, Megawati can still survive until 2004. However, it is questionable whether this will be sufficient for her to be given yet

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another term in 2004. That is a question Megawati will probably only worry about when the time comes.

The Economy in 2002 and Beyond But even if Megawati thinks that time is on her side, there is still great concern that attention to the economy cannot wait. But how bad is the economy? Both the assessments and the indicators are mixed. There is a clear list of reform measures that have to be undertaken in order for the economy to achieve sustained recovery. These various measures are contained in the series of International Monetary Fund (IMF)-supported programmes as pledged by the government in its various letters of intent (LoI). It is no secret that many of the programmes have not been implemented in full, or in good faith. The reasons are varied. Lack of capacity and understanding by the bureaucracy is one, but political difficulties also account for the inaction. Over the years, since the outbreak of the financial crisis in late 1997, the poor implementation of the IMF-supported programmes has caused strained relations with the IMF and the international donor community. This has also affected the perceptions of international investors and markets. One of the immediate efforts by the Megawati government was to improve the relationship with the IMF. That relationship was at its ebb during the Wahid presidency because the economic team was essentially against the involvement of the IMF. It had no intention of implementing the programmes, especially not under the strict timetables and continued scrutiny on matters of detail. Megawati’s economic team co-operates with the IMF. In fact, its understanding about the steps to be taken to overcome the country’s huge economic problems accords with the basic framework of the IMF, namely monetary and fiscal discipline and maintaining open economic policies. However, it is the capacity to implement this sort of programme that remains a big problem. Co-ordination within the government has always been a major problem. Poor governance and corruption are an endemic problem. Lack of legal certainty is a major obstacle to resolving many

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problems, including corporate debt restructuring. There have been no improvements in these areas. In the past Soeharto’s strong and centralized leadership provided the assurance that things got done. This kind of leadership is no longer available to the country. The current leadership is also not a staunch believer in the need for reform. In fact, Indonesia’s reformasi era has practically ground to a halt. Yet the economy has been on its way towards recovery, albeit a weak one. In 2002, and perhaps beyond that, Indonesia will experience economic recovery even without the reforms. This is not ideal for a sustained recovery. But this economic recovery is also not directly attributable to the government’s economic policies and efforts. Economic growth of 4.8 per cent in 2000 and 3.5 per cent in 2001 resulted mainly from the dynamism and resilience that are present in the society itself. Since the financial crisis, a great deal of economic activity has shifted from the concentration in big corporations and state enterprises to medium- and smallscale activities as well as informal (household- and individualbased, not necessarily “black”) activities. It is likely that a large portion of the latter remains unrecorded and is not captured by the statistics. It may well be that the economy’s real growth rate is higher than the official estimate, but this is beside the point. Such indicators as continued expansion of retail space, sales of cars and motorcycles, renovation of office space, and a miniboom in small- and medium-sized housing estates, all point to the fact that there has been a recovery since the second half of 2001 that is still continuing. The recovery has been driven largely by domestic demand and domestic investment. A great deal remains unknown about the return flows of so-called “parked money”. Given the country’s very open capital account, recording is extremely poor. Anecdotal evidence suggests that, while perhaps not in huge amounts, there does seem to be a continued inflow of capital from abroad that finances the activities of medium-sized local investors. Overall, however, investment, as estimated by the national statistics office (BPS), began to slow down in the second quarter of 2001 and showed negative growth in the third quarter of 2001.

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While the government appears to be in a paralysis most of the time, it should not be seen as hopeless. There is still a good deal of mess and frustration in the country, but Indonesia is no longer a “messy state”, let alone on the verge of becoming a “failed state”, a concern that was not a remote possibility. The political stability that has been in place since Megawati’s presidency began appears to be a major factor in the revival of local investments. It is far from sufficient, though, to reattract substantial foreign investment into the country. The “do nothing” approach works in that no major policy mistakes are being made. And the often misplaced sense of vulnerability on the part of the government has both its negative and positive impacts on policy- and decision-making. On balance, the impact may be unintentionally positive in the short run but it is certainly negative in the longer term. At stake is the country’s long-term potential for growth. In the short term, big investments may not be required as there is still some excess capacity. The absence of foreign investment, in a sense, also creates space for medium- and small-scale investments that could result in a more balanced economic structure. For the longer term, reform is critical to achieve sustained growth, and the role of foreign investment is critical for any industrial and technological upgrading of the country. With the above discussion as a background, what can be expected to happen to the economy in 2002? Definitely there will not be a breakthrough. The general view is that the economic situation will be more of the same as in 2001. The government targets are aimed at some improvements in a number of macroeconomic indicators. Growth is expected to reach 4 per cent (compared to 3.5 per cent in 2001), inflation is targeted at 9 per cent (reduced from 12.6 per cent in 2001), the interest rate (on SBIs or Bank of Indonesia certificates) is to be lowered to 14 per cent (17.6 per cent at year-end 2001), and the rupiah is expected to strengthen to Rp9,000/US$ (from Rp10,450/US$ at year-end 2001). The budget deficit for 2002 will be reduced to 2.5 per cent of GDP from 3.7 per cent in 2001. How realistic are these targets? Table 1.1 shows growth projections by a number of Indonesian research institutions,

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TABLE 1.1 Indonesia: Economic Projections for 2002

Growth (%) Inflation (%) Interest rate (%) Rp exchange rate (Rp/US$) Fiscal deficit (% of GDP)

Indef

Econit

LPEMFEUI

CSIS

2.9 11 17

3.5 9–11 14–17

3.4 10.2 n.a.

3.8 10 17

10,922

10,000

9,800

10,000

4.8

n.a.

n.a.

3.2

Notes: Indef — Institute of Development Economics and Finance Econit — Advisory Group in Economics, Industry, and Trade LPEM-FEUI — Institute for Economic and Social Research, Faculty of Economics, University of Indonesia CSIS — Centre for Strategic and International Studies Sources: Various publications and media reports.

ranging from 3 to nearly 4 per cent, suggesting slightly greater caution. In the view of LPEM-FEUI (Institute for Economic and Social Research, Faculty of Economics, University of Indonesia), 4 per cent can be reached only if investment grows by 10 per cent. If political stability is maintained, this may not be beyond reach given the rather low base. Growth of investment was about 17 per cent in 2000. However, with the publication of recent export statistics, showing a drastic decline in non-oil exports in November 2001, there have been suggestions that the growth projections will have to be revised downwards to between 2 and 3 per cent. If the world’s economic growth picks up in the second half of 2002, the impact may not be that damaging. It should be noted as well that most of these projections assume continued reliance on domestic demand for consumption and investment. More questionable is the ability to keep inflation under control and below double digits, given the need for the government to raise the prices of a range of commodities for which it has provided huge amounts of subsidies, such as fuel and electricity. The manner in which the price adjustments are made has in the past accounted

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for a sizable portion of the inflationary impact. Administered prices, such as those of public transportation, tend to be overadjusted and sticky. Most projections show an inflation rate of 10 per cent or more. In line with this, the rupiah exchange rate is projected to be close to or above the Rp10,000/US$ level. Interest rates are expected to be much higher than the government’s target, with some projections showing interest rates hovering at 17 per cent.

Conclusion The uncertainty of these projections relates to the possible adverse impact on private economic activities of the greater pressures faced by the government in its own finances. The budget outlook is most worrying. While the budget deficit is set at 2.5 per cent of GDP, less than in the 2001 budget, the financing of this deficit remains problematic given the difficulties in raising domestic financing from the sales of assets under Indonesian Bank Restructuring Agency (IBRA) and privatization. The difficulties can be overcome only with a radical overhaul of the institutions involved, in addition to the firming up of the government’s political will. In addition there is concern that an over-ambitious target of tax revenues, without undertaking a radical overhaul of the tax administration itself, would result in a situation where the government may kill the goose that lays the golden egg. The targeted tax to GDP ratio of 13 per cent is still low by international standards, but it is a significant increase from the 10 per cent in 1999. On the expenditure side interest payments and subsidies account for about 40 per cent of total expenditures. While a reduction of external debt service payments have been achieved through Paris Club negotiations, reducing domestic debt remains a major challenge. Reducing subsidies is also another major challenge. The effect of the weak leadership on the economy will be felt mostly in a continued deterioration of the public finance situation. This, in turn, can have an adverse impact on private sector activities through crowding-out effects. In the longer run it weakens the

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country’s potential for growth. Another risk relates to possible public disenchantment with the government’s inability to implement reforms and to seriously attack corruption. If left to fester, this may easily lead to widespread demonstrations and unrest. Note *An earlier version of this chapter was previously issued in “Outlook for Indonesia”, in Trends in Southeast Asia (Singapore: Institute of Southeast Asian Studies, January 2002).

© 2003 Institute of Southeast Asian Studies, Singapore

Reproduced from Governance in Indonesia: Challenges Facing the Megawati Presidency, edited by Hadi Soesastro, Anthony L Smith and Han Mui Ling (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast13 Asian ABDURRAHMAN WAHID’S PRESIDENCY Studies. Individual articles are available from < http://bookshop.iseas.edu.sg >

2 Abdurrahman Wahid’s Presidency What Went Wrong? Paulo Gorjão

Introduction On 20 October 1999, the People’s Consultative Assembly (Majelis Permusyawaratan Rakyat, MPR) — comprising the 500 members of the People’s Representative Assembly (Dewan Perwakilan Rakyat, DPR) and 200 representatives from interest groups and regional factions — elected Abdurrahman Wahid (also known as Gus Dur), the leader of the National Awakening Party (Partai Kebangkitan Bangsa, PKB), as the fourth President of Indonesia and the first democratically elected.1 Contrary to what was predicted by many, he defeated Megawati Sukarnoputri, the leader of the Indonesian Democratic Party–Struggle (Partai Demokrasi Indonesia–Perjuangan, PDI-P). On 7 June 1999, the PKB gained the third highest number of votes (12.6 per cent) in the DPR election, but it came in fourth in allocated seats with fifty-one members. Although the PDI-P emerged as the largest party with 153 seats and 33.7 per cent of the votes, it could not translate this into capturing the presidency of Indonesia. After several weeks of 13 © 2003 Institute of Southeast Asian Studies, Singapore

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intense political bargaining, Wahid’s victory was seen as the result of Megawati’s mistakes. First, she allowed him to be progressively alienated. Then, Megawati’s inflexibility was an obstacle to a power-sharing alliance with the PKB and Amien Rais’ National Mandate Party (Partai Amanat Nasional, PAN). Finally, the vote against President Bacharuddin Jusuf Habibie’s accountability speech by the PDI-P members in the MPR for all intents and purposes eliminated the candidate against whom she had a guaranteed victory.2 Megawati would say to an aide in tears that “I can’t believe this has happened — my own brother stabbed me in the back”.3 Still, not everything was lost for her. Fearing a wave of violence across the country, many MPR members were willing to cast a vote for Megawati as a way to appease her supporters and maintain political stability. Initially, she refused to seek the nomination for Vice-President of Indonesia, but she later accepted and won with PKB’s political support. Despite her initial feelings of sadness, disappointment, and humiliation, her advisors believed that she could assume, as Vice-President, a pivotal role in the near future. Less than two years later, the chain of events would show how correct they were. The choice of Gus Dur as the new democratically elected President had, from the outset, acknowledged risks and potential weaknesses. Political observers and Indonesian politicians alike cited his health as a liability, owing in particular to his poor eyesight and two previous strokes. However, his health was a variable beyond his control. What he could — or could not — manage in the future were three other challenges. The first concerned his behaviour. He had always been unpredictable and erratic. His behaviour as head of Nahdlatul Ulama (NU), Indonesia’s biggest Muslim organization, was seen as proof of his “advanced logic”.4 However, even if his behaviour had not created serious problems in the past, the same could not be true when he became the President of Indonesia. The second challenge to achieving a politically strong administration was the PKB’s minority status in the DPR. In the absence of a majority party, a stable government is dependent on bringing together several parties. Thus, Wahid needed to establish and maintain a political coalition. In fact, calls for a power-sharing

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government accommodating all sides were made before and immediately after the MPR special session by the three political parties with most seats in the DPR — the PDI-P, the Golongan Karya (Golkar), and the United Development Party (Partai Persatuan Pembangunan, PPP). In order to overcome this political weakness, Wahid appointed his thirty-five-member Cabinet on 26 October 1999. It is known that Wahid wanted to nominate a Cabinet with only eighteen to twenty-five members. The difference in the numbers between his intentions and his “rainbow” or “national unity” Cabinet was an obvious proof of the power sharing that had occurred behind the scenes. After intense bargaining involving Wahid, Megawati, Akbar Tandjung as the leader of Golkar, Rais, and General Wiranto as representative of the Indonesian military (Tentara Nasional Indonesia, TNI), an agreement had been reached. The third challenge was related to the country’s lack of a coherent and clear model of government. The 1945 Constitution — Undang-Undang Dasar (UUD45) — was (and continues to be) short and general. Therefore, the UUD45 did (and still does) not offer clear guidelines concerning, among other things, the nature of the Indonesian political system. The unclear constitutional nature of Indonesia’s model of government, between presidentialism and parliamentarianism, partly explains the difficulties subsequently experienced by Wahid. This chapter will review the Indonesian democratic political development between October 1999 and July 2001, corresponding to the twenty-one months of Abdurrahman Wahid’s presidency. Among his many challenges, particular attention will be given to four of them: (1) Aceh and Irian Jaya’s secessionist claims; (2) accountability demands concerning Soeharto’s corruption and East Timor human rights’ violations; (3) the civil–military relationship; and (4) the political relationship between the government and the DPR.5

Aceh and Irian Jaya’s Secessionist Claims Aceh and Irian Jaya were the most visible symptoms of the wider problem of regional issues that Wahid faced. In 1950, after

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an initial Dutch federalist attempt to maintain their control over the East Indies, Indonesia became an independent unitary state. This was a defeat not only for the Dutch, but also for those who had supported the devolution of powers to the provinces, including the first Vice-President of Indonesia, Mohammad Hatta. Between 1950 and 1998, Indonesia experienced a period of intense concentration of power in the central government. This option allowed the Soekarno and Soeharto governments total control of the state, but it did nothing to establish an acceptable balance of power between the central government and the provinces. When Soeharto was overthrown, this unsolved problem resurfaced. The negative association of federalism with the Dutch attempts at political manipulation in the past led to a psychological legacy, making its adoption nowadays almost impossible. Therefore, instead of a federalist approach, Wahid tried to respond to the decentralization demands with a new arrangement favouring regional autonomy — laws actually passed by his predecessor, B. J. Habibie. This was considered inevitable. If Indonesia wished to maintain its territorial integrity and cope with secessionist threats, then it had to transfer power from the central government to the provinces. Otherwise, it was feared that sooner or later, some provinces could follow the path of East Timor. As a consequence, two laws on regional autonomy and fiscal balance between the central and local governments took effect as early as January 2001. Ill prepared and ill conceived, the process was a failure. The major confirmation came in early January 2001, when Ryaas Rasyid, Minister of Administrative Reforms, resigned, citing irreconcilable differences over the government’s management of the decentralization process. His resignation came when Wahid vetoed his proposal for a special agency to handle regional autonomy policies. Aceh and Irian Jaya’s secessionist claims were beyond the scope of the laws mentioned above. Theoretically, secessionist threats have consequences not only upon the boundaries and identity of Indonesia, but also to the survival of the democratic regime itself, because “the vast majority of citizens in a democracy-to-be must have no doubt or mental reservations as to which political community they belong to”.6

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Quite revealing as to how seriously Wahid considered this issue was the fact that he took the secessionist claims in Aceh as his personal task to resolve. In a departure from the traditional repressive security approach, he said more than once that if Indonesia had been able to hold a Popular Consultation in East Timor, it would be also capable of doing it in Aceh. Why he did this apparently without much thought and so publicly is still unclear, although he genuinely did so in order to accommodate the local demands, both rhetorically and substantively. Whatever the reasons, the consequence was that his comments put him immediately in conflict with the military. TNI commander-inchief, Admiral Widodo Adi Sucipto, soon made clear that he was prepared to admit the fact that “the security approach [was] not the proper way to settle the Aceh problem”, but this was the extent to which he was willing or able to go.7 After Wahid’s public comments, the Indonesian military spokesman Major General Sudrajat contradicted him, clearly intending to set the limits to a new approach concerning the territory. The Co-ordinating Minister for Political Affairs and Security, General Wiranto, also spoke against Wahid’s proposal, pointing out that any potential solution to the Aceh problem could not violate the UUD45, and added that he personally favoured as a solution a model of regional autonomy and revenue sharing. Without doubt, the TNI leadership did not want Aceh to become the next East Timor. Ideological, political, and economic reasons explain the TNI views. Ideologically, the TNI’s belief in the maintenance of national territorial integrity explains the opposition to a self-determination referendum. Politically, Aceh also allows the TNI to emphasize its continuing importance within democratic Indonesia. Economically, the conflict is a major source of funds.8 Furthermore, it was not only the TNI who were against Wahid’s referendum proposal for Aceh. The major political parties also made clear where they stood in that matter. Tandjung pointed out that any decision to hold a referendum in Aceh had to receive prior approval of the MPR, and Amien Rais also made it plain that a referendum should be “the very last alternative after all means [have] been exhausted”.9 When dealing with this issue, Wahid adopted a two-level approach. Internationally, he attempted to isolate the Free Aceh

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Movement (Gerakan Aceh Merdeka, GAM) from international support. In several of his foreign trips, among other things, he sought renewed support for Indonesia’s territorial integrity. Domestically, he tried to accommodate Acehnese demands.10 How this would be done according to Indonesia’s interests became progressively clear. The Indonesian Government was prepared to let the Acehnese choose between a wide-ranging autonomy within Indonesia and the maintenance of the current status. The referendum proposal to be held would include the possibility of adopting aspects of Islamic Law in the territory, but the possibility of a choice between a wide-ranging autonomy and independence was ruled out. After three meetings, beginning in January 2000, the Indonesian Government and GAM signed “A Joint Understanding on Humanitarian Pause” in May 2000, in Geneva, under the auspices of the Henry Dunant Center (also known as the Center for Humanitarian Dialogue). As one commentator pointed out at the time, the accord “implie[s] that Jakarta de facto cannot avoid GAM — just as GAM, now weakened by division and international isolation, need[s] Jakarta”.11 The agreement omitted the word “ceasefire” and did not address the key issue of whether or when a referendum on independence could be held. GAM also did not say if it accepted autonomy within Indonesia as an interim solution. Although Indonesia’s Minister of Foreign Affairs, Alwi Shihab, considered it a “breakthrough”, the humanitarian pause was received with caution, namely because by signing it, Jakarta was apparently conferring international recognition on GAM. Yet, after many truce extensions and several rounds of negotiations between both parties, they were still unable to reach a compromise. In fact, the seriousness of the situation on the one hand, and Wahid’s increasing political weakness on the other hand, led to a major departure from the initial stance. A major indication of this occurred in April 2001 with Wahid’s decree authorizing the TNI to “restore law and order”. This symbolized his final capitulation concerning his diplomatic approach towards the pro-independence movement. Separatist tensions also arose in Irian Jaya in December 1999, when the Morning Star separatist flag, the Bintang Kejora, was hoisted in a peaceful ceremony attended by thousands in Jayapura.

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Their aim was to renew demands for independence on the anniversary of the formation of the Free Papua Organization (Organisasi Papua Merdeka, OPM). Theys Hiyo Eluay, chairman of the Papuan Customary Council Assembly, organized the event, and took the opportunity to demand dialogue on the independence of the territory. As with Aceh, Wahid used a two-track strategy. While isolating Irian Jaya internationally, he also tried to accommodate their grievances domestically. For example, he said that the territory should be renamed West Papua, according to the wishes of the population. Moreover, he supported financially the Papuan People’s Congress held in May–June 2000, where a political resolution was passed affirming that the province had been independent since 1961, and rejecting the 1962 New York Agreement.12 This immediately became a turning point.13 Under pressure Gus Dur had to say that he did not recognize the legitimacy of the Papuan People’s Congress because they had “rejected the presence of Papuan people who [were] proIndonesian”.14 Like in Aceh, after his initial tolerance, TNI political pressure led to a different policy. In October 2000 a ban on the Morning Star flag was announced and a crackdown on the proindependence Papua Task Force followed. From December 2000 onwards, no Morning Star flags were authorized to fly in Irian Jaya except on the houses of some tribal leaders. Furthermore, the Papuan leaders — Theys Eluay, John Mambor, Don Flassy, Thaha Al-Hamid, and Herman Awom — were all arrested for subversion. Once again the Indonesian Government resorted to repressive measures. Under nationalist and military pressure, Wahid capitulated and his increasing political weakness led the police to ignore his demand for the release of the five separatist leaders. Despite the regime change, the failure of Wahid’s efforts obviously meant that the TNI security approach continued to prevail. Wahid was unable to deal with the multi-dimensional and interdependent character of the power play that was going on. Owing to his domestic political weakness, he could cope with secessionist threats only in co-operation with the other political parties and the TNI, not against them. Any policy that was not consensual enough, as were his policies concerning Aceh and Irian Jaya, was doomed to fail. His dilemma was that either he

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accepted the facts as they were, an option that he knew to be in the long term no solution at all, or, if he did not, he had to confront the remaining and powerful New Order (Orde Baru) elite. In turn, this was highly likely to face enormous resistance, as it did. The policy that theoretically seemed more reasonable, the search for a consensual approach, was not a real option because, in the end, it would lead to the promotion of the status quo. In this sense, it was unacceptable from his point of view. Therefore, he chose confrontation and was condemned to lose.

Accountability Concerning Soeharto’s Corruption and East Timor Human Rights Violations Gus Dur had two urgent cases demanding accountability. Domestically, he faced enormous pressure to make Soeharto accountable for past practices of corruption, collusion, and nepotism (korupsi, kolusi, nepotisme, KKN) and, internationally, he faced pressure to set up an investigation concerning the human rights violations committed by the East Timorese militia and the TNI in East Timor during 1999. On these issues he faced opposing pressures. On the one hand, the pro-Reformasi students and some non-governmental organizations (NGOs) demanded that Soeharto should be held accountable for the past legacy and brought to trial. A reasonable thing to ask but difficult to implement because, on the other hand, the TNI and a large section of the political establishment demanded that the past should be forgotten. Linked as they were with the New Order, any trial would inevitably implicate them. Both demands had, from Wahid’s point of view, advantages and inconveniences. If he held Soeharto and others linked to him accountable for the past KKN, he would weaken the New Order’s powerful elements and at the same time capture the support of the democratic sectors, although by doing so he would create enemies of those with powerful economic and political resources. Alternatively, if he let the past misdeeds go judicially unpunished, not only would he avoid creating powerful enemies but he would also gain their political support. However, this approach would mean that he would lose the support of the democratic forces.

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As mentioned before, Gus Dur became hostage to his own convictions. Politically, the less costly policy was to forget the past. Again, this was not a long-term solution. As a consequence, Gus Dur tried to use a pragmatic approach and sought a compromise. He would not forget the past, but he also would not seek full accountability. Therefore, he ordered the Attorney General, Marzuki Darusman, to reopen the corruption investigation against Soeharto, while at the same time making clear that he would prefer a negotiated political settlement. In fact, if Soeharto were to be found guilty of corruption, Wahid stated that he would grant him a pardon. His strategy of compromise was dependent on whether Soeharto accepted it. If the former Indonesian leader refused to bow, as he did, then Gus Dur would have no other option but to go forward with legal proceedings. This was already a defeat because it meant that he had to push forward with an alternative that was more costly and uncertain. Moreover, if he failed to make Soeharto accountable, his reputation would be badly hurt. After several legal manoeuvres and behind-the-scene discussions, in February 2000 Soeharto’s medical team formally told the Attorney General’s Office (AGO) that he was too sick to face a corruption investigation. Soeharto had failed to show up for questioning, for alleged corruption involving foundations that he had chaired during his rule, because he was “physically and mentally unfit”. Soeharto was officially charged with corruption but he did not show up in court, and later the South Jakarta District Court finally ruled that Soeharto’s health made him unfit to stand trial for alleged corruption. Although this decision was expected, it was a major blow to Wahid’s efforts because it undermined his credibility and the anti-graft campaign. Once his battle against Soeharto was lost, Wahid shifted his attention to Soeharto’s son, Hutomo Mandala Putra (also known as Tommy Soeharto). In September 2000 Gus Dur ordered the arrest of Tommy. As in the case of the release of Irian Jaya’s separatist leaders, the national police failed to carry out his order. (Chief General Rusdihardjo was dismissed as a consequence and General Surojo Bimantoro was appointed in his place, a decision that Wahid would later have cause to regret.) Gus Dur tasted a small victory when the Supreme Court sentenced Tommy to

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eighteen months in prison on corruption charges. Tommy’s conviction marked Wahid’s first concrete victory in the fight against corruption. Later Wahid rejected a plea for clemency and Tommy was ordered to surrender himself to the authorities, which he did not. This added another blow to Wahid’s credibility. Ultimately he had been unable to score even one major triumph in his fight against the Soeharto family. Overlapping with this, Gus Dur also faced international pressure to prosecute those involved in the human rights violations committed in East Timor during 1999. Again, this was not an easy option. Internationally, if he could not satisfy the demands for justice, Indonesia faced the prospect (although unlikely) of an international human rights court and, above all, the threat of military and economic pressure. At the same time he was also heavily pressured domestically, in particular by the TNI, to resist the international demands. Owing to his political weakness, Wahid was not able, during his presidency, to seek justice more fully. He was always more rhetorical than substantive, and his approach seemed to vary according to his bargaining power. Initially he was confident enough to support the investigation concerning the human rights abuses in East Timor. Therefore, in November 1999 the chairman of the Commission of Inquiry for Human Rights Violations in East Timor, Albert Hasibuan, included Wiranto in the list of people to be questioned. Hasibuan released an interim report saying that he had found evidence confirming that the East Timorese militia and the TNI had perpetrated the wave of violence in the territory. Although this was a significant step forward in Indonesia, the conclusions were not new. This had been obvious to the international community for a long time. Despite enormous efforts by the TNI to obstruct the process towards human rights accountability, at this stage Wahid was able to allow the development of the investigation. Furthermore, pressure upon Wiranto was something that Wahid saw as a benefit. The weaker Wiranto was, the stronger the President would be. He had enough political capital to allow the investigation concerning Wiranto’s involvement in the events in East Timor to run its full course, but this was as far as he could go. Reacting to the increasing foreign pressure to set up an international tribunal, he felt domestically

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compelled to publicly rule out this option, while promising that Indonesia would see through its own justice. In January 2000 the suspects were questioned and by the end of the month, the National Commission on Human Rights (Komnas HAM) presented an executive summary to Marzuki Darusman with the results of the Inquiry into Human Rights Violations (KPP HAM) in East Timor. This document implicated Wiranto in the violence that took place in East Timor during 1999, and recommended a formal investigation. The executive summary recommended that “Wiranto should be held accountable”, because “the crimes against humanity committed in East Timor occurred entirely, directly and indirectly, because of … [his] failure … to insure security in the implementation of the government’s two options”.15 The executive summary was made publicly known on the same day as the Report of the International Commission of Inquiry on East Timor was presented to the Secretary-General of the United Nations, Kofi Annan, recommending that “the United Nations should establish an international human rights tribunal”.16 However, the new constitutional Article 28I, introduced to the UUD45 in August 2000, excluded the possibility of retroactive prosecution of offences. This interpretation became a source of controversy because this new article seemed to suggest that the human rights violations committed in East Timor during 1999 would not be prosecuted.17 An obvious indication that human rights accountability was increasingly distant came in September 2000 when the AGO named nineteen suspects to be questioned. Wiranto and the notorious East Timorese militia leader Eurico Guterres were not among them. According to unnamed sources, the alleged reason for the omission was the existence of little evidence against Wiranto. Therefore, the AGO would take “an incremental approach, using information gleaned from lower level officers to assemble cases against senior officials”.18 Although this is probably true, the fact was that Gus Dur was increasingly under siege and unable to target Wiranto and Guterres. Furthermore, also in September, three United Nations workers were killed in Atambua, West Timor. This fact made Wahid’s political life even worse, since both situations did not contribute to appease the international community dissatisfied with the course of the events.

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The international outrage with what was going on was appeased in November 2000, when the DPR passed a law allowing the creation of a human rights tribunal to try the 1999 human rights abuses in East Timor and the 1984 Tanjung Priok incident. Only in March 2001 did the DPR approve the establishment of an ad hoc court and in the following month, Wahid issued Presidential Decree No. 53 authorizing this court. However, the decree only allowed the prosecution of crimes committed after the August 1999 Popular Consultation in East Timor. As one diplomat said, it was becoming increasingly obvious that “Indonesia [was] doing just enough to make it look like progress [was] being made, without actually accomplishing anything”.19 In the end Soeharto did not face trial, Tommy was a fugitive,20 and the international community was still waiting for accountability concerning the events in East Timor during 1999. The TNI opposition to human rights accountability and the erstwhile New Order elite’s resistance to scrutiny proved to be insurmountable.

Civil–Military Relations Wahid had also to deal with the establishment of a new civil– military relationship. Theoretically, this should be guided by four criteria: 1. a high level of military professionalism and recognition by the military officers of the limits of their professional competence; 2. the effective subordination of the military to the civilian political leaders who make the basic decisions on foreign and military policies; 3. the recognition and acceptance by that leadership of an area of professional competence and autonomy for the military; and 4. the minimization of military intervention in politics and of political intervention in the military.21 Wahid aimed to achieve two different objectives, which were not always convergent. He aimed to guarantee his own security against an unwanted and undemocratic removal from power. Bearing in mind that he did not accept the status quo and actively sought to overcome it, there were chances that the former New

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Order elite would try to depose him, legally or illegally. Therefore, a weak and divided military institution was his best guarantee of survival. But, at the same time, if he went too far in his efforts to divide and rule over it, it was possible that his actions would provoke a backlash. At the same time he intended to subordinate the TNI to civilian authority. As a democrat, there was no other way out. The political power of the military had to be curtailed. The government nominations and the military reshuffles were quite important to fulfil those two goals. Therefore, Wahid nominated Juwono Sudarsono as the new Minister of Defence, the first civilian occupying that post since the 1950s. Juwono was a civilian acceptable to the TNI because he was known to it. He was a former head of the National Defence Institute (Lembaga Pertahanan Nasional, Lemhanas), a TNI-linked think tank, and had been recommended for the post by Wiranto. Furthermore, he had been a minister in the Soeharto and Habibie governments. Wahid also nominated Admiral Widodo Adi Sucipto as the TNI commander-in-chief, the first non-Army officer to be appointed to the position since Soeharto first came to power. With this nomination, Wahid intended to weaken Wiranto’s position and to counterbalance, within the TNI structure, the power of the Army. He aimed to reach this goal despite the fact that Widodo was close to Wiranto and had no personal power base within the TNI.22 Yet, the main concern of Gus Dur was Wiranto. He had been until then the TNI commander-in-chief. Aiming to undermine his power base within the TNI, Wahid included Wiranto in the government as Co-ordinating Minister for Political Affairs and Security. It is assumed that Wiranto ensured that his major military rivals would be part of the government, in particular Lieutenant General Agum Gumelar and Lieutenant General Susilo Bambang Yudhoyono. Wiranto wanted them in the government because this would force them to resign from active military service. Indeed, the nominations of Juwono and Widodo contributed to the public perception of a declining influence of the military in politics, despite TNI’s continuing presence in the Cabinet with six ministers — with the exception of Wiranto, all of them were in non-defence positions. However, this was far from being totally true. For example, in November 1999 Wiranto authorized

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a TNI reshuffle promoting officers close to him, without first submitting the list to Juwono.23 It is clear that Wiranto held enormous political power in the early days of Wahid’s government. This was a potential threat to Wahid and an obstacle to his reformist agenda. While he wanted to push forward with TNI reforms and impose his supremacy upon Wiranto and the military, they tried to keep as much New Order privileges as possible in the new democratic regime. Progressively, the balance of power between Wahid and Wiranto changed. A relevant step towards the shift was the promotion of General Tyasno Sudarto to the post of Army chief of staff in November 1999. Tyasno was promoted mainly because he had been against Wiranto’s intentions to be a candidate for vice-president in October 1999. An equally important moment took place in January 2000, when Wahid confirmed that he had requested another reshuffle within the TNI. Among other shifts, Air Rear Marshal Graito Usodo replaced the military spokesman, Major General Sudrajat, and Air Rear Marshal Ian Santoso Perdanakusumah was appointed to be the head of the Strategic Intelligence Agency (Badan Kordinasi Intelijen Negara, BAIS). After the military reshuffle in November 1999, which caught Wahid by surprise, the next moves were aimed at reducing the Army’s institutional dominance and Wiranto’s power. The way to do this was through the appointment of non-Army members and Wiranto’s rivals to the TNI top brass. If by securing his political position, Wahid was also contributing to consolidate civilian supremacy over the military, then this was even better. The fact that in January 2000 Komnas HAM had implicated Wiranto in the violence that took place in East Timor during 1999 provided a golden opportunity to Wahid to get rid of Wiranto once and for all. While in Davos, Switzerland, he immediately sought Wiranto’s exit from the government and reiterated his decision the next day in London. This was not a surprise since in an interview with the Far Eastern Economic Review, Wahid had already said that if Wiranto were to be found implicated he would ask him to resign.24 According to “insiders”, it had been Wahid “himself who gave the human rights panel looking into East Timor atrocities the go ahead to finger” Wiranto,

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before he left for “his 16-day odyssey across Europe and Asia, there to conduct a long-distance battle”.25 Initially, Wiranto dismissed the calls for his resignation, saying that he was prepared to defend himself against charges of wrongdoing. He said that he would like to discuss the matter with Wahid after his overseas tour. Wiranto had been brought into the government because of his military power base, but since then he had clashed frequently with Wahid about who was really in charge.26 At the time, conflict resolution was seen as a test to the “shaky transition to civilian rule”.27 Aware that the way he dealt with Wiranto was being carefully observed by the TNI, Wahid decided to look for a way out of the impasse. He wanted to impose his supremacy upon the TNI without alienating his military allies. Therefore, Wahid declared that Wiranto “would be given an amnesty, pardoned, after being judged guilty”.28 This was obviously an argument to convince Wiranto to step down. Progressively, senior military officers openly backed Wahid’s bid to force Wiranto to resign from his post.29 For example, the Army chief of staff General Tyasno Sudarto supported Wahid, saying that he hoped Wiranto would bow to the President’s wish. This was a sign that, at this particular moment, Wahid was able to control the TNI, or at least to avoid its insubordination. It is unclear why, suddenly, Gus Dur made what appeared to be a major retreat and decided to allow Wiranto to keep his job temporarily. Cabinet Secretary Marsilam Simanjuntak said that Wiranto would remain at his post until the President’s final decision, to be made after reviewing the report of the Inquiry into Human Rights Abuses.30 His behaviour was partially a repeat of what had happened with Hamzah Haz (see the next section). Again, he accused a member of the government of improprieties and suggested as a solution his resignation.31 Surprisingly, the next day Wahid contradicted Simanjuntak and said that he had decided to suspend Wiranto from the Cabinet. After two weeks of political tension, Wiranto had no other option but to accept Wahid’s decision. This episode seemed at the time to be another step towards consolidating civilian power over the military, while at the same time alienating the military’s support for Wahid (even

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though Widodo claimed that all branches of the TNI backed Wahid’s decision to suspend Wiranto from the government). Wiranto’s removal opened the door to another major wave of military reshuffles in February 2000. Major General Agus Wirahadikusumah became the new chief of the Army Strategic Reserve Command (Komando Cadangan Strategis Angkatan Darat, Kostrad), replacing Lieutenant General Djadja Suparman. Lieutenant General Endriartono Sutarto became the new Army deputy chief of staff. Lieutenant General Djamari Chaniago became the TNI chief of General Affairs, replacing Lieutenant General Suaidi Marasabessy. Although Graito Usodo denied speculation concerning the reshuffle, it was obvious that Suaidi and Suparman lost their positions because they were close to Wiranto. Furthermore, Usodo also made clear that the replacements were made after consulting Wahid and, therefore, with his approval.32 Analysts considered the reshuffle of seventyfour military positions as “the most important in decades to ease the armed forces out of politics and end its participation in business”.33 But it was also thought that the main consideration behind the military reshuffle and the promotion of Wirahadikusumah, a Gus Dur ally, had been “to ensure that the president’s men occup[ied] the most strategic of positions and [had] troops under their command as a political contingency”.34 Yet, although reinforcing Gus Dur’s control over the military, the increasing interference in the military career structure was creating enormous resentment within the TNI. At the time it seemed that this reshuffle was the beginning of the shift in the TNI’s balance of power in favour of the reform generals. It looked like the first step towards the reform of the TNI and to bring it under civilian control. This was also the interpretation in March 2000 when Wahid disbanded the Co-ordinating Agency to Support the Maintenance of National Stability (Badan Kordinasi Bantuan Pemantapan Stabilitas Nasional, Bakorstanas), a tool through which the military exercised its combined role of defence and politics. This was significant because Bakorstanas had been an instrument for Soeharto and the military to ensure full control of Indonesia.

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In June 2000 a third major TNI reshuffle took place. Political observer Johanes Kristiadi pointed out that once again the political motivations behind the reshuffle had been to purge hard-line elements close to Wiranto.35 Surprisingly, in July Wirahadikusumah was removed from Kostrad and his post was taken over by Major General Ryamizard Ryacudu. Wirahadikusumah was closely associated with Bondan Gunawan, former state secretary, who had resigned owing to the Bulog scandal (see below). Furthermore, Wirahadikusumah had been recently involved in an audit of the Kostrad finances, revealing cases of corruption. The fact that he made public his findings was for obvious reasons considered unacceptable to several powerful TNI high-ranking military officers, and only contributed to his making more enemies within the TNI. Gus Dur’s support became increasingly difficult to maintain and Wirahadikusumah’s departure may have been timed to boost support from the TNI in the forthcoming August 2000 MPR annual session, as well as a quid pro quo between Wahid and the TNI. If he took “pressure off the demoralized TNI on this key financial front”, then the military would have “more zeal in stopping inter-religious violence” in Maluku.36 The transfer of Wirahadikusumah was the turning point in Wahid’s control of the TNI. After the August MPR annual session, he increasingly lost control over it, because he failed to recognize and accept that, on the one hand, there was an area of professional competence and autonomy for the military and, on the other hand, political intervention in the military should be minimized. His wish to secure his position and his actions to reform the military were unbalanced and therefore provoked a backlash against him. Still, Wahid should not bear the entire blame. From the beginning, the TNI was reluctant to recognize limits to its military competence, to accept an effective subordination to the civilian political leaders, and to minimize its intervention in politics. In the end, the divisions among the different political parties played in its favour. Wahid left power without being able to say that there was a new civil–military relationship in line with the new democratic standards.

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Political Relations between the Government and the DPR After an intense bargaining political process leading to the formation of the thirty-five-member Cabinet, Gus Dur immediately disrupted his relationship with some of the political parties which had backed him. From the beginning, the wide coalition present in the government raised concerns among the analysts of possible divisions. Owing to the many political groupings included in the Cabinet, it was predicted that it “would show unity and hold legitimacy in the short term”, but such unity would be fragile and “vulnerable to friction in the long run”.37 In other words, it was feared that “in the long term [the government] might not be either viable or good for democracy”.38 What nobody predicted was how short the honeymoon period would be. There were advantages and disadvantages in taking this option. A broad coalition offered a wider support base, something that Wahid needed owing to the PKB’s weak election results. A minority government was a recipe for political instability, as well as a guarantee that it would be unlikely that it could achieve something. The only solution, a coalition, was also a guarantee that political bargaining and obstacles to democratic reform would have a seat in the government. Again, a dilemma was in place. If Gus Dur really wanted to democratically reform Indonesia, he had to form a coalition government which, in turn, raised difficulties for political change. Either he stayed quiet or he would be in trouble. To make this challenge even worse, Wahid added to the equation his erratic behaviour and instinctive reactions. The first episode leading to the disruption of Wahid’s governmental coalition took place in November 1999. He mentioned that he would replace three members of his government who were involved in KKN, but in the next few days refused to say specifically who they were. One who was selected by the press as being on the President’s list was the Co-ordinating Minister of People’s Welfare and Poverty Eradication, Hamzah Haz. Later Gus Dur announced that Haz had asked to resign — something that the PPP Executive Board later denied — and he had accepted it. As if this was not enough, he replaced him with a non-PPP

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figure, Basri Hasanuddin. He disregarded the fact that the PPP was associated with PAN, one of the main elements in the Central Axis in the DPR. He made the mistake of alienating the PPP support in the DPR where it was the third largest party with fiftyeight seats. The dissatisfaction within the Central Axis with what had happened led Rais to threaten to “retaliate against attempts to undermine its strength”, and to show his “disappointment with Hamzah’s replacement” by a new minister who was “not from PPP”.39 In case Gus Dur had forgotten, Rais reminded him how important the PPP had been in Megawati’s defeat. One month after the installation of the government, the inter-party alliance was already starting to fall apart. In fact, this was a pattern of behaviour that Wahid would repeat several times in the future, which was responsible for the high costs in his relationship with the political parties and the TNI. The second important incident leading to the end of Wahid’s political coalition took place in April 2000, when he compelled the State Minister of Investment and Enterprises Development and member of the PDI-P, Laksamana Sukardi, and the Minister of Industry and Trade and member of Golkar, Yusuf Kalla, to resign. A PKB member, Rozy Munir, and Lieutenant General Luhut Panjaitan, both close to Gus Dur, were the respective replacements. As before with Haz, the replacements did not maintain the political configuration. It seems that behind his decision was the intention to fill the government with loyalists in key ministerial posts, allowing him to control “the financially lucrative state industries”.40 In fact, without naming Wahid’s PKB, Rais accused some ministers of trying to control state-owned enterprises by placing their associates and relatives as top executives. Undoubtedly, Wahid was being pressured by the PKB not only to control state-owned enterprises, but also to find jobs for the members. NU had been away from power for too long. It, too, wanted a slice of the pie. Making things even worse for himself, Gus Dur said that the reshuffle was due to the two ministers’ alleged involvement in KKN, instead of their incapacity to work together as he had said before.41 The dissatisfaction with his actions among the DPR members was so high that, in June 2000, they approved an interpellation motion to question him over the dismissal of Kalla

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and Sukardi. A total of 332 DPR members voted in favour of the interpellation proposal and only sixty-three against. Quite revealing was the fact that a significant number of the motion supporters were from Golkar and PDI-P. Wahid had started to lose political support from both major parties. In a certain way the dismissal of both ministers was the trigger that led to his impeachment. From April 2000 until July 2001, it was a question of carefully setting up a constitutional and legislative web, as well as to present a motive allowing for Wahid’s impeachment. This took place in July 2000, when the chairman of the PPP, Rusydi Hamka, submitted a proposal that was supported by 237 DPR members from six factions for an inquiry into the Brunei and Bulog scandals that meanwhile had erupted. The scandals involved a US$2 million donation by the Sultan of Brunei to Gus Dur that was unaccounted for and the embezzlement of US$3.5 million from the National Food Logistics Agency (Badan Urusan Logistik, Bulog) by the President’s former masseur. Also in July, Tandjung proposed publicly for the first time that Wahid’s daily duties should be transferred to Megawati. This clearly showed that Golkar was prepared to shift support towards the Vice-President. Like the Central Axis before, Golkar also began to gradually perceive Wahid’s presidency as dangerous to its interests. In the MPR annual session held in August 2000, Gus Dur told the session that he intended to take a back-seat role after the government reshuffle that was due to take place in the next few weeks. Furthermore, he agreed to hand over the day-to-day running of the government to Megawati. While Wahid was trying to appease the major political parties, the MPR was busy approving several decrees. Among the decisions taken, the most important concerned the UUD45 since some of the amendments contributed to enlarge the powers and responsibilities of the DPR, namely by allowing its own bills to become law thirty days after their adoption, with or without presidential proclamation. This implied the removal of the presidential legislative vetoing power. But the most important decision taken by the MPR, from the point of view of short-term interests, was the one granting to the DPR the powers of interpellation and

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inquiry. In fact, the amendments were made to pave the way for what would be forthcoming. Having survived the MPR annual session, Gus Dur announced a new government on 23 August 2000. The number of Cabinet members was reduced from thirty-five to twenty-six, eight of whom were new faces. The political parties’ dissatisfaction concerning the restructuring and reshuffling of the government was immediately clear because Wahid largely excluded the other factions from the Cabinet. Wahid seemed to have considered the coalition unworkable. The government’s performance until then had been poor, in part owing to a lack of co-ordination and rivalries among ministers from different parties. Instead of rebuilding his government coalition, Wahid decided to exclude the major parties from the Cabinet. This explains partially why the Presidential Decree No. 121/2000, signed on 23 August 2000, assigning the daily running of government to Megawati had been coldly received. Furthermore, the decree did not appease the PDI-P because it had left full authority in every field in the hands of Wahid. The DPR retaliated against him when it voted to launch an inquiry into the Bulog and Brunei scandals. Quite revealing of the DPR mood was the result of the ballot. There were 356 DPR members in the house and 307 voted in favour of the inquiry, only four voted against, and forty-five abstained — an overwhelming majority had turned against Gus Dur. The arrest by the police of Wahid’s former masseur Alip Agung Suwondo in October 2000 for his alleged role in the Bulog scandal and his testimony denying Wahid’s involvement in the Bulog affair did not put an end to the inquiry. Neither did the fact that the police cleared Wahid of any participation in the scheme. Against Suwondo’s testimony and the police clearance, in January 2001 the DPR special committee investigating the two scandals declared that Wahid had a role in the withdrawal and disbursement of the Bulog funds and had been inconsistent in his explanations concerning the financial assistance provided by the Sultan of Brunei. In February 2001, the DPR endorsed the report of the special committee, saying that Wahid “could be suspected of playing a role” in the two financial scandals. Again, the voting results speak for themselves. With 393

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votes in favour (the PKB walked out of the session), including those from the PDI-P, Golkar, PPP, PAN, and the military and police factions, and four votes against from the Love the Nation Democratic Party (Partai Demokrasi Kasih Bangsa, PDKB), Wahid had ninety days to reply to the charges that were made against him. Meanwhile Megawati continued to distance herself from Wahid and started to describe their relationship as purely professional. This constituted the strongest public signal of her intention to downgrade their relationship. The tide of impeachment continued and six DPR factions — among them the PDI-P, Golkar, and PPP — submitted their drafts towards a second memorandum. Later, Wahid rejected the DPR censure and for the first time apologized for any “inappropriate behaviour”.42 It became immediately obvious that his reply to the memorandum did not put an end to the process. As the Jakarta Post editorial pointed out, “whatever the response the President gave, the majority of the [DPR] would still want to proceed … along the road leading to his impeachment”.43 On 30 April 2001, the DPR issued the second memorandum of censure. With 363 votes in favour, fifty-two against, and forty-two abstentions (the police and military factions abstained), the memorandum was approved and gave thirty days to Gus Dur to respond. During the month of May, using the carrot-and-stick approach, Wahid searched for a political compromise, a sort of power-sharing arrangement. Despite his increasingly isolated position, he insisted on imposing his own conditions, and stated that Megawati could have all his executive powers except those affecting policy-making and appointments,44 while at the same time threatening to declare martial law, dissolve the DPR by presidential decree, and call for snap elections. Without other credible options, he kept insisting on these despite the fact that the TNI was against these plans and had made clear that it would not implement them. According to Gus Dur, the Presidential Decree No. 121 signed in August 2000 giving the daily running of government to Megawati could be revised. However, the fact that he had not respected the content of the decree meant that Megawati could not trust him, since he could do the same in the future. Therefore,

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she wanted a MPR decree because in that way she was more secure against his possible disregard of what he had agreed before. In turn, this was totally unacceptable to him because it would make him a symbolic figure. In the end this impasse contributed to his impeachment. Without any solution to the political gridlock, Wahid tried to capture, once again, the TNI support. Earlier, several high-ranking TNI elements had made public comments against his intentions to declare martial law, dissolve the DPR by presidential decree, and call for snap elections. Furthermore, Sutarto urged Gus Dur not to reshuffle the TNI high command, and advised him not to dissolve the DPR or declare a state of emergency. At that time, it was widely circulated that he intended to do a military reshuffle, as a way to put in key posts elements more favourable to his views and interests. The fact that Wirahadikusumah, and later Lieutenant General Johny Lumintang, refused to replace Sutarto, without prior approval from the TNI hierarchy, led him to back away from a direct confrontation with the military. Yet, the threat of impeachment was becoming increasingly likely despite the fact that Darusman had cleared him of any wrongdoing in the Bulog and Brunei scandals. On 30 May 2001, with 365 votes in favour, thirty-nine abstentions, and four votes against (again, the PKB members left the room before the vote), the DPR voted to begin impeachment proceedings. The MPR convened a special session on 1 August to hear charges against Gus Dur for alleged corruption and incompetence, while he continued resisting against the inevitable. In a last attempt to avoid his destiny, Wahid reshuffled the Cabinet, dismissing four ministers, the Attorney General, and the National Police Chief, Bimantoro, who refused to step down while Wahid was powerless to enforce his decision. This was a clear sign of how fragile his grip on the government, the TNI, and the police had become.45 In an effort to improve his relationship with Megawati, he decided that Gumelar — considered to be close to her — should replace Yudhoyono in the post of Co-ordinating Minister for Political, Social, and Security Affairs. Overlapping with this and in an attempt to pressure some elements of Golkar (Tandjung and deputy speaker Ginandjar Kartasasmita) and the PDI-P (namely

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Megawati’s husband, Taufik Kiemas, and Arifin Panigoro, head of the PDI-P faction in the DPR), Gus Dur replaced Darusman with Baharuddin Lopa.46 By appointing Lopa, he wanted to signal that from then on, he would be tough on corruption cases, a threat perceived to be directed at Megawati and Tandjung. Amid rumours and real threats that he would boycott the impeachment session, sack top generals, and declare a state of emergency, Megawati warned — with TNI support — that a state of emergency declaration would be unconstitutional. Meanwhile Gus Dur kept using the carrot-and-stick approach. While threatening to declare a state of emergency, he also made it clear that he continued to look for a compromise, although only according to his own conditions. However, his “stick” strategy suffered a major blow when Lopa died. Suddenly, his threat to investigate the past of influential Golkar and PDI-P elements had less credibility, since he had lost his first line of defence.47 Without Lopa, it became much more difficult to convince his political opponents to drop their moves towards impeachment and to reach a compromise.48 Aiming to keep up pressure on Golkar and the PDI-P, he appointed his close ally Simanjuntak to the post of Attorney General. He was expected to continue the investigations of alleged corruption cases, but it was too late. As a response to Megawati’s refusal to attend high-level talks among the major party leaders, he gave parliament until 20 July 2001 to find a political agreement, otherwise, he would declare a state of emergency. He was aware that Megawati was closing the door on political compromise, which explained why she began to avoid meeting him. As early as 13 July, Megawati had said that the impeachment was inevitable and, one day later, added that she would support an early impeachment if Gus Dur declared a state of emergency. As Wahid’s deadline approached, the political tension began to rise. Rais called for the MPR members to be ready to meet if Wahid decided to fulfil his threat to declare a state of emergency. On 20 July, Wahid postponed for eleven days his plan to declare a state of emergency and installed Chairuddin Ismail as acting commander of the police. The MPR had threatened to hold a snap impeachment session if Gus Dur went forward with his plan to install Chairuddin. Therefore, on the next day the

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MPR decided to begin a special session. With 592 votes in favour, five against, and four abstentions, it was decided that Wahid should be summoned to appear at the MPR special session on 23 July to be held accountable for his past twenty-one months in office. Gus Dur reacted by refusing to attend the MPR special session, by ordering the PKB to boycott it, and, in the early hours of the crucial day, by issuing a decree ordering both the DPR and the MPR to be suspended, and by outlawing Golkar. Furthermore, and despite his total lack of support within the TNI and the police, he urged them to block the MPR special session. These were desperate measures taken by a desperate man. Wahid had failed completely in his efforts to find a working balance between the government and the DPR. On 23 July 2001, after twenty-one months in power, he was sacked by the MPR special session. Megawati stabbed him in the back as he had done to her in October 1999. With all 592 members present voting in favour, the MPR decided to impeach Gus Dur for violating the UUD45, and on the same day they swore in Megawati as the fifth President of Indonesia. The irony did not stop here. On 26 July the first minister sacked — Hamzah Haz — became the new Vice-President.

Conclusions: What Went Wrong? From the above discussion, Wahid’s presidency was a lost opportunity, although in his defence, it must be said that his efforts faced, from the beginning, enormous resistance, in particular from the TNI and other elements of the New Order elite deeply involved with Soeharto’s regime. This does not attenuate the fact that: (1) he was not able to manage his government’s political relationship with the DPR and the MPR; (2) he failed to impose civilian supremacy upon the military; (3) he did not succeed in his efforts to provide accountability concerning Soeharto’s clan and East Timor; and (4) he was unable to establish a new relationship between the central government and the provinces, in particular Aceh and Irian Jaya. What went so wrong, so soon? There are three interrelated levels of explanation. The first one concerns personal factors. After two strokes and with poor eyesight, Wahid was a relatively unhealthy person with physically reduced

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capacities. His constant jokes about his political opponents also did not help to mend fences. Megawati was one of his favourite targets. It was widely circulated that he had remarked that she had skipped the announcement of the new Cabinet in August 2000 because she went to take a bath. He also joked about her alleged love affairs. Furthermore, his leadership style “characterized more by ad hoc instinctive reactions to changing circumstances than long term planning”,49 also did not contribute to a stable government. His erratic behaviour, his comments about Megawati, his allegations that ministers had been sacked owing to corruption, and his comparisons of the DPR to a “kindergarten” only made things worse. A second level of explanation is related to the present political legislature. Owing to Wahid’s party results in the June 1999 DPR elections, he was politically weak. With 12 per cent of the votes in the DPR and controlling only around 8 per cent of the seats in the MPR, the PKB did not offer a strong power base for a stable government. Therefore, although relatively understandable, Wahid’s lack of concern to maintain his coalition was hardly a good option. A third reason, and the most important, as to why everything went wrong is related to institutional factors. As it was pointed out, “most countries returning to democracy usually go back to whatever constitution they had in the past, even if it never worked”.50 It is at this stage obvious that the UUD45 is not the democratic safeguard that it should be. Its maintenance in the post-Soeharto democratic period, and especially with Gus Dur, proved to be a factor of instability. Despite the introduction of constitutional amendments, it continues to be necessary to redefine the political system. In fact, the hybrid nature of the Indonesian political system between presidentialism and parliamentarianism means that instability will continue in the short-term future. As Marcus Mietzner points out, without the reform of the constitutional system and a clear order regarding the relations between the state institutions, political instability will remain an institutionalized phenomenon. This institutionalized political disorder in turn constitutes the biggest obstacle to economic recovery and overshadows prospects for further democratization in Indonesia.51 © 2003 Institute of Southeast Asian Studies, Singapore

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Furthermore, other transitions to democracy in the past have empirically shown that “fragmented multiparty systems and presidentialism make an extremely unsupportive combination for an enduring democracy”.52 Thus, Wahid’s removal and the nomination of Megawati as the new President of Indonesia can solve, at least temporarily, the problems at the first and second levels, but it will not put an end to the problems erupting from the third level. The isolated constitutional amendments that were made, without a broad view about the future political system, only contributed to higher levels of political conflict.53 This problem will be solved only with a new constitution, or with a consistent and extensive revision of the UUD45. Among other challenges, Indonesia needs to define clearly its state structure, the checks and balances, the separation of powers, the role of the Supreme Court and to reorganize the judicial system.54 The vast array of constitutional “grey” areas is tremendous. Among them, one needing urgent solution is the model of government to be adopted. The optimal long-term solution to the political instability in Indonesia may depend on the adoption of a clear parliamentary system, not only because “parliamentarism over time develops many incentives to produce coalitional majorities [and] presidentialism has far fewer coalition-inducing incentives”, but also because “parliamentarism’s greater facility in creating enduring majorities out of multiparty coalitions”, and “greater capacity to endure with a large number of parties in the legislature than does presidentialism”.55 Equally relevant is the “impasse-breaking device” which is missing in Indonesia. In parliamentary systems, the legislative and executive branches are mutually dependent on each other. “The legislature can dismiss the government, and the government can call for new elections. This mutual dependence helps produce coalitional majorities or, failing that, provides routine impasse-breaking devices”.56 This relationship does not exist in presidential systems. Wahid was elected for five years and the only way to dismiss him, even though he lacked political support in the DPR and the MPR, was through constitutional mechanisms of questionable legal nature. Moreover, the fact that the DPR representatives are also members of the MPR does not provide a possible balance of power between © 2003 Institute of Southeast Asian Studies, Singapore

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them. The DPR wishes are unlikely to be changed by the MPR. A solution could be a bicameral system with separate elections in different time cycles to choose the members of the DPR and the MPR. Last, but not the least, the legitimacy of the Indonesian political system requires direct elections. This would not only increase political legitimacy and accountability, but it would also contribute to provide higher stability and avoid an embarrassing situation in which a political leader that came a distant fourth in the elections can become President. The consequence of this was that after twenty-one months of Wahid’s presidency, Indonesia continues to face the same structural challenges. Will Megawati succeed where he failed?

Notes * I am grateful to Marcus Mietzner and Anthony L. Smith for their helpful comments on an earlier draft of this chapter. I alone am responsible for the facts and opinions expressed. This research was supported by Fundação para a Ciência e a Tecnologia, Portugal, Program PRAXIS XXI, BD 20380. 1. In fact, the total number of members in the MPR is 695. The five seats allotted to East Timor were withdrawn from the MPR after the 1999 Popular Consultation in the territory. 2. See Marcus Mietzner, “The 1999 General Session: Wahid, Megawati and the Fight for the Presidency”, in Indonesia in Transition: Social Aspects of Reformasi and Crisis, edited by Chris Manning and Peter van Diermen (Singapore: Institute of Southeast Asian Studies, 2000), pp. 39–57. 3. John McBeth and Michael Vatikiotis, “Lady in Waiting”, Far Eastern Economic Review, 17 May 2001. 4. Arief Budiman, “Indonesia: The Trials of President Wahid”, in Southeast Asian Affairs 2001, edited by Daljit Singh and Anthony L. Smith (Singapore: Institute of Southeast Asian Studies, 2001), p. 146. 5. A fifth important challenge, which is beyond the scope of this chapter, concerns the Indonesian economic recovery. 6. Dankwart A. Rustow, “Transitions to Democracy: Toward a Dynamic Model”, Comparative Politics 2, no. 2 (April 1970): 350. 7. “TNI to End Security Approach in Aceh: Widodo”, Jakarta Post, 4 November 1999.

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8. International Crisis Group (ICG), Aceh: Why Military Force Won’t Bring Lasting Peace (Jakarta and Brussels, 12 June 2001), pp. 12–15. See also ICG, Aceh: Can Autonomy Stem the Conflict? (Jakarta and Brussels, 27 June 2001). 9. “Aceh Referendum should be Last Alternative: Amien”, Jakarta Post, 12 November 1999. 10. Michael Malley, “Indonesia: Violence and Reform Beyond Jakarta”, in Southeast Asian Affairs 2001, edited by Daljit Singh and Anthony L. Smith (Singapore: Institute of Southeast Asian Studies, 2001), pp. 160–63. 11. Aboeprijadi Santoso, “Aceh: More Challenges from Geneva”, Jakarta Post, 17 May 2000. 12. Under the 1962 New York Agreement, the Netherlands transferred sovereignty over West Papua to Indonesia. Indonesian sovereignty over West Papua was to be tentative because, under Article XVIII of the agreement, Indonesia undertook to ascertain the wishes of the people of West Papua through a consultant process to establish whether they wanted to remain part of Indonesia or to form an independent state. This consultation took place in July 1969. However, West Papua independence activists claimed that the 1969 consultation was not properly conducted and was therefore not valid. 13. Malley, op. cit., pp. 163–65. 14. “Jakarta Rejects Papua Congress as ‘Treason’”, Indonesian Observer, 6 June 2000. 15. “East Timor Probe Faults Wiranto”, Jakarta Post, 1 February 2000. 16. Sónia Picado Sotela, Judith Sefi Attah, A.M. Ahmad, Mari Kapi, and Sabine Leutheusser-Schnarrenberger, “Report of the International Commission of Inquiry on East Timor to the Secretary-General”, United Nations, A/54/726, S/2000/59, 31 January 2000, paragraph 153. The Report can be viewed at , accessed on 12 October 2000. 17. For a detailed list of the constitutional amendments, see , accessed on 12 June 2001. 18. Rajiv Chandrasekaran, “Prosecutors Name 19 in East Timor Violence Probe”, Washington Post, 2 September 2000. 19. Dan Murphy, “Timor Trial’s Devil Is in the Details”, Christian Science Monitor, 27 April 2001. 20. Tommy Soeharto was only arrested on 28 November 2001 following a pledge by President Megawati to tackle crime and corruption.

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21. Samuel P. Huntington, “Reforming Civil-Military Relations”, Journal of Democracy 6, no. 4 (October 1995): 9–10. 22. Damien Kingsbury, “The Reform of the Indonesian Armed Forces”, Contemporary Southeast Asia 22, no. 22 (August 2000): 307. 23. Ibid., p. 313. 24. “Interview: Abdurrahman Wahid”, Far Eastern Economic Review, 3 February 2000. 25. Susan Sim, “Flip-flops or Master Moves by the President?”, Straits Times, 15 February 2000. 26. Keith B. Richburg, “Indonesian Chief Presses Accused General to Quit”, International Herald Tribune, 2 February 2000. 27. Ibid. 28. Manuela Paixão, “Wiranto irá ser Julgado e Perdoado” [Wiranto will be judged and forgiven], Diário de Notícias, 7 February 2000. 29. “Wiranto Should Quit, Indonesian Officers Say”, International Herald Tribune, 12–13 February 2000. 30. Keith B. Richburg, “Wahid Retreats on Dismissal of Top General”, International Herald Tribune, 14 February 2000. 31. Susan Sim, “Wiranto to Keep Post — For Now”, Straits Times, 14 February 2000. 32. “Major TNI Reshuffle Announced”, Jakarta Post, 29 February 2000. 33. Lindsay Murdoch, “Military Reformer’s Blow to Old Guard”, Sydney Morning Herald, 29 February 2000. 34. Derwin Pereira, “Wiranto Loyalists Forced Out”, Straits Times, 6 March 2000. 35. “Observers say TNI Reshuffle Politically Motivated”, Jakarta Post, 17 June 2000. 36. Hamish McDonald, “Military Reformer Loses Post in Backlash”, Sydney Morning Herald, 1 August 2000. 37. Aribowo, from the Airlangga University, pointed this out in “Analysts warn of likely splinters in new Cabinet”, Jakarta Post, 28 October 1999. 38. Eric Bjornlund, director of the Jakarta office of the Carter Center in Atlanta as quoted by Seth Mydans, “Indonesian Leader Forms ‘Mixmaster’ Cabinet”, New York Times, 27 October 1999. 39. “Axis Force to Retaliate against External Threats”, Jakarta Post, 3 December 1999. 40. R. William Liddle, “Indonesia in 2000: A Shaky Start for Democracy”, Asian Survey 41, no. 1 (January/February 2001): 210. 41. “Graft Rumors Swirl After Reshuffle”, Jakarta Post, 28 April 2000.

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42. Jonathan Thatcher, “Wahid Sorry but Rejects Parliamentary Censure”, Reuters, 28 March 2001. 43. “What Next?”, Jakarta Post, 29 March 2001. 44. Susan Sim, “Mega Walks Out after Offer of Limited Powers”, Straits Times, 8 May 2001. 45. Sadanand Dhume and Dini Djalal, “Wahid’s Fight against Hope”, Far Eastern Economic Review, 14 June 2001. 46. See “Gus Dur’s Surprising Reshuffle”, Van Zorge Report on Indonesia, 12 June 2001. 47. “Attorney General’s Death Deals Blow to Indonesia’s Wahid”, Agence France-Presse, 4 July 2001. 48. Don Greenlees, “Wahid’s Defence in Disarray”, Australian, 5 July 2001. 49. ICG, Keeping the Military under Control (Brussels and Jakarta: ICG, September 2000), p. 6. 50. Adam Przeworski, Michael Alvarez, José Antonio Cheibub, and Fernando Limongi, “What Makes Democracies Endure?”, Journal of Democracy 7, no. 1 (January 1996): 49–50. 51. Marcus Mietzner, “Abdurrahman’s Indonesia: Political Conflict and Institutional Crisis”, in Indonesia Today: Challenges of History, edited by Grayson Lloyd and Shannon Smith (Singapore: Institute of Southeast Asian Studies, 2001), p. 43. 52. Juan J. Linz and Alfred Stepan, Problems of Democratic Transition and Consolidation: Southern Europe, South America, and Post-Communist Europe (Baltimore: Johns Hopkins University Press, 1996), p. 180. 53. Mietzner, “Abdurrahman’s Indonesia”, p. 32. 54. Andrew Ellis, “Reflections on the Constitutional Implications of the SI-MPR”, Van Zorge Report on Indonesia, 6 August 2001, pp. 22–24. 55. Linz and Stepan, op. cit., p. 181. 56. Ibid.

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Reproduced from Governance in Indonesia: Challenges Facing the Megawati Presidency, edited by Hadi Soesastro, Anthony L Smith and Han Mui Ling (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part44 of thisAZYUMARDI publication may AZRA be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available from < http://bookshop.iseas.edu.sg >

3 The Megawati Presidency Challenge of Political Islam Azyumardi Azra

Introduction There have been concerns among many people that the growing anti-U.S. sentiments expressed in widespread, sometimes rowdy, street demonstrations in several cities in Indonesia could spell the end of the Megawati-led coalition government. Radical Muslim groups or hard-liners have been asserting themselves in a much more visible manner in the aftermath of terrorists’ attacks on the World Trade Center and the Pentagon in the United States, and the subsequent U.S. military retaliation against Afghanistan. These groups have accused President Megawati of being too sympathetic towards the United States. Her silence or her refusal to condemn the U.S. military strikes in Afghanistan has been regarded by the Muslim hard-liners as a reflection of her unfriendly attitude towards Islam and Muslims. Certain individuals and Muslim groups have become increasingly critical of the Indonesian Government’s attitude and responses to the U.S.–Afghanistan crisis. The most visible among these Muslim hard-line groups are the Front Pembela Islam (FPI, Islamic Defenders Front), Forum Komunikasi Ahlus-Sunnah wal44 © 2003 Institute of Southeast Asian Studies, Singapore

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Jamaah (FKAWJ, Communication Forum of the Ahl al-Sunnah wa al-Jama‘ah) or more popularly known as Laskar Jihad (Jihad Force), and the Hizb al-Tahrir (Party of Liberation). Lately, other Muslim groups and institutions, such as the Majelis Ulama Indonesia (MUI, Indonesian Council of the Ulama), have also become increasingly critical of the Megawati administration. Similarly, groups of Muslim students who are members or affiliates of the Partai Keadilan (PK, Justice Party) have also become more vocal; they staged the largest peaceful demonstrations against the U.S. military retaliation in Afghanistan. The anti-American outbursts have undoubtedly put a lot of pressure on President Megawati. Some observers even believe that the Muslim hard-liners’ expressions of anti-Americanism would pose serious political threats to the political future of President Megawati. How serious are these threats? This chapter discusses recent developments regarding radical political Islam and the challenge it poses to the Megawati government.

Hard-line Muslims: Radical Attitudes One of the most important challenges President Megawati faces is the rise of radical political Islam, which appears to be one of the most visible political developments in the post-Soeharto Indonesia. Recent widespread anti-American demonstrations are not only coloured by religious feelings, but they also reflect dissatisfaction with the Megawati government. The most visible challenge for President Megawati thus far has come from Muslim hard-line groups like FPI, Laskar Jihad, Hizb al-Tahrir, and other smaller groups. These groups are known for their refusal to accept President Megawati on the basis of her gender. According to them, it is against Islamic teachings for a woman to be the leader of a country. Despite their refusal on religious grounds to admit a woman to a leadership position, they have not been able to contest President Megawati’s constitutional and political legitimacy. The U.S. confrontation with the Taliban and Osama bin Laden has only encouraged these groups to reassert themselves more

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publicly. These groups began to express their strong anti-American sentiments when U.S. officials identified the 11 September terrorists as members of the radical Islamic group Al-Qaeda, with links to Osama bin Laden, who was protected by the Taliban government in Afghanistan. The American ultimatum and subsequent bombings of Afghanistan further radicalized these Muslim hardline groups. Even though the Bush administration has maintained that its confrontation with the Taliban and Osama bin Laden is not an anti-Islam crusade, the Indonesian Muslim hard-liners believe that the United States plans to destroy Islam and Muslims. They argue that the bombing of Afghanistan should not have taken place in the absence of any convincing evidence that Osama bin Laden and his organization, Al-Qaeda, were responsible for the attacks against the United States. They believe that the American military retaliation in Afghanistan was motivated by hostility towards Islam, which was reflected in the use of the term “Operation Crusades” by President Bush. When Bush was reported to favour the use of the code name “Operation Infinite Justice”, that again created a lot of resentment among Muslims, since Muslims believe that it is only God who is infinite. Finally President Bush adopted a more neutral term, “Operation Enduring Freedom”, which has no religious connotation. However, the damage is already done. Insensitivity on the part of President Bush and other American senior officials has clearly contributed to the heightened anti-American sentiments among Indonesian Muslims. Most Muslims have made it clear that terrorism and the terrorist attacks on the World Trade Center and the Pentagon that left more than 3,000 people dead must be condemned; such ruthless attacks run contrary not only to Islamic teachings, but also to universal humanity (ukhuwwah al-insaniyyah). At the same time, however, they appeal to the United States and its Western allies to restrain themselves from attacking Afghanistan indiscriminately in their war against terrorism. They believe that military retaliation and any kind of violence would not put an end to terrorism; on the contrary, it would only perpetuate the vicious cycle of violence among those involved.

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The Muslim hard-liners have generally felt that the United States and its Western allies have been unfair to Muslims or Islam as a whole. They believe that the United States and the Western world have used the 11 September tragedy as a pretext to express their hostility towards Muslims and Islam. They believe that there is a Zionist–Western conspiracy against Islam and Muslims. This conspiracy theory, in my observation, has strongly influenced the psychology of many hard-line Muslim groups. Deeply influenced by this kind of psychology, it is not surprising then that Muslim hard-line groups have responded angrily to the United States and its allies. Many felt that the United States attacked Afghanistan despite the lack of conclusive evidence implicating Osama bin Laden in the 11 September attacks.1 Indonesian Muslim hard-liners then took to the streets in Jakarta and other major cities in Indonesia. They not only appealed to Indonesians to boycott American products, but also demanded that the Indonesian Government terminate diplomatic relations with the United States. Sensing the imminent attacks of the United States against Afghanistan, they also threatened to attack and occupy the American embassy in Jakarta and expel any American citizens residing and travelling in Indonesia. “We will not listen to any calls from anybody. If the U.S. government does attack Afghanistan, we will immediately attack the U.S. embassy and search for American citizens and expel them from Indonesia,” said M. Siraj Alwi, operational commander of the FPI.2 In fact, the Solo branch of the FPI conducted a search for American citizens in a number of hotels in the Central Java town. Even though they found no foreigners in these hotels and, therefore, did no harm, the political and psychological impacts of the “sweeping” have been enormous. News on the “sweeping” of foreigners in the national and international media has created a lot of anxiety among Indonesians and foreigners alike. The United States even issued a travel advisory advising its citizens to avoid travelling to Indonesia. With the continued escalation of the confrontation between the United States and the Taliban government, Muslim hard-line groups in Indonesia launched a nationwide campaign for a jihad

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in defence of Afghanistan. For that purpose, they started to enlist Muslim volunteers to be trained and sent to Afghanistan. For instance, the Gerakan Pemuda Islam Indonesia (GPII, Indonesian Muslim Youth Movement) established a jihad recruitment centre in Jakarta. It was reported that at least 1,800 volunteers, including a few women, from Jakarta, West Java, and Central Java had registered since the enlistment exercise began in the final week of September. The GPII stated that before leaving for Afghanistan, volunteers would join the combat training programme, which would be carried out by experienced instructors who had, from 1992 to 1994, participated in the Balkan war involving the BosniaHerzegovina Muslims and the Christian Serbs. Other jihad registration centres were also opened in other cities such as Makasar (South Sulawesi), Medan (North Sumatra), and Surabaya (East Java). The leaders at these centres appealed to Muslims to express their solidarity with the Afghan Muslims in a concrete way. They called upon Indonesian Muslims to take up arms for a jihad against the United States. According to them, the volunteers would be trained and sent to Afghanistan, together with the Muslim paramilitary groups such as the Jundullah (Jund Allah, or troops of God). Even though one can expect some expression of solidarity — based on the principle of Islamic brotherhood (ukhuwwah alIslamiyyah) — by Indonesian Muslims towards their fellow Muslims, it is clear that the hard-liners have not just succeeded in grabbing the media spotlight only recently. There was much public expression of Muslim solidarity when the Soviet Union invaded Afghanistan in 1979, when the United States and its allies attacked Iraq in 1990, and during the Serbs’ conflict with Bosnian Muslims. But the nature of Islamic solidarity then was distinctively different from that which emerged during the United States– Taliban crisis. In the past there was no mass appeal for jihad or any form of organized registration for volunteers to go to Afghanistan, Iraq, or even Bosnia. This clearly had to do with the Soeharto government, which not only provided very limited room for the Muslim hard-liners to express themselves publicly, it also undertook very harsh measures against them. In contrast, after the fall of Soeharto, many groups — including Muslim hard-

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liners — have been asserting themselves publicly in the name of democracy or Islamic solidarity. Despite their strong expressions of Islamic solidarity, it is important to point out that their support for the Afghan Muslims does not necessarily mean their unequivocal support for the Taliban or Osama bin Laden. In fact many leaders of the hard-line groups are very critical of both. Ja’far Umar Thalib, the national leader of the Laskar Jihad, for instance, openly stated that Osama bin Laden has a very limited knowledge of Islam and that he was surrounded only by opportunists who made use of Islam for their own material ends. Ja’far Umar Thalib added that the Taliban are the khariji (seceders), in reference to the religious extremists who abandoned the unity of the ummah (Muslim nation) for their own narrow ends in the early history of Islam. As a consequence of this view, the Taliban are not regarded as part of the Ahl al-Sunnah wa alJama’ah school of Islamic thought and law that is adhered to by the majority of Indonesian Muslims.

Moderate Muslims: Mainstream Voices The increasing prominence of Muslim hard-liners, one has to admit, has damaged the international image of Indonesian Islam. For many years Indonesian Islam has been regarded as a tolerant and moderate form of Islam, or Islam “with a smiling face”. The fact that the hard-liners have been able to capture the public’s imagination has created a wrong impression that Indonesian Islam is in a transitional process towards radicalization; in fact some observers have already talked about the “Talibanization” of Indonesian Islam. This tendency to view the hard-liners as representative of Indonesian Islam is very unfortunate. Despite the growing prominence — at least in the mass media — of the hard-liners, discerning observers will find that the mainstream Indonesian Muslims remain moderate in their religious attitude as well as in their political behaviour. It is hard to imagine that these (mainstream) Muslims would adopt the radical religious belief and practices of the Afghan Taliban.

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The moderate position of the mainstream Indonesian Muslims can be observed in the public responses made by the two largest Muslim organizations in Indonesia, that is, the Nahdlatul Ulama (NU, the Awakening of Ulama/Muslim religious scholars) and the Muhammadiyah (Followers of the Prophet Muhammad). Each organization has a membership of around 35 to 40 million Muslims. These two organizations have publicly stated that they do not agree with, let alone support, the appeal for Indonesian Muslims to wage jihad in Afghanistan in the event of a U.S. attack. Hasyim Muzadi, the successor of Abdurrahman Wahid (who had been elected as the fourth President of Indonesia) said that the NU would not recruit its members as volunteers for a jihad in Afghanistan. He maintained that a jihad does not always mean holy war; efforts to develop Islam and the Muslim ummah are also called jihad. He also believed that the terrorist attacks in the United States were a tragedy of humanity, not a tragedy of religion. As such, the terrorist attacks should not be transformed into religious conflicts. Similar sentiments have been expressed by the national chairman of Muhammadiyah, Syafii Maarif, who succeeded Amien Rais, the present speaker of the Indonesian MPR (People’s Consultative Assembly). Syafii Maarif, who is also a history professor at the State University of Yogyakarta, indicated that the Muhammadiyah would not get involved in a radical move. Syafii criticized the MUI’s call for jihad, which he believed had been misunderstood by many Muslims, given the different connotations of the word. He concluded that it was not wise to use the word jihad as it would only raise Muslims’ emotions and provoke radicalism. It is worth noting that the MUI, generally considered to be a very moderate Muslim body, seemed to support the call for jihad. After a meeting with the leaders of the thirty-two Islamic member organizations, represented by its secretary Din Syamsuddin, the MUI condemned the terrorist attacks on the United States. However, at the same time, the MUI called on Muslims to prepare a jihad, should the United States and its allies attack Afghanistan to pursue Osama bin Laden. These statements from the MUI have been strongly criticized by many moderate Muslim leaders and organizations, including © 2003 Institute of Southeast Asian Studies, Singapore

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the NU and Muhammadiyah. An example is Abdurrahman Wahid, former President of Indonesia and former national chairman of the NU, who pointed out that the idea of conducting jihad was against his personal belief that a truthful struggle must be based solely on the principle of non-violence. As one might expect, he opposed the idea of “sweeping” Americans and other foreigners out of Indonesia. Likewise, Syafii Maarif also expressed his opposition to this idea. He called upon all Muslim groups to stop unlawful activities, such as conducting searches for foreigners, as it could only worsen the image of Indonesia in the eyes of the international community. In view of these strong criticisms, Din Syamsuddin clarified that jihad fi sabillilah (jihad in the way of God) means that Muslims should undertake efforts to improve various aspects of their lives — social, economic, and educational — for the glory of Islam. Such efforts are also regarded as fighting for the way of Allah. As such, jihad means fighting for God’s will in a very broad sense, not necessarily in the form of physical war. Syamsuddin added that the MUI used the term jihad in the statement because the Council wanted to correct the misperception in various circles of Muslim and Western societies that jihad always connotes physical war. While opposing the sending of jihad forces to Afghanistan, moderate Muslim leaders appealed to Indonesians to focus their attention on humanitarian concerns in Afghanistan rather than simply expressing their religious solidarity. They felt that it would be more useful if Indonesian Muslims assisted in the problems confronting the Afghan people. Syafii Maarif said that Islamic organizations in Indonesia could show their support for the Afghan people by collecting donations, irrespective of whether the United States attacked Afghanistan or not. He said, “Our solidarity should be addressed to those who are suffering by sending them food, medicine, nurses, and doctors. This kind of aid is more important than jihad forces.” A similar appeal was also made by Salahuddin Wahid, a national executive member of the NU. He urged Indonesians not to become members of the jihad forces and to show their solidarity for their fellow Muslims by sending food, clothes, and other supplies. He believed that Islamic groups in Indonesia had the capability to send fighters to Afghanistan, but warned: “To go © 2003 Institute of Southeast Asian Studies, Singapore

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there, we need money and we should also have skills to fight in a war zone. The presence of Indonesians in Afghanistan in fact may cause problems for the Afghans.” Again, it is important to point out that right from the very beginning, the leaders of moderate mainstream Indonesian Muslims had appealed to the United States to refrain from attacking Afghanistan as a means of punishing Osama bin Laden or the Taliban government. They believe that military operations would not eliminate terrorism; in fact, they would only victimize innocent Afghan civilians. When the United States and its allies did attack Afghanistan, they demanded that the United States end its military operations as soon as possible. The U.S. military operations in Afghanistan have created new tensions in Indonesia. On the one hand, hard-liners have appealed to the Indonesian Government to break off diplomatic relations with the United States. On the other hand, moderate Muslim leaders of the NU and Muhammadiyah believe that Indonesia needs to maintain good relations with the United States and its allies to help resuscitate the Indonesian economy. “If we cut our relations with the U.S., our country’s economy would collapse in less than two weeks. Then who will be responsible?”, said Hasyim Muzadi, national chairman of the NU. There is little doubt that the U.S. military operations in Afghanistan have exerted new pressures on Megawati’s government. President Megawati was caught in a dilemma in deciding how to respond to the U.S. attacks. On the one hand, Indonesia needs aid from the International Monetary Fund, the World Bank, and other donor countries, yet sections of the population find it difficult to come to terms with the U.S. military operations in Afghanistan. Moderate Muslim leaders have urged the government to explain its stance on the U.S. military operations in Afghanistan to both hard-line groups in Indonesia and the United States and its allies to avoid misunderstandings. Hasyim Muzadi said that the government should explain to hard-line groups the constraints it faced in responding to the U.S. attacks. Similarly, Syafii Maarif urged the Megawati government to explain the domestic political constraints it faced to the United States and other Western countries.

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President Megawati: Speaks Little but Firmer After realizing that the mainstream Muslim parties and organizations do not support their opposition to President Megawati, the Indonesian Muslim hard-line groups seem to have lost their momentum to fight. The furors in the aftermath of the terrorist attacks and the subsequent U.S. military operations in Afghanistan have, however, provided these groups with a new vigour. Contrary to most opinions that Megawati has been slow to give appropriate responses to the crisis, I would argue that she has been firm in her attitudes. Of course, she has spoken too little on the U.S.–Afghanistan crisis, but I believe that she knows how to respond to the continued crisis. In fact, Megawati has outlined the Indonesian government responses to the crisis right from the very beginning. During her visit to the United States a week after the World Trade Center and Pentagon tragedy, Megawati made it clear to President Bush that Indonesia would help the United States in its fight against international terrorism. At the same time, she also urged the U.S. Government to refrain from any hasty military retaliation. Her attitude changed when the United States and its allies did launch military operations in Afghanistan. At the commemoration of the Ascension Day of the Prophet of Muhammad in October 2001, Megawati reiterated her position: Violence should not be answered with violence. Whoever commits terror must be punished, but it is unacceptable that someone, a group or even a government — arguing that they are hunting down perpetrators of the terror — attack people or another country for whatever reason.3 Even though she made no mention of any specific country in her speech, the message was clearly directed at the United States, which had already launched military strikes against Afghanistan a week before. Before long, the U.S. officials expressed their displeasure with Megawati. This is followed by Australian Prime Minister, John Howard, who strongly criticized Megawati’s changing attitude.

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On the other hand, Megawati’s statements were warmly welcomed by various parties in the country. While the hard-liners judged that these remarks were not strong enough, moderate Muslim leaders felt that the government had responded adequately to the crisis and they urged the government to follow up with concrete action. The Minister of Foreign Affairs, Hassan Wirayuda, even appealed for an end to the military operations in Afghanistan before the start of Ramadhan in the middle of November 2001. He stated that the fasting month of Ramadhan was very important for Muslims to reflect and express solidarity. Therefore, it would be tumultuous if military actions were continued in Afghanistan. Prolonged military conflict in Afghanistan would have destabilizing effects on countries with large Muslim populations, like Indonesia, Pakistan, and Malaysia. The firm attitude of Indonesian foreign policy in this latest episode is a marked change from its usual “ambiguous” foreign policies relating to Muslims and Islam. In fact, Vice-President Hamzah Haz has even called on the Organization of the Islamic Conference (OIC) to support Indonesia’s call for an end to U.S. military operations before the month of Ramadhan. Thus far, OIC member countries have not criticized the U.S.-led strikes on Afghanistan. They have only expressed their concern that the military operations could result in civilian casualties. Initially, Megawati had been criticized by many quarters for remaining silent and not having a stronger position while daily anti-U.S. mass protests erupted in several Indonesian cities. However, she broke her silence after a meeting with leaders of the Indonesian parliament. She promised that the Indonesian Government would review its “soft” stance on the U.S. attacks on Afghanistan. This change in government attitude was also put forth by Hamzah Haz. Initially he seemed to give the “green light” for anti-U.S. demonstrations and jihad in Afghanistan, but later he urged Muslim hard-liners to stop the anti-U.S. rallies in the country: I am pleading once again for the rallies to stop. As VicePresident and coming from a Muslim-based party, I

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understand the feelings of Muslims, but I am concerned whenever a rally turns violent.4 If the rallies continued, Hamzah Haz feared that Indonesia would face more economic hardships. Furthermore, Hamzah Haz felt that the continuing rallies would hurt the image of Islam and he maintained that the Indonesian Government had taken into account the interests, sensitivities, and feelings of Indonesian Muslims. Speaking after her return from Japan, Megawati raised her objections to the “sweeping” of foreigners and added that the government would clamp down on hard-liners if they carried out their threats. Following these statements, Co-ordinating Minister of Political and Security Affairs, Susilo Bambang Yudhoyono, said that the government would issue a strict ban against Indonesians planning to go to Afghanistan for a jihad against the United States. He added that the Indonesian Government had an obligation to protect its citizens and participation in a foreign war was not acceptable. In fact, the Indonesian immigration office warned those would-be jihad fighters that their citizenship could be revoked. The government would also take stern action against individuals who burned the flags or symbols of other nations, or effigies of their heads of state. For this reason, the Indonesian security agencies would not hesitate to disperse or stop demonstrations that had the potential to erupt into anarchy. Indeed, the police cracked down on some hard-line groups, such as the FPI, FPI-Surakarta, Jundullah, and Hizbullah Front, when they staged an anti-U.S. rally at the front of the parliament building on the holiday of the Prophet Muhammad’s Ascension. Protesting the U.S. attacks against Afghanistan and demanding that the government sever diplomatic relations with the United States, the hard-liners were, however, stopped by the police. The police ordered them to disperse because, according to the law, it is prohibited to demonstrate on a public holiday. When the demonstrators ignored police warnings, hundreds of police officers then began to fire tear gas, water cannons, and blanks at the demonstrators, who fled to the FPI headquarters on Jalan

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Petamburan Tanah Abang. Possible violence between the two parties was only avoided with the interference of the Minister of Religious Affairs, who acted as a mediator between the two parties. Eventually, the police not only arrested a number of FPI members, they also questioned the leader of FPI, Habib Muhammad Riziq Shihab, who was subsequently charged with insulting the police, instigating mass hatred, and violating the law that bans demonstrations on national holidays.

Fragmented Political Islam The waves of anti-American mass demonstrations in Indonesia seem to have decreased significantly. But this does not mean that political Islam would diminish. In fact, there is strong evidence to indicate that political Islam, which has been gaining momentum since the fall of Soeharto, would continue to exert itself in the Megawati and post-Megawati era. It would continue to affect not only the Megawati presidency, but also the entire course of Indonesian politics. The rise of political Islam in post-Soeharto Indonesia can be clearly observed in several tendencies. First, the establishment of a great number of Islamic parties which have replaced Pancasila with Islam as the sole ideological basis of their organization. Second, the rising demands from certain Muslim groups for the official adoption and implementation of shari’a (Islamic law), particularly calls for the reintroduction of the so-called “Jakarta Charter” into the Preamble of the 1945 Constitution. Lastly, the proliferation of radical Muslim groups such as the Lasykar Jihad, FPI, Hizb al-Tahrir, and the Angkatan Mujahidin Indonesia (Jihad Fighters’ Group of Indonesia). These developments not only pose great challenges for the Megawati presidency, they also bring into question the existence of the Pancasila state. Indeed, the very idea of transforming Indonesia into an Islamic state cast doubts on the future of democracy and pluralism in Indonesia. Despite recent tendencies among Indonesian Muslims towards political and formal Islam, it

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is unlikely that Indonesia would and could be transformed into an Islamic state. Why is this so? Before going any further, it should be noted that any discussion of Muslim politics should avoid any sweeping generalization. In fact Islam as a political reality and Muslims are not a monolithic phenomenon. Robert Hefner has persuasively argued that there is no single, civilization-wide pattern of Muslim politics, but a variety of competing organizations and ideals.5 In his opinion, the modern era’s nation making and market globalization have, if anything, only increased the pluralism and contestation of politics in the Muslim world. As a result, the most significant “clash of cultures” in the new millennium is not between distinct civilizations, but rival political traditions within the same Islamic country.6 The contest and rivalry among a variety of Islamic political traditions have become increasingly complex with the contemporary Islamic revival. At the theoretical and practical levels, Muslim intellectuals, scholars, ulama, and leaders have engaged in debates on the compatibility or incompatibility between Islam and contemporary ideas and practices of democracy, civil society, and human rights. While the majority of Muslims have accepted — albeit tacitly — the modern form of nation state, there are differences and divisions within the communities on the form of democracy to be implemented in their respective countries. As Islamic revival gains momentum, there are signs that many secular nation states in the Muslim world have failed to deliver on their promises of a better life for their people. This failure has not only eroded the credibility of secular regimes in the eyes of evergrowing number of Muslims, but has also cast serious doubts on the viability of modern nation states. This is evident from attempts by certain radical Muslim movements, such as the Hizb al-Tahrir, Gama’ah Tafkir wa al-Hijrah, and other splinter groups of the Ikhwan al-Muslimun, to replace secular nation states with the classic model of Islamic state, or better known as the caliphate (al-khilafah). The proponents of the caliphate also believe that this kind of Islamic political entity, led by a single caliph, is the only answer to what they perceive to be Muslim disunity and powerlessness vis-à-vis the Western powers.7

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The contemporary revival of the idea of a single and universal caliphate, undoubtedly, is very problematic. Its revival is mostly based on historical and religious romanticism, as well as misconceptions of the very meaning of the caliphate and its historical development in the post-Prophet Muhammad period. Supporters of the caliphate have failed to distinguish between the original and genuine caliphate during the Rightly Guided Caliph (al-khulafa’ al-rashidun) and the despotic monarchies of the Umayyads (661–750), Abbasids (750–1258), and the Ottomans (1350–1918) that followed. While at least the first two caliphs, Abu Bakar and Umar ibn al-Khattab, were elected on their merit, the subsequent “caliphs” in the post-al-khulafa’ al-rashidun period were essentially kings (muluk) with uncontested rights and privileges over all other Muslims. Therefore, modern thinkers of the caliphate such as Jamal alDin al-Afghani, ’Abd al-Rahman al-Kawakibi, Rashid Rida, Sayyid Qutb, and Abu al-A’la al-Mawdudi have all refused to recognize the credibility and legitimacy of those Muslim kings as “caliphs”.8 One should be aware, however, that these thinkers propose different, if not conflicting, ideas on some main themes of the caliphate. Al-Kawakibi and Rida, for instance, insist that the caliph should be an Arab of the Quraysh tribe. Al-Mawdudi, on the other hand, strongly refutes this idea; to him, the caliph should be democratically elected from among all Muslims based on merit by a special electing body called ahl al-halli wa al-’aqd, or Majlis alShura. According to al-Mawdudi, the lofty position of the caliph must not be reserved for the Arabs, since they have no special privileges over other non-Arab Muslims.9 Despite these conceptual and practical issues surrounding the feasibility and viability of the caliphate today, the idea seems to have continually attracted certain groups of Muslims throughout the world. In Southeast Asia, particularly in Indonesia, the idea of the caliphate has been revived by organizations such as Hizb al-Tahrir and Jamaah Tarbiyah since the 1990s. During Soeharto’s New Order regime, these organizations had been very careful not to invite the regime to take firm actions against their activities. The painful democratic transition and economic crisis in the post-Soeharto era have given these organizations the space to operate and recruit. © 2003 Institute of Southeast Asian Studies, Singapore

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Indonesian Case: Pancasila In the aftermath of the fall of Soeharto, polemics and debates among Indonesian and foreign observers on the relations of Islam and politics/democracy in the nation state of Indonesia have once again come to the forefront. This has a lot to do with the rise of political Islam, which appears to be one of the most visible political developments in post-Soeharto Indonesia. Many believe that the rise of political Islam, represented by the emergence of Islamic parties, would bring serious political repercussions to the future of the Indonesian state, which is still based on the national ideology, Pancasila. It is worth pointing out that in spite of the fact that the first pillar of Pancasila is the belief in One Supreme God, many — if not most — foreign observers view the Indonesian state as basically secular. This argument is further supported by the fact that Indonesia does not adopt any religion, particularly Islam — the religion most Indonesians adhere to — as the official religion of the state. On the other hand, the majority of Muslims argue that the Indonesian state is neither secular nor theocratic. For them, Pancasila is fully in accordance with Islamic belief and teachings. The first pillar of Pancasila, for instance, is simply another reformulation of the Islamic belief in One Supreme God (tawhid). Similarly with the other four pillars of Pancasila: just and civilized humanity; unity of Indonesia; democracy which is guided by the inner wisdom of its leaders; and social justice for the entire people of Indonesia.10 In spite of the Muslims’ acceptance of Pancasila, one should admit, however, that certain Muslim groups had in the past attempted to replace the Pancasila with Islam as the basis of the Indonesian state. In the 1950s the Masjumi Party, for instance, struggled in the national parliament to replace the Pancasila with Islam. Then came the Darul Islam (Islamic State) rebellions under the leadership of Kartosuwirjo in West Java and Daud Beureueh in Aceh, which attempted to establish the Indonesian Islamic State (NII, or Negara Islam Indonesia). All these efforts —legally and illegally — failed. It is important to note that there are still strong suspicions among non-Muslim groups, mainly Christians, © 2003 Institute of Southeast Asian Studies, Singapore

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that Muslims would continue their struggle to establish an Islamic state in Indonesia at the expense of the other citizens.11 As a result, both the Soekarno and Soeharto regimes took harsh measures not only against any potential Muslim group that subscribed to the idea of an Islamic state, but also against any dangerous manifestation of political Islam. For more than forty years, Islamic political forces became the subjects of state repression and manipulation. The New Order regime of Soeharto, in particular, provided no room for political Islam to breathe. Soeharto in fact carried out a systematic depoliticization of Islam, the peak of which was the forced implementation of Pancasila as the sole ideological basis of any organization.12 Fierce opposition to the forced implementation of Pancasila as the sole ideological basis of any organization came not only from many Muslim organizations, but also from several Christian organizations that opposed the move even more bitterly. Yet Muslims became the main subjects of tight state control even after their adoption of Pancasila. The retreat of political Islam during the New Order period, however, provided a momentum for the rejuvenation of cultural Islam. Following the implementation of Pancasila, Soeharto began to adopt a more accommodative and reconciliatory attitude towards Islam and Muslims. This is evident, for instance, from the enactment in 1989 of the Law of Islamic Court and Law of National Education, which recognizes the existence of Islamic education on par with secular education. This was followed by the establishment of ICMI (Ikatan Cendekiawan Muslim Se-Indonesia, All Indonesian Muslim Intellectual Association), chaired by B.J. Habibie, then Minister of Research and Technology; the founding of Islamic banks (Bank Muamalat Indonesia, BMI; and Bank Perkreditan Rakyat Syariah, BPR-Syariah); and the like. Soeharto’s approach was similar to that of Snouck Hurgronje, the most prominent Islamic Advisor of the Dutch Netherlands Indies’ Government, who advised the Dutch to allow “Islam as cultural phenomenon” to express itself more freely at the expense of political Islam that must be suppressed by all means necessary. However, Soeharto miscalculated and underestimated the farreaching implications of the so-called cultural Islam. He seemed

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to have been dictated by the growing political repercussions of cultural Islam. Indeed, there were debates as to whether Soeharto’s new-found Islamic leaning was a reflection of his attempts to coopt Islam for his political ends or whether he had been co-opted by Muslims. The most widely discussed example of the political repercussions of cultural Islam is ICMI. Even though ICMI is formally an association of Muslim intellectuals, there is no doubt that it has played a significant political role since its establishment in 1990. By way of Habibie — often called the “super minister” — ICMI had allegedly engineered the increase in the number of Muslim ministers in the last two Soeharto Cabinets at the expense of the Christians. ICMI had also been influential in high-rank government appointments such as provincial governors and the like. Many observers even termed this period the “honeymoon” between Soeharto and Islam. Having considered the role of Habibie in ICMI political manoeuvres, it is not surprising that many Muslims regarded Habibie and ICMI as the main representatives of Islam and Muslims. Habibie’s personal piety had only added to this sentiment. When Soeharto resigned from the presidency and was replaced by Habibie, several Muslim groups supported his presidency and defended him from his opponents who questioned his legitimacy.

Rise and Fall of Islamic Parties Despite his relatively short presidency, one of the most significant contributions of Habibie was the liberalization of Indonesian politics. Right after his appointment, Habibie freed most of the political prisoners, abolished restrictions to press freedom, rescinded the 1985 Mass-Organization Law that made it obligatory for all organizations to adopt Pancasila as their sole ideology, and more significantly, abandoned the three-party system of Indonesian politics represented by Golkar, Hamzah Haz’s PPP (Partai Persatuan Pembangunan, United Development Party), and Megawati’s PDI-P (Partai Demokrasi Indonesia–Perjuangan, Indonesian Democratic Party–Struggle). Without such a legal

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obligation to abide by Pancasila, it was reasonable to expect that many Muslims would seek a return to Islam for their political parties.13 This soon led to the proliferation of Islamic political parties. For example, there were some forty Islamic parties among the 141 parties that were formally registered with the Ministry of Justice for the June 1999 general election. After a selection by the Team of Eleven (Tim 11), the committee entrusted with screening the political parties that could contest the election, forty-eight parties — of which twenty were Islamic — were found eligible to take part.14 This was far more than the ten Islamic parties that had participated in the 1955 general election. Several months before the June 1999 election, I had doubted the prospects of these Islamic/Muslim parties for three main reasons. First, these parties had only caused acute political fragmentation, schisms, and conflicts between the Muslim leadership and the masses. They had created confusion and tensions among the Muslims at the grass-roots level. In fact, there were cases of open fighting among the fanatic supporters of the Islamic parties, even among members of the NU who were supporters of different parties. Second, these Islamic/Muslim parties had assumed naively that the Indonesian Muslims would support them in the election purely on the basis of Islamic solidarity. Third, these parties seemed to have underestimated both the PDI-P and Golkar. Many Muslim political leaders believed that Megawati’s PDI-P would not stand a chance at winning the election because of her gender, her unproven capability, and her reliance on the charisma of her father, Soekarno; and the predominance of non-Muslim and secular figures in her party. All these factors proved to be wrong. Despite appeals from many Muslim ulama and leaders to Muslims not to cast their votes for PDI-P, Megawati’s party won the election. On the other hand, the Islamic parties had also underestimated Golkar. Since the fall of Soeharto, Golkar has come under repeated attacks as the status quo party, but the reality is that Golkar has been able to keep much of its political machine intact while the Islamic parties struggle to establish theirs. As a result, Golkar emerged second only to the PDI-P in the election.

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All of the above arguments could perhaps explain why the Islamic parties were defeated in the June 1999 election. Taken together, all twenty Islamic parties could only win 37.1 per cent of the total votes. This is a significant decline compared with the results of the 1955 election, when the Islamic parties won 43.9 per cent of the total national votes. In contrast, the PDI-P and Golkar were able to win more than half of the total votes (33.76 per cent and 22.46 per cent respectively).15 Worse still, of the twenty Islamic parties, only four could meet the required minimum threshold of 2 per cent of parliamentary seats (precisely ten seats); they were the PPP, PKB (Partai Kebangkitan Bangsa, National Awakening Party), PAN (Partai Amanat Nasional, National Mandate Party), and PBB (Partai Bulan Bintang, Crescent Star Party). The fact that the Islamic parties won only a small share of the votes in the 1999 election led many Muslims to believe that the end of Islamic politics is near. This prompted the leaders of the Islamic parties to forge their own political alliance, known as Posos Tengah (Central Axis), to garner more support. It was through the Central Axis that the Islamic parties were able to get their candidate, Abdurrahman Wahid, elected as Indonesia’s fourth President. However, a simple coalition of Islamic parties was insufficient to gain them the political influence they desired. In fact their coalition fell apart during the turbulent times of President Wahid; all the Islamic parties — with the exception of Wahid’s own party, the PKB — turned against him and supported the election of Megawati in the special session of the MPR on 23 July 2001. Now, with such a dismal performance, what are the prospects of the Islamic parties, or even political Islam in Indonesia? First of all, the results of the 1999 election once again confirmed that Islamic parties have never been very popular among Indonesian Muslims. This is because most Indonesian Muslims are leaning towards what I call “substantive Islam” rather than “formalistic Islam”.16 Although there is a continued tendency among Muslims to undergo some kind of “santri-nization”, this has more to do with ritualistic or cultural Islam rather than with political Islam or Islamic parties. The tendency among Muslims to become more devout (santri), at least formally, does not necessarily

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translate into a more Islamic political orientation. To put it simply, for many Muslims Islamic belief and rituals is one thing, political behaviour is another. Therefore, there are no convincing signs that the majority of Muslims support the idea of formal Islamic politics. So far, no prominent Muslim leader subscribes to the idea of an Islamic state in Indonesia at the expense of Pancasila. Prominent leaders of Muslim politics, such as Abdurrahman Wahid, Amien Rais, Yusril Ihza Mahendra, Deliar Noer, Ahmad Sumargono, Muhaimin Iskandar, Nur Mahmudi Ismail, A.M. Fatwa, Salahuddin Wahid, and many others, have openly declared that they and their political parties do not wish to establish an Indonesian Islamic state.17 In fact, Amien Rais, the present Speaker of the MPR, as well as former President Abdurrahman Wahid have long before this, established that an Islamic state has no precedent in Islamic history. Rais even stated explicitly that Muslims are not bound by any religious obligations to establish one. To this list, one might also add the leaders of the largest Muslim social-religious organizations, such as Hasyim Muzadi (general chairman of the NU) and Syafii Maarif (national leader of Muhammadiyah), who have also dismissed the idea of an Indonesian Islamic state. Even Nur Mahmudi Ismail, the first president of the Partai Keadilan and a key advocate of Islamic political revival in Indonesia, has accepted Pancasila as the sole foundation of the Indonesian state. He recognizes that his party is indeed based on Islam, but that does not necessarily mean that the establishment of an Islamic state is the ultimate goal.18

Viability of Shari’a in Indonesia The application of the shari’a, or Islamic law, in Indonesia is not a new idea. It can be traced back to the early days of Indonesian independence during which the Indonesian leaders formulated the Indonesian Constitution, or what is better known as the 1945 Constitution. At the initial stages, the Muslim leaders introduced to the Preamble of the 1945 Constitution a stipulation stating that “the Indonesian state is based on the belief in the One Supreme God with the obligation to the adherents of Islam to implement

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the syariah”. This stipulation came to be known as “the seven words” of the Piagam Jakarta (Jakarta Charter). This stipulation was subsequently dropped because of objections from Christian leaders and secular nationalities who argued that the national constitution should not give preferential treatment to any religious group. Furthermore, the constitution should maintain the integration of national plurality.19 However, this debate on the application of the shari’a continued. Muslim leaders brought their case once again to the Constituent Assembly in 1959 and this ended only with President Soekarno’s Decree on 5 July 1959 that stated in no uncertain terms that Indonesia would maintain the 1945 Constitution. This means that the Piagam Jakarta, the basis of the application of the shari’a, should be abandoned. But it is clear that the issue is far from being resolved. The MPR sessions in 1966 and 1967, following the fall of Soekarno, were tense with rumors that the Muslim groups wanted to bring forth the Piagam Jakarta for deliberation. But as one might expect, this was suppressed by the army-backed Soeharto regime. In the post-Soeharto period, several of the newly established Islamic parties — discussed above — once again demanded the legalization of the Piagam Jakarta as an integral part of the Preamble of the 1945 Constitution.20 The appeal for the application of the shari’a gained momentum when Islamic law was proposed as part of the solution for the Aceh province. There are at least two main reasons behind this move: one, the majority of Acehnese are Muslims; and two, it is believed that the application of the shari’a could overcome the social ills in Indonesian society, such as drug abuse, prostitution, and other crimes. Calls for the introduction of the shari’a increased in the period before the 2000 annual session of the MPR. Certain Islamic parties, particularly the PPP, openly declared their support for the reinclusion of the Piagam Jakarta in the MPR session. But these moves were strongly opposed by the majority of the MPR members, and the appeal for the application of the shari’a, once again, failed in the Indonesian highest political institution. Despite the ill-fated response, the aspiration of Islamic law continued to attract certain groups of Muslims. In late October

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2001, some Muslims in South Sulawesi province appealed for the implementation of the shari’a in their region. Hopes for the implementation of Islamic laws were raised with the enactment of the Law of Nanggroe Aceh Darussalam (NAD) by President Megawati not long after her election to the presidency. It remains doubtful, however, that the shari’a could be smoothly implemented in Aceh, given the complexity of the problems involved. The Piagam Jakarta is likely to re-emerge in the annual session of the MPR at some stage in the near future. It remains to be seen whether the PPP would once again push for the idea. But given the widespread opposition from the majority of Muslims both within the MPR and without, the full application of shari’a remains a remote possibility.

Conclusion Having discussed these complex developments, it is apparent that radical political Islam has very little prospects in Indonesia. By the same token, it is very doubtful that the hard-line Muslim groups would be able to pose a real threat to Megawati’s government. The reasons are clear. First, hard-line groups remain on the fringe in Indonesia. The emergence of these groups is more a result of a weak post-Soeharto state that has no ability to control wayward elements. The nature of Indonesian Islam, which is essentially tolerant, peaceful, and accommodative, would prevent these groups from gaining widespread support. Second, the majority of the moderate Indonesian Muslims would continue to support Megawati. Some feel that Megawati should be given a fair chance to lead the nation out of the crisis while others see her as the only viable candidate. Although, admittedly, moderate Muslims have been unhappy with her “silence” and leadership style, they have refrained from criticizing her directly. Even Amien Rais, who is well known for his strong criticism of previous Indonesian presidents, has avoided any outright direct criticism of Megawati. Not least important is Hamzah Haz’s changing attitude. In the case of the U.S.–Afghanistan crisis, he has been criticized for his unclear and conflicting statements. In fact he has been regarded © 2003 Institute of Southeast Asian Studies, Singapore

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as having some differences with Megawati. This observation, I would argue, has some truth; but this is not the whole story. We have to admit that there are some suspicions among certain circles about Hamzah Haz. He is the national leader of the PPP which, as discussed above, is known to support the reintroduction of the Piagam Jakarta, an entry point for the implementation of the shari’a in Indonesia. Considering his latest attitude, I would suggest that he is making some adjustments and compromises not only to the reality of Indonesian politics, but also to Megawati. In conclusion, President Megawati will survive the challenges posed by Muslim hard-line groups. Even her Vice-President, Hamzah Haz, the leader of the conservative Islamic party PPP, has not pledged his full support for them. However, she would be distracted by their activities and this could affect her performance to lead Indonesia towards political stability and economic recovery. Notes 1. The evidence against Osama bin Laden has not been fully released to the public. The strongest publicly released evidence implicating Osama was contained in two televised tapes: Osama’s televised threats to American citizens in the aftermath of the bombings and his conversation with associates. However, several groups in the Muslim world questioned the authenticity of the tapes. Some even suggested that the evidence was manufactured by the United States and its allies. Thus far, only some governments have been privy to the full body of evidence which, as reported in the international media, points to Osama, and the Al-Qaeda terrorist network that he heads, as the mastermind behind the atrocities on 11 September. 2. Jakarta Post, 2 October 2001. 3. John Roberts and Peter Symonds, “Megawati continues balancing act in Indonesia”, 22 October 2001. (.) 4. Jakarta Post, 23 October 2001. 5. Robert Hefner, “Islam and Nation in the Post-Soeharto Era”, in The Politics of Post-Soeharto Indonesia, edited by Adam Schwarz and Jonathan Paris (New York: Council on Foreign Relations, 1996). 6. Ibrahim M. Abu-Rabi’, Intellectual Origins of Islamic Resurgence in the Modern Arab World (Albany: State University of New York Press, 1996), p. 41. 7. R. Hrair Dekmejian, Islam in Revolution: Fundamentalism in the Arab World (Syracuse: Syracuse University Press, 1995); Abu-Rabi’, © 2003 Institute of Southeast Asian Studies, Singapore

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8.

9. 10.

11.

12.

13. 14.

15.

16. 17. 18. 19. 20.

op. cit.; Bruce B. Lawrence, Shattering the Myth: Islam beyond Violence (Princeton: Princeton University Press, 1998). Azyumardi Azra, Pergolakan Politik Islam: Dari Fundamentalisme, Modernisme hingga Post-Modernisme [Struggles in Islamic politics: From fundamentalism, modernism to post-modernism] (Jakarta: Paramadina, 1996), p. 153. Lukman Thaib, The Islamic Polity and Leadership (Petaling Jaya: Delta Publishing, 1995), pp. 79–80. Tarmizi Taher, Aspiring for the Middle Path: Religious Harmony in Indonesia (Jakarta: Centre for the Study of Islam and Society [CENSIS], IAIN Jakarta, 1997), pp. 1–16. See Azyumardi Azra, “Islam and Christianity in Indonesia: The Roots of Conflict and Hostility” (Paper presented at the international conference on Religion and Culture in Asia-Pacific: Violence or Healing?, RMIT University, Melbourne, 22–25 October 2000). Bahtiar Effendy, Islam dan Negara: Transformasi Pemikiran dan Praktik Politik Islam di Indonesia [Islam and the nation: Transformative ideas and practical Islamic politics in Indonesia] (Jakarta: Paramadina, 1998). See Azyumardi Azra, Islam Substantif: Agar Umat Tidak Jadi Buih [Substantive Islam] (Bandung: Mizan, 2000). Arskal Salim, “The Idea of Islamic State in Indonesia” (Paper presented at the University of Wisconsin-Madison and Northern Illinois University Student Conference on Southeast Asia, DeKalb, Illinois, 3-4 March 2000), pp. 7–8. Azyumardi Azra, “The Islamic Factor in Post-Soeharto Indonesia”, in Indonesia in Transition: Social Aspects of Reformasi and Crisis, edited by Chris Manning and Peter van Diermen (Singapore: RSPAS-ANU and ISEAS, 2000). Azra, Islam Substantif. Salim, op. cit., p. 10. Salim, op. cit., p. 10. Taher, op. cit., pp. 38–39. Salim, op. cit., pp. 13–14.

References Abu-Rabi’, Ibrahim M. Intellectual Origins of Islamic Resurgence in the Modern Arab World. Albany: State University of New York Press, 1996. Azra, Azyumardi. Pergolakan Politik Islam: Dari Fundamentalisme, Modernisme hingga Post-Modernisme [Struggles in Islamic politics: From

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fundamentalism, modernism to post-modernism]. Jakarta: Paramadina, 1996. . Islam Substantif: Agar Umat Tidak Jadi Buih. Bandung: Mizan, 2000. . “The Islamic Factor in Post-Soeharto Indonesia”, in Indonesia in Transition: Social Aspects of Reformasi and Crisis, edited by Chris Manning and Peter van Diermen. Singapore: Research School of Pacific and Asian Studies, Australia National University, and Institute of Southeast Asian Studies, 2000. . “Islam and Christianity in Indonesia: The Roots of Conflict and Hostility”. Paper presented at the international conference on Religion and Culture in Asia-Pacific: Violence or Healing?, 22–25 October 2000, at RMIT University, Melbourne, Australia. Dekmejian, R. Hrair. Islam in Revolution: Fundamentalism in the Arab World. Syracuse: Syracuse University Press, 1995. Effendy, Bahtiar. Islam dan Negara: Transformasi Pemikiran dan Praktik Politik Islam di Indonesia [Islam and the nation: Transformative ideas and practical Islamic politics in Indonesia]. Jakarta: Paramadina, 1998. Eickelman, Dale F. and James Piscatori. Muslim Politics. Princeton: Princeton University Press, 1996. Esposito, John L. and John O. Voll. Islam and Democracy. New York: Oxford University Press, 1996. Fealy, Greg. “Islamic Politics: A Rising or Declining Force?”. Paper presented at Rethinking Indonesia Conference, 4–5 March 2000, in Melbourne, Australia. Hefner, Robert W. “Islam and Nation in the Post-Soeharto Era”, in The Politics of Post-Soeharto Indonesia, edited by Adam Schwarz and Jonathan Paris. New York: Council on Foreign Relations, 1996. Lawrence, Bruce B. Shattering the Myth: Islam beyond Violence. Princeton: Princeton University Press, 1998. Liddle, William and Saiful Mujani. “Islam, Kultur Politik, dan Demokrasi: Sebuah Telaah Komparatif Awal” [Islam, political culture, and democracy: A preliminary study]. Unpublished paper, 2000. Salim, Arskal. “The Idea of Islamic State in Indonesia”. Paper presented at the University of Wisconsin-Madison and Northern Illinois University Student Conference on Southeast Asia, 3–4 March 2000, in DeKalb, Illinois. Taher, Tarmizi. Aspiring for the Middle Path: Religious Harmony in Indonesia. Jakarta: Centre for the Study of Islam and Society (CENSIS), IAIN Jakarta, 1997. Thaib, Lukman. The Islamic Polity and Leadership. Petaling Jaya: Delta Publishing, 1995.

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Reproduced from Governance in Indonesia: Challenges Facing the Megawati Presidency, edited by Hadi Soesastro, Anthony L Smith and Han Mui Ling (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part publication may be reproduced 70of thisDEWI FORTUNA ANWAR without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available from < http://bookshop.iseas.edu.sg >

4 Megawati’s Search for an Effective Foreign Policy Dewi Fortuna Anwar

Introduction The implementation of foreign policy is closely related to the concept of national interests. An effective foreign policy would be one that achieves the objectives laid down by the country concerned in pursuance of its national interests. Without discounting the idiosyncrasies of particular leaders in the formulation and implementation of a country’s foreign policy, the analysis of national interests will help to clarify the purpose, dynamism, and direction of foreign policy.1 Although there are disagreements on the nature of national interests — objective and permanent or subjective and changeable — there is little doubt that national survival and economic well-being constitute the core of any nation’s interests. The content of a country’s foreign policy, and how it conducts itself beyond its national borders, is primarily determined by its relative power in the international community. While some countries with superior military and economic strength have ambitions to exercise regional or even global dominance, others only wish to focus on their internal problems.

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Despite their heterogeneity, developing countries on the whole share a basic similarity in their national interests, and hence foreignpolicy objectives. For these countries, the demands of nation building tend to overwhelm all other considerations. As R.C. Good argues, “the foreign policy of a new state cannot be understood exclusively in the light of domestic necessities; but unless the omnipresent task of state-building is allowed to illuminate the objectives and motives of foreign policy, it cannot be understood at all”.2 As such, for a new state, foreign policy is mainly — though not exclusively — a response to domestic conditions, not to external problems. As most developing countries have suffered from colonialism and imperialism, preservation of national sovereignty is usually one of the most important foreign policy objectives. Developing countries are often extremely sensitive to any moves, particularly those coming from the developed world, which could be construed as interference in their internal affairs. Related to national sovereignty is territorial integrity, for many developing countries are still nation states in the making, with regions within each country struggling for separatism. International recognition and support for their territorial integrity are, therefore, also very important in the foreign policy agenda of many developing countries. Besides preserving national sovereignty and territorial integrity, economic development is also regarded as a primary national objective by most developing countries. Due to their lack of financial resources and technical expertise, developing countries are greatly dependent upon the outside world, particularly on the developed countries, for economic and technological assistance. It is quite obvious that the national interests of many developing countries often demand contradictory foreign policy strategies. The desire to protect its sovereignty and retain the maximum autonomy in the international arena often conflicts with a country’s economic interests. The first objective calls for a more distant and critical attitude towards the major powers, while the second calls for a more co-operative if not supplicant policy towards the powers that can give the most assistance. It is also self-evident that a country’s ability to project itself as an

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independent actor in the international arena is closely linked to its national capability. Yet ironically most new states can only achieve economic development through greater dependence on the developed world. Striking the right balance between these two main national objectives is clearly a challenge, and the survival of a government is often dependent upon its ability to deliver the economic goods without being seen to be betraying its national identity and pride. Indonesia is one of the countries in which this dilemma of dependence has been felt most acutely. From the very beginning, Indonesia has pursued a free and active (bebas aktif) foreign policy doctrine, enunciated by Vice-President Mohammad Hatta in 1948, which was designed to keep the country neutral during the Cold War. It became clear, however, that maintaining a nonaligned stance during the global conflict between the West and the communist bloc was not easy and entailed certain costs. President Soekarno pursued national independence over every other consideration, but this is not unique to Indonesia; in fact for every country that was still living under imperialism, this was a paramount concern. Soekarno’s efforts achieved the national objective of detaching West Irian from Dutch control and made Indonesia a leading spokesman of the developing world. But by confronting the West, Soekarno allowed the Indonesian economy to suffer, and he also brought Indonesia closer into the communist camp. These factors eventually led to Soekarno’s downfall. When Soeharto took power in 1965, he abandoned Soekarno’s high profile and confrontational foreign policy and developed closer relations with the West. Unlike Soekarno, Soeharto focused on economic development and Indonesia embarked on over three decades of economic growth, though at some cost to its free and active foreign policy.3 A free and active foreign policy, or non-alignment, could not be anything more than political rhetoric, as Indonesia became almost wholly dependent on the West and Japan for its economic development, while maintaining its distance from the communist camp. With the end of the Cold War, the significance of non-alignment has diminished. Moreover, the onset of globalization and the rapid social changes taking place in many developing countries, including Indonesia, have blunted sensitivities over national © 2003 Institute of Southeast Asian Studies, Singapore

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sovereignty to a certain degree. A market-orientated economy has made Indonesians more receptive towards the ideas of regional integration and global interdependence, while democratization has made the Indonesian Government accept the idea of human rights as universal values. On the other hand, the merciless onslaught of globalization has also caused alienation and marginalization among many societies throughout the world, not least in Indonesia. In fact, the regional monetary crisis, which devastated the Indonesian economy and forced Indonesia to become even more dependent on international financial institutions and donor countries, has led to a general feeling of humiliation among the Indonesian populace. This has fuelled national resentment, leading to calls for greater nationalism among certain groups in Indonesian society. The changing global environment in the wake of the 11 September 2001 terrorist attacks on the United States, which was blamed on Muslim terrorists associated with Osama bin Laden and his AlQaeda organization, has further added to Indonesia’s problems and has become the first major foreign policy test for President Megawati.

Megawati’s Foreign Policy Challenges and Opportunities Since the collapse of the New Order regime of President Soeharto in May 1998, there have been a number of significant advances made by Indonesia, particularly in the political field. From being a decidedly authoritarian regime, Indonesia has become the world’s third largest democracy with the holding of a free and fair general election in June 1999, an active parliament, and a robust civil society. Indonesia now enjoys freedom of speech and association. Nevertheless, one cannot deny that Megawati took over from President Abdurrahman Wahid in August 2001 in the midst of yet another round of debilitating political crisis that had made it doubly difficult for Indonesia to recover from its four-year long economic crisis. Although Thailand and South Korea, the two other countries hardest hit by the financial crisis, have made healthy recoveries, the Indonesian economy continues to be in the doldrums. Indonesia © 2003 Institute of Southeast Asian Studies, Singapore

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is still almost totally dependent on the International Monetary Fund (IMF) and other international donors, with no sign of its being able to reduce its aid dependency in the immediate future. The IMF support remains critical for Indonesia not just because it helps to finance the government development budget, but also because the IMF holds the key to the disbursement of loans and aid from other countries. The IMF bail-out package was given with stringent conditions as laid out under successive Letter of Intent (LoI) agreements, which the Indonesian Government is supposed to meet before any disbursement is released. Notwithstanding the important role played by the IMF in pushing for the necessary economic reforms, one must admit that the Indonesian Government can no longer claim to have sovereignty or autonomy over its economic policy. To make matters worse, it is widely acknowledged that some of the IMF policy prescriptions for Indonesia were inappropriate and served only to deepen the crisis when it first hit the country. This makes many Indonesians resent the role of the IMF. How to ensure continuing support from the IMF and other donors on the one hand, and yet secure maximum flexibility for the Indonesian Government to implement its policies on the other, constitutes a major challenge for Indonesia’s foreign policy. President Wahid, while in office, alienated the IMF by refusing to meet some of its conditions. The IMF withheld disbursements, and the perceived loss of international support helped to speed up Wahid’s downfall. Yet securing loans and aid from the IMF, the World Bank, and other donor countries and agencies is far from sufficient to bring about economic recovery for Indonesia. In order to enjoy the same level of economic growth as in the pre-crisis period, Indonesia must receive large amounts of foreign investment from the private sector. However, formal assurances of support for Indonesia from foreign governments have failed to attract foreign and domestic investors who fled the country after the political unrest and racial riots against ethnic Chinese in May 1998. Regional rebellions, bloody ethnic and religious conflicts, and the lack of rule of law continue to plague Indonesia. Indonesia’s image as a risky place to do business because of poor security, legal uncertainty, and continuing political instability has deterred foreign investment.

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Uncertainty over the process of economic restructuring has further worsened Indonesia’s image in the eyes of international investors. In the wake of 11 September, threats and demonstrations against American interests in Indonesia by small but vocal radical Islamic groups protesting the U.S. bombing of Afghanistan have further tarnished Indonesia’s international standing. How to improve Indonesia’s image overseas and to attract badly needed foreign investment and tourists — who used to contribute a substantial amount to its economy — continue to pose a major challenge for Indonesia’s diplomacy. This is not to say that Indonesia has no bargaining power left. As the largest country in Southeast Asia that straddles important sea lanes of communication linking Northeast Asia and the Middle East, Indonesia continues to have strategic importance even after the Cold War. Indonesia’s national unity and political stability are critical to ensure the stability of the region as a whole. These strategic considerations undoubtedly influenced such key donors as the United States, Japan, and the Western European countries, which dominate the IMF and the World Bank, to continue supporting Indonesia despite its many problems. The fact that Indonesia has become a new democracy has removed a major obstacle in the country’s relations with the West. Western donor countries are, in fact, very interested to help Indonesia consolidate its nascent democracy. Moreover, Indonesia is the world’s largest Muslim nation, with nearly 90 per cent of its 210 million people adhering to the Islamic faith. At a time when the international community is engaged in a global struggle against terrorism, particularly one that has been spawned by Islamic extremism, Indonesia’s generally moderate and tolerant brand of Islam assumes a new strategic importance. President Megawati herself also seems to enjoy broad international support. Firstly, as an opposition leader oppressed by the Soeharto regime, Megawati had attracted much international sympathy. Furthermore, the Megawati government has succeeded in bringing about the much-needed political stability after Wahid’s increasingly erratic and controversial presidency. As the chairman of PDI-P (Partai Demokrasi Indonesia–Perjuangan), the party that won the largest number of parliamentary seats in the 1999 general

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election (32 per cent), Megawati has a much wider popular and legislative support than Wahid ever had, as the latter won only 10 per cent of the seats in the parliament. Her calm and silence have also made the Megawati presidency a soothing antidote to her predecessor’s quirkiness, which had beset the country for twentyone tumultuous months. Although with time Megawati’s characteristic silence and belated response to problems have drawn increasingly sharp criticisms, it is generally expected that her government will survive till the elections in 2004. Even Megawati’s political opponents are reluctant to force another mid-term change of the presidency as this could plunge the country into another round of political crisis and uncertainty, thereby making it even more difficult for the Indonesian economy to recover. Megawati’s currently unchallenged political ascendancy contributes to her government’s international credibility.

Megawati’s Foreign Policy Like the earlier governments, the Megawati government is fully aware of the importance of regional and international support in solving Indonesia’s multidimensional crisis. The current government has emphasized two national priorities that constitute the mainstay of Indonesian foreign policy. The first priority is to maintain Indonesia’s sovereignty and territorial integrity, while the second is to achieve and consolidate the country’s economic recovery. These foreign policy objectives are clearly spelled out in the Megawati’s “Gotong Royong” (mutual assistance) Cabinet policy. As stated by the new Foreign Minister, Hassan Wirajuda, a career diplomat: The Indonesian Foreign Service is called upon to play an active role in defending and preserving the sovereignty and territorial integrity of the Republic. Our basic message is that it is to the interest of the region and the world at large that Indonesia remains stable, secure and fully capable of addressing its internal problems. … Indonesian foreign policy also has a significant role in the nation’s efforts at achieving and consolidating economic recovery

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after suffering the devastation of the Asian financial crisis of 1997–1998. A large part of that task is the restoration of the confidence of foreign investors, trading partners, and donors and international financial institutions in our economy and governance.4 Although Indonesian foreign policy is primarily aimed at serving the goals of the national government, this does not mean that the Indonesian Government will be entirely inward-looking. The Megawati government has reiterated its commitment to continue Indonesia’s long-held tradition of taking constructive initiatives in international affairs, in fulfilment of the constitutional mandate.5 The Preamble of the 1945 Constitution clearly mandates that the Indonesian Government should contribute to the shaping of “a world order based on freedom, abiding peace and social justice, and equitably shared prosperity”.6 Of primary concern to the Indonesian leaders since the early days of independence is the need to sustain a common front among developing countries seeking an equitable and mutually rewarding partnership with the developed world. In that respect Megawati’s foreign policy, in terms of its general principles and broad formulation, is no different from that adopted by the New Order government, particularly in its later years. Abdurrahman Wahid, who was more inspired by Soekarno’s nationalism and high foreign policy profile than by Soeharto’s low posture, tried to pursue an active and personalized foreignpolicy agenda marked by frequent overseas travel, with visits to as many countries as possible within each trip. Besides soliciting support for Indonesia’s territorial integrity and economic recovery, Wahid’s frequent travels and eclectic choice of destinations were also aimed at diversifying Indonesia’s external linkages so as to avoid overdependence on the West. Although Wahid emphasized the importance of Indonesia’s relations with the West, and made a number of visits to the United States and Europe, he also underlined Indonesia’s desire to forge a special triangular relationship with China and India. Wahid also made a point of visiting countries unfriendly to the United States, notably to Cuba right after his visit to Washington.

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In a controversial move, Wahid accorded less importance to the Association of Southeast Asian Nations (ASEAN), the cornerstone of Indonesia’s foreign policy since its establishment in 1967, and instead he floated the idea of a West Pacific Forum as a new regional association that would be of a more immediate concern to Indonesia. The West Pacific Forum, as he articulated it, would comprise Indonesia, Australia, New Zealand, Papua New Guinea, and East Timor.7 This proposal, made during an informal ASEAN Summit in Singapore in late 2000, was seen by many as an attempt to undermine ASEAN, particularly when it was accompanied by threatening and critical remarks against Singapore. Despite a promising beginning, Indonesia’s foreign policy under Wahid, like his administration as a whole, soon lost its focus. Wahid’s overly ambitious and “ecumenical” foreign policy, which viewed all countries as being equally important for Indonesia, proved to be not only costly but also less effective in achieving its primary objectives. 8 Towards the end of his government, Wahid alienated many of Indonesia’s traditional friends, particularly Singapore and the United States, while nothing significant emerged from his many new initiatives with other countries.9 Learning from the mistakes made by the Wahid government, the Megawati administration tried to reorientate Indonesia’s foreign policy back to the basics, abandoning Wahid’s “ecumenical” foreign policy in favour of the well-tested “concentric circles” formula carried out for most of the New Order period. This “back to basics” foreign policy has been aided by the appointment of a senior career diplomat, Hassan Wirajuda, who is able to focus all of his expertise and attention to his job as Foreign Minister, unlike his immediate predecessor, Alwi Shihab. Shihab had little time to manage Indonesian foreign policy because he was also the chairman of Wahid’s Partai Kebangkitan Bangsa (PKB, National Awakening Party) and a close confidant of Wahid. He also had to accompany the President in meetings and on trips unrelated to foreign policy. Unlike Wahid, who carried out a more personalized foreign policy and effectively sidelined the role of his Foreign Minister, Megawati prefers to let her Foreign Minister take charge. Although Megawati has also undertaken foreign travel, these

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trips have been carefully considered by the Foreign Ministry, and follow the well-established foreign policy pattern of the past three decades. A reading of the current foreign policy agenda, as outlined by Foreign Minister Hassan Wirajuda, clearly shows that Megawati’s foreign policy initiatives are essentially the same as those carried out by the Foreign Ministry for the best part of the New Order period. This is not surprising as the bureaucracy would be more comfortable following a familiar and well-tested path of foreign diplomacy. Moreover, this foreign policy approach has proven to be quite successful in achieving most of Indonesia’s development objectives under the New Order regime, particularly in ensuring regional stability and mobilizing resources for Indonesia’s economic development. A key feature of this foreign policy approach is the “concentric circles” formula. That is, Indonesia will accord a higher priority to relations with regions closest to its own national boundaries, primarily for political and security reasons, though economic considerations have become increasingly important. By this measure, the top priority foreign policy “circle” is ASEAN, long regarded as the main thrust of Indonesian foreign policy. Maintaining friendly relations with its immediate Southeast Asian neighbours is critical to ensuring Indonesia’s own security, particularly in the border areas. The current Indonesian Government has also reiterated its interests in maintaining friendly relations with the nations of the South Pacific, particularly with Papua New Guinea, which shares a common border with Indonesia and sea lanes with Australia. Interestingly, Foreign Minister Wirajuda has kept alive Wahid’s idea of a West Pacific Forum. He has argued that “all the South Pacific nations could all be important political and economic partners. We will therefore continue our intensive consultations on the concept of a Southwest Pacific Forum and maintain our Dialogue Partner status in the South Pacific Forum”.10 He stressed, however, that such a forum is not meant to undermine ASEAN. The third “concentric circle” of Indonesian foreign policy consists of the East Asian countries, namely Japan, China, and South Korea. Apart from the countries in these three “concentric circles”, Timor Lorosa’e (East Timor) and India are

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also close neighbours which the current Indonesian Government wishes to develop close relations with. The commitment to develop friendly relations with East Timor, Indonesia’s newest neighbour, is the only major departure from the New Order government, which had tried so hard to secure international recognition for East Timor ’s integration with Indonesia. This reversal in policy clearly signals Megawati’s full acceptance of East Timor’s independence despite her initial opposition. She follows the path already charted by President Wahid, who demonstrated his support for East Timor by officially welcoming Xanana Gusmão, the Timorese resistance leader, to Jakarta and by visiting Díli. At the same time, like the earlier governments, the current Indonesian government continues to pay homage to Indonesia’s non-aligned credentials. Membership in the Non-Aligned Movement (NAM), a grouping of developing countries in Asia, Africa, and Latin America, is closely related to Indonesia’s free and active foreign policy doctrine such that NAM cannot be ignored by any Indonesian Government. The Megawati administration is also expected to continue to be active in the Organization of the Islamic Conference (OIC), for Indonesia is the world’s largest Muslim nation. It has also signalled its commitment to other regional and international organizations of which Indonesia is a member, such as APEC (Asia-Pacific Economic Cooperation) and ASEM (Asia-Europe Meeting). On top of that, the Megawati government also places a special emphasis on maintaining a solid bilateral partnership with the United States, Japan, and the European countries. Close bilateral relations with these countries are clearly important for both political and economic reasons.11 Megawati’s foreign policy agenda reflects her desire to demonstrate to the international community that despite Indonesia’s current difficulties, it will try to continue its active regional and international role. This is partly a response to earlier criticisms that Indonesia was neglecting its regional responsibility, particularly within ASEAN, resulting in a regional power vacuum and a weakening of the organization.12 The question is to what extent the current Indonesian Government can deliver on its formal commitments given the current difficulties facing the country, and © 2003 Institute of Southeast Asian Studies, Singapore

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whether the initiatives carried out by Indonesia beyond its own borders would carry any weight. Clearly, it is still too early to judge the effectiveness of Megawati’s foreign policy. Yet in the first six months of her presidency, there have been a number of significant achievements. Of course, there are also a number of foreign policy challenges that could derail these gains made by her government. The first important step taken by Megawati was to restore Indonesia’s close relations with its ASEAN neighbours and to reaffirm ASEAN as the cornerstone of Indonesian foreign policy. Concerns about Indonesia’s declining interest in ASEAN, prompted by Wahid’s outburst in Singapore, were allayed when Megawati followed the ASEAN tradition of making her first overseas visits to the ASEAN capitals. Megawati visited all the other nine ASEAN members during 20–29 August 2001. Observers have noted that by travelling to the ASEAN capitals, the Indonesian President signalled the regional grouping’s centrality in her foreign-policy approach.13 Besides shoring up Indonesia’s relations with its Southeast Asian neighbours, securing their support for Indonesia’s territorial integrity and forging closer co-operation to deal with common problems such as terrorist threats, Megawati’s visits were also aimed at convincing the regional leaders of her ability to tackle Indonesia’s deep-rooted problems.14 At the same time, Indonesia’s continuing commitment to ASEAN is also regarded as critical for the continuing viability of the regional association. Maintaining close relations with ASEAN, particularly when Indonesia faces secessionist movements and a continuing economic crisis, is clearly a necessity. It is important for Indonesia that regional rebels, and other elements seeking to destabilize the country, do not find sanctuary in neighbouring countries. This has been the primary raison d’être of ASEAN right from the very beginning. ASEAN’s intra-regional and extra-regional economic co-operation has also become more important for Indonesia. Indonesia’s economic future is now seen as inseparable from the development of the region as a whole, particularly when ASEAN faces such major competitors as China. Nevertheless, dealing with the ASEAN countries when the country is in such a weakened state also poses a major challenge for the Indonesian Government. Indonesia was once regarded as © 2003 Institute of Southeast Asian Studies, Singapore

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a natural leader, or at the very least a primus inter pares, but today, because of its dismal economic condition, unstable politics, and internal conflicts, other ASEAN members no longer look up to Indonesia for leadership of the organization. Even Megawati recognized this as she felt that her ASEAN tour actually brought home her country’s humiliating position. Addressing Indonesians in Malaysia, Megawati stated that she was “ashamed” to have taken over a poor country begging for help from its neighbours. She was quoted as saying: “If I were an ostrich, I would bury my head in the sand in shame…We have to ask for help. Even countries like Myanmar are offering rice supplies to feed our people.” Her sense of humiliation was palpable when she added: “Can you imagine how it feels asking help from your neighbours when you come from a country said to be the biggest in the region, and with the most potential?”15 Indonesia’s standing among its neighbours inevitably suffered a further dip when a group of Indonesian workers rioted in Malaysia. In response, the Malaysian Government threatened to send most of them back home, and to ban future Indonesian workers. Given the large number of Indonesian workers in Malaysia, a number estimated to be over 2 million (both legal and illegal workers), and the lack of job opportunities at home, the Malaysian Government’s threat was viewed with great alarm in Indonesia. The Indonesian Government apologized immediately for the troubles caused by some of its workers and lobbied hard to persuade the Malaysian Government not to send home workers who had not caused any trouble. The Indonesian Vice-President, Hamzah Haz, even expressed his willingness to go to Kuala Lumpur to urge Prime Minister Mahathir to rescind his decision to discriminate against Indonesian workers. All these efforts, however, failed to prevent the Malaysian Government from forcibly expelling illegal workers, most of whom were Indonesians, in August 2002. Injured pride notwithstanding, it is quite clear that the Megawati government has pursued a pragmatic foreign policy vis-à-vis its ASEAN neighbours which places Indonesia’s economic interests at a much higher priority than national prestige. This point is worth noting given the fact that Megawati’s father,

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Soekarno, was known to put his pride and national prestige over pragmatic economic needs. Instead of trying to confront or put any pressure on Malaysia, which could have strained bilateral relations, the Indonesian Foreign Minister called for a cooling-off period which would enable the two countries to resolve the longstanding problem of Indonesian migrant workers in Malaysia in a cordial manner. The Megawati government also realized that it has little choice but to abide by the conditions set by the IMF if it is to get any financial assistance from the donors. As such, one of the first key priorities of the new Cabinet was to restore the country’s relations with the IMF, which had been derailed by the acrimonious relations between the IMF and Wahid’s Co-ordinating Minister for Economic Affairs, Rizal Ramli. Such was the importance of obtaining support from the IMF that Megawati appointed to her Cabinet, particularly to the economic portfolios, individuals who would be considered by both the IMF and the international community to be “market friendly”. Her strategy bore fruit for Indonesia’s relations with the IMF were soon restored, and the Megawati government was accorded high marks by a number of Western countries, notably the United States. To demonstrate his support, President Bush asked Robert Zoellick, U.S. Trade Representative, who was on a visit to India, to make an unscheduled stop in Indonesia. Zoellick was the first member of the Bush Cabinet to visit Indonesia, only days after Megawati became President. Zoellick was reported to have been impressed with his three-hour meeting with Megawati and he praised her Cabinet as being “extraordinarily strong” and said that her government was sending all the right signals to the international community.16 Developing solid bilateral relations with the United States is recognized as being extremely important for Indonesia’s political and economic interests. As the sole remaining superpower, the United States can provide Indonesia with the much needed economic and technical assistance, through bilateral and multilateral channels. At the same time Indonesia had been almost entirely dependent on the United States for its defence needs throughout the New Order period. In the aftermath of the postballot violence in East Timor, the U.S. Congress banned arms sales

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to Indonesia and that had severely undermined the Indonesian military capability. Restoring military ties with the United States is, therefore, an important item in the foreign policy agenda for the Megawati government. The Bush administration has also indicated from the very beginning that it wishes to strengthen bilateral ties with Indonesia, including restoring aspects of the bilateral defence co-operation. As such, soon after her inauguration, President Megawati was invited by President Bush to make an official visit to Washington. Maintaining an appropriate balance in its relations with the United States has always been tricky for Indonesia. On the one hand, Indonesia desires to have American support and has been eager to seek U.S. endorsement of its policies. Support from the United States for a particular Indonesian leader adds to his/her legitimacy, while conversely, its absence would undermine a leader’s domestic credibility. On the other hand, overdependence on the United States, or too close an alliance with the United States in regional and international affairs, would also undermine an Indonesian leader’s credibility for he/she would be accused of violating the principle of a free and active foreign policy. Economic dependency and pragmatism notwithstanding, there is a limit beyond which Indonesian foreign policy cannot venture without endangering the legitimacy of the government. The end of the Cold War has made the maintenance of a strictly non-aligned status less urgent for Indonesian diplomacy, and with the establishment of the New Order regime, Indonesia moved closer to the West. Yet there is one area in which the positions of Indonesia and the United States have always been at odds, particularly with regard to the Israel–Palestinian question. As a Muslim nation, Indonesia is strongly anti-Zionist and it supports the establishment of an independent Palestinian state. Indonesia is also naturally sympathetic to developing countries in the Muslim world vis-à-vis the developed world. It was indeed bad luck that on the eve of Megawati’s visit to Washington, terrorists associated with the Al-Qaeda group attacked the World Trade Center in New York in the name of Islam. President Bush announced his determination to seek out and punish Osama bin

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Laden and those protecting him, leading to the U.S. war in Afghanistan. Megawati’s visit to Washington, therefore, took on a different meaning from what was originally intended and that sparked off controversies back home. Despite these difficulties, Bush did not cancel his invitation to Megawati. She came to America for a week-long visit after the 11 September attack. In fact, as the president of the world’s largest Muslim nation, Megawati’s visit to Washington served an important symbolic purpose for Bush in that her presence would show that the U.S. Government was not targeting Islam or Muslims when it launched an attack against Afghanistan. Both Megawati and Bush were keen to draw a distinction between Islam and the terrorists. During that visit, the American Government pledged to give Indonesia aid while the United States sought Indonesia’s support for the global war against terrorism.17 The two presidents also agreed to strengthen military co-operation between the two countries, particularly in the area of reform of the Indonesian military. Bush also conceded that the United States would withdraw its embargo on Indonesia of the commercial sales of non-lethal defence items. Under normal circumstances Megawati’s trip to Washington, which secured such large sums of bilateral assistance from the U.S. Government, would have been hailed as an unqualified success in Indonesia, even by the more nationalistic elements. In all Washington announced an aid package consisting of US$130 million in bilateral assistance, US$400 million in trade and investment promotion, and US$100 million in additional benefits under the Generalized System of Preferences. Yet Megawati’s visit was not well received at home. Many in Indonesia, particularly among the more avowedly Muslim groups, suspected that Megawati was being bought off by the United States to support its attacks on Afghanistan. When the U.S. air strikes on Afghanistan began, large anti-U.S. demonstrations were staged in front of the U.S. embassy in Jakarta. Indonesians viewed the U.S. bombing of Afghanistan as unjustified because many innocent civilians’ lives would be lost. The radical Islamic groups, such as the Laskar Jihad (Jihad Troops), even threatened to carry out “sweeping”

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against American nationals and pressured the Indonesian Government to strongly denounce the U.S. actions and even to cut off diplomatic ties with Washington. Although there was no serious damage to the bilateral relations between Jakarta and Washington, for the views of the more radical Islamic groups found little support among the Indonesian population at large, the intended effect of Megawati’s visit to the United States was not achieved. News of the demonstrations and threats against Americans, which were allowed to go unchecked for almost a week in Megawati’s absence, created the impression that Indonesia was not only becoming increasingly anti-America but it was also turning into a radical Islamic nation, an impression that further damaged Indonesia’s image overseas, particularly amongst Western nationals. Although few people supported the call made by the more radical Islamic groups to sever diplomatic relations with the United States, the Indonesians’ general unhappiness with the U.S. bombing of Afghanistan was genuine. The Indonesian Government, therefore, could not afford to be seen to be actively supporting the U.S. military campaign in Afghanistan. Although she avoided open and direct criticisms of the United States, Megawati made a veiled criticism of the U.S. campaign, stating that no country had a right to attack another because of the actions of certain individuals.18 Indonesia and other Muslim countries called on the United States to cease bombing during the fasting month of Ramadhan, and for the United Nations to play a more proactive role to resolve the crisis. The recent case involving the United States clearly shows that Indonesia has certain fundamental principles which it will not readily compromise under any circumstances. These principles form the outer boundaries of Indonesian foreign policy that a government can only cross at its own peril. Nevertheless, the Megawati government as well as the majority of the Indonesian political public recognize that overcoming Indonesia’s economic crisis must be the first priority, and that Indonesia should avoid taking any actions that would jeopardize this primary objective of economic recovery. Economic needs, therefore, entail a more pragmatic and utilitarian foreign policy, although this policy might

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be viewed as undignified by those who reminisce about the days of Soekarno’s rule when Indonesia dared to challenge the developed world even when it was economically weak. Nonetheless, despite its economic dependence on the developed countries, the present Indonesian Government, just like the previous administration, also tried to diversify its external linkages. Besides emphasizing the importance of strong bilateral ties with the United States, Japan, and Europe, Indonesia has also begun to pay more attention to China and India lately. Earlier, President Wahid floated the rather grandiose vision of a “China, Indonesia, and India” triangle as a new power structure in international relations, but this idea was never discussed seriously and it was soon forgotten. Megawati has not made any new foreign policy initiatives, but her government has intensified its diplomatic efforts towards China. China’s vast economic potential and rapid economic growth present both challenges and opportunities for both Indonesia and ASEAN as a whole. The Chinese Government has also shown a strong interest in developing closer ties with Indonesia, particularly in the economic field. After Megawati’s visit to Shanghai for an APEC (Asia-Pacific Economic Co-operation) meeting in late October 2001, the Chinese Prime Minister Zhu Rongji paid a visit to Indonesia in early November. Megawati clearly takes a more personal interest in fostering relations with China, and this is reflected when she appointed her husband, Taufik Kiemas, to lead an official highlevel Indonesian delegation to China on 18–20 December 2001. Although Taufik Kiemas’s role in leading an official ministerial delegation drew criticisms and charges of nepotism against Megawati, it nevertheless shows Megawati’s desire to strengthen ties with Beijing. In the past few years Indonesia’s relations with its neighbour, Australia, have been the most turbulent, marked with frequent ups and downs. At one point, relations between Jakarta and Canberra seemed to be nearing breaking point right after the East Timor ballot, but both countries have restored relations when both agreed to look ahead rather than dwell on the past. Although bilateral relations improved significantly after President Wahid’s visit to Canberra, and Prime Minister John Howard’s visit to

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Jakarta soon after Megawati became President, relations became strained again over the issue of illegal immigrants, particularly over the Tampa incident in September 2001. A group of illegal Middle Eastern immigrants heading for Australia were rescued from a sinking Indonesian ship by a Norwegian tanker, Tampa. Australia refused to allow the immigrants into Australia while the Indonesian Government refused to take responsibility for these illegal migrants. Indonesia was offended by Australia’s “megaphone diplomacy”, particularly when Australian politicians made accusations against Indonesia in the foreign press. To show her displeasure, Megawati reportedly refused to take a telephone call from Howard and did not hold any bilateral meetings with him in Shanghai during the APEC summit. Recently, however, Indonesia–Australia relations have again shown signs of improvement. During the election campaign, Howard announced that Indonesia would be his first overseas destination after being re-elected, a sign of goodwill that has been welcomed by the Indonesian Government. Howard’s visit took place in early February 2002. The Indonesian Government’s desire to enhance relations with Australia is, however, not shared by the Indonesian parliament (DPR). The legislators accused Australia of giving support to separatist movements in East Timor, Aceh, and West Papua and they refused to receive Howard during his visit, an action that was also followed by members of the People’s Consultative Assembly (MPR).

Conclusion Indonesia’s foreign policy in the first six months of Megawati’s presidency is seen to be steering the country back on course after Wahid’s tumultuous presidency. Megawati’s foreign policy focuses on the need to develop harmonious relations with Indonesia’s immediate neighbours, which are important for ensuring Indonesia’s own security, and on efforts to mobilize economic resources for Indonesia’s economic recovery. Indonesia’s foreign policy under Megawati has, therefore, emphasized development over independence, and stressed pragmatism over national sentiments. In this respect Megawati follows more closely the

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foreign policy path laid out by Soeharto — with East Timor being a major exception. For now, this policy has been quite effective in achieving its immediate objectives. Despite the relatively successful foreign policy initiatives, however, the Megawati government has not been able to do much to improve Indonesia’s international image or to restore investors’ confidence. In a way there is only so much international diplomacy can do, as these perceptions are largely based on the performance of other government institutions. No matter how skilful the diplomats, they cannot conceal actual developments in their country. News of bloody conflicts, pervasive corruption, and legal uncertainty continue to deter investors from returning to Indonesia. Indonesia’s newly democratic environment also poses a challenge to the government in implementing foreign policy. Unlike under Soeharto’s authoritarian regime, the formulation of foreign policy can no longer be insulated from public scrutiny. This has put a constraint on foreign policy, as the Indonesian Government may not be able to pursue a particular policy, even if it is believed to be in the best interests of the country, if there are strong public oppositions. Moreover, foreign policy is no longer the monopoly of the executive branch of government, for under the newly democratic system, the parliament also plays an important role. Although foreign policy remains the prerogative of the executive, in certain cases the parliament takes a position opposite to that of the government, and that could reduce the effectiveness of the initiative carried out by the government.

Notes 1. Joseph Frankel, National Interest (London: Pall Mall, 1970), pp. 28–29. 2. R.C. Good, “State Building as a Determinant Foreign Policy in the New States”, in Neutralism and Nonalignment, edited by L.W. Martin (New York: Praeger, 1962), pp. 3–12. 3. See Franklin B. Weinstein, Indonesian Foreign Policy and the Dilemma of Dependence. From Sukarno to Soeharto (Ithaca and London: Cornell University Press, 1969). 4. Statement by N. Hassan Wirajuda, Minister for Foreign Affairs, Republic of Indonesia, at Jakarta Foreign Correspondents’ Club, 12 October 2001.

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5. Ibid. 6. See Directorate of Foreign Information Services, Department of Information, Republic of Indonesia, Indonesia 1999: An Official Handbook (Jakarta, 1999). 7. During an informal ASEAN Summit in Singapore and an ASEAN Plus Three meeting in late 2000, Wahid proposed that Papua New Guinea (PNG) and East Timor be accepted as members of ASEAN. When Lee Kuan Yew, Senior Minister of Singapore, brushed aside this idea, on the grounds that PNG was already a member of the South Pacific Forum and East Timor was not yet an independent country, Wahid accused Singapore of being arrogant and even made threatening remarks about cutting off water supplies to the island state (though Singapore purchases its water from Malaysia, not Indonesia). Wahid then suggested that Indonesia should form a West Pacific Forum comprising Indonesia, Australia, New Zealand, PNG, and East Timor. 8. The term “ecumenical” to characterize Indonesia’s foreign policy under Wahid was coined by Alwi Shihab, Foreign Minister in Wahid’s Cabinet, and a specialist in comparative religions. 9. See Dewi Fortuna Anwar ,”Indonesian Foreign Policy: Losing Its Focus in 2000”, Van Zorge Report on Indonesia 2, no. 21 (December 2000): 18–24. 10. Wirajuda, op. cit. 11. Ibid. 12. See, for instance, Theodore Friend, “Power Vacuum in ASEAN: Indonesia, Regional Security, and the USA”. E-Notes, Foreign Policy Research Institute, 9 April 2001. 13. See, for example, “Mega tour”, The Hindu, 2 September 2001. 14. See “Megawati heads for Laos”, BBC News, 22 August 2001. 15. “Mega tour”, The Hindu, 2 September 2001. 16. Amit Barush, “Megawati sending right signals to neighbours”, The Hindu, 14 August 2001. 17. Eriko Uchida, “Indonesia’s President Megawati Flies to Meet President Bush” (). 18. Megawati criticized the American military actions in Afghanistan on two occasions. The first was during the Isra’ Mi’raj religious celebration at the Jakarta great mosque, Istiqlal, in October 2001. The second was in her State Address to the People’s Consultative Assembly in November 2001.

© 2003 Institute of Southeast Asian Studies, Singapore

Reproduced from Governance in Indonesia: Challenges Facing the Megawati Presidency, edited by Hadi Soesastro, Anthony L Smith and Han Mui Ling (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian CHALLENGE OF THE TNI 91 Studies. Individual articles are available from < http://bookshop.iseas.edu.sg >

5 Challenge of the TNI and Its Role in Indonesia’s Future Jusuf Wanandi

Introduction To understand changes in the Indonesian military (Tentara Nasional Indonesia, TNI), particularly its political role, it is necessary to consider the wider political reforms in Indonesia, since reform in the TNI is only a part of the political reforms. Indonesia today is in a difficult period of transition following forty years of authoritarian rule under Soekarno (eight years) and Soeharto (thirty-two years). Therefore, the pendulum of social and political development tends to swing to the other extreme, creating a transition period characterized by fluidity and uncertainty. The Indonesian crisis is a deep one, encompassing political, economic, social, and even cultural aspects. It is so complex because the economic crisis was followed by a change of leadership in an environment of globalization that has significant effects upon values and identities. Therefore, it will take some years before things settle down and the crisis can be considered to have been 91 © 2003 Institute of Southeast Asian Studies, Singapore

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overcome. Economic restructuring will take some time to be completed because of the huge magnitude of restructuring, and especially when the team of economic ministers remains less than active. In the political field a process of democratization has been unleashed. To a certain extent, this will be accompanied by some destabilizing factors. In the midst of this, the armed forces, and their prospects, loom large over Indonesia. Professionalization of the army has only just begun, and will take some time to materialize. The military were for so long Soeharto’s “praetorian guard”, and thus completely corrupted — now they are also completely demoralized. This has weakened their capability to maintain law and order, resulting in a severely deteriorating security environment. The challenge for Indonesia is to maintain some sense of identity and its values and culture. In the meantime, there has been a backlash against globalization. Efforts to overcome this are very important. It is perhaps a natural reaction for the people to revert to their traditional values, to their religion, and to their ethnic communities in their search for an anchor. Due to the increased inequalities, communal groups and different social groups have become hostile to one another. These hostilities may originate with class divisions but are mainly caused by social divides in society, such as race, ethnicity, and religion. The fluidity, uncertainty, and contradictory developments in this transition period in Indonesia show how difficult, complex, and fragile this transition is. Despite its great challenges and difficulties, the process of democratization and liberalization has to be sustained for the society to achieve maturity. A professional military, under the firm control of civilian leadership, is essential for a democratic, and stable, Indonesia.

Changes in the Political Role of the TNI The role of the TNI in politics dates back to the 1945 revolution against the Dutch. The TNI started life as the People’s Army and the Revolutionary Army, and acted as a body of freedom fighters against the Dutch. That has been the basis for its legitimacy to have a role in Indonesian civil life, including politics, ever since. It has also been used in the interpretation of the 1945 Constitution, © 2003 Institute of Southeast Asian Studies, Singapore

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to affirm that professional or functional groups, including the TNI, can be represented in Indonesia’s highest constitutional body, namely the People’s Consultative Assembly (MPR). However, in reality, this dual role (that is, external and internal defence) derives more from the TNI’s historical/political role rather than from the Constitution. The TNI has exercised its political role in times of crisis, especially in 1958–63, when the state of war and emergency was proclaimed due to various threats: the constitutional crisis, regional rebellions, and Dutch resistance to handing West Irian to Indonesia as promised at the Round Table Conference in the Hague in 1949. The peak of its power occurred during the earlier Soeharto years, 1967–78, after the political parties and the civilian leadership showed their inability to govern the country following the general election of 1955. The civilian authorities could not resist the encroaching power of the Communist Party, under Soekarno’s increasing patronage, culminating in the abortive coup of 30 September 1965. After 1978 Soeharto was in full control of the TNI, which gradually became his “praetorian guard”. The political role of the military was Soeharto’s reward for it. Since 1988 questions have been raised as to whether the new generation of TNI leaders, graduating from military academies across the country, have the same legitimacy as the earlier freedom fighters to be involved in politics. They do not have the same experiences and political acumen at the national level as the earlier generations to be able to run the country. After Soeharto resigned, the TNI, which was completely dependent on him, and which he ran as the supreme commander from 1988, lost its power and legitimacy. The TNI has also become divided, demoralized, and no longer has real leadership capabilities because the leaders were selected, one way or another, by Soeharto himself — and they were thoroughly corrupted by this process. Most of those who advanced were close to him, or to his son-in-law, General (ret.) Prabowo Subianto. This sort of relations has ended, but the damage still persists. There are, however, still significant barriers to a possible military takeover of the government. This is due to the military’s limitations and internal divisions, but also because the public will not accept this after the thirty-two years of absolute power under Soeharto. The military was, after all, the main instrument of Soeharto’s © 2003 Institute of Southeast Asian Studies, Singapore

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power, and there is deep mistrust in the wider community towards it. Some major changes are taking place in the TNI. The TNI has been heavily criticized for its human rights abuses, as it was once little more than Soeharto’s instrument for oppression. For its own survival, the military is now trying to adjust and adapt to the new environment in which it finds itself. In 1999 the TNI proposed a new paradigm that consists of the following four points:1 1. 2.

3. 4.

to establish a professional, effective, efficient, and modern armed forces; to support the movement for reformation in a gradual and sustained way and to formulate a concrete and clear agenda, setting the priority, and determining the sequencing of the reforms; to adopt a neutral position in Indonesia’s political life; and to withdraw gradually towards a complete retreat from dayto-day practical politics.

Based on that new paradigm, the TNI suggested fourteen basic changes in its organization: 1.

2.

3. 4.

5.

Separation of the police from the armed forces (the military was renamed the TNI), which was implemented on 1 April 1999. The police no longer come under the Department of Defence, and will probably in time be placed under the Department of Home Affairs (currently they answer to the President’s Office). Abolition of the National Council for Socio-Political Affairs and the provincial councils that used to oversee the TNI’s practical politics. Changing the chief of staff for political affairs to the chief of staff for territorial affairs. Liquidation of the armed forces’ staff for functional or professional appointments in the civilian administration for domestic security (Kamtibmas ABRI) and the council for professional appointments (Babinkar). Abolition of the department of social-political affairs of the regional command, the regimental and the secondary regional

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6.

7. 8. 9. 10. 11.

12.

13. 14.

command (Sospoldam, Sospolrem, Sospoldim), and the professional appointments body of the regional command (Babinkardam). Abolition of the professional appointments department/unit (for secondment outside the TNI) of the TNI by retiring the personnel or moving them to other posts. Abolition of the armed forces faction in the parliament and in regional legislatives (provincial and district). Complete withdrawal from day-to-day practical politics. Separation from the Golkar Party, as well as keeping an equal distance from all other political parties. Commitment to a non-partisan attitude at election time. Changing the paradigm concerning the relations between the TNI and the so-called TNI’s “extended family” (other related and connected organizations organized by family members of ABRI, veterans, and retired servicemen’s councils). Revision of a number of TNI doctrines to adjust to the era of reformation and the TNI’s role in the twenty-first century. Rotation among the three service branches of the TNI for the post of commander-in-chief (now is the turn of the Navy). Making the TNI responsible for external security, while the police will be in charge of internal security.

These changes were introduced under the transitional government of B.J. Habibie. When Abdurrahman Wahid (Gus Dur) took over as President, he was much more in control of the TNI than Habibie could ever be, because he was the first democratically elected President. Wahid began to consolidate his position through the replacement of General Wiranto as commander-in-chief, whom he dismissed from the Cabinet because of his alleged involvement in the human rights abuses in East Timor in the wake of the August 1999 plebiscite. Wahid’s act was only the first step in the process of professionalization of the TNI and establishing civilian control over the armed forces. In theory, control over the military should be exercised by the President as the supreme commander of the TNI, based on the power afforded to the President in accordance with the 1945

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Constitution. To have real civilian control, however, substantial structural changes will have to be made. First, the reform of the Constitution to unequivocally establish civilian supremacy and control is needed. Constitutional reforms should include the role and responsibility of civilians in formulating the mission of the TNI and determining the limits of the power of the TNI. It should also include the TNI’s commitment to human rights, as embodied in the Constitution. Furthermore, the laws and regulations on defence and domestic security, as well as the regulations to implement them, have to be laid down by the civilian authorities. These rules alone remain inadequate, because they entail civilian supremacy only in the decision-making process. What has been proclaimed thus far as civilian control is still limited to the decisionmaking level and does not include implementation. Civilian supremacy should also be exercised in formulating the implementation of the rules and in assuring that the TNI is accountable to the civilian authorities. On the other hand, the civilian leaders should be endowed with the capability to oversee TNI’s policies, as well as their implementation, and accountability. This has yet to happen. A culture of total civilian supremacy has yet to be established, although it is occurring gradually, to replace the “command culture” of the military. Only then will there be civilian democratic solutions to social and political conflicts (such as those in Aceh and Papua) through negotiations and political compromise instead of by the use of force or physical means — which has occurred continuously in Indonesia since the Dutch colonial period. At this stage of political development, where the unity of the country is still at stake and where vigilantes and militias with all kinds of political affiliations are present, the TNI is still a prerequisite for keeping the nation and the country together. However, this role is less absolute than before. If the TNI does not come under adequate civilian control, then its excesses and abuses of human rights will continue. The TNI has relented somewhat and has acknowledged its abuses in the past. Public regret has also been shown in a few cases (such as General Wiranto’s apology in Aceh in 1999). Some members of the TNI have been brought to

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trial in a few key cases — although the ad hoc court for human rights abuses in the past is still ongoing. The TNI has also changed the curricula of the staff and command schools and academies, to incorporate the imperative of civilian control, as well as to implement its new paradigm. However, not all these goals have been implemented consistently. Importantly, however, in many instances the changes have been introduced in response to public pressure. The TNI still has a long way to go in reforming itself, because in the regions, from the provincial to the village level, the existing TNI structures to control political life are still present and are definitely more effective than at the (civilian) centre. They might not be equally powerful at all levels, nonetheless they are powerful still. All intelligence agencies, including those designed as civilian, are still in the hands of the military, although they are not as effective as before. To compound the problem of political interference and control, the leaders of the TNI have been also demoralized. They are unsure about their future because the civilian authorities, whom they are constitutionally required to answer to, are also in disarray. The political elite is also divided on the kind of reforms to be undertaken and on how fast this should happen. In addition, relations among the armed services are not good due to the Army’s political dominance and past excesses. The Air Force and the Navy are generally thought to be unhappy because they have to endure the criticisms resulting from the Army’s excesses. The police are also no longer willing to allow the Army to interfere again in domestic law and order problems and they block this where possible.

National Defence The TNI needs to formulate a totally new defence strategy that takes into consideration the new strategic surroundings in the Asia-Pacific, where new uncertainties have arisen. In the short and medium term, Indonesia is not facing threats from abroad, but in the long term there will be new uncertainties about the

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balance of forces and possible new alignments in the region. These also include the military revolution in arms (MRA) that can be answered only through the acquisitions of new, sophisticated defensive weapons. In the meantime the problems of arms control and non-proliferation are permanent features of the region, especially in Northeast Asia and the South Asian subcontinent. New security issues, such as the environment, illegal migration, human trafficking, transnational crime, drug trafficking, piracy, and terrorism, as well as the sudden economic downturn and crisis as experienced recently, could become more acute and immediate. This means that the old strategy of the TNI, which is heavily based on domestic stability and security, involving an all-out “people’s warfare” to face the threats of subversion and infiltration, has to be changed fundamentally in the long run. In this new strategy to be formulated, the capabilities and the equipment of the Navy and Air Force will become more important than the Army’s. But since the Army’s role in supporting the police remains critical, a new definition of its task and limits, its accountability and mandate, should be examined seriously. At this stage of development, with the TNI leadership in disarray, leadership from the civilian authorities is critical. However, this has not been provided as yet by the current presidency while divisions in the political elite on TNI reforms are still being felt. In the face of these challenges, civilian leaders have to prepare themselves to ensure an effective oversight of the military. They need expertise in strategy, force structure and command, procurement of equipment and platforms, as well as on the process of making the TNI accountable. Foreign governments will also have a role to play in the creation of a professional military in Indonesia. Some assistance from the United States for a possible resumption of training was discussed during President Megawati’s visit to Washington in September 2001.

Wither Democracy? The TNI leadership was quite united during the 2001 political impasse created by Gus Dur. When the then President declared a state of emergency, the military ignored this as a breach of the © 2003 Institute of Southeast Asian Studies, Singapore

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Constitution. This demonstrated support for democracy has augered well for them in the eyes of the general public. It has also united them for the first time since Soeharto’s fall. But in facing the new strategic development and new alignments following the 11 September terrorist tragedy, the TNI leadership has not been able as yet to come up with new answers. They watched from the sidelines when small groups of Muslim extremists took over the national agenda and threatened foreign embassies. The TNI appears to be at a loss, apparently because it is unclear about President Megawati’s policies. In fact, it was ultimately Megawati who failed to give clear directions on dealing with those extremist groups. It was also the Partai Demokrasi Indonesia–Perjuangan (PDI-P) faction in the MPR, the highest legislative body in the country, that has extended the presence of the military faction in the MPR until 2009. The reformist credentials of the PDI-P have been questioned by the public, as Megawati’s party appears to continue to rely heavily on the TNI. Because President Wahid was so capricious in his policies towards the TNI, it has become closer to Megawati, who appears to be more sympathetic and who is also a conservative as far as the unity of the nation and political stability are concerned. How all this is going to end will depend on the strength of the civil society to push for democratic ideals and their full implementation. The media plays a critical role in this effort, especially in preventing, or bringing to an end, abuses by the TNI. While it is necessary to have the TNI as a credible instrument of the state, due to the continuing domestic crisis and regional conflicts, the TNI has to accept absolute civilian supremacy. Furthermore, civilian leaders, including those in the PDI-P, must assert the constitutional authority of civilian government. If this cannot be established now, another conflict concerning the TNI’s role and authority could erupt in the future. Civilian supremacy is still very fragile and will pose a continual challenge for some time to come. The outcome will depend partly on the military, but the efforts by the civilian leaders are most critical. They have to come up with new ideas about their supremacy, the rules and regulations, new paradigms and doctrines for the military, and their implementation (including determining the military budget). © 2003 Institute of Southeast Asian Studies, Singapore

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The International Dimension One of the most important aspects of TNI reform in the near future is the acceptance by the international community and recognition of its new and reformed role in Indonesian politics. For this to happen, the TNI has to overcome the blemish it has created for itself because of the abuses surrounding the plebiscite in East Timor in August 1999. This has yet to be overcome by a resolute decision from the Indonesian Government and the TNI to compensate for earlier mistakes. Any restoration should involve the repatriation, without delay, of some 60,000 East Timorese along the border of West Timor. It is in Indonesia’s self-interest to overcome this problem, otherwise problems along its border with East Timor will continue to haunt it in the future. Another important decision in this regard is to bring to justice other perpetrators of human rights abuses in East Timor both in relation to the destruction following the plebiscite and the killings of three United Nations volunteers in West Timor. In the meantime, efforts to normalize the relationship between the U.S. military and the TNI have to start, while giving the Indonesian Government and the TNI the opportunity to get their act together to undertake the above rehabilitation measures. With the restoration of relations with the U.S. military, a signal will be given to the international community, namely that the TNI has been rehabilitated and therefore, assistance, especially in training and education, should be restored. This should also improve the conditions for arms sales, especially of the spare parts that are needed to restore law and order in far-flung parts of the archipelago.

The Future Agenda Indonesia needs a TNI that is capable and professional to keep the country together and to defend it. Opportunities for training and education have been limited because of the financial crisis. The TNI also desperately needs to keep up with technological advances — at the moment, it is seriously lagging behind.

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Some of the unfinished reforms of the TNI include the following: 1.

2.

3.

4.

It should be recognized that government leadership in conflict resolution is critical. Otherwise the police and the TNI will continue past practices, namely to apply a military solution to every social/political conflict, especially in Aceh and Papua. It has yet to be seen whether the right lessons have been learnt by the government and the TNI from the conflict resolution process in Poso (Central Sulawesi). Rules and legislation on defence and security-related issues have yet to be completed. A start has been made with two basic laws. The one on defence is considered acceptable and has passed through the parliament. The other law on the police, which was heavily criticized by the public, was also passed by the parliament without any amendments. The protest against the law on the police was with regard to the overwhelming power given to the police and the President as the commander-in-chief, without any provision for oversight by an independent body on the President and the chief of the police, and thus opens the possibility for future abuses. Constitutional reform, as the basis for civilian and democratic control, remains unfinished, while the other rules have yet to be formulated, in part due to failure to implement the laws that have been passed (but not yet enacted). The government has yet to initiate a defence policy review, with reference to the political reforms undertaken thus far, which can form the basis for formulating further policies on doctrine, structure, organization, training, oversight, and budget of the TNI and the police. Many of the reforms, including those on strategic and operational doctrines, have not been implemented because of the lack of leadership in the government as well as in the TNI and the police. The review of intelligence bodies, through legislation and with parliament oversight, is critical, but is not even close to being started. Intelligence has been in the hands of the military for too long. This has to change because it is prone

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5.

6.

7.

8.

to serious abuse, especially with regard to domestic security matters. Around 35 per cent of the military expenditure comes from the national budget, while the rest has to be funded from all manner of business enterprises — including security protection of civilians and companies. All this has to be professionalized and made transparent. The defence budget has to be increased gradually, so that the total military expenditures will be provided for by the national budget. This consolidation would also, in time, enable the military to receive potential financial assistance from abroad. In the meantime a financial plan for the transition over the medium term has to be in place. A review of the defence planning and the process of material acquisition is also needed. This has to be based on the earlier efforts described above, and has to include a component of education and training of military and civilian defence planners. Furthermore, personnel for review, logistics, and training management are also necessary to implement the plan. The rule of law has to be applied not only to East Timorrelated abuses, but also in regard to the ongoing conflicts in Aceh, Papua, and Maluku. It is not easy to reverse these situations, where violence has become endemic, but failure to do so will lead to total alienation and an increasing cycle of violence. The military representation in the MPR, the DPR (People’s Representative Assembly), and the DPRD (regional parliaments) should be terminated in 2004. The involvement of the military in these bodies creates a number of potential dilemmas for its representatives, and provides the opportunity for future intervention in politics again. In any event, MPR membership will not extend beyond 2009, as decided by the annual MPR session.

The above list is indeed a tall order. Not much has been undertaken and accomplished since 1999, except for some changes in the education curriculum on human rights, some proposals on

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the territorial reorganization of the TNI in the future, and some study of the TNI business enterprises. This lack of movement was due in part to the messy political situation under President Gus Dur, and in part also due to a lack of vision on the part of the TNI leaders and the divisions among them on political reform. However, the blame should also be directed to civilian leaders for their lack of initiatives and ideas. The pressure for reform has consistently come from civil society and the media, albeit without having produced many results so far.

Concluding Remarks In summary, the running of society is far too complicated for the TNI to contemplate, not least of all because it lacks the wherewithal to govern effectively. But the TNI may not rule out the possibility of returning to power, and sometimes it points to the incapabilities of civilian leaders to run the country, even though it no longer has the capacity to do so. However, considering the diversity of the country and the multiple crises Indonesia is experiencing, the government does need a capable but reformed TNI to keep Indonesia together, and to maintain law and order as a prerequisite to overcoming the various crises. That is what President Megawati appears to be aiming at, although her statements on this issue are often less than clear. She and the PDI-P are considered to be too close to the TNI, and there is widespread concern that she might give it too much power again. This is especially true because of the insurgencies in Aceh and Papua, where it is already evident that a hard-line and militaristic approach has been adopted, rather than seek political resolution and compromise. In Aceh, a militaristic approach has been tried to counter the rebellion (which has occurred in three distinct phases) since the mid-1970s, and this has failed, even at the height of the TNI’s power at the end of the 1980s. What the Acehnese want most is justice against the abuses of human rights, a degree of home rule, and a fair share of their resources. There is now a window for a negotiated deal with GAM (Free Aceh Movement). But GAM has insisted on the need for an international interlocutor, in the form

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of a strengthened Henri Dunant Center facilitation team, simply because the Jakarta government is not trusted by GAM. It is also important that Jakarta appoints a team of negotiators and a special assistant in charge of Aceh to sort out a muddled policy. In the case of Papua, more attention to home rule and the training of Papuan leadership, as well as intensive education and health programmes, are important. The new special autonomy law is a good start in that it, inter alia, returns 70 per cent of the revenue from natural resource extraction to the province. The murder of Theys Eluay, the noted Papuan independence leader, has aroused deep suspicions of military involvement. If the investigations are not credible, then the situation could worsen rapidly. A new calamity can be expected in Papua if the military adopts the East Timor mode of operations, namely by using and training militia groups and undertaking clandestine operations. This kind of operation will only drive more Papuans to the independence cause. The insurgencies in Papua are still at a low level — they are a long way to developing a critical mass because the Papuans are divided along tribal lines and thus lack a sense of Papuan nationalism. It is the external support to the cause of the Papuans that could be much more disturbing to Indonesia — as articulated by a number of policy-makers in Indonesia. This scenario may well happen if a political solution cannot be found. These are critical issues for Megawati, and she would be best advised to work towards a political solution, even though this may take time. Although it is tempting to resort to a military solution in the restive provinces, this will only prolong the miseries of the populace and make the situations more complicated and far more difficult to solve. In this context Megawati’s relationship with the military should also be made more clear to the public. She has in fact received bad treatment at the hands of the TNI in the past. One indelible experience was that of her father, Soekarno, who was ousted and isolated, even from his family with the evident support of the TNI. Secondly, when she was demoted as the PDI leader in 1996, a number of her supporters were killed when the party headquarters was taken over by her opponents organized by the TNI.

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Megawati knows that the TNI should not have any political role to play in the future, although she needs it as a state instrument to keep the nation united and to maintain law and order in order to overcome Indonesia’s multiple crises. But the TNI should be under the complete control of a democratic civilian authority. For this to happen, she should pick a professional officer to be the commander-in-chief, and instruct the Minister of Defence to drastically reform the TNI according to the wishes of the government, on behalf of the people. This is a challenge that is within Megawati’s power to address because of her credibility with the military leadership. In fact overhauling the military could also boost her public popularity, especially among the opinion leaders in the civil society and the media, who have hitherto been skeptical about her close relations with the military and her willingness to bring it back into a political role. Admittedly these suggested reforms will take some time to carry out, and after the normative part through legislation and rules has been completed, their implementation will depend to a large extent on the financial support from the government. With two-thirds of the military expenditures funded from off-budgetary sources, instituting these reforms represents a huge challenge to a struggling economy. But transparency has to start as soon as possible, and Megawati has already increased the military budget incrementally in the year 2002. It is hoped that this is well spent and will lead to the achievement of the national objective of a reformed and professional TNI under democratic and civilian control so that it is able to fulfil its obligations to Indonesia — namely defending the country from external challenges. Note 1. See the following: Markas Besar ABRI, ABRI Abad XXI Redefinisi, Reposisi, dan Reaktualisasi Peran ABRI Dalam Kehidupan Bangsa [ABRI in the 21st century: Redefinition, reposition, and re-actualization of ABRI’s role in national life] (Jakarta: MABES ABRI, 1998), pp. 17–19; and Wiranto, “Paradigma Baru ABRI” [The new paradigm of ABRI], Kompas, 9 March 1999.

© 2003 Institute of Southeast Asian Studies, Singapore

Reproduced from Governance in Indonesia: Challenges Facing the Megawati Presidency, edited by Hadi Soesastro, Anthony L Smith and Han Mui Ling (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part106 of this publication be reproduced TODUNGmay MULYA LUBIS without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available from < http://bookshop.iseas.edu.sg >

6 Constitutional Reforms Todung Mulya Lubis

After fifty-six years of independence, it is reasonable for Indonesians to question whether they have learned from their long history, be it from the tumultuous pre-independence period, or the independence struggles. Many say that Indonesia is a relatively young nation, and it is highly unlikely that it will be able to achieve nationhood without a long arduous process of nation building. Even the United States took several centuries to attain the national coherence that it enjoys today. Yet many Indonesian citizens are increasingly disappointed in the democratic process, which has been undermined by many crises, be it in the economic, political, social, legal, or cultural arena. After the political ascendancy of the Gus Dur–Megawati government in 1999, there were renewed hopes that Indonesia had, once again, a dwi-tunggal (dual team), a duo that would be able to work together to foster national development and strengthen national interests. During the immediate post-Soeharto period, reforms seemed to have gained momentum and there was growing optimism about the future of the country. Unfortunately, such optimism was very short-lived as political rivalry set in and tragically, the dwi-tunggal disintegrated. The tragedy of dwi-tunggal Soekarno–Hatta was repeated by the failure of the dwi-tunggal of Gus Dur–Megawati. 106 © 2003 Institute of Southeast Asian Studies, Singapore

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In the months following the resignation of Soeharto, the optimism shared by many Indonesians was not unjustified. The new government forced the military to retreat from its “dual function”, upheld civilian supremacy, removed virtually all press restrictions, initiated reconciliation with regional opposition, and opened the door for the development of civil society. If opinion polls had been taken at that time, there would be every indication that public support for the government would have been strong. These domestic developments were also supported by the international community, which considered these reforms in Indonesia as a victory for democracy. The spirit of democracy has become strongly manifest in Indonesia, as evidenced in the print media, parliament, non-governmental organizations (NGOs), and regional governments. The parliament, for example, has become extraordinarily active in policy debates, in sharp contrast to the “rubber stamp” parliament of the Soeharto era. Likewise the press now enjoys unprecedented freedom, so much so that news reporting has become very sensational, while the media’s role as a government watchdog has been relatively neglected. The NGOs, however, are far more influential in the development of postSoeharto Indonesia. Increasingly, they have become involved in all spheres of Indonesian life. With the passing of regional autonomy laws, provincial governments have become increasingly impatient to exercise their autonomy and the associated powers, even before the necessary administrative infrastructure is ready. Like it or not, post-Soeharto Indonesia has undergone dramatic changes that have transformed the political-economic landscape of the country. In line with the above changes, there has been a process of desanctifying of the Indonesian Constitution.1 In the past, the 1945 Constitution was considered sacrosanct. But since the fall of the Soeharto regime, there have been constitutional amendments in 1999, 2000, and 2001, which are very significant in Indonesian political history. Briefly, these amendments can be divided into four areas: (1) laying the legal foundation that enables the People’s Representative Assembly (DPR) to pass laws establishing civilian control over the military; (2) ensuring the separation of power and

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checks and balances in the political system; (3) passing laws that supported a decentralization of political power to the regions; and (4) inclusion of a new chapter in the Constitution on human rights. In the MPR (Majelis Permusyawaratan Rakyat or People’s Consultative Assembly) session in 2001, it was decided that the 2004 presidential election will be a direct election, although what happens if no candidate gains 50 per cent + 1 of the votes is still to be decided. Amendments to alter the composition of the MPR (in favour of regional representatives) and to create a constitutional court were also approved. Undoubtedly, these amendments to the 1945 Constitution are an effect of the political upheaval that ousted Soeharto, and then Habibie; however, at the same time they can also be said to have brought about far-reaching changes. The constitutional amendments made are praiseworthy as they set the stage for future constitutional reforms in Indonesia. Furthermore, they have brought about a resurgence of constitutional discourse that has been largely absent since the Konstituante (constituent assembly) era in the 1950s. Experts of constitutional law have been engaging vigorously in debates on the Constitution. The widening perceptions of constitutional change could be regarded as a conflict between the different forms of democracy desired. Regardless of the merits and risks of each approach, such constitutional discourse constitutes valuable social capital for the future progress of Indonesian democracy. Unfortunately, the views of many constitutional law experts (for example, law professors Marun Alrasyid and Ismail Sunny), primarily academics and civil leaders, were not taken into consideration in the constitutional amendments to date. Political parties’ interests were dominantly represented in the various amendments. What is perhaps worse is that these amendments were not made with a clear sense of the future overall political structure of the country. There has always been a lack of clarity on whether the Indonesian democratic system should be presidential or parliamentary, and this confusion remains. It is clear that the constitutional amendments occurred as a reaction to the oppression of the Soeharto era. Despite the attempts by the DPR and the MPR to limit the formerly unchecked powers of the presidency, it is still inaccurate to say that Indonesia is moving towards a pure

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parliamentary-based system. Why? According to the 1945 Constitution, the Indonesian President is not formally accountable to, and cannot dissolve or abolish, the DPR. On the other hand, the MPR is the highest state institution that elects the President and the Vice-President and is the body to whom the President and Vice-President must be accountable. This ambiguity regarding the relationship between the presidency and the legislature is one of the fundamental weaknesses of the 1945 Constitution. However, it is apparent that as part of the process of constitutional reform, the power of the position of President as both head of state and head of government has been seriously reduced. Meanwhile the legislative branches of government, namely the DPR and the MPR, which were subordinate to the President in practice, now enjoy stronger power over the presidency. For instance, although the DPR cannot dismiss the President directly, it can petition for a special session to impeach the President. This is because 495 members of the 700-member MPR are also members of the DPR. Furthermore, if the MPR agrees to the DPR’s request to convene a special session, it could call upon the President to make “an accountability speech” to defend the performance of his or her government. Thus, in reality, the President can be placed under the control of the DPR. The ouster of President Abdurrahman Wahid has made it clear that the present political system provides for very strong legislative powers over the presidency. In a situation where there is no political party with a full majority in the DPR/MPR, the government will always be weak, and this is the consequence of the multi-party political system that Indonesia currently has. In other words, the rising power of the DPR/MPR is not only because the First Amendment (1999) and Second Amendment (2000) of the 1945 Constitution have taken away many of the President’s prerogatives, but also because politically, the President’s political party or support base is so weak under recent arrangements that he or she is unable to control a working majority in the DPR/MPR. In short, Indonesia is experiencing a power shift from the executive to the legislative branch of government. The Indonesian political system is one that recognizes the MPR as the supreme state institution in the country. The MPR is

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the sole institution superior to the other bodies listed in the Constitution: namely the presidency, the DPR, the MA (Mahkamah Agung or Supreme Court), the DPA (Dewan Pertimbangan Agung or Supreme Advisory Council), and the BPK (Badan Permeriksa Kenangan or Supreme Auditing Body). The MPR has powers to establish the legality of its own actions. What this means is that there is still not a complete set of checks and balances in Indonesia, as all are accountable to the MPR, directly or indirectly. There is no meaningful separation of powers in another sense as the Supreme Court is not an independent judicial body. The authority for judicial review is not vested in the Supreme Court, but in the MPR. So if the MPR acts as the sole judge of the constitutionality of its own acts, who can control and monitor the MPR? The separation of powers in the Indonesian Constitution is a key issue in the process of constitutional reform. Here, the role of the Supreme Court is instrumental as an independent watchdog of the presidency and the DPR. However, the MPR now clearly has the monopoly of power, so it is extremely probable that vested political interests would determine the decisions of the MPR. In this context, one cannot help but ask: does Indonesia still need an MPR? Or is there a need to establish a political system that ensures effective checks and balances among the executive, legislative, and judicial branches of power? Is there a need for a proper bicameral system? A direct presidential election? Should Indonesia look for a parliamentary system with federal characteristics? On this last issue, Indonesia is too geographically dispersed to be bound in a unitary state. A federal system might be more appropriate for Indonesia. The United States, Canada, Germany, and Australia are examples of countries with a federal state structure. Indonesia could learn from the constitutional history of these countries. To some extent, regional rebellions and demands for wider regional autonomy are not just reactions to the centralistic, repressive, and unjust policies of the past, they are also an inevitable consequence of the sheer geographical size of the Indonesian nation state. It can also be observed that the DPR has deviated from its proper function because it has taken on the dual roles of being part of the executive and the judiciary, and it even controls the

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MPR. For example, the approval of the DPR must be sought for the appointment of the chief of the National Police. If a President is shackled by this kind of requirement, the presidency will not be effective because the President should have the prerogative to appoint and dismiss any of his or her Cabinet ministers and other key office holders. Under the present system, if for any reason the President is dissatisfied with the performance of an official, he or she is unable to dismiss the official without the approval of the DPR. The current governor of the central bank, Syahil Sabirin, is a case in point. Although accused of corruption, President Wahid was unable to remove him from office, as the governor has powerful backers in the DPR. Rather than being in the hands of an independent body, partisan interests have come into play. One could not object to the involvement of the DPR in the selection and appointment of key state officials, such as a minister, an ambassador, the Chief Justice, and the head of Intelligence (Bakin). However, not all government appointments should require the DPR’s approval. In addition, the authority of the President to dismiss state officials, which is certainly based on evaluations of work performance, should not require the DPR’s prior approval. This conditionality renders the President ineffective in running his or her administration, as the President could be trapped in the political tussles in the DPR. The ouster of Gus Dur from his presidency is a bitter experience, which should not be repeated since the impeachment was made without due process of law. Without delving too deeply into the debates on the constitutional legality of the impeachment process against President Gus Dur, as a supplementary point it is apparent that Indonesia needs clearer rules and regulations on the impeachment process against any future presidents. If a criminal suspect has the right to defend himself in a court process, then it is only fair that a President, who faces impeachment charges, be given the right to defend himself in the impeachment process. Anyone who holds the office of presidency in the future needs to be provided with the freedom to govern, without being constantly restricted by legislators. The present constitutional reform process must establish strong fundamentals for a powerful and democratic government with effective checks and balances

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among the executive, legislative, and judicial branches, and full guarantees for human rights. Any constitutional amendments made should be done with this paradigm in mind. Indonesia’s legislature should not move from one amendment to the next with no clear sense of direction. A proper study of international experiences is urgently needed in order to inform a more comprehensive constitutional framework. The examples of established democracies are important, but equally important are the experiences of newly democratizing and developing countries. Indonesia could usefully review the constitutional reform processes in the Philippines, Thailand, Nigeria, and South Africa. Take Thailand as an example. Thailand’s new Constitution was established after intense debates by a 99-member Constitution Commission, which comprised elected representatives of 76 provinces and 23 experts in the fields of constitutional law, political science, government, and public administration. The text of the new Constitution of Thailand was circulated widely and discussed in all the provinces. Inputs from experts and the general public were reviewed and much of these were included in the new Constitution. It is interesting to note that the Constitution Commission succeeded in formulating a comprehensive Constitution (Thailand’s sixteenth) consisting of 337 articles, which was rightly dubbed “the People’s Constitution”. (By contrast, Indonesia’s Constitution has only thirty-seven articles.) In the new Constitution, there are firm provisions covering not only the three branches of power, but also other areas of governance. Provisions have been made for the establishment of the AntiCorruption Commission, the Human Rights Commission, the General Election Commission, the Auditing Body, and so on. In fact, one of Thailand’s leading legal experts, Vitit Munthaborn, observed that the new Constitution of Thailand sets the parameters for an institutionalized system of checks and balances. The rich substance of Thailand’s Constitution, which provides for effective checks and balances in the political system, is not the only aspect to admire. What is equally important as the substantive content is the participatory process of the constitution making itself. To ensure that constitutional reforms in Indonesia are credible, they must encompass views from as many members of

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the social strata as possible. If Indonesia wants a truly democratic and legitimate constitution, then this is the proper course of action. The ongoing constitutional debate should not be static, in that it should not just question the will of the framers of the constitution and its contents. If the constitution is to be a “living” one, then it should respond not only to the present problems of government, but also address future issues of governance. Learning from the recent experiences of the Philippines, Thailand, and South Africa, it is high time that Indonesia developed a truly democratic and representative constitution. The 1945 Constitution, even with all its present amendments, is inadequate to steer the Indonesian ship of state into the future. In short, a new constitution is needed to re-establish the social contract between nation and state. Note 1. For details on recent constitutional changes, see: Eric Bjornlund, Indonesia’s Road to Constitutional Reform: The 2000 MPR Annual Session (Washington, D.C.: National Democratic Institute for International Affairs, 2001); National Democratic Institute for International Affairs, Indonesia’s Change of President and Prospects for Constitutional Reform: A Report on the July 2001 Special Session of the People’s Consultative Assembly and the Presidential Impeachment Process (Washington, D.C.: NDI, 31 October 2001); and Blair A. King, “Constitutional Tinkering”, Inside Indonesia, January–March 2001.

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Reproduced from Governance in Indonesia: Challenges Facing the Megawati Presidency, edited by Hadi Soesastro, Anthony L Smith and Han Mui Ling (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part114 of this KUMIKO publication may be reproduced without the prior permission of the Institute of Southeast Asian MIZUNO Studies. Individual articles are available from < http://bookshop.iseas.edu.sg >

7 Indonesian Politics and the Issue of Justice in East Timor Kumiko Mizuno

Introduction Two and a half years have passed since an overwhelming majority of the East Timorese opted for separation from Indonesia at the United Nations (UN)-supervised ballot. East Timor is now preparing itself under the supervision of the UN to become an independent nation. Although not travelling an easy path, it has made steady progress towards establishing self-government. In assessing the relations between Indonesia and East Timor, however, two crucial problems remain: the identification and punishment of individuals responsible for human rights violations in East Timor and the treatment of the East Timorese refugees still in West Timor. This chapter examines one of these two residual problems — specifically, the Indonesian Government’s responses to domestic and international pressures to identify and punish those responsible for human rights violations that occurred prior to and immediately after the ballot. This chapter will have a

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special focus on the politics behind the two phases of the national investigation into the case, and briefly observe the preparation for the trials, which are still in progress. The first phase of investigation was a preliminary inquiry (penyelidikan) conducted by the Commission of Inquiry for Human Rights Violations in East Timor (Komisi Penyelidikan Pelanggaran Hak Asasi Manusia di Timor Timur, KPP-HAM Timtim), which was formed by the Indonesian National Commission of Human Rights (Komnas HAM). This was followed by an investigation (penyidikan) conducted by the Joint Investigation Team (Tim Penyidik Gabungan, TPG) formed by the Attorney General’s Office (AGO). The preparation for the trials has involved many governmental actors, but the AGO, the Supreme Court, and the Ministry of Justice and Human Rights are the main ones. KPP-HAM’s work gained high marks from the international community. Despite initial doubts, the commission showed integrity and independence as a team, finally issuing a groundbreaking report which included a list of names of the high-ranking military and police officers and their civilian backers considered responsible for gross human rights violations in East Timor. In contrast, the follow-up investigation by the AGO received little praise, either domestically or internationally. It showed tardiness in proceeding with the investigation and in identifying the perpetrators of human rights violations. Post-investigation developments have been likewise disappointing. The trials started on 14 March 2002; however, there is considerable suspicion of continued political manipulation surrounding these trials. This is in stark contrast to the steady development — although still in its early stage — of the justice system in East Timor. How did all this happen? What explains the different Indonesian responses over this period? This chapter argues that the changing political power configurations and elite interests in Indonesia largely explain the course of developments. This is chiefly because the issue of justice in East Timor — including foreign pressure related to this issue — becomes an excellent political commodity for members of that elite in current competitive Indonesian politics.

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Politics Leading to the Establishment of KPP-HAM On 4 September 1999 the result of the UN-supervised ballot was announced: an overwhelming majority of the East Timor people opted for independence. The announcement, however, provoked an escalation of violence by the pro-integration militia groups. The militia groups had already begun their violence well before the ballot date, spurring calls for investigations into human rights violations; however, prior to the announcement of the ballot result, these calls for investigations were in most cases calls for inquiries into specific incidents. The international community was far more concerned with the ongoing breakdown in security in the period leading up to, and the weeks immediately after, the ballot. It was not until the visit of Mary Robinson, the United Nations High Commissioner for Human Rights, to Darwin, Australia, on 12 September 1999 and to Jakarta on the following day that the issue of investigation was highlighted domestically as well as internationally. In her meeting with President Habibie in Jakarta, Robinson urged that military personnel be held accountable for their crimes and requested that Habibie co-operate with an international commission of inquiry on East Timor. According to Marzuki Darusman, the then chairman of Komnas HAM, Habibie’s response to her request was positive. Habibie told Robinson, “The establishment of such a commission should be considered”, although it was not clear whether he meant “international” or “national”.1 Immediately after the meeting, Marzuki himself commented that Indonesia needed to establish a kind of truth and reconciliation commission for East Timor.2 Although Komnas HAM did not clearly indicate its intention to form a new commission in the following week, Marzuki announced on 22 September 1999 at Habibie’s private house that the government planned to set up a national inquiry for investigating human rights violations in East Timor. On the following day, Habibie issued a presidential instruction to establish a national commission.3

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Factors Influencing the Establishment of KPP-HAM The reasons for the 22 September decision of the Indonesian Government to create a “national” inquiry body can be looked at from both national and international perspectives; this chapter will show, however, the latter perspective was more important than the former. According to some members of KPP-HAM, this decision was a direct reaction to the decision of the UN Commission on Human Rights (UNCHR) of 20 September 1999 to hold a special session on East Timor.4 The Indonesian Government had already recognized the possibility that a resolution to set up an international inquiry — the first step towards the establishment of a war crimes tribunal — would be adopted. Therefore, before the UNCHR opened the special session, the government at least needed to demonstrate its intention to set up a national inquiry body. In addition, the government also aimed to use this initiative to lobby individual UNCHR member states not to vote for the establishment of an international commission of inquiry at the session. The question is, who took the initiative in forming KPP-HAM, and what were their motives for setting up the commission? According to observations of members of KPP-HAM, it was President Habibie and the then TNI (Indonesian military) commander, General Wiranto, who took the initiative. Both were greatly concerned with the possibility that an international tribunal would be established. Moreover, this initiative was very much influenced by the domestic political environment the two leaders were facing at that time. Political bargaining had already started over the presidential election at the coming general session of the People’s Consultative Assembly (MPR),5 which was originally scheduled to be held in November 1999. On 21 September the general chairman of the Golkar Party, Akbar Tandjung, declared his intention, though stressing that it was a personal stance, to promote the Habibie–Wiranto partnership as the presidential and vice-presidential candidates. However, at that time Habibie was in a very difficult situation. Habibie’s speech on East Timor before the People’s Representative Assembly (DPR) on the same day

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drew negative responses. This revealed that Habibie’s East Timor policy — which might have become his lasting achievement — did not work to his political advantage at all.6 In addition to this, criticism and pressure regarding his major political scandal, the Bank Bali corruption case, were at their height. Facing these difficulties, Habibie needed to gain popular support by showing his strong commitment to human rights, an area that he thought of as “his own”. His support for the establishment of a national inquiry body with a legal basis can partly be seen in this context.7 Furthermore, he also needed to seek the support of Wiranto by showing his strong intention to protect Wiranto from a possible international tribunal. This was related to the fact that, facing the very competitive environment surrounding the coming presidential election, Habibie needed the thirty-eight votes of the TNI/Polri representatives (fraksi) to be elected President.8 Wiranto, meanwhile, needed to protect himself from being brought to such a tribunal, which would inevitably end his political career. (According to a source close to Wiranto, he had already shown his ambition to become Vice-President as early as January 1999.)9 Wiranto repeatedly explained in interviews and seminars that he wanted KPP-HAM to counter international allegations which he thought were biased. In an interview he stated, From the beginning, we have already agreed that the mission of the KPP is, firstly, to prevent the establishment of an international tribunal, secondly, to preserve national prestige, and thirdly, to protect the national interest.10 While preparing for the formation of a national inquiry body, Marzuki recognized that the international community held low expectations that a national body would have the capacity to carry out impartial inquiries. During the UNCHR session Marzuki, as the chairman of Komnas HAM, tried to convince the member countries in his speech that a proposed national team would be trustworthy;11 however, such efforts, supported by active backdoor diplomacy, did not succeed. On 27 September, the UNCHR adopted a resolution in favour of the formation of an international commission of inquiry on East Timor (later named International Commission of Inquiry on East Timor, or ICIET).12

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Steps in the Formation of KPP-HAM Marzuki officially announced the formation of Komisi Pencari Fakta untuk Timor Timur (Fact Finding Commission for East Timor, which was soon renamed KPP-HAM Timtim) on 7 October 1999. On the following day, President Habibie issued Government Regulation in Lieu of Law No. 1 Concerning Human Rights Tribunals (Perpu No. 1/1999 tentang Pengadilan HAM), which granted Komnas HAM the sole authority to inquire into human rights violations that would later be brought before the courts.13 With regard to the selection of the members of KPP-HAM, Marzuki recognized that he and his Komnas HAM colleagues had to select people with credible human rights records from the perspective of both the Indonesian public and, especially, the international community. There appeared to be no “direct” international pressure in the selection of the members, such as demands to select specific individuals, although there was “indirect” pressure which Komnas HAM members felt in differing degrees. For example, while Asmara Nababan, a Komnas HAM member who himself became a member of KPP-HAM, claimed there was only a small amount of international pressure, another KPP-HAM member, H.S. Dillon, acknowledged that Komnas HAM needed to include human rights activists who were popular in the international community, such as Munir and Todung Mulya Lubis, because Komnas HAM tended to be regarded as “pro-integration”.14 At the selection stage, candidates from non-governmental organizations (NGOs) at first hesitated to join the commission. Munir, co-ordinator of Kontras (Commission for Disappearances and Victims of Violence), for example, had some reservations. He doubted the efficiency of such a national inquiry body, and foresaw a possible conflict of interest with his own activities as a human rights lawyer and activist.15 Other NGO figures had similar concerns. Facing this concern of the candidates, Komnas HAM members seriously discussed KPP-HAM’s freedom from external intervention. This was the most important condition demanded by non-Komnas HAM candidates. Marzuki then promised the candidates that there would be no intervention from inside and outside Komnas HAM and agreed to facilitate KPP-HAM’s access to the government as well as to the international community.16

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Nevertheless, Marzuki felt it necessary to at least confer with Wiranto on the composition of the members of KPP-HAM. Wiranto then recommended some figures who later became members of the Advocacy Team for Military and Police Officers’ Human Rights (Tim Advokasi HAM Perwira TNI/Polri) such as Adnan Buyung Nasution and Ruhut Sitompoel. However, Marzuki rejected these recommendations because of their possible effect on the credibility of Komnas HAM/KPP-HAM.17 Eventually four noted NGO figures, Munir, Nursyabani Katyasungkana, Todung Mulya Lubis, and Zoemurotin K.S., joined the team. From Komnas HAM, Marzuki Darusman,18 Albert Hasibuan, Asmara Nababan, H.S. Dillon, and Police Major General (ret.) Koesparmono Irsan joined the team. These members were assisted by thirteen assistant investigators, fourteen secretariat staff, and three resource persons, most of whom came from leading human rights NGOs.19

Factors Influencing the Performance of KPP-HAM (September 1999–January 2000) KPP-HAM started its inquiry on 10 October 1999, and its work accelerated after Abdurrahman Wahid and Megawati Sukarnoputri were elected the new President and Vice-President respectively at the general session of the MPR on 20–21 October 1999. KPP-HAM’s mandate was to gather facts, data, and information concerning human rights violations that occurred in East Timor from January 1999 until the MPR decree of 20 October 1999 that ratified the results of the UN ballot. In less than four months, it conducted a substantial amount of work. This work included field investigations in West Timor (six times) and East Timor (three times); the excavation of mass graves in West Timor (once); interviews with victims of incidents (fifty-five persons) and other witnesses in East and West Timor (twenty-three persons); and interviews in Jakarta (forty-five persons). These efforts culminated in a report of over 4,000 pages.20 As KPPHAM members acknowledged, their inquiries — and the field investigation in particular — were greatly helped by their assistants who had strong connections with NGOs in East Timor.21 Among the various types of inquiries, the most politically

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sensitive was, undoubtedly, the questioning of the TNI and Indonesian National Police (Polri) officers and their civilian associates. On 18 November KPP-HAM announced its plan to question high-ranking TNI/Polri officers — including then Coordinating Minister for Political and Security Affairs (Menko Polkam) Wiranto — and their civilian supporters. The questioning started on 20 December 1999 and, without major resistance from the witnesses, proceeded until 18 January 2000. High-ranking TNI/Polri officers were called to the office of Komnas HAM for questioning one after another during this period. This was an unprecedented event. Why was KPP-HAM able to carry out the questionings of the officers so smoothly? Two factors were key. The first related to the attitude of the TNI leadership. On 1 December 1999 KPP-HAM held a meeting with the new TNI commander, Admiral Widodo A.S., to get permission to question its officers. In the meeting Widodo agreed to the request and offered to facilitate the process. Although he suggested that he would give moral support to the officers who were to be questioned, he also stressed that the TNI very much respected and supported efforts to uphold the law, particularly efforts to uphold human rights.22 Widodo is a naval officer who had fewer obligations to suspected TNI/Polri officers, and this appears to have made him less hesitant in facilitating KPP-HAM’s work.23 Moreover, the Widodo circle within the TNI was the group which did not favour politicking and had not yet been alienated from President Wahid. (Wahid later antagonized the TNI leadership by his blatant favouritism towards specific military officers — see the third section of this chapter.) Second, Wiranto himself co-operated with the questioning. During the questioning, Wiranto gave his version of events and especially stressed his efforts in making peace between the two warring factions, forming the Commission of Peace and Stability (Komisi Perdamaian dan Stabilitas, or KPS), and making the ballot itself safe and successful. Wiranto regarded the questioning as a good opportunity to defend his actions. Munir stated, “Wiranto was perhaps the most co-operative among all the witnesses. He even gave many documents which could prove his commission, not just omission [of human rights violations].”24

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Nevertheless, just before the questioning started, a backlash from a section of the TNI surfaced. The commander of the Army Strategic Reserve Command (Kostrad), Lieutenant General Djadja Suparman — a close ally of Wiranto — was most vocal in defending the military personnel who were to be questioned. Djadja, for example, commented that KPP-HAM’s action in calling the TNI officers for questioning was an “effort to corner the TNI … . There is a large conspiracy inside and outside the nation to annihilate the TNI systematically”.25 He also implicitly threatened that it could cause a backlash from the soldiers if their leaders and corps continued to be humiliated. TNI spokesperson Major General Sudradjat — another close ally of Wiranto — also criticized this process. He remarked that KPP-HAM was established just to entertain foreign countries, and he made several other comments in a way which clearly went beyond his capacity as TNI spokesperson.26 Marzuki reacted to Djadja’s comments, stating that they could be interpreted as an attempted intimidation of KPP-HAM. He immediately sent a letter to Widodo to ask whether Djadja’s comments reflected the voice of the TNI as an institution. Marzuki then assured the media that such comments from Djadja would not affect the work of KPP-HAM.27 During the questioning, another ongoing political development came to the attention of the public: Wahid disclosed his intention to make Wiranto “non-active” as the Menko Polkam (Co-ordinating Minister for Political and Security Affairs) until he was proven not guilty in the East Timor case; however, Wiranto refused to resign. The drawn-out Wahid–Wiranto showdown over this issue intensified when Wahid made a sixteen-day trip abroad from 28 January to 13 February 2000. (In fact, one of the main purposes of this trip was to lobby the international community against supporting the establishment of an international tribunal, in particular during the annual World Economic Forum summit.)28 While abroad, Wahid indicated at every stopover his intention to dismiss Wiranto and finally carried out his threat on the night of his return.29 By showing his intention to dismiss Wiranto, Wahid aimed to achieve two purposes. One was to gain further support from the international community — economic support, in

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particular. In Seoul, he commented that Indonesia stood no chance of an economic recovery if Wiranto persisted in his refusal to quit.30 The other purpose was to show the domestic community that he was protecting Wiranto from a possible international tribunal that would also constitute a national humiliation. Additionally, by actually dismissing Wiranto, he demonstrated to both the domestic and international communities his strong intention to consolidate civilian supremacy and that he was actually running the country. The international environment at that time was another issue which coloured this drama played out by the President, Wiranto, and KPP-HAM. There was rumour of a coup, which was first articulated by the then U.S. Ambassador to the UN, Richard Holbrooke. In a telephone interview with a panel of Indonesian journalists in Jakarta on 14 January 2000, he gave a strong warning against domestic forces wishing to suppress democratic reform in Indonesia. He repeatedly expressed his support for Wahid and Marzuki’s attempts to reveal the truth behind the violence, and accused the military of attempting to thwart the work of KPPHAM.31 Even taking Holbrooke’s outspoken character into account, and the complete lack of evidence that a coup was being planned, the comment can be interpreted as a strong warning by the U.S. Government to the anti-reform forces in the TNI, and support for President Wahid.32 This stance was reinforced by the fact that U.S. Ambassador to Indonesia Robert S. Gelbard met with Wahid within a day of Holbrooke’s warning and conveyed a message of support for him from U.S. President Bill Clinton.33 Then, how did these various pressures actually affect the behaviour of KPP-HAM members? Overall, they appeared not to be greatly influenced, although the degrees of influence depended on the source of pressure. As far as the pressure from domestic individuals and groups are concerned, KPP-HAM members from Komnas HAM certainly felt pressure from Wiranto. This was because of Wiranto’s powerful position as Menko Polkam. They felt this especially during the questioning when Wiranto stressed face-to-face to members of KPP-HAM that he was one of the people who formed KPP-HAM. However, Wahid’s tough stance

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against Wiranto itself relieved the nervousness of KPP-HAM members.34 From Wahid himself, they did not sense any pressure, though they recognized that he was supporting their work. With regard to pressure from Wiranto’s allies, such as Djadja, this appeared to hold little influence. Marzuki’s strong reaction to Djadja’s comments may have helped this. They were, however, disturbed by radical groups, especially ultranationalistic and/or Islamic groups such as Front Pembela Islam (FPI, Islamic Defenders Front), seemingly co-ordinated by Djadja. These groups branded KPP-HAM a foreign agency, anti-TNI, and anti-Islam, and staged demonstrations almost daily during the questioning and preparation of the announcement of the result of KPP-HAM’s inquiries. But as a member of KPP-HAM commented, such demonstrations and other threats were quite normal in Indonesia, and did not greatly concern the members.35 What about the effect of foreign pressure? KPP-HAM members felt “direct” pressure from the ICIET, which was conducting its investigation in parallel with KPP-HAM’s investigation and demanding that strict international standards guide KPP-HAM’s inquiries.36 On the other hand, they were little affected by “indirect” pressure such as comments from Holbrooke and other important foreign figures. However, a KPP-HAM member observed that foreign pressure that showed support for them like Holbrooke’s may have had some negative impact in that it raised nationalist sentiments among both the elite and the public, and it may also have made the TNI more adamant.37 This negative impact appeared to be minimal, however. KPP-HAM published its final report on 31 January 1999 and its executive summary was made public on the same day. The summary listed the names of thirty-three individuals held responsible for human rights violations, and detailed the “planned and systematic violence” which occurred following the UN ballot. Moreover, it implicated former TNI commander Wiranto and four other military and police generals in the killings and destruction in East Timor. Concerning the responsibility of Wiranto, the report said that Wiranto “fully acknowledged and realised the extent of the violence and destruction in East Timor but failed to take

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action. … Therefore, General Wiranto, as the TNI commander, should be the one to take responsibility.”38 International responses to the KPP-HAM’s final report were extremely positive. The UN High Commissioner for Human Rights, Mary Robinson, called the KPP-HAM report an important step against impunity.39 On the same day of the publication of KPPHAM report, ICIET also published its inquiry results, demanding the establishment of an international crimes tribunal.40 UN Secretary General Kofi Annan, the United States, and Australia all immediately voiced opposition to an international tribunal, however, stressing the need to give Indonesia a chance to prosecute its own citizens. Domestically, although there was criticism by some DPR members over the publication of the names of suspects, the alleged bias in the identification of TNI/Polri members as suspects, and KPP-HAM’s disregard of crimes committed by the proindependence side, there was no systematic attack on the work of KPP-HAM at that time. Furthermore, the response from the TNI headquarters was supportive. TNI spokesperson Vice Marshal Graito Usodo suggested that the “military was relieved by the report’s forceful nature in that it could stem foreign pressure for an international war crimes tribunal on East Timor”.41 Concerning the dismissal of Wiranto, the TNI leadership made its stance clear that it was all up to the President.42 While KPP-HAM was on the job, Wiranto and his officers failed to find an effective way to counter KPP-HAM’s increasingly bold approach. Obstruction of KPP-HAM’s work, or its production of a report that was perceived as weak, would only increase the possibility that an international tribunal would be established. On the other hand, a forceful report, such as the one the KPP-HAM actually produced, would serve to humiliate those on whom it focused and the results of the inquiry would be drawn on in the post-KPP-HAM investigations and future trials.43 Moreover, they were not sure if they would be able to effectively intervene in the post-KPP-HAM investigations because politics was extremely fluid at that time and President Wahid’s policy was extremely unpredictable. The team of lawyers for the suspected TNI/Polri

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officers, Tim Advokasi HAM Perwira TNI/Polri, was the main voice opposing the KPP-HAM’s mode of inquiry. But they were also worried about an international tribunal. Their only choice, therefore, was to attack the amateurism of KPP-HAM, while stressing their own professionalism, and to defend the officers by pointing out the paucity of evidence of their involvement in the violence.44 Wiranto recognized that he needed to let the KPP-HAM work freely to prevent an international tribunal, but expected that the KPP-HAM would at least counter unfounded allegations from the international community. Wiranto did not like the fact that the outcome of the KPP-HAM investigation was quite similar to that of the ICIET, which he claimed had never asked to meet with him, but collected information only from the KPP-HAM and the proindependence circle. Finding his name on the list, Wiranto felt deceived by the President and Marzuki. He stated, “They assured me face to face that there was nothing wrong with what I had done and told me not to worry [about the KPP-HAM]… . I can’t understand at all what politicians do.”45 In summary, a number of factors were key to the effective performance of KPP-HAM. In addition to the strategic selection of its members and their staff, key members of the government, such as the President and Marzuki, offered strong visible and invisible support. At the same time the TNI commander, Widodo, refrained at least from intervening in their work. This does not necessarily mean that the political elite as a whole had goodwill towards what KPP-HAM or Komnas HAM was doing; however, they found little benefit in openly objecting to KPP-HAM’s work. Foreign pressure was not deeply felt by the KPP-HAM members, but it certainly had some positive effects on the efficiency of their work by counteracting pressure which would otherwise have come from the TNI and other elements in the political elite. Wahid took advantage of the foreign pressure to dismiss Wiranto while waiting for the result of KPP-HAM’s inquiry. His stance of trusting KPP-HAM’s work also benefited him, as he was seen by both the international community and within Indonesia as making an effort to consolidate civilian supremacy.

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Follow-up Investigation by the Attorney General’s Office (February–October 2000) KPP-HAM’s final report was handed to Komnas HAM and then submitted to the AGO on 31 January 2000. Marzuki — who by then had become Attorney General — immediately appointed Deputy Attorney General for General Crime, M.A. Rachman, and Deputy Attorney General for Intelligence, Jusuf Kertanegara, to co-ordinate the follow-up investigation. According to Government Regulation in Lieu of Law No. 1 Concerning Human Rights Tribunals (Perpu No.1/1999 tentang Pengadilan HAM), the follow-up investigation was to be finished within three months after the preliminary report was handed to the AGO, with a possible three-month extension.46 Marzuki told the media that this period was enough for his office. Nevertheless, this investigation process — the examination of the KPP-HAM’s final report, the start of the actual investigation, questioning of potential suspects, field investigation, and the announcement of suspects — proceeded very slowly. In addition to this tardiness, the announcement of the suspects attracted much criticism. In the list of nineteen “potential” suspects made public on 1 September 2000, the names of Wiranto, the TNI commander at the time of the violence in East Timor, and Eurico Guterres, the Aitarak (Thorn) militia commander, were left out. (Guterres was later added to the list on 2 October 2000, along with three more suspects.) The DPR passed the Human Rights Courts Act (UU Pengadilan HAM No. 26/2000) on 6 November 2000, which provided a stronger legal basis for moving the investigation and prosecution forward; nevertheless, this legal basis only materialized at the end of the investigation when the names of the suspects had already been compiled. Although the AGO always claimed that they left open the possibility for more suspects to be named, not a single name was added to the suspect list after 2 October 2000. Moreover, four militia members were later dropped from the list on the ground that the AGO was unable to find witnesses for their cases. How did all this happen? What factors were behind the tardiness

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and poor result of their work? Below, we will observe six aspects — inter-related in many respects — that provide the answers to these questions. They are the following: team composition and the working environment at the AGO; legal problems in proceeding with the investigation; elite political interests in developing the legal framework; the problems surrounding the identification of suspects; the changing political context; and a lack of international pressure.

The Team There were problems in the team itself. Marzuki formed the Joint Investigation Team (Tim Penyidik Gabungan, TPG) on 19 April 2000, after the special team of the AGO had finished examining the final report of KPP-HAM. TPG was headed by M.A. Rachman and consisted of seventy-nine members, who were divided into the sixty-four-member Investigation Team (thirty-eight from the AGO, ten from Puspom TNI [the military police], six from Polri, and ten from the Department of Internal Affairs), and fifteen members of the Expert Team.47 It is obvious that the inclusion of members of the TNI and the Polri — the very institutions under investigation — reduced the efficiency and credibility of the team’s work. Marzuki stressed that he tried to limit the number of TNI/ Polri officers in the Investigation Team in order to avoid a “conflict of interest”, but with a total of sixteen members they were a substantial part of the team.48 According to a Human Rights Watch report, as early as the training session held for the TPG investigators, some investigators expressed their unwillingness to pursue the 1999 violence case.49 One investigator stressed that there had always existed the two warring factions — pro-independence and pro-integration — in East Timor, while another investigator suggested the necessity to pay equal attention to the allegations in the Indonesian press that Australian Interfet soldiers had committed atrocities against prointegration militia members. Moreover, the Investigation Team included a military police colonel named Hendarji, who had allegedly obstructed investigations into the role of Kopassus troops in the disappearances of student activists in 1998. On the other

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hand, the Expert Team consisted mostly of legal experts, including a few lawyers associated with human rights NGOs, such as YLBHI (Yayasan Lembaga Bantuan Hukum Indonesia or Indonesian Legal Aid Foundation) and ELSAM (Lembaga Studi dan Advokasi Masyarakat or the Institute for Policy Research and Advocacy).50 Marzuki invited these experts to join the Team out of his concern about the Investigation Team’s lack of experience with cases related to international law and human rights. Despite this objective, in the actual investigation the Expert Team was allowed only to give recommendations to the Investigation Team, which simply paid little heed to the advice from those experts.51 Another problem in TPG surfaced when its members conducted a field investigation in East Timor. According to a briefing by Rachman on his return from East Timor, their work was very much hampered by the inadequate preparations of UNTAET (United Nations Transitional Administration in East Timor).52 To this claim, Sidney Jones, the head of the UNTAET Human Rights Unit until mid-2000, countered that it was TPG which had been little prepared for the field investigation; however, she admitted that UNTAET had been hesitant to share information with TPG. This was because UNTAET was unsure about how the team would use this information and how witnesses would be protected.53 Local East Timorese distrusted TPG as well. Even KPP-HAM, which involved local NGOs, was not fully trusted by them simply because it was an Indonesian investigation team. The distrust in TPG, which involved not a single local NGO but instead many Indonesian TNI/Polri officers, was therefore not at all surprising.

Legal Problems in Proceeding with the Investigation A legal problem also seriously hampered the investigation — the absence of appropriate human rights legislation. When TPG started its investigation in April 2000, the team leader Rachman admitted having no legal umbrella for proceeding with the investigation. Before the draft Human Rights Courts Act was adopted by the DPR on 6 November 2000, Perpu (Government Regulation) No. 1/

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1999 had been the only legal basis that stipulated the process from conducting a preliminary inquiry (that is, KPP-HAM stage) for cases before a human rights court. And there was no human rights court at that time. This Perpu, which was issued by Habibie at the time of the formation of KPP-HAM, was rejected by the DPR on 13 March 2000.54 Nevertheless, this was used by the Investigation Team as the legal basis during most of the investigation, on the grounds that it was still valid as it had not yet been officially repealed. However, the Expert Team objected to relying on the Perpu.55 Besides doubts about its effectiveness, the Expert Team felt that as a Perpu was an emergency measure, the cases they had to deal with were not emergencies and therefore required a sound legal foundation. They then recommended combining the various existing national laws with international laws, while pushing for the adoption of the draft Human Rights Courts Act.56 However, the Investigation Team preferred to use this Perpu, complementing it with the Criminal Code (KUHP, KUHAP) and Human Rights Law (UU No. 39/1999 tentang HAM). Actually, the Criminal Code was chiefly used in the investigation. However, there was a major flaw in applying the code to human rights violation cases: it does not recognize crimes of omission, which means that it applies only to direct perpetrators of crimes. As a result, senior officers cannot be prosecuted unless proven to have issued direct commands. Meanwhile, the Human Rights Law stipulates the application of retroactive prosecution of gross human rights violations categorized as “crimes against humanity” in the explanation of Article 4. However, this alone is insufficient when it comes to preparing for trials for these human rights violation cases because the law only stipulates that there should be trials and fails to stipulate the procedures to be followed.57 The draft Human Rights Courts Act which was eventually adopted by the DPR on 6 November 2000 not only allowed for punishing crimes of omission,58 but also allowed retroactive prosecution. It does this by providing for the creation of an ad hoc court on the proposal of the DPR and the issuance of a Presidential Decision.59 However, the law had not actually been adopted by the DPR until most of the investigation had been completed. Considering that much time was spent discussing the validity of

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the Perpu and other discussion on legal bases to move the investigation forward, the delay in the adoption of the Human Rights Courts Act very much contributed to the slow process of the investigation.60 And more critically, the delay in adopting this law allowed the investigators to use chiefly the Criminal Code. Moreover, the investigators lacked a desire to modify their investigation results or conduct further investigation based on the newly adopted Human Rights Courts Act.

Elite Political Interests in Developing the Related Laws During the time TPG was proceeding with the investigation, there were two distinct political controversies over laws which had an influence on the investigation: the amendment of the 1945 Constitution and the delay in the adoption of the draft Human Rights Courts Act mentioned above. The amendment of the Constitution was made at the annual session of the MPR (Sidang Tahunan [ST] MPR) in August 2000, which included an insertion of a human rights chapter. At the centre of the controversy was a clause rejecting retroactivity applied to human rights crimes [Article 28 I (l)].61 This amendment, which was proposed by the TNI/Polri representatives, attracted much speculation on the motives of those representatives who supported the idea. As a member of Commission A at the ST MPR which was assigned to discuss the constitutional amendments admitted, this issue had hardly been discussed at the Ad Hoc Committee (PAH) of ST MPR. This Committee started work about two months before ST MPR to lay the ground for the constitutional amendments. According to a Commission A member, the issue was only discussed in a synchronization team in several meetings at a hotel in July 2000.62 MPR Speaker Amien Rais admitted that the introduction of the amendment was an oversight, unnoticed by many legislators. He also acknowledged that leaders of Commission A were people with little knowledge of legal and human rights issues.63 Foreign Minister Alwi Shihab was also confused. He stated that the amendment was a blemish on Indonesia’s image and that he would personally find it difficult to explain it to the international community.64 Meanwhile,

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Lieutenant General (ret.) Hari Sabarno from the TNI/Polri representatives denied that the non-retroactive principle was intended to protect past human rights violators. He suggested, however, that these cases be referred to a “truth and reconciliation [commission]” — the formation of which had also been simultaneously discussed in another bill.65 With another important decision made at the ST MPR — the maintenance of thirty-eight seats for the TNI/Polri representatives at the MPR until 2009 — the adoption of the amendment indicated the enhanced bargaining power of the TNI vis-à-vis other political parties and President Wahid in the context of a very fragmented legislative body.66 Hari Sabarno commented after the session that the decision was not their own choice, but rather reflected the wishes of other representatives in the MPR.67 A member of the Expert Team of TPG suggested that the amendment in fact caused confusion among the investigators because they became unsure about what they would do if the amendment invalidated the retroactive prosecution, for which they had been preparing.68 Marzuki admitted that the amendment had caused his office to postpone naming the suspects so they could prepare a stronger legal argument.69 How the amendment actually affected the substance of investigation was hard to gauge, however. As noted earlier, another factor that affected the investigation negatively was the delay in adopting the Human Rights Courts Act. The DPR started to discuss the draft law on 5 April 2000, and its promulgation was expected by late July 2000, as DPR Speaker Akbar Tandjung assured.70 However, its passage had to be put on hold until as late as 6 November. Although it was reported that this delay was partly due to technical problems such as a lack of funds to hold meetings and the existence of many other bills which had to be dealt with concurrently, political resistance was also a crucial factor. According to media reports, there had been resistance, especially from the TNI/Polri representatives and the Golkar representatives, with regard to the retroactive aspects of the bill. In a discussion over the bill, for example, a TNI/Polri representative stressed the breach of the universality of the principle of non-retroactivity.71 It must be noted here that this occurred before the 1945 Constitution was amended to include

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the non-retroactive principle. It was therefore quite likely that the amendment of the Constitution persuaded those DPR members who had been opposed to the Human Rights Courts bill to accept it, leading the bill finally to be adopted unanimously.

Problems Surrounding the Identification of Suspects On 1 September 2000 the AGO formally identified nineteen people, including three generals, as suspects in human rights violations at the 1999 UN ballot in East Timor. These generals were former Region IX/Udayana commander Major General Adam Damiri, former Korem 164/Wira Dharma commander Brigadier General Tono Suratman, and former East Timor police chief Brigadier General Timbul Silaen. Most controversially, General Wiranto, Eurico Guterres, and former chief of armed forces intelligence (BAIS), Major General Zacky Anwar Makarim, were not included.72 From the early stages of this AGO investigation, there was much uncertainty and ambiguity in identifying suspects, particularly among high-ranking TNI/Polri officers. A number of factors explain this. Firstly, solid evidence to prove the involvement of non-field operators — in particular, the high-ranking officers who had given crucial orders from Jakarta or conducted intelligence operations — was lacking. In the case of Wiranto, the Expert Team had nominated him as a suspect before the first list was completed; nevertheless, either the Investigation Team or the Attorney General removed his name. The spokesperson for the AGO only suggested that there was not enough evidence to identify him as a suspect.73 Marzuki suggested that this kind of problem was due partly to the over-cautiousness of the Investigation Team as well as its way of investigating. When identifying the suspects, the Expert Team preferred to start from the top commanders, while the Investigation Team preferred to start from the bottom — that is, with field operators against whom they had concrete evidence. Then, as was noted, the Investigation Team had little respect for the Expert Team’s recommendations.74 Secondly, Marzuki himself made his own calculations regarding the timing of the announcement. In determining

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suspects, his authority was enormous. An Expert Team member suggested that it was very easy for Marzuki to take someone’s name off the suspects list at the very last moment.75 When determining the suspects, it was quite likely that Marzuki and his staff were concerned about the reaction from Wiranto and Eurico Guterres, both of whom had many followers and could cause political unrest or even violence. Bomb blasts which rocked the AGO in July 2000 during the questioning of Soeharto’s youngest son, Tommy Soeharto, were still fresh in the minds of the staff there, which might have affected them to some extent. Thirdly, as Munir observed, it was to test the international reaction. He supposed that if there was a substantial international outcry, the AGO might change its attitude. Fourthly, an Expert Team member, Luhut M.P. Pangaribuan, hinted that there was “the Marzuki factor” behind this. Marzuki was a prominent politician in the Soeharto era and many of the potential suspects were, in fact, his friends. It was not difficult to imagine that psychologically it was not easy for Marzuki to bring them to trial.76

Changing Context of Domestic Politics The more serious problem was that President Wahid was unwilling to push strongly for the post-KPP-HAM investigation, or simply paid little attention to it. Certainly, before dismissing Wiranto, he repeatedly stated that he would pardon Wiranto if he was later found guilty, but this should not mean that he would relax his pursuit of justice. In fact, since Wahid dismissed Wiranto and the AGO investigation began in mid-February 2000, he hardly commented on this issue. This was very much related to the changing context of domestic politics around February 2000. He was simply too preoccupied with a political struggle, and obviously more interested in political survival than pushing his initial reform agendas forward. The East Timor case, as well as most other outstanding human rights violation cases, came to a halt as a result.77 Moreover, despite his pledge to eradicate corruption and improve the country’s notoriously corrupt judicial problem, he himself was accused of engaging in unlawful practices represented by his two chief financial scandals — “Buloggate” and “Bruneigate” — and various interventions in the judiciary.78

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After Wahid dismissed Wiranto, he continued his attempts to sideline the Wiranto group within the military, and began promoting military officers whom he regarded as controllable and beneficial to him. His most blatant step was the replacement of Kostrad commander — and Wiranto’s ally — Djadja Suparman, with his own favourite Agus Wirahadikusumah on 1 March 2000. This favouritism spurred the alienation of the Widodo-led TNI leadership, which had previously been aligned with Wahid’s reform policy. Wahid’s political mismanagement continued. One of the most serious examples was his sacking of ministers mostly for corruption allegations, which were not accompanied by solid evidence. Moreover, those who were sacked belonged to the parties that had contributed to Wahid’s elevation to the presidency. His party, the National Awakening Party (Partai Kebangkitan Bangsa, or PKB), occupied only 8 per cent of the seats in the 695-member MPR. His opponents were increasingly motivated to tie up with the military, which still had substantial political power. Wahid’s weak position vis-à-vis the military was evident when he compromised with his political opponents, including the military, during ST MPR in August 2000. His unsuccessful attempts to make military personnel changes, especially those involving Wirahadikusumah, were but further evidence of the weak position he occupied.79 Wahid once again made clear his tough stance against hardliners within the military as he had done one year earlier, when he reacted to the incident in which three UN humanitarian workers were brutally murdered by East Timorese militias in Atambua, West Timor, on 6 September 2000. The President heard the news for the first time during the opening speech by UN Secretary General Kofi Annan at the World Millennium Summit, which 155 heads of state and government attended. He felt greatly humiliated by what he claimed were “many bad elements within the military”, and promised to identify the perpetrators.80 However, the responses from the TNI leadership as well as the civilian political elite were very cool. The military, while portraying the incident as “uncontrollable” or “emotional reaction by militias”, continued to show a half-hearted attitude towards the disarmament of militias, which was supposed to be carried out in response to the UN

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Security Council resolution over the Atambua incident. The civilian political elite, however, tended to blame the militia/refugee problem on the international community, even fanning xenophobic public sentiments against the threat of economic sanctions.81 Observing the reaction, the international community appeared to be at a loss as to how to support Wahid, and obviously doubted Wahid’s ability to control the military.82 This was in stark contrast to the period when KPP-HAM was still investigating, when there was a convergence of effective support for what Wahid was doing. As expected, Wahid himself in no time returned to the day-to-day political battlefield and became detached from the issue.

Absence of International Pressure The period during which international pressure on Indonesia worked most effectively was between the second week of September 1999 and mid-February 2000 — from the weeks immediately following the announcement of the ballot result until Wiranto was made “non-active” from his Menko Polkam post in mid-February 2000. However, after the release of the forceful KPP-HAM report and the dismissal of Wiranto that followed, foreign pressure lessened dramatically. The UN, as well as major Western nations, indicated they would trust the Indonesian Government in following up on the KPP-HAM’s inquiries. In addition, various types of sanctions began to be lifted. Most symbolically, the United States partially resumed military cooperation unofficially in mid-February, and officially in May,83 even though it later suspended it in reaction to the Atambua killing. The same stance was taken by the European Union, which had dropped its arms embargo on Indonesia as early as midJanuary 2000. In early May 2000, when the AGO was still continuing its investigation, Ana Gomes, Portuguese Ambassador to Indonesia, was asked whether the member countries of the EU were still closely watching the investigation process by the AGO. She responded that after reading the excellent contents of the KPP-HAM’s report, their interest in pushing the issue of justice had strongly lessened and they were more interested in supporting a smooth democratic transition in Indonesia.84

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During the annual session of the UNCHR in Geneva held at the end of April 2000, Indonesia was even praised for its progress and observance of human rights by some countries at the session. The tone of Mary Robinson’s speech at the session was also softer compared to a few months previously. Instead of criticizing the slow work of the AGO, she indicated that the Office of the High Commissioner wished to provide technical assistance to help the AGO’s work.85 The international mass media were also less interested in covering the work of the AGO. Only after the controversial amendment of the 1945 Constitution during ST MPR — and, more notably, after the Atambua killings — did the Western governments begin to resume applying strong pressure on the Indonesian Government to solve the militia problem. However, this had little impact on the AGO investigation into the human rights’ violations of 1999. With regard to the identification of suspects, there appeared to be little pressure on the AGO from foreign governments or the UN to include specific individuals in the list of suspects. Although human rights NGOs and the international media were strongly critical, the foreign governments and the UN were far more restrained although they held expectations that additional suspects would be identified. The head of UNTAET, Sérgio Vieira de Mello, usually outspoken, also praised the direction that the AGO was taking, showing his hope that more suspects would be identified.86 The president of the National Council of Timorese Resistance (CNRT), Xanana Gusmão, praised the list as “an act of courage worthy of applause”, and downplayed the fact that some top officials, among them Wiranto, were not included in the list. He also stressed that the Indonesian authority should be given time.87 This positive international reaction to the identification of nineteen suspects did not lead to the AGO feeling a sense of urgency in identifying more suspects. (The only exception was the case of Eurico Guterres, who was named as a suspect along with three more people on 2 October 2000, but this was likely a result of international pressure in relation to the Atambua killing.) In addition to a lack of direct international pressure on the AGO investigation, the slow progress of investigations and preparation for trials by UNTAET may have also negatively

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affected the performance of the AGO investigation. This was in contrast to the situation where KPP-HAM had faced strong pressure from the ICIET, the UN counterpart of KPP-HAM, which demanded that the AGO conduct an investigation in line with strict international standards. The Indonesian Government and UNTAET signed a Joint Communiqué on 29 February 2000 and Memorandum of Understanding (MoU) on 5 April 2000 on cooperation in investigations.88 However, it was only in August 2000 that the Office of Prosecutor General of UNTAET began charting out a plan for systematic investigations of serious human rights violations cases, and only in November 2000 that a basic legal framework for dealing with them was eventually established.89 By the time the first indictment for crimes against humanity was made in December 2000 in East Timor, the AGO’s investigation had been completed. The AGO was satisfied with its own investigation and had little intention of co-operating with UNTAET on the exchange of information, not to mention the extradition of suspects.

Post-Investigation Developments (November 2000–February 2002) The period after the completion of the AGO investigation was spent with the technical preparation for trials. The focus then moved to the AGO, the Supreme Court, and the Ministry of Justice and Human Rights, which prepared for trials. However, the intrinsic weakness of the judiciary allowed the presidential office and the now-empowered DPR to influence the entire process leading to the trials. After all, the very decision to open the East Timor trials was in the hands of these two institutions.

DPR Proposal and Presidential Decrees As stipulated in the Human Rights Courts Act, the retroactive prosecution for human rights violations is allowed only by establishing an ad hoc court (Article 43[1]) and the establishment of an ad hoc court requires a proposal by the DPR and the agreement of the President (Article 43[2]). From the beginning, there was

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criticism among the human rights community about the law’s necessitating the initiative of the DPR — which is nowadays regarded as one of the most nationalistic governmental bodies in Indonesia, or what rights activists dub the “lembaga impunity baru” (new institution of impunity) — for establishing such a court. As expected, despite its urgent nature, it took another four and a half months for the DPR to propose (on 21 March 2001), the establishment of an ad hoc court which would handle the 1999 East Timor violence cases (the ad hoc trial for the 1984 Tanjung Priok killings case was simultaneously proposed).90 One month later, on 23 April, President Wahid issued a decree on the establishment of an ad hoc court (Keppres No. 53/2001).91 However, a major difficulty surfaced. The decree stipulated that an ad hoc human rights court would only hear crimes that occurred after the referendum of 30 August 1999 (Article 2). This meant that after two and a half years of waiting, the hearings of only two of the five major cases investigated by the AGO would likely be taken to the court.92 The background behind the cut-off date was unclear but media reports suggested that the military had pressured President Wahid to limit the period to the post-referendum period so that the military/police could avoid prosecution:93 if only these two cases were handled, the lawyers of the military could argue in court that the human rights violations could be all explained by the militias’ “running amok” in reaction to the result of the “fraudulent” ballot. This was the claim which had been most popularly used by military/police officers allegedly involved in the 1999 violence.94 Reacting to criticisms from human rights groups, foreign governments, and the UN, President Wahid promised to correct the decree; however, before he could solve this problem, he was impeached and replaced by Vice-President Megawati Sukarnoputri on 23 July 2001. Megawati’s nationalist outlook, her close relationship with the military, and the military’s contribution in her rise to the presidency all greatly worried the human rights community. They predicted that Megawati was unlikely to do something that would damage the military’s core interests. That worry was relieved when she issued a new decree overruling Wahid’s decree shortly after she took office. The new decree allows

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the pursuit of human rights violations that occurred in Liquiçá, Díli, and Suai in April 1999 as well as those in September 1999 (Article 2, Keppres No. 96/2001).95 Although the specification of the place and months still poses a constraint in identifying a systematic or organized nature of the human rights violations at the court hearings, the new decree at least allows authorities to pursue the two other major incidents, the Liquiçá killings and the attack on Manuel Carrascalão’s house. However, Megawati disappointed the human rights community in no time when she selected M.A. Rachman, the leader of the AGO investigation team, as the new Attorney General.96 The mass media immediately speculated on Megawati’s motive, suspecting that she accepted recommendations from retired generals, such as Wiranto or BIN (the National Intelligence Agency) chief Lieutenant General (ret.) Hendropriyono, or civilian political leaders allegedly involved in corruption, including her husband Taufik Kiemas.97 Lawyers for the suspected military/police officers denied the link between the military and the selection of Rachman, but one thing is certain: Rachman is popular among this circle because he had demonstrated his “professionalism” in proceeding with the investigation.98

Further Preparations for Trials Although it was unclear exactly when the AGO finished its investigation, it regarded 17 October 2000 as the official deadline for the investigation. After that, its main remaining tasks were to locate and question militia suspects who had yet to be detected, make the dossiers for all the suspects to be brought before the court, and select prosecutors for the trials.99 The Ministry of Justice and Human Rights, led by Yusril Ihza Mahendra, co-ordinated the preparations for ad hoc trials and funded the expenses and facilities for the trials. The Supreme Court, led by Bagir Manan, was responsible for selecting judges for the trials, and Supreme Court judge, Benjamin Mangkoedilaga, led the team to select the ad hoc judges.100 The authorities announced regularly — almost monthly — the dates for the opening of the trials since the end of the AGO

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investigation, much to the frustration of the human rights community. Initially scheduled for the end of January 2001, they were postponed monthly, and only started on 14 March 2002. Furthermore, as widely reported, the selection of judges was opaque and very slow, taking seven to eight months. The judgeselection team eventually chose eighteen non-career judges (mostly university professors) and twelve career judges, but their quality and independence have been doubted. Among the ranks of judges were some individuals with negative track records. (A similar pattern was seen in the selection of the prosecutors for the trials.)101 Moreover, it took some time for the ad hoc trial judges to assume their official capacities, and the ad hoc prosecutors for the trials were selected after the judges were officially put in place. This then necessitated waiting another week for the prosecutors to be officially installed. There is a suspicion that there was a concerted effort on the part of the Indonesian authorities to delay trials by completing technical items one by one, rarely preparing multiple items concurrently. The government also tends to ameliorate international criticism by highlighting each step, while always stressing technical problems in the process leading to the trials. Finally, there is the problem with the amended Constitution, which was discussed in the previous section. Despite the lack of media coverage about one and a half years ago, the situation has not changed. How the conflict between the non-retroactive principle stipulated in the Constitution and retroactive prosecution permitted in the Human Rights Courts Act will be treated is now all up to the interpretation of the judges who will deal with these cases.

Co-operation with East Timor? As noted in the previous section, the MoU was concluded between Indonesia and East Timor to smoothen investigation on each side, and this enabled the Indonesian Investigation Team to visit East Timor for a field investigation in July 2000; however, the MoU did not function properly thereafter — in particular, from the point of view of UNTAET. There has been little progress in the sharing of information, witnesses, and forensic evidence,

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let alone in the transfer of suspects across the two countries. Obviously the biggest obstacle which UNTAET has faced is that nearly all the key individuals — both the security forces and civilians — behind the gross human rights violations in East Timor are resident in Indonesia. This forced the East Timor administration to limit itself to the only available, mostly petty, suspects.102 For Indonesian investigators and prosecutors, the dysfunctionality of the MoU has not caused a serious problem because this only made them weed out or drop the cases for which they could not find witnesses or strong evidence of human rights violations. A further hurdle for the East Timor administration is the general hostile attitude of the Indonesian political elite towards what they regard as an infringement of national sovereignty. The hostile attitude was typically demonstrated when a mission from UNTAET’s Serious Crimes Unit (SCU) visited Jakarta in early December 2000. The delegation aimed to question selected witnesses, some of whom were also on the suspect list of the AGO. Despite the AGO’s assurance for interview arrangements, it turned out that the delegation was simply not permitted to carry out its work and returned to East Timor empty-handed. The rejection started from the lawyers of the TNI/Polri, followed by the TNI headquarters, and nationalist elements in the DPR, members of Commission I (Commission on foreign and defence affairs) in particular. This led to the DPR’s summoning of the Attorney General and the Foreign Minister to explain the MoU, and the DPR’s decision to review the MoU itself in its next plenary session. The legislators’ argument was that the MoU was not legally binding because it was not approved by the DPR.103 This kind of attitude towards the East Timor investigation has not changed at all up until the present time. The renewal of the MoU looks hopeless because the DPR is unlikely to agree to it, considering the increasingly antagonistic attitude towards foreign intervention over the issue. These developments suggest that UNTAET has no other option but to continue its own investigation within its own jurisdiction, and develop its own framework of justice, including the reconciliation scheme which has been established in East Timor (while sometimes sounding out Indonesia’s willingness to co-operate,

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even at a minimal level). The holding of Indonesian national trials itself is likely to give the Indonesian Government a reason for not co-operating further with East Timor over the issue. Despite all these pessimistic trends, the trials themselves are at least unlikely to disturb the current progress of prosecution in East Timor as well as the reconciliation scheme which accompanies the gradual repatriation of the refugees. As the reconciliation scheme proceeds and, more generally, East Timor develops as a nation, more former militia members are likely to return to East Timor. These individuals, in turn, will prove to be critical sources of information regarding past human rights violations. According to a Jakarta-based pro-integration Timorese who maintains close contact with suspected officers, the military/police officers allegedly responsible for the 1999 violence are now no longer very concerned with information leaks from defecting militia members in West Timor. This is because they are increasingly sure that they would be protected domestically, even though they might face national trials. Although this is ironic, the military’s more cooperative attitude towards the repatriation of refugees and reconciliation since the beginning of 2001 is partly owing to this factor. Reformist Region IX/Udayana commander Major General Williem da Costa is one positive factor, but he cannot pursue reform without the support of the military headquarters. However, the position of the Jakarta-based hard-line pro-integration Timorese is another matter. They still regard the UN ballot as totally fraudulent and attempt to raise their cause with nationalist elements in the DPR — Commission I members in particular — and still have close relationship with suspected officers.104 Moreover, one of them, the last East Timor governor, Abilio Osorio Soares, is now on trial. Political reconciliation with this group requires elaborate strategies on the East Timor side because we have not seen any driving force on the Indonesian side for this objective.

Conclusions: Challenges of the Megawati Government This chapter has observed the factors influencing the Indonesian Government’s responses to domestic and international demands

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to identify and punish individuals responsible for human rights violations in East Timor. It demonstrated that the Indonesian Government’s performance over this crucial problem was largely explained by a political power game at the elite level, where the key players used the issue as an important political commodity. The government occasionally responded to domestic public demands, but the responses to those demands tended to be cosmetic. The general strength of international pressure often explains the positive government response, but this chapter suggests that this requires precise timing and credibility, and the lack of the strategy on the side of pressure exerting states/ institutions often gives the Indonesian political players room to manoeuvre over the issue. Following the referendum related violence in East Timor, there was a dramatic change in the political power map. President Habibie, who had found it in his own interests to lay the groundwork for the process of justice, was replaced by Abdurrahman Wahid in the presidential election of October 1999. The Wahid government had more apparent legitimacy to make drastic reform, and initially, enough power to do so. President Wahid let KPPHAM work independently and boldly, and had a strong personal interest in its doing so. However, towards the end of his first year in office, the power balance changed rapidly between the President and the military, and the President and political forces that had an interest in opposing Wahid’s policies or had interests aligned with the military. This was the very period when investigations were being conducted by the more conservative AGO team. This chapter demonstrated that besides the military, legislators were perhaps the most serious obstacle, as they actually participated in antireform acts. Among these acts were wooing support from the military through an amendment of the Constitution, arousing a xenophobic mood within the nation, and rejecting co-operation with UNTAET over the investigations. The role of international pressure was crucial. So was the establishment of KPP-HAM and the continuing foreign pressure that facilitated its work. This pressure also helped Wahid, who wanted to eliminate the remaining power of the Wiranto group as well as promote civilian supremacy in the government.

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Nevertheless, ironically, the performance of KPP-HAM led to a relaxation of such international pressure — it declined dramatically following the start of the follow-up investigation. The UN and foreign governments initially showed their intention to push for an international tribunal if the follow-up investigation was unsatisfactory; but this initial condition appeared to evaporate gradually. Even after the AGO’s performance was proven to be poor, there was almost no indication that the UN and foreign governments would push for an international tribunal at the risk of weakening the already fragile government. This contributed to the identification of the small number of suspects and the extremely narrow focus of crimes. Nevertheless, the maintenance of a certain level of pressure at least prevented this outstanding problem from coming off the Indonesian agenda. It is still difficult to judge the performance of the year-old Megawati government in this field. It will be necessary to closely observe the trials, and the follow-up work as well as co-operation with East Timor over this issue in the post-trial period. However, this chapter’s findings suggest a pessimistic outlook, at least in the near future. The Megawati government has achieved a certain degree of political stability in the past year or so, thanks largely to the strategic selection of the Vice-President and Cabinet members.105 This gives her room to carry out the difficult reform agendas, which her opponents might otherwise be able to effectively prevent. Some steps in the corruption cases — most notably, the Akbar Tandjung case — can perhaps be looked at from this perspective. As far as the East Timor case is concerned, however, she has made little progress so far. The eventual opening of the trials may not be regarded as her big achievement because the holding of the national trials is an obvious international obligation that cannot be postponed for even another year. Moreover, as repeatedly argued in this chapter, many legal loopholes have already been created since the AGO’s investigation started. These legal loopholes help assure the military that the national trials would not damage its institutional interests. The military appears to recognize that, although the possibility that an international tribunal will be established is very low, it nonetheless remains a possibility. The

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TNI spokesperson Major General Sjafrie Sjamoesddin clarified the TNI’s commitment to the national trials.106 There are at least four main obstacles confronting the Megawati government in the justice field — not only the East Timor cases, but also a number of outstanding human rights violation cases. The first problem is Megawati’s lack of leadership. Although the effective performance of KPP-HAM during the initial months of the Wahid period was helped by the same stability enjoyed by the present government, Wahid’s strong leadership was an even bigger factor in enabling the KPP-HAM to perform well. A close examination of Megawati’s role over the past twelve months in the preparation for trials in the East Timor cases reveals that she has been primarily involved with the preparation of technical items, such as the issuance of a presidential decree and government regulations, and the acceptance of the ad hoc judges. Despite the great importance of these items for the efficiency and credibility of future trials, there is little indication that she is taking any initiatives in this process. Rather, she has relied almost entirely on the State Secretariat, most likely, State Secretary Bambang Kesowo personally.107 If Megawati had the necessary political will, these items would have been completed more quickly and thoroughly as Habibie typically demonstrated in his initial period as the President. The second problem is Megawati’s close relationship with the military and the general comeback of the military’s hard-line approach. As has already been noted, she owes a debt to the military for her rise to the presidency and she herself shares a similar nationalistic outlook with the military. Notably, many of the present top posts in the Army (and among her advisors) are occupied by hard-line officers with extensive combat experience in East Timor and other trouble regions, and/or with Kopassus backgrounds.108 This may be reflected in the current hard-line approach of the military in dealing with security disturbances and in particular separatist movements in the nation. And Megawati herself appears to be supporting this line. Furthermore, the TNI’s top echelon under her government is far more solid than it was in the initial Wahid period, when KPP-HAM was functioning. There is now no clear reformist versus anti-reformist division within the

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institution like that which Wahid exploited. The recent TNI–KPPHAM showdown over the Semanggi–Trisakti case provides a striking contrast to the developments in the KPP-HAM case. Helped by the DPR’s July 2001 decision recommending that these three incidents be resolved in ordinary courts, not in human rights courts, the military and the police have adamantly rejected repeated summoning by Komnas HAM/KPP-TSS (Trisakti, Semanggi I dan II) to question their officers in relation to these incidents.109 Although Vice-President Hamzah Haz and Defence Minister Matori Abdul Djalil have urged the military to co-operate with the questioning, Megawati has not demonstrated any initiative in this process, letting the confrontation take its course — again, her leadership matters. Another worry related to the problem with the military is that there is a tendency for the civilian political elite to woo the military when they are motivated to challenge the President. This has enabled the military to easily resist reform agendas, especially those involving human rights. It is very likely that this pattern will be repeated as the 2004 general and presidential elections approach. The third challenge is the DPR’s increasing attempts to influence the foreign policy decision-making process, in particular, decisions which involve “foreign intervention”. This chapter has argued that the DPR, especially Commission I, is now one of the biggest obstacles to Indonesia–East Timor co-operation. The Commission’s continuing criticism of UNTAET, support for hardline Timorese causes, and its request to Megawati not to attend the independence ceremony in East Timor are good examples. Even Foreign Minister Hasan Wirajuda, who has earned much credit from the East Timorese by his efforts to mend the relationship between Indonesia and East Timor (and also Indonesia and Australia), became a target of criticism for his being “too conciliatory”. East Timor and Australian issues continue to be used by these politicians as a valuable political commodity to enhance their power in national decision-making. The Commission’s rejection of the visit of Australian Prime Minister John Howard to Jakarta in February 2002 can also be seen in this context.

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The last problem is related to international pressure. If the national trials yield even token punishment for some officers, it is quite unlikely that the foreign governments will impose economic sanctions on Indonesia, let alone push for an international tribunal. The United States under the Bush government has already displayed its wish to resume military co-operation with Indonesia, which was frozen due to the Indonesian military’s role in the 1999 violence in East Timor. And this wish became more explicit after the 11 September terrorist attacks in the United States. This gives a signal to the Indonesian Government and the TNI that the United States and its allies might put human rights issues aside in order to facilitate their fight against terrorism. In addition, the East Timor leaders, especially the first President of East Timor, Xanana Gusmão, obviously do not want to cause tension with Indonesia only because of this justice issue. Despite its continuing heavy economic dependence on donor nations, Indonesia now appears to have a stronger bargaining position vis-à-vis the international community than the previous two governments had. All the above points suggest that there is little driving force that pushes the Megawati government to achieve substantial reforms in ending legal impunity for violations of human rights. Whatever the likelihood, East Timor is a crucial test case. If her government fails in this case, it is less likely that the other outstanding human rights violation cases will make any progress under Megawati’s leadership.

Notes *An earlier version of this chapter was presented at the conference “East Timor in Transition: Past, Present, and Future”, Northern Illinois University, 12–13 April 2002. The author would like to thank Harold Crouch, Ed Aspinall, and Jennifer Amyx for their insightful comments on this chapter. 1. “Robinson zeros in on alleged rights abuses”, The Jakarta Post, 14 September 1999. 2. “Marzuki: Bentuk Komisi Kebenaran Dan Rekonsiliasi Timtim” [Marzuki: Forming a Truth and Reconciliation Commission on East Timor], Suara Pembaruan, 13 September 1999. 3. “Muladi: Indonesia Siap Jelaskan Soal Pelanggaran HAM di Timtim”

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4.

5.

6.

7. 8.

9. 10. 11. 12.

[Muladi: Indonesia is prepared to explain the problem of human rights’ violations in East Timor], Republika, 24 September 1999. With regard to the request from Portugal on 9 September 1999, the UNCHR consulted by a letter with the fifty-three member nations about the necessity to hold a special session. The body narrowly agreed to hold a special session, with twenty-eight responses in favour, fifteen against, two in abstention, and eight without any response. “Commission on Human Rights to Hold Special Session on Situation in East Timor”, HR/99/92, UN press release, 20 September 1999. A special session had been held only three times in the previous decade (on Yugoslavia in 1992 and 1993; and Rwanda in 1994). The MPR is the supreme decision-making body in Indonesia. Its major functions are to elect the president and vice-president, decide the Broad Guideline of State Policy (GBHN), and amend the Constitution. It also has the power to impeach the president. General legislative functions are held by the People’s Representative Assembly (DPR). Habibie defended his policy in a one-hour address. The speech attributed the government’s new policy on East Timor almost entirely to the aim of freeing Indonesia from various foreign pressures, to the extent that opponents of Habibie criticized that it was as if the Indonesian Government adopted the policy to please the international community. On the criticism see, for example, “Kalangan DPR Kecewa Atas Penjelasan Habibie” [DPR circle is disappointed with Habibie’s explanation], Suara Pembaruan, 22 September 1999. Interview with Munir, Deputy Director of Indonesian Legal Aid Foundation (YLBHI), 26 April 2000. Actually, at that time every possible candidate for the presidential election formally or informally offered the vice-presidential post to Wiranto. Confidential interview, May 2000. “Wiranto: Harus Bicara Dulu dengan Suharto” [Wiranto: Need to talk with Suharto first], Forum Keadilan, 13 February 2000. “HAM Timtim: Ada ancaman AS” [Human rights in East Timor: With US threat], Garda, 17–23 January 2000. Nevertheless, Indonesia was not defeated totally. It managed to have sentences inserted in the resolution to the effect that the international inquiry would be undertaken “only in co-operation with Indonesia’s own inquiry”. There was one more issue in the

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13.

14.

15.

16.

17. 18. 19.

resolution: it requested the Indonesian Government to accept UN special rapporteurs to make preliminary reports in particular fields. “Special Session of Commission on Human Rights Adopts Resolution on East Timor”, UN press release, HR/CN/99/70, 27 September 1999. This is stipulated in Article 10(1) in “Perpu No. 1 tentang Pengadilan HAM” [Government Regulation in Lieu of Law No. 1 Concerning Human Rights Tribunals], Undang-Undang Hak Asasi Manusia 1999 [Human Rights Laws, 1999] (Bandung: Citra Unbara, 2000). Interview with Asmara Nababan, 10 May 2000; interview with H.S. Dillon in “HAM Timtim: Ada ancaman AS” [Human rights in East Timor: With US threat], Garda, 17–23 January 2000. On Komnas HAM’s pro-integration role in East Timor, see, for example, “UN body to set up inquiry on East Timor”, The Jakarta Post, 28 September 1999; and “Rekomendasi bagi Jenderal Wiranto” [Recommendations for General Wiranto], Panji Masyarakat, 2 February 2000. He was associated with several international human rights groups, including a Swedish-based human rights inquiry body. However, as a human rights lawyer and activist dealing with human rights abuses, he, as well as his colleagues, felt that he should participate because if the KPP-HAM failed, the military would be in a stronger position to resist inquiries into other cases such as those involving Aceh and Ambon. He was also encouraged by the participation of Asmara Nababan, Albert Hasibuan, and H.S. Dillon from Komnas HAM in KPP-HAM; he regarded them as supporters for human rights. Interview with Munir, 26 April 2000. Interview with Munir, 26 April 2000; and Zoemurotin K.S., 27 June 2000. The staff assisting KPP-HAM from various NGOs, especially ELSAM (Institute for Policy and Advocacy) and PBHI (Indonesian Legal Aid and Human Rights Association), also suspected the effectiveness of the commission initially. However, mainly because of the good composition of the formal members of KPP-HAM, several members from the two NGOs joined KPP-HAM as assistants. Interview with Amiruddin, ELSAM, 16 May 2000. Interview with Munir, 26 April 2000. Marzuki resigned as a member of Komnas HAM and KPP-HAM in December 1999 due to his new assignment as Attorney General. Komisi Penyelidik Pelanggaran Hak Asasi Manusia di Timor Timur, Ringkasan Eksekutif Laporan Penyelidikan Pelanggaran Hak Asasi Manusia di Timor Timur [Executive Summary Report on the Inquiry into Human Rights Violations in East Timor] (Jakarta, 31 January 2000).

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20. “Perlawanan Wiranto” [Wiranto’s resistance], Tempo, 13 February 2000. 21. Assistants included members of noted NGOs such as YLBHI, PBHI, Kontras, ELSAM, Solidamor, and Díli-based Yayasan HAK. Aniceto Guterres, Director of Yayasan HAK, stressed that he was willing to provide data to KPP-HAM only because KPP-HAM included some of his good friends. (Interview with Aniceto Guterres, 10 January 2001.) Note that Yayasan HAK is the NGO which collected substantial evidence indicating the involvement of the TNI and Polri (Indonesian National Police) in human rights violations surrounding the UN ballot in 1999. Although some of the documents were stolen by the SGI, the intelligence body of the Special Forces Command (Kopassus), on 3 September 1999 or were lost in the attack by pro-integration militias on 5 September, many documents remained. They again collected similar documents after the multinational Interfet troops arrived on 20 September 1999. (Interview with Lefidus Malau, Director of Fortilos, 4 August 2000; Aderito de Jesus Soares, Director of Sahe Institution for Liberation, 12 January 2001.) All the formal and informal assistants to KPP-HAM whom the author interviewed answered that they might not have helped KPP-HAM at all if there had been no credible human rights activists in the commission. 22. “Panglima TNI Setuju Sejumlah Perwira Tinggi Diperiksa” [TNI commander agreed with the questioning of several high-ranking officers], Kompas, 2 December 1999; “Pleidoi para Jenderal” [Plea of the generals], D&R, 20–26 December 1999. 23. Wiranto created the post of deputy TNI commander in his last days as TNI commander and put the then Navy chief-of-staff Widodo in charge. Wiranto calculated that Widodo would soon replace him, and that bypassing the weak TNI commander, he could still maintain his power over the Army. Marcus Mietzner, “The First 100 Days of the Abdurrahman Presidency: An Evaluation”, in Indonesia: The Uncertain Transition, edited by Damien Kingsbury and Arief Budiman (Adelaide: Crawford House Publishing, 2001), p. 333. 24. Interview with Munir, 26 April 2000. For the text of the questioning of Wiranto by KPP-HAM conducted on 24 December 1999, see “Draft Notulen Pemeriksaan Wiranto” [Notes on the questioning of Wiranto], an apakabar e-mail, 15 September 2000. 25. See his various comments in “Jenderal-Jenderal di Ambang Pintu Mahkamah” [Generals at the doorstep to tribunal], D&R, 20–26 December 1999; “East Timor Is Enough”, Tajuk, 22 December 1999; “Nama Habibie Pun Disebut” [Even Habibie’s name was mentioned], Panji Masyarakat, 5 January 2000.

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26. “TNI Mulai Waspadai” [TNI now on alert], Panji Masyarakat, 5 January 2000. Sudradjat was dismissed by Abdurrahman Wahid on 13 January 2000. These events also made vocal reformist Major General Agus Wirahadikusumah’s stance known to the public. Wirahadikusumah gave his opinion that “soldiers only serve the TNI as an institution, not their leaders”. “Kalau Kita Punya Pimpinan Ngrampok, Terus Diadili, Masak Kita Sakit Hati?” [If our leaders steal something and are then put on trial, should we feel offended?], Forum Keadilan, 26 December 1999. Wirahadikusumah was then Sulawesi commander. He was one of Wahid’s favourites along with Army chief-of-staff General Tyasno Sudarto, both of whom were not in tune with Wiranto. Wahid expected them to further erode the remaining influence of Wiranto at that time. 27. “Marzuki Membidik Wiranto Terkilik” [Marzuki tries to find a target, Wiranto gets annoyed], Gatra, 25 December 1999; “Nasib Para Petinggi di Tangan Komisi” [The fate of the officers is in the hands of the commission], Forum Keadilan, 26 December 1999. 28. For a complete picture of the Wahid–Wiranto showdown, see “Permintaan di Tengah Muhibah” [Request in the midst of a visit], Forum Keadilan, 13 February 2000; “Gus, Master of the Game”, Gamma, 16–22 February 2000; “Gus Dur, Wiranto, dan Drama Kejatuhan itu” [Gus Dur, Wiranto, and the downfall drama], Tajuk, 17 February 2000. 29. However, on the day he returned to Jakarta, Wahid hesitated in dismissing Wiranto, even though the final report of KPP-HAM had already named Wiranto as being responsible for the human rights violations that occurred in East Timor. It was reported that after Wahid’s decision to retain Wiranto for a while was made public, the presidential office was inundated with telephone calls from foreign governments, including the U.S. Government, and Indonesians who were worried about the possible economic damage which this decision would cause. It was also reported that Marzuki was one of the main actors who changed Wahid’s mind from retaining Wiranto to sacking him. Reportedly, Marzuki told Wahid that he would resign unless Wiranto was dismissed. These episodes can be read in “Saat Wiranto Tergilas ‘Buldoser Zig-Zag’” [When Wiranto was run over by a ‘zig-zag’ bulldozer], Forum Keadilan, 27 February 2000; and “Gus Dur, Wiranto, dan Drama Kejatuhan Itu” [Gus Dur, Wiranto, and the downfall drama], Tajuk, 17 February 2000. 30. “Indonesia’s Wahid/Wiranto Lose Chance for Recovery”, Associated Press, 10 February 2000.

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31. “US warns of anti-reform forces”, The Jakarta Post, 15 January 2000. The text of the original conversation is in “Transcript: Ambassador Holbrooke NY-Jakarta Teleprocess Conference January 14”, U.S. Department of State, 14 January 2000. 32. “Aborts Cadet Ala America”, Tekad, 24–30 January 2000. 33. “Clinton gives strong support to Gus Dur”, The Jakarta Post, 16 January 2000. 34. Interview with Asmara Nababan, 10 May 2000. 35. “E. Timor probe faults Wiranto”, The Jakarta Post, 1 February 2000. 36. ICIET conducted a nine-day inquiry from 25 November 1999 in East Timor, and then visited Jakarta for non-inquiry purposes. 37. Interview with Robertus Robet, YLBHI, 18 April 2000; Munir, 26 April 2000; and Asmara Nababan, 10 May 2000. The demonstrators’ view can be seen, for example, in “Komnas HAM Dinilai Gunakan Standar Ganda dan Diskriminatif” [Komnas HAM is judged using double and discriminative standard], Media Indonesia, 13 January 2000. 38. See Komisi Penyelidik Pelanggaran Hak Asasi Manusia di Timor Timur, op. cit. Among the thirty-three people, one of the officers named Serda was missing in some publications of the executive summary. In the full report over 160 names were reportedly listed as suspects in human rights violations. There is also a secret version of the summary report, in which Wiranto’s responsibility was described in a stronger tone, and the responsibility of the TNI/Polri elaborated in more detail. Munir wrote this secret version, and according to him, the executive summary which was circulating widely was made just for discussion. (The author read the secret version during an interview, but does not possess a copy.) James Dunn, UNTAET expert on Crimes against Humanity in East Timor, however, suggested that Wiranto had read the secret version and pressured Marzuki to change the content. Interview with James Dunn, 10 January 2001. 39. United Nations Commission on Human Rights, Press Release, 31 January 2000. 40. United Nations Office of the High Commissioner for Human Rights, Report of the International Commission of Inquiry on East Timor to the Secretary General, A/4/726, S/2000/59. 41. “Indonesia: Report strikes at army’s heart”, Financial Times, 1 February 2000. 42. On Wahid’s final decision to dismiss Wiranto, the TNI spokesperson commented, “The TNI believes that the decision by the President is

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43.

44.

45. 46.

47. 48.

49.

always oriented to the interests of the people and the nation, and General Wiranto will accept this with entire sincerity and a big heart.” “Wiranto: Tidak Perlu Dimasalahkan” [Wiranto: No need to be questioned], Suara Pembaruan, 15 February 2000; “TNI Siap Amankan Keputusan Presiden” [TNI is prepared to protect the presidential decision], Media Indonesia, 15 February 2000. A source close to Wiranto and the former chief of armed forces intelligence (BAIS) Major General Zacky Anwar Makarim, who met these two and other suspected officers in September or October 1999, suggested that they were extremely worried about the prospect of an international tribunal. The most worried was Zacky, who reportedly stated at the meeting, “My fate is finished”. Confidential interview, May 2000. Interview with Muladi, Supreme Court Judge/Tim Advokasi member, 19 April 2001; and Tim Advokasi member, 18 October 2000. Interview with General (ret.) Wiranto, 25 May 2001. See Article 13 (2) of Perpu No. 1/1999. The Joint Investigation Team (TPG) focused on the five cases of grave human rights violations which happened in April and September 1999: the attack on Manuel Carrascalão’s house (17 April 1999); the attack on the Liquiçá Church Complex (6 April 1999); the murder of Dutch journalist Sander Thoenes of Financial Times (21 September 1999); the attack on Díli diocese and Bishop Carlos Belo’s private house (5–6 September 1999); and the attack on Ave Maria Church in Suai (6 September 1999). “Jaksa Agung Bentuk Tim Penyidik Gabungan” [Attorney General forms a Joint Investigation Team], Republika, 20 April 2000. “Jaksa Agung Tidak Berat Periksa Wiranto” [Attorney General is not hesitant in investigating Wiranto], Suara Pembaruan, 15 February 2000. It is unclear why Marzuki did not reject TNI/Polri members, but it is certainly the AGO’s conventional practice to include some TNI/Polri members in a team to investigate violence, and Marzuki may have been unable to flatly reject such a custom. Perpu No. 1/ 1999 tentang Pengadilan HAM did not prevent the TNI/Polri from participating in the investigation of human rights violation cases (see Article 12). Human Rights Watch, Unfinished Business: Justice for East Timor, Press backgrounder, August 2000. A member of the Expert Team complained that there was little independence in the Investigation Team. He said that there were two sources of command — one from

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50.

51.

52.

53. 54.

55.

56. 57.

58.

Team leader Rachman and the other from the TNI — in the Team, and that there might be leakage of information to the TNI. “Jaksa Agung Bentuk Tim Penyidik Gabungan” [Attorney General forms a Joint Investigation Team], Republika, 20 April 2000. “Kejagung ajak LSM ikut sidik kasus Timtim” [Attorney General Office invites NGOs to join the investigation into the East Timor case], Satunet.com, 17 March 2000. See the very informative interview with Adrianus Meliala, a member of the Expert Team, in “Jangan Membiarkan Ular itu Marah” [Don’t let these snakes get angry], Media Indonesia, 10 September 2000. “Persiapan Kurang, Pemerikaan Saksi Lambat” [Preparation was not enough, investigation into witnesses was delayed], Kompas, 21 July 2000. Interview with Sidney Jones, Asia Director of Human Rights Watch, 8 December 2000. According to Minister of Law and Legislation, Yusril Ihza Mahendra, the main reason why the DPR rejected this perpu (government regulation) was that it did not allow retroactive prosecution. However, there was a more convincing reason. Many DPR members did not like the fact that Habibie made the perpu under strong international pressure. “Seluruh Fraksi Tolak Perpu Pengadilan HAM” [The entire faction rejects perpu on human rights trials], Kompas, 14 March 2000. “Kejakgung Perlu Payung untuk Kasus Timtim” [Attorney General Office needs a (legal) umbrella for the East Timor case], Media Indonesia, 15 March 2000. On the debate of the effectiveness of the Perpu, see, for example, “Pelanggaran HAM di Timtim: Hari ini Penyidik Gabungan Memanggil Dua Jenderal” [Human rights violations in East Timor: The joint investigators will summon two generals today], Kompas, 1 May 2000. The 1945 Constitution only defines that the DPR can either accept or reject a perpu. See “Kasus Pelanggaran HAM Timtim: Tak Ada Dakar Hukum untuk Menyidik” [The East Timor human rights violations case: No legal foundation to investigate], Kompas, 8 May 2000. Interview with Irianto Subiakto, YLBHI director/Expert Team member, 2 October 2000. See Chapter 9, Article 104 in “UU No. 39/1999 tentang HAM” [Law No. 39/1999 Concerning Human Rights], Undang-Undang Hak Asasi Manusia 1999 [Human Rights Law 1999] (Bandung: Citra Umbara, 2000). Habibie signed this law on 23 September 1999. See Chapter 6, Article 42 in the Human Rights Courts Act. Undang-

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59.

60. 61.

62. 63.

Undang Republik Indonesia Nomor 26 Tahun 2000 Tentang Pengadilan Hak Asasi Manusia [Indonesian Republic Law No. 26 Year 2000 Concerning Human Rights Courts Act] (Jakarta: B.P. Panca Usaha, 2000). See Chapter 8, Article 43 in the Human Rights Courts Act. The provision to permit retroactive prosecution in the general — not ad hoc — trial environment was in the original bill, but it was withdrawn after repeated discussions by the draft-making team. According to a member of the team, Adnan Buyung Nasution, the reason for requiring the law to have the DPR’s approval was that past human rights violation cases would require a political decision. Munir, another member of the team, objected to the idea, but was defeated by the opinion of the majority. The draft bill was finalized on 18 March 2000. “Tim Penyusun Sepakat RUU Pengadilan HAM Berlaku Surut Tanpa Batas Waktu” [Law-making team agrees on the draft Human Rights Courts Act that allows retroactivity without time boundary], Kompas, 4 February 2000; “Memburu Wiranto dengan UU Pengadilan HAM” [Urging Wiranto by Human Rights Courts Law], Forum Keadilan, 13 February 2000. Interview with Luhut M.P. Pangaribuan, an Expert Team member, 5 December 2000. It states “[t]he right not to be prosecuted based on a law which can be applied retroactively are human rights which cannot be diminished under any condition”. See Article 28 I (l) in “Perubahan Kedua: Undang-Undang Dasar Negara Republik Indonesia Tahun 1945” [The Second Amendment: The 1945 Constitution of the Republic of Indonesia], Ketetapan-ketetapan Sidang Tahunan MPR-RI Tahun 2000 [Decrees of the 2000 MPR-RI session] (Jakarta: Restu Agung, 2000). Minister of Justice and Human Rights Yusril Ihza Mahendra stressed that Article 28 j (2) stipulates: “In performing rights and freedom, each person should be submitted to limitations which can be specified by law”; therefore, the government can still implement the retroactive principle based on the Human Rights Courts Act. “Yusril: Asas tak Berlaku Surut tidak Absolut” [Yusril: Non-retroactivity principle is not absolute], Republika, 1 September 2000. Nevertheless, this interpretation is highly debatable. “Assembly to pass amended constitution”, The Jakarta Post, 16 August 2000. “Past rights crimes may get protection under Constitution”, The Jakarta Post, 18 August 2000.

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64. “RI’s human rights image blemished”, The Jakarta Post, 21 August 2000. 65. “Government to announce E. Timor mayhem suspects”, The Jakarta Post, 23 August 2000. 66. The MPR adopted a decree permitting the TNI to retain its seats in the MPR until 2009 at the latest. This was a surprise to many because the main parties had already set the deadline of 2004 for the complete removal of the TNI/Polri appointees from legislative bodies. It was widely regarded that this was the result of each party’s attempt to woo support from the thirty-eight TNI/Polri members. The President, who was facing possible impeachment, also wanted their support. Because of the deal, the TNI/Polri group did not back the DPR’s censure of the President following his controversial sacking of two economics ministers. Here, note that as a consequence of the general election of July 1999, the 500-member DPR and the 700-member MPR (which includes all the 500 DPR members) were very fragmented, with five large parties and a number of smaller parties. 67. “TNI/Police Will Be Happier Outside Parliament”, detikcom, 22 August 2000. 68. Interview with Luhut M.P. Pangaribuan, 5 December 2000. 69. “Yusril reassures international community on rights violators”, The Jakarta Post, 1 September 2000. 70. “House to support bill on rights court”, The Jakarta Post, 17 June 2000. 71. “DPR plenary discusses HR Court bill”, Kompas, 16 June 2000. 72. Zacky was assigned by Wiranto as chief liaison officer between Indonesia and UNAMET (United Nations Mission in East Timor). However, it is widely believed that Wiranto gave him the task of winning the ballot at all costs. Another prominent intelligence officer, Major General Sjafrie Sjamsoeddin, who acted as a “courier” between Jakarta and East Timor and was allegedly seen in the militia attack on Bishop Belo’s house of 6 September 1999, was not even included in the recommendation list of KPP-HAM because of a lack of evidence that he engaged in the violence. Munir was rather disappointed to admit that he was not able to find any solid evidence on Sjafrie’s involvement. (Interview with Munir, 26 April 2000.) Although the total number of suspects in the AGO’s list was actually twentythree, one of the militia suspects, Olivio Mendoça Moruk, was murdered on 5 September 2000. 73. “Team declares Wiranto suspect in Timor melee”, Indonesian Observer,

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74.

75. 76.

77.

78.

22 August 2000. It may be true that the investigators did not find any evidence clearly proving that Jakarta ordered the violence. Related to this point, see a careful and balanced analysis by Geoffrey Robinson, “The Fruitless Search for a Smoking Gun: Tracing the Origins of Violence in East Timor” (Paper prepared for the symposium on Violence in Indonesia, University of Leiden, 13–15 December 2000). See also Samuel Moore, “The Indonesian Military’s Last Years in East Timor: An Analysis of Its Secret Documents”, Indonesia 72 (October 2001): 9–44. “Panglima TNI Setuju Sejumlah Perwira Tinggi Diperiksa” [TNI commander agrees with the questioning of several high-ranking officers], Kompas, 2 December 1999; “Pleidoi para Jenderal” [Pleas of the generals], D&R, 20–26 December 1999. Interview with Irianto Subiakto, 2 October 2000. Interview with Luhut M.P. Pangaribuan, 5 December 2000. It is unclear, however, how his membership in Golkar affected the selection of suspects. KPP-HAM and Expert Team members tended to suggest that Marzuki acted according to his own political ambition, rather than reacted to pressure from the party. In addition to Marzuki, Rachman’s close relation with the military, especially Wiranto, was also raised as an issue by the mass media. For example, reportedly Rachman has known Wiranto well since both sat in the Security and Legal System Stabilization Council during the Habibie administration. “I Honestly Swear”, Tempo, 21–27 August 2001. For an overview of the various outstanding human rights violation cases in Indonesia, see the International Crisis Group, Indonesia: Impunity versus Accountability for Gross Human Rights Violations (Jakarta and Brussels, 2 February 2001). “Buloggate” is his alleged involvement in the embezzlement of US$3.7 million from a government agency Bulog, while “Bruneigate” is his possible improper acceptance of US$2 million from the Sultan of Brunei. Among many of his interventions in the judicial process were his recommendation to the Attorney General to stop investigation of his financial supporter, Marimutu Sinivasan, and his apparently arbitrary targeting of the Bank Indonesia governor, Syahril Sabirin, over Sabirin’s role in the Bank Bali scandal. For a detailed analysis of Abdurrahman Wahid’s political mismanagement, see Marcus Mietzner, “Abdurrahman’s Indonesia: Political Conflict and Institutional Crisis”, in Indonesia Today: Challenge of History, edited by Grayson Lloyd and Shannon Smith (Singapore: Institute of Southeast Asian Studies, 2001), pp. 24–45.

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79. The most important steps in this context were Wirahadikusumah’s dismissal from the post of Kostrad chief at the end of July 2000 and Wahid’s unsuccessful attempt to promote him to Army chief-ofstaff in early October 2000. For the background of this tug-of-war between Wahid and the TNI over the military personnel change around the period, see Jun Honna, “Consolidating Civilian Control: The Indonesian Military Politics under the Abdurrahman Government” (Paper presented at the conference organized by Shizuoka Asia Pacific Forum, Shizuoka, Japan, 1–3 December 2000). Abdurrahman Wahid, who faced the risk of impeachment, managed to survive the MPR session, but was forced to hand over formally the government’s daily administration to Vice-President Megawati, although in practice her powers were very limited. 80. “Insiden Atambua Juga Permalukan TNI” [The Atambua incident is humiliation for TNI as well], Republika, 11 September 2000. 81. The Indonesian political elite strongly reacted to the threat of an embargo of military-to-military contacts by the United States in relation to the militia problem. The anti-U.S. drive was further intensified by the interventionist approach of U.S. Ambassador to Indonesia Robert Gelbard and Israel’s attacks on Palestine at that time. These issues became a convenient political tool for opponents of Wahid, who had said that he planned to open commercial ties with Israel. This xenophobic fanning was a typical domestic response immediately after the ballot, when Australia was the major target of the political elite. 82. Even U.S. Ambassador to the UN Richard Holbrooke, who had most openly supported Abdurrahman Wahid, showed his doubt about the government’s ability to control the military. “Timor refugees face starvation”, BBC, 9 September 2000. 83. A Pentagon official revealed that it was renewing its ties first with the Air Force and Navy, considering the widely spread suspicion that the U.S. training had assisted the Kopassus special force. “United States and Indonesia Quietly Resume Military Cooperation”, The New York Times, 24 May 2000. 84. Communication with Ana Gomes, 3 May 2000. 85. Comment by Albert Hasibuan, the head of KPP-HAM. “KPP-HAM Timtim Lambat, Komisi Tinggi HAM PBB akan Kirim Utusan” [KPPHAM Timtim is slow, High Commissioner will send the mission], Kompas, 7 April 2000. 86. “De Mello lauds moves to try East Timor suspects”, The Jakarta Post, 2 September 2000.

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87. “East Timor: Gusmão Praises Indonesian List of Post-Referendum Violence Suspects”, Lusa, 1 September 2000. On the other hand, another prominent East Timorese leader, José Ramos Horta, commented that the list was unacceptable and that the UN now had no option but to insist on an international war crimes tribunal. (“Senior generals to escape trial for East Timor killings”, The Guardian, 2 September 2000.) Nevertheless, Ramos Horta toned down his view when he visited Jakarta in late January 2001. He showed his strong support for what Marzuki was doing. (“Horta Puji Upaya Marzuki Darusman” [Horta praises Marzuki Darusman’s effort], Kompas, 25 January 2001.) He even stated on the occasion that he would request the United States to resume military assistance to Indonesia during his coming visit there. (“Top E. Timorese wants US to help Indonesian army”, Reuters, 24 January 2001.) Horta has been swinging back and forth in pushing for an international tribunal, while Xanana has consistently argued that it was not his priority because he was worried about repercussions that it may have on East Timor–Indonesia relations. 88. The MoU allows for arrest in the country of the other signatory, transfer of suspects between the two countries, and the sharing of information, witnesses, and forensic evidence. 89. UNTAET internal document. 90. However, there was also a view that the fact that the DPR proposed the trial should be noted. In June 2001, the DPR recommended that the Trisakti, Semanggi I, and Semanggi II incidents that occurred in reformasi demonstrations, in which a number of students were shot dead by the security forces, be tried in ordinary courts, not in human rights courts. 91. “Pembentukan Pengadilan Hak Asasi Manusia Ad Hoc Pada Pengadilan Negeri Jakarta Pusat (Keppres No. 53/2001)” [The Establishment of Ad Hoc Human Rights Courts in the Central Jakarta District Court (Presidential Decree No. 53/2001)] . 92. These two cases involved incidents that occurred on 6 September 1999, and involved an attack on Bishop Belo’s house and the massacre at Suai church. One of the criticisms of Wahid’s decree was that it would allow Eurico Guterres to escape prosecution because he became a suspect only in the case of the attack on Manuel Carrascalão’s house that took place before the ballot. One more priority case that occurred soon after the referendum, the case of the

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93.

94.

95.

96.

murder of Dutch journalist, Sander Thoenes, had already been virtually dropped as early as July or August 2000 because of what the AGO claimed to be “the lack of evidence”. (The AGO has never officially announced the dropping of the case but an Expert Team member revealed it.) As a result, not even a single member of Battalion 745, whose members were allegedly behind the murder, was named by the AGO. (“Slaughter and Hiding in Plain Sight”, Tempo, 18–24 September 2001.) Ahead of the trial, the AGO is showing some intention to reinvestigate the case, but it is unclear whether it will add this case for prosecution. See, for example, “Guterres set to slip through the net on atrocities”, Sydney Morning Herald, 1 May 2001. Wahid was at that time fighting the last battle with his opponents, including the military leadership, and rumours of a number of “deals” proposed by the President were rampant. The author heard these arguments many times at “campaign” seminars held in Jakarta in 2000–1, where suspected military officers, pro-integration Timorese, and their lawyers participated. And this type of arguments is expected to be heard in court. These arguments can be read in, for example, Colonel Muh. Nur Muis, Kecurangan UNAMET Selama Jajak Pendapat di Timor Timur pada Tahun 1999 [UNAMET’s fraud during the 1999 popular consultation in East Timor] (Jakarta: Lembaga Demokrasi Indonesia Baru, 6 October 2000); Suhardi Somomoeljono, Analisa Yuridis Mengenai Konspirasi Internasional Atas Wirayah Timor-Timur [Judicial analysis on the international conspiracy on East Timor] (Jakarta: Dewan Pimpinan Pusat Himpunan Advokat, May 2000); and Domingos M. Dores Soares, The Perfect Crime: Konspirasi Internasional [The perfect crime: International conspiracy] (Jakarta: Yayasan Futuro, 2000). “Perubahan atas Keppres No. 53 Tahun 2001 tentang Pembentukan Pengadilan HAM Ad Hoc pada PN Jakarta Pusat (Keppres No. 96 Tahun 2001)” [Amendment of Presidential Decree No. 53 Year 2001 Concerning the Establishment of Ad Hoc Human Rights Courts in the Central Jakarta District Court (Presidential Decree No. 96 Year 2001)] . Rachman replaced Wahid’s ally, Marsillam Simanjuntak, who took office only briefly. Simanjuntak’s predecessor was Baharuddin Lopa. Lopa was known for his integrity and independence, but he died of heart failure only one month after he became Attorney General. Responding to the news of Lopa’s death, human rights lawyer

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97

98. 99.

100.

101.

102.

103.

Todung Mulya Lubis lamented that one promising factor had disappeared. (“Lopa praised for his integrity in law enforcement”, The Jakarta Post, 5 July 2000.) See, for example, “Mega under fire over choice of A-G”, The Straits Times, 16 August 2001; “Kuda Hitam Tunggangan Militer” [Dark horse for the military], ADIL, 27 August 2001. Interview with Muladi, 18 April 2001; interview with another Tim Advokasi member, August 2001. “Jaksa Agung: Pemerintah Tak Akan Berikan ‘Impunity’ ” [Attorney General: Government will not give ‘impunity’], Kompas, 24 November 2000. The AGO has delayed indictment before the trial begins. This is because the trial must start within seventy days after the ad hoc prosecutors for this case receive the dossiers from the investigation team (Article 24 of Human Rights Courts Act). These three officials and Attorney General M.A. Rachman have never had any reputation for their human rights perspectives. This partly explains the poor performance of the post-investigation process. For some notes on the judges with dubious track records, see “Menyambut Pengadilan HAM ad hoc: Patut Dipertanyakan Track Record Sebagian Hakim Ad Hoc dan Karier serta Perlunya Segera UU Perlindungan Saksi” [The start of ad hoc human rights trials: Need to question the track record of some ad hoc and career judges, require witness protection law], Solidamor Press Release, 22 January 2002. For the case of prosecutors, see, for example, “Lawyers doubt rights prosecutors’ capability”, The Jakarta Post, 9 February 2002. The delay of the selection of judges was partly due to the assassination of Syafiuddin Kartasasmita, who had been leading the initial team responsible for selecting judges. Syafiuddin was regarded as one of the few brave judges in Indonesia, who had sentenced Tommy Soeharto and Soeharto’s crony Bob Hassan to prison terms. Again, a promising figure had disappeared from the scene. Nevertheless, some militia leaders and former soldiers have already been tried and sentenced in East Timor. Joni Marquez, former Tim Alfa militia commander, received the heaviest sentence so far — thirty-three years and four months’ imprisonment — at the end of 2001. There has been no indication that the issue of MoU was actually taken up in the following DPR sessions, however.

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104. One interesting discussion involving this group and Commission I members is the idea of a “Timor province by 2004”. The province that they envisage includes West Timor and islands surrounding West Timor, where former pro-integration Timorese would play some important role in local administration. This discussion was conducted formally between pro-integration Timorese leaders and some Commission I members in mid-2001. A pro-integration Timorese source suggested that Sabam Sirait and some other members of Megawati’s party PDI-P (Partai Demokrasi Indonesia– Perjuangan or Indonesian Democratic Party for Struggle) were sympathetic to the idea. This idea sounds very unrealistic, but the discussion itself may be alarming in that it may have a negative impact on reconciliation. (Confidential interview, August 2001.) 105. By supporting the selection of Hamzah Haz, the chairman of PPP (Partai Persatuan Pembangunan or United Development Party) as Vice-President, Megawati aimed to tame the power of the Central Axis (Poros Tengah, a loose coalition of Islamic parties), and this strategy has been working well so far. As far as the allocation of the Cabinet posts is concerned, she allocated four seats to her party, PDI-P, three seats to Golkar, two seats each to PPP and PKB, and one seat each to PAN (Partai Amanat Nasional or National Mandate Party) and PBB (Partai Bulan Bintang or Crescent Moon and Star Party). Although these appointments appear to be in proportion to these parties’ strength in the DPR/MPR, Megawati effectively appointed her own party members and non-member allies (including TNI officers and technocrats) to important posts, while giving PDIP’s rival party, Golkar, less important posts. This is related to PDIP’s intention to obtain a large part of Golkar votes in the next general election and counter Islamic parties which are likely to attempt to defeat Megawati in the next presidential election. 106. “Sikapi Kasus Timtim: TNI Bentuk Posko Advokasi” [Responding to the East Timor case: TNI forms an advocacy post], detikcom, 14 March 2002. 107. Army chief-of-staff (KSAD) General Endriartono Sutarto and Kostrad chief Lieutenant General Ryamizard Ryacudu greatly contributed to Megawati’s rise to the presidency and seemingly continue to be trusted by her. Her close allies, BIN chief Lieutenant General (ret.) Hendropriyono, Minister for Transportation Lieutenant General (ret.) Agum Gumelar, and Megawati’s political advisor Major General (ret.) Theo Sjafei keep influencing her policies. They were generals

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who were greatly involved in combat operations in East Timor and other troubled regions during the Soeharto period. She also has an adjutant and chief bodyguard with Kopassus backgrounds. 108. The recent most surprising personnel change was that involving Major General Sjafrie Sjamsoeddin on 15 February 2002. Despite his questionable track record for extensive covert operations in restive provinces and Jakarta, he was promoted to the post of TNI spokesperson. Although he was not named as a suspect in the 1999 East Timor violence case, it is widely believed that he played an important intelligence role in the mayhem. Moreover, he was blamed by the public as being responsible for the May 1998 violence, including the Trisakti incident that occurred when he was Jakarta military commander. Besides him, some officers who are waiting for the Timor trial, such as Major General Adam Damiri and Brigadier General Tono Suratman, are rumoured to be promoted in the near future. This trend can be seen as TNI’s message that they have their own standard concerning “good officers” which should not be interfered with by the domestic public and the international community. 109. Endriartono Sutarto said that the TNI would not turn its personnel over for questioning as the DPR had made the political decision not to categorize the three incidents as gross human rights violations. (“Officers must abide by law: Commission”, The Jakarta Post, 1 February 2002.) The TNI argues that the existence of Komnas HAM and KPP-HAM is invalid, pointing out the poor legal foundation. The Supreme Court refused to issue a legal opinion on the inquiry in the TSS case and left it to the Central Jakarta District Court. (“KPP HAM to subpoena defiant generals”, The Jakarta Post, 7 February 2002.) Then, the Central Jakarta District Court handed down the ruling to the effect that the existence of Komnas HAM/ KPP was legally valid. (“Komnas HAM dan KPP TSS Jalan Terus” [Komnas HAM and KPP TSS to continue], Republika, March 2002.)

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Reproduced from Governance in Indonesia: Challenges Facing the Megawati Presidency, edited by Hadi Soesastro, Anthony L Smith and Han Mui Ling (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute Southeast165 Asian SECESSIONIST CHALLENGE INofACEH Studies. Individual articles are available from < http://bookshop.iseas.edu.sg >

8 Secessionist Challenge in Aceh Problems and Prospects Rizal Sukma

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

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As a result of negotiation between the central government and Aceh rebel forces, the province was, however, given a daerah istimewa (special region) status and promised a broad autonomy in the fields of religion, adat (customary law), and education. It was expected at the time that the compromise would eliminate sources of discontentment within the Acehnese society against the central government in Jakarta. However, this promise was never fulfilled by the central government. Consequently, a subsequent rebellion against Jakarta, which took the form of a secessionist movement, led by Gerakan Aceh Merdeka (GAM, Free Aceh Movement), resurfaced in 1976. Since then, Aceh has continued to pose a serious challenge to the territorial integrity of Indonesia during the New Order period and beyond. Indeed, the protracted conflict in Aceh, which has escalated since the downfall of President Soeharto’s New Order government in May 1998, constitutes one of the bloodiest conflicts in contemporary Southeast Asia. Various attempts by the main parties to the conflict — the Indonesian Government and GAM — to seek a peaceful solution through negotiation have not made significant progress. Several agreements to reduce the violent confrontations between the government of Indonesia and GAM failed to achieve results. Both sides are still unable to close the wide gap in their positions. While the Indonesian Government could only promise a greater degree of autonomy to Aceh, GAM has not renounced its determination to secede from the Republic. In fact, as the Megawati government began to emphasize the use of military force in dealing with the problem, the prospect for a peaceful resolution of the conflict through political negotiation remains uncertain. This chapter examines the current conflict in Aceh, especially since the collapse of Soeharto’s authoritarian rule in May 1998. The discussion is divided into four main sections. The first section outlines the roots of the current conflict. The second section discusses the escalation of the conflict in the context of democratization in post-Soeharto Indonesia. The third section examines the prospect for a peaceful resolution of the Aceh conflict under President Megawati. The fourth section discusses the two fundamental issues, the process of negotiation and the problem of

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justice, that must be addressed before any peaceful resolution of the conflict becomes possible.

Roots of Acehnese Rebellion The nature of the GAM rebellion, which drags on to this day, is significantly different from the DI rebellion. While the DI rebellion sought to change the nature of the Indonesian state into an Islamic republic in which Aceh would be an integral part, GAM wants a complete separation of Aceh from the Republic of Indonesia. It is important to note, however, that the DI rebel movement in Aceh acted quite independently of the NII’s central leadership in West Java. In fact, the relationship between Aceh’s DI and the movement’s central leadership had always been strained, inter alia, by differences over key issues such as the structure of the state and the rebellion’s strategy.1 Leaders of GAM, led by Hasan di Tiro, maintain that the people of Aceh represent a distinct nation with an inherent right to self-determination. In this context GAM-led insurrections “are indeed unique in Aceh’s history of resistance, in that they are the first articulation of political opposition which asserts a secessionist rather than a regionalist goal”.2 In other words, the end goal of the movement is to secede from the Republic of Indonesia and establish an independent State of Aceh. Despite the difference in their nature, however, widespread discontentment and distrust among the Acehnese against the central government in Jakarta serves as the main underlying context for both rebellions. When the Acehnese first took up arms against Jakarta under the banner of Darul Islam in 1953, the rebellion was primarily triggered by the sense of betrayal felt by the Acehnese people. That feeling was caused by Jakarta’s decision in 1950 to abolish the status of Aceh as an autonomous province within the Republic of Indonesia and merge it with the neighbouring north Sumatra province. The rebellion was finally brought to an end in 1962 after Jakarta agreed to restore the status of Aceh and granted the province a special status which would allow it to exercise a degree of autonomy in the fields of religion, customary law, and education.

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However, the sources of discontent and distrust that gave birth to the current rebellion are far more complex. At the risk of oversimplifying, they can be grouped into four main sources: exploitation; excessive centralization of power and cultural homogenization; military oppression; and impunity. The first source of discontent and distrust is economic in nature.3 During the New Order period, the exploitation of Aceh’s extremely rich natural resources went on at an unprecedented scale. With its abundant natural resources, including oil, natural gas, timber, and valuable minerals, Aceh contributed approximately 11 per cent of Indonesia’s national revenue.4 From the liquid natural gas alone, it is estimated that on average, Aceh contributed approximately US$2.6 billion a year to the central government’s coffers. 5 Meanwhile, taxes and royalties from the oil and gas fields contributed billions of dollars annually to the central government’s revenues.6 The New Order’s exploitation of Aceh’s natural resources had created numerous problems for the province. For example, the expansion of industrial projects, especially the industrial plants for natural gas, fertilizer, and pulp, had led to undesirable effects such as expropriation of land from small farmers without adequate compensation and serious environmental degradation.7 Despite its abundant natural resources, Aceh is among the poorest provinces in the country. All in all, the common feeling among the Acehnese is that instead of getting their fair share from the extraction of natural resources by the central government, they suffer from an increased incidence of poverty and increasingly harsh military control. Consequently, many Acehnese come to view their homeland as being plundered, exploited, and treated unjustly by Jakarta. The second source of discontentment can be found within the New Order’s policies of excessive centralism and uniformity and its consequences on local identity. Jakarta, obsessed with the notion of national unity (persatuan nasional), imposed uniformity across the country with scant regard for the pluralistic nature of the Indonesian society. For the New Order government, the creation of a single Indonesian identity became a sacred mission. The programme of transmigration, for example, was meant “to gather

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and unite all ethnic groups into a single people, the people of Indonesia”. Through this programme, it believed that “the different ethnicities will gradually disappear and at the end, there will be only one type of people”.8 In reality, the New Order government simply ignored the complaints from many people outside the island of Java, including those from Aceh, that the transmigration programme simply meant Javanization. Politically, the imposition of the highly centralized rule of Jakarta inevitably destroyed local political institutions and culture to the effect of undermining Aceh’s local identity. For example, with the introduction of Javanese-style bureaucratic structure and the politics of co-optation based on rewards and sanctions, the ulama rapidly lost their influence over the Acehnese community. The new ruling elite — the governors, bupati (regents), Acehnese technocrats, and new middle class — now willingly “served at the centre’s pleasure, and were first and foremost administrators of the central will, as opposed to representatives of the specific interests of their region”.9 Coupled with excessive control from the centre, the opportunity for the Acehnese to enjoy its status as a “special region” as promised by Jakarta had been rendered largely meaningless. The third source of the rebellion involves the politics of military repression and terror, especially during the 1989–98 period in which Aceh was under military control, known as DOM (Daerah Operasi Militer). If the exploitation of Aceh’s vast natural resources and the nature of the New Order’s centralistic rule served as the primary factors that strengthened Acehnese resentment against Jakarta, the use of brutal military repression since 1990 has inflicted a deep sense of trauma among the Acehnese against Indonesian rule altogether. Many Acehnese found it difficult to understand why the central government, despite its success in crushing the second rebellion attempt by GAM by early 1992,10 continued to prolong the use of heavy military repression. Consequently, when the violation of human rights by security authorities in the province persisted, the feeling of disgust among the Acehnese against the military in particular, and Indonesia’s rule in general, reached an unprecedented level. Indeed, due to gross violations of human rights perpetuated by the military during the DOM period, it has

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been noted that “any tolerance of Indonesian rule was almost entirely extinguished”.11 The fourth factor is the issue of impunity manifested in the inability (or unwillingness) of the central government in Jakarta to provide justice to Aceh by bringing to trial those responsible for gross violation of human rights during the DOM period. The tremendous sufferings caused by the military during the DOM era continue to leave bitter feelings against the central government among ordinary Acehnese. Indeed, the trial of the perpetrators of human rights abuses during that period constitutes the most difficult problem that needs to be addressed urgently. Until now, however, Jakarta’s ability to push for significant progress on this issue has been seriously limited. The entire truth about what actually happened during the 1989–98 period of martial law remains uncovered, and there have not been any significant attempts to solve several cases of violation of human rights that took place before May 1998. Worse still, despite changes of government in Jakarta, from Habibie to Abdurrahman Wahid, and now to Megawati, there have been reports that human rights abuses continue to be perpetrated by the Indonesian security personnel. This is not to suggest that the security personnel are the only ones who commit human rights abuses. In fact, there are reports that elements of GAM have also perpetrated the same abuses. However, it is the abuses perpetrated by the security personnel that affect the ability of the central government to win the hearts and minds of the Acehnese, thus reducing its ability to resolve the conflict peacefully. Unless this problem is addressed in a substantial way, any solution to the Aceh problem would remain an incomplete one.

Political Context of Conflict: Escalation in Post-Soeharto Era The escalation of conflict in Aceh in the post-Soeharto period cannot be separated from the nature of the fragile democratic transition in the country. In fact, there are those who maintain that the escalation constitutes an unintended consequence or a byproduct of democratic transition. Within the bourgeoning literature

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on ethnic conflict, for example, it has been noted that “the transition to democratic politics is meanwhile creating fertile conditions for nationalism and ethnic conflict”.12 It has also been argued that “a sudden reduction in the potential costs of secession, either through the weakening of central government authority or external support for the seceding community, can generate secession attempts”.13 In many developing countries, the breakdown of authoritarian rule and the transition towards democracy often signifies the weakening of central government authority. Indeed, the escalation of conflict in Aceh should also be understood in relation to the political situation of post-Soeharto Indonesia as a whole. First, the collapse of the Soeharto regime in May 1998 ended three decades of authoritarian rule and moved the country towards a period of democratic transition. Second, that transition, which occurred at the time of severe economic and social crises, has been accompanied not only by the collapse of the state’s effective control over its domestic affairs but also by the reality of reduced state capacity. Third, the breakdown of central authority and reduced state capacity have, in turn, unleashed the potentials for inter-ethnic and inter-religious conflicts long suppressed by authoritarian means. Coupled with the absence of strong civic institutions, these three conditions provide a fertile ground for any conflict, including separatism, to escalate. However, one should not jump to the conclusion that the escalation of the secessionist conflict in Aceh should be blamed squarely on the introduction of democracy in Indonesia. It has been argued that “spreading the benefits of democracy worldwide is a worthy long-run goal. However, the strategies for accomplishing this must be guided by a realistic understanding of the politics of transition.”14 In the case of Indonesia, it is this “understanding of the politics of transition” that is conspicuously absent. In other words, it is the nature of Indonesia’s democratic transition, rather than the democratic transition per se, that should be blamed for the escalation of the Aceh conflict. It is not an exaggeration to say that Indonesia’s transition towards democracy has been messy, difficult, and hampered not only by a protracted power struggle among the civilian political elite, but also by the consolidation of the military’s

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political position. Thus, the nature of the government’s response to the Aceh problem — one that is characterized by a form of ambiguity — is largely defined by that power struggle at the national level. Indeed, the nature of Indonesia’s transition to democracy serves to limit the ability of post-Soeharto governments to resolve the conflict through peaceful means. The transition towards democracy has not been preceded by the complete destruction of elements of the New Order’s authoritarianism. When the presidency was passed over to B.J. Habibie in May 1998, he ruled with an administration that was dominated by the same individuals who had served Soeharto before he resigned. After Abdurrahman Wahid was elected as Indonesia’s fourth President in October 1999, elements of the New Order continued to be given important positions within the government, and Golkar — Soeharto’s main electoral vehicle — even managed to maintain its position as a powerful political player. Indeed, “although the authoritarian structure of the Soeharto regime was largely dismantled, elements of it survived…”.15 Under President Megawati, there are now reasons to believe that those elements are now rapidly consolidating and returning to the centre stage of national politics. In the case of the Aceh conflict, the continuing presence of New Order elements at the national level is reflected in the biased attitude of many military and political elite that downgrades the Acehnese grievances on the one hand and emphasizes the secessionist demand of GAM on the other. For example, members of parliament (DPR), especially from the Golkar Party, have not expressed any serious interest in pushing for the trial of those responsible for the gross violation of human rights committed in Aceh by the military during the DOM period and beyond. The military, for its own reasons, has also not expressed any enthusiasm in resolving the conflict in Aceh through peaceful means. It in fact harbours strong scepticism over the negotiation between the Indonesian Government and GAM. In that context it has been noted that “military officers continue to believe that the only way to defeat the Acehnese insurgency is to crush it by military means”.16

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The competitive nature of the post-Soeharto political system also affects Jakarta’s attitude towards Aceh. In such a political system, competing political parties continue to court support from the military. Consequently, the political position of the military remains relatively strong. For example, President Wahid’s decision in April 2001 to issue Presidential Instruction (Instruksi Presiden, Inpres) No. 4/2001, which gave the military a freer hand in dealing with the Aceh problem, should be understood in that context. As the decision to undertake a renewed military campaign was taken at the time when the President’s power was weakening, it is likely that Wahid attempted to court the military by not restraining it in Aceh.17 President Wahid might have been motivated by the need to mend his relationship with the military, with the object of securing military support in the light of the growing threat of impeachment. The reluctance by sections of the government and the parliament to pursue cases of human rights violation in Aceh18 might also be driven by an unwillingness to take up issues that might antagonize the military, whose support is very much sought after by the competing parties. The escalation of conflict in the post-Soeharto era is also caused by the absence of unity and consensus at national leadership level on how best to approach the problem in Aceh. On the one hand, some civilian politicians have tried to pursue a conciliatory policy of negotiation with GAM and rejected the use of military means in resolving the conflict. On the other hand, there is also a more hard-line view arguing that the Acehnese, especially GAM members, are “perennial troublemakers who are asking for more than they deserve”.19 This group believes that the problem in Aceh can only be solved after GAM is destroyed by military force, not through dialogue and negotiation. They also fear that a special autonomy to Aceh would trigger the same demands from other regions.20 The absence of consensus was clearly evident in the case of negotiation between the Indonesian Government and GAM facilitated by a Geneva-based non-governmental organization (NGO) Henri Dunant Center (HDC). When the negotiation between the two parties resulted in the agreement on the “Humanitarian Pause”, reactions from within the military and

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civilian elite circles in Jakarta were those of opposition. Senior military figures, for example, were of the opinion that making peace with pro-independence rebels was a step backwards for the country. An aide to President Wahid, for example, acknowledged that “there are factions in the TNI who are unhappy about the agreement and might sabotage it. They have all along been trying to wreck our peace efforts by using force blindly.”21 The same criticism was also voiced by some civilian politicians. Speaker of the House (DPR) Akbar Tandjung, for example, criticized the government for involving an outsider (the HDC) in the conflict and for failing to consult the parliament on the matter. Shortly before the agreement was signed, a number of DPR members even asked the government to postpone the implementation of the accord.22 This absence of unity and consensus at the centre inevitably resulted in a degree of ambiguity in the policy towards Aceh. President Wahid, for example, was forced to alternate his position between supporting a referendum and threatening to use military force. During his ASEAN tour in early November 1999, Wahid provoked angry domestic reactions when he said,“I support a referendum as their [Acehnese] rights. If we can do it in East Timor, why not in Aceh?”23 In a dialogue with Acehnese students in Washington, D.C., in mid-November, Wahid repeated his support for a referendum and stated that such an event “is only a matter of time”.24 When a display of support for independence grew stronger in Aceh, however, Wahid quickly changed course and declared that “Aceh remains an integral part of the Republic of Indonesia. The TNI will resort to repressive measures if Aceh decides to secede.”25 Despite his personal preference for a negotiated political settlement, Wahid also authorized a fresh military operation through the Inpres (Presidential Instruction) No. 4/2001.26 In the eyes of many Acehnese, the implementation of the Inpres serves as a proof of the ambiguity of the central government in solving the Aceh problem. The erratic rule of Wahid, who oscillated freely between the promise of a negotiated political settlement on the one hand and the threat to use force on the other, clearly

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worsened the situation. Moreover, Wahid personally antagonized the whole population in the province when he asserted that the Acehnese regarded him as a prophet. Leadership ambiguity has contributed further to the resumption of violence in Aceh, the deterioration of trust among the Acehnese in the central government, and the escalation of armed conflict between GAM and the Indonesian security forces.

Aceh under President Megawati: Return of the Military? What are the prospects for a peaceful resolution of the Aceh conflict under President Megawati? When Megawati Sukarnoputri succeeded Wahid as Indonesia’s President in July 2001, it was expected that the problem of Aceh would become one of the main priorities of her government. Indeed, immediately after her confirmation as President by the People’s Consultative Assembly (MPR), there were signs that her new government would soon step up its efforts to resolve the Aceh problem. Even though Megawati had made it clear from the very beginning that maintaining territorial integrity would be a leading priority of her government, it was not immediately clear at that time how she was going to resolve the issue. Many speculated that she would be more inclined to resort to military means in solving the problem in Aceh. Her strong nationalist sentiments and uncompromising stance on Indonesia’s territorial integrity were often cited as the two factors that would push her closer to the military approach. However, some expected that she would keep her promise made before the 1999 presidential elections. Indeed, Megawati promised that if she were elected as President, she “would not let even a drop of blood … drip in Aceh”.27 The promise was seen as a sign that Megawati would prefer peaceful ways of resolving the conflict, especially through dialogue. Doubts, however, began to creep in when her visit to Aceh on 8 September 2001 failed to bring about any significant improvement in the security situation in the province. Nor did it bring about brighter prospects for a peaceful and immediate resolution of the conflict. In fact, there

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were no signs that the dialogue with GAM in Geneva, which was virtually stalled since the fall of President Wahid, would soon be resumed. Like her predecessors, Megawati did not devise any new and concrete policy in dealing with Aceh. She simply followed Wahid’s policy, based on Inpres No. 4/2001, and maintained that the government’s offer on a special autonomy should pacify the Acehnese demands. Rather then addressing the grievances of the Acehnese, especially on human rights abuses, Megawati made it clear that the Acehnese should “forget the past” and “move on to the future”. Moreover, her close and cordial relationship with the military strengthened speculation that her policy on Aceh would in balance favour a stronger and tougher military approach. However, there have been a series of non-military measures attempted by the Megawati government to solve the problem. First, the government made it clear that it did not have any intention to revoke the special rights given by the previous government to Aceh for the implementation of the shari’a law (Islamic law) in the province. Second, despite initial objections expressed by her political party, Megawati agreed to put a new Special Autonomy Law (Undang-Undang Nanggroe Aceh Darusslam or NAD) for Aceh into effect starting from January 2002. Third, as reflected in the 2002 national budget, she also demonstrated her government’s promise to return 70 per cent of the oil and gas revenues back to the province. With these three concessions, the government felt that the people of Aceh, including GAM, should abandon their demand for independence. It seems that the Megawati government has ignored the fact that the implementation of the shari’a law, special autonomy law, and revenue-sharing in favour of Aceh only addresses some of the root causes of the problem in the province. They have partly addressed the problems of economic exploitation and Javanization, but failed to address the problems of continued military oppression and the culture of impunity. Indeed, the three concessions have not resulted in significant changes in the overall security situation in Aceh. On the contrary, during the first six months of Megawati’s administration, violence continued to wreck the province. It was reported that the conflict cost between 1,500 and 1,700 lives in

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2001 alone.28 Since the launching of a fresh military operation by the Army in May 2001, armed clashes between GAM and Indonesia’s security forces have taken place almost on daily basis, with the number of casualties increasing on both sides. Under such circumstances, the civilian populace seems to have been the main victims of the protracted conflict. In January 2002 alone, more than 250 people might have died in the conflict. The prospect for a peaceful resolution of the Aceh conflict is increasingly uncertain due to three important developments. First, the 11 September terrorist attacks on the United States, and the American call for a global war against terrorism, would provide a new opportunity for the Indonesian Government to step up its own war in Aceh without having to worry much about American scrutiny. Some government officials, for example, began to exploit the situation by portraying the secessionist movement in Aceh as a form of terrorism. Second, the merit of a firmer military approach, at least to the government, seems to have strengthened when government troops managed to deliver a serious blow to GAM with the death of its commander, Tengku Abdullah Syafii, in an armed clash in late January 2002. Third, partly reflecting a newfound confidence on the part of the military, the government finally reinstated a regional military command (Kodam) in Aceh; the move gave the military a stronger legal basis for its permanent presence in Aceh and that in turn would aid its execution of counter-insurgency operations against GAM. Indeed, such new confidence on the part of the Indonesian Government regarding its military approach to the conflict is well reflected in its attitude towards the negotiation process with GAM in Geneva. The peace talks, which were brought to a halt around the time of the downfall of President Wahid, were finally resumed on 2–3 February 2002. Despite the government’s willingness to continue the dialogue, however, the two-day meeting in Geneva has not resulted in a substantial change in the positions of both sides. The GAM leadership, for example, has yet to relinquish its demands for independence. The government, on its part, continues to express its impatience at the pace of negotiation and in fact began to renew its threats to terminate the negotiation process if GAM continues to reject the autonomy solution for Aceh. In other

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words, while the gap between GAM and the government remains as wide as ever, it seems that the military is increasingly consolidating its return to the centre stage in the Aceh conflict. If this trend continues, one can only expect that a protracted violence in Aceh would continue to become a norm rather than the exception.

Conclusion: What Needs to be Done? It has been almost four years since the collapse of Soeharto’s authoritarian rule in Indonesia. However, the problem in Aceh has not yet showed encouraging signs towards resolution. On the contrary, signs of the return of a more militaristic approach are increasingly evident. Despite the strengthening of Indonesia’s military approach, the possibility for a peaceful solution to the conflict is not totally absent. That, however, requires the willingness of both sides to agree on two fundamental issues — the process and agenda of negotiation and the problem of justice — which need to be addressed before any peaceful resolution of the conflict becomes possible. First, for the Indonesian Government, the most pressing issue is how to regain the trust of the Acehnese people. That would require it to address the problem of justice, in both the legal and economic sense. The tremendous sufferings caused by the military during the DOM era continue to leave bitter feelings against the central government among ordinary Acehnese. Therefore, the most difficult problem that needs to be addressed soon by President Megawati is the trial of the perpetrators of human rights abuses during that period. On this issue, important segments of the Acehnese society have repeatedly made it clear that the current form of resistance against the central government in Jakarta would not come to an end before the Acehnese quest for justice is fulfilled. Indeed, it was the failure to deal adequately with this sensitive issue that hampered the ability of Habibie and Wahid to resolve the problem in Aceh. Now, Megawati is also beset by the same problem. Until now, her government’s ability to push for significant progress on this issue has been seriously limited. Much more still needs to be done on this front. Meanwhile, the continuing armed

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clashes between GAM and the Indonesian security apparatus as well as the excesses of the military’s continuing efforts to quell the secessionist movement could once again provide a fertile ground for another round of resistance. In other words, unless the issue of justice is addressed in a substantial way, what has been achieved so far remains an incomplete solution to the Aceh problem. And, as long as this problem continues, threats to security in terms of human suffering, at both the national and regional levels, will persist. More importantly, such threats cannot be overcome solely by the use of military force. Any solution to the Aceh problem should start with a serious attempt to address and resolve the cases of violation of human rights in the province. Second, any meaningful initiative to find a peaceful solution to the conflict would require not only a clear agenda at the negotiating table, but also a step-by-step approach to the peace talks. Here, it is imperative for both sides to agree on a ceasefire or, in the more preferred government terminology, a “period of cessation of hostilities and violence”. Only after such a requirement is met would both sides then be able to move on to other items on the agenda. Here, creative thinking on how to solve the conflict peacefully that places the security and well-being of the ordinary Acehnese people above all other interests would have a better chance to prevail. If both sides intend to manipulate such a “period of cessation of hostilities and violence” as an opportunity to consolidate their own position, then the conflict in Aceh will continue to be one of the bloodiest in the region.

Notes 1. For a comprehensive discussion on this issue, see Nazaruddin Sjamsuddin, The Republican Revolt: A Study of Acehnese Rebellion (Singapore: ISEAS, 1985). For a comprehensive study on the causes of the DI rebellion in Indonesia in general, see C. van Dijk, Rebellion under the Banner of Islam: The Darul Islam in Indonesia (The Hague: Martinus Nijhoff, 1981). 2. David Brown, The State and Ethnic Politics in South-East Asia (London: Routledge, 1994), p. 156. 3. For a detailed discussion on the economic sources of Acehnese discontent, see Tim Kell, The Roots of Acehnese Rebellion, 1989–1992,

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4. 5. 6. 7. 8.

9. 10.

11. 12. 13. 14. 15. 16.

17. 18.

19. 20. 21. 22.

Cornell Modern Indonesia Project No. 74 (Ithaca: Cornell University, 1995), pp. 13–28. Merdeka, 11 January 1999. Republika, 12 January 1999. Geoffrey Robinson, “Rawan Is as Rawan Does: The Origins of Disorder in New Order Aceh”, Indonesia, no. 66 (October 1998), p. 135. Ibid., p. 136. Statement by Indonesian Minister of Transmigration, Martono, Ecologist, London, 2 March 1986, quoted from Richard Barber, ed., Aceh: The Untold Story (Bangkok: Forum-Asia, 2000), p. 25. Kell, op. cit., p. 84. The second GAM rebellion began in 1989. For a detailed account on the cycles of GAM rebellion, see Rizal Sukma, “The Acehnese Rebellion: Secession in Post-Suharto Era”, in Non-Traditional Security Issues in Southeast Asia, edited by Andrew T. Tan and Kenneth Boutin (Singapore: Select Books, 2001). Barber, op. cit., p. 36. Jack Snyder, From Voting to Violence: Democratization and Nationalist Conflict (New York: W.W. Norton & Company, 2000), p. 20. Viva Ona Bartkus, The Dynamic of Secession (Cambridge: Cambridge University Press, 1999), p. 217. Snyder, op. cit., p. 16. Scott B. MacDonald and Jonathan Lemco, “Indonesia: Living Dangerously”, Current History, April 2001, p. 178. Aceh: Why Military Force Won’t Bring Lasting Peace, ICG Report No. 17 (Jakarta and Brussels: International Crisis Group, 12 June 2001), p. 15. See Aceh: Can Autonomy Stem the Conflict? ICG Report No. 18 (Jakarta and Brussels: ICG, 27 June 2001), p. 4. Compare this to the reaction by the government, especially the military, to the accusation that the military had violated human rights in Ambon when a group of soldiers opened fire at members of Laskar Jihad (a hard-line Muslim group participating in the conflict), leaving more than twenty people dead. Within weeks, the military decided to remove the Maluku regional military commander and sent a team to Ambon to investigate the incident. Aceh: Can Autonomy Stem the Conflict?, p. 16. See, for example, the statement by the governor of National Resilience Institute (Lemhanas), Kompas, 16 May 2001. The Straits Times, 5 May 2000. Kompas, 11 May 2000.

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23. Margot Cohen, “Alarms in Aceh”, Far Eastern Economic Review, 18 November 1999, pp. 17–18. 24. Gamma, 21 November 1999. 25. Gamma, 12 December 1999. 26. The Inpres No. 4/2001 was actually meant to provide a policy framework for a comprehensive approach to solve the Aceh problem, in which military was only one component. However, when there was no discernible progress in other areas, the Inpres in practice served more as a justification for an escalation of military operation in Aceh. 27. The Hindu, 19 August 2001. 28. For estimates, see “Indonesia”, Associated Press, 2 January 2002; and “GAM wants talks to be postponed”, The Jakarta Post, 28 January 2002.

References Barber, Richard. Aceh: The Untold Story. Bangkok: Forum-Asia, 2000. Bartkus, Viva Ona. The Dynamic of Secession. Cambridge: Cambridge University Press, 1999. Brown, David. The State and Ethnic Politics in South-East Asia. London: Routledge, 1994. Cohen, Margot. “Alarms in Aceh”. Far Eastern Economic Review, 18 November 1999, pp. 17–18. Kell, Tim. The Roots of Acehnese Rebellion, 1989–1992. Cornell Modern Indonesia Project No. 74. Ithaca: Cornell University, 1995. MacDonald, Scott B. and Jonathan Lemco. “Indonesia: Living Dangerously”. Current History, April 2001, p. 178. Robinson, Geoffrey. “Rawan Is as Rawan Does: The Origins of Disorder in New Order Aceh”. Indonesia, no. 66 (October 1998), p. 135. Snyder, Jack. From Voting to Violence: Democratization and Nationalist Conflict. New York: W.W. Norton & Company, 2000. Sukma, Rizal. “The Acehnese Rebellion: Secession in Post-Suharto Era”. In Non-Traditional Security Issues in Southeast Asia , edited by Andrew T. Tan and Kenneth Boutin. Singapore: Select Books, 2001. van Dijk, C. Rebellion under the Banner of Islam: The Darul Islam in Indonesia. The Hague: Martinus Nijhoff, 1981.

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Reproduced from Governance in Indonesia: Challenges Facing the Megawati Presidency, edited by Hadi Soesastro, Anthony L Smith and Han Mui Ling (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part 182 of this publication may be reproduced MOHAMMAD SADLI without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available from < http://bookshop.iseas.edu.sg >

9 Economic Overview Mohammad Sadli

Introduction On 31 October 2001 Jakarta’s mass media were full of negative assessments about the performance of President Megawati in the first 100 days. An exception was Arief Budiman from Melbourne University (known to be somewhat left-of-centre), who recognized three achievements of Megawati. First, she restored normal relations with the International Monetary Fund (IMF); second, she cultivated good relations with the military; and third, she appeased the Muslim community with her statement opposing the war in Afghanistan. Representing the economic Cabinet, Dorodjatun KuntjoroJakti, Co-ordinating Minister of Economics, could probably make the complaint that the criticisms have not been completely fair to him as well as the rest of the Cabinet members, who were all inaugurated on 10 August 2001, after more than two weeks of pondering by Megawati over the formation of her Cabinet. For them, the first 100 days would have been on 19 November, although Megawati was inaugurated on 23 July 2001. Would this brief interlude make much difference for the economic co-ordinating minister? Perhaps he might hope it could,

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

Macroeconomic Situation As it stands now, however, the market has not given the new government a vote of confidence, except at the very beginning. When Megawati Sukarnoputri assumed the presidency, the rupiah strengthened impressively to Rp8,500 to the U.S. dollar, after having reached a low of Rp11,300 at the end of Abdurrahman Wahid’s term. Since then, however, market sentiments have weakend and exports have come down. The September 2001 export figure was the lowest for the year. In 2000 total exports reached US$62 billion, or a little over US$5 billion a month, and this was a very healthy figure. The figure for September 2001 stood at US$4.32 billion, compared with US$5.77 billion in September 2000. Imports, a good indicator of the robustness of the domestic economy, also sank to US$2.14 billion in September 2001, while a year earlier, it was US$3.45 billion. Generally speaking, imports should amount to over US$3 billion a month to reflect normal economic conditions. The rupiah rate of exchange in early November 2001 has also weakened significantly to once again breach the Rp10,000 per U.S. dollar level.1 Hence the depreciation of the rupiah during the first 100 days of the Megawati administration had been much greater than in the first three months of Gus Dur’s government.

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On 17–18 January 2000, in my evaluation of the first 100 days of the Wahid administration at an Institute of Southeast Asian Studies (ISEAS) conference, I said in my concluding remarks that the Gus Dur administration should be awarded a “B grade” for its economic performance. That grade is an average of a “B+” for macroeconomic policy agenda, a “B–” for the bank-restructuring agenda, and a “C+” for corporate restructuring; overall, a “B”. And then my infamous last words: “There is every prospect that the grade will improve over the coming year to a B+ average.”2 Looking back, one regrets giving such a high grade. But, then again, the exercise of evaluating a government so soon is a bit risky and premature. In those days, in January 2000, the DEN (Dewan Ekonomi Nasional or National Economic Council) was still in existence with its chairman, Emil Salim, a noted economist, playing a very important role. Ministers Laksamana Sukardi and Jusuf Kalla were still in the Cabinet, although they were later fired by Gus Dur. Sri Mulyani, the most prominent young, female economist from the University of Indonesia, was also still secretary of the DEN. In short, the optimism and euphoria were not over after Wahid’s first 100 days. Why is it that after 100 days of the Megawati presidency, the euphoria is gone and the scorecard painted more reddish than black? But even with such a score, nobody in Jakarta, perhaps with the exception of Islam hard-liners, wants to bring down Megawati. At the moment all the major political parties in the parliament and the People’s Consultative Assembly (MPR) are willing to let her continue till 2004. Is it because all the other options are perceived to be disastrous for the country? Or is it because people are willing to extend the political grace period in the hope of improvement in the general situation? Although market conditions improved substantially in August 2001 on hopes of a return to political stability in Indonesia and early initiatives on economic policy, this optimism has been eroded by concerns over the global economy and the 11 September attacks. The world economic situation has deteriorated since the second half of 2001 with the threat of a world recession. After the 11 September terrorist attacks the possibility of the world economy sliding into a recession

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has increased, and the people’s confidence as to when the upturn will come has become more tenuous. In explaining the perception of a dismal record of the first 100 days of Megawati’s presidency in the economic field, one has to distinguish between the impact of the fast-changing external and domestic situation after 11 September 2001, and the possible causes of the less-than-optimal performance of the economic team in the Cabinet. This chapter will concentrate on the second.

The Economic Team in the Cabinet President Megawati is often seen to have limited leadership ability and is therefore very much dependent on the three co-ordinating ministers, namely for security and political affairs, economic affairs, and social affairs. The Cabinet, which Megawati formed in August 2001, was called, in various circles, a “dream team”. But actually that term was used more in the foreign press. From a domestic perspective, we are inclined to praise Megawati for being able to fend off so many political pressures domestically and, after two weeks (a relatively long waiting period), for coming up with an “optimal team”, under the circumstances. With respect to the economic portfolio, her choice of Dorodjatun Kuntjoro-Jakti actually came as a last-minute compromise because some very influential quarters wanted a return of economic ministers who had served in the Wahid Cabinet. Dorodjatun, who was the Indonesian Ambassador in Washington, D.C. for four years, and before that, Dean of the prestigious Faculty of Economics at the University of Indonesia, looked like a suitable prospect to Megawati although she did not know him personally.

Performance of the Economic Team The public perception so far is that Dorodjatun as a key coordinating minister has not performed up to expectations. The often heard complaint is that he is not too focused when it comes to identifying the main problems and seeking workable solutions.

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He spent the past four years in Washington, D.C. and knows a lot about the United States and the world economy, but his comprehension of complex domestic issues may have become rusty. He can paint a comprehensive picture of the global forest but fails to identify the unhealthy Indonesian trees. He also has not been able to coach the economic ministers into a compact and functioning team. The economic ministers have, on more than one occasion, made contradicting statements. On the other hand, he still has the respect of his peers and other intellectuals because they see him as an honest person and free from corruption (KKN). As an economist, he is also “mainstream” and does not entertain outlandish or unorthodox economic ideas. Individuals like Dorodjatun and Boediono have no high political ambitions or party political commitments, hence “have nothing to lose”; so they can be more forceful and courageous and are able to act according to their professional convictions. Leading politicians at the November 2001 MPR session, which marked Megawati’s first 100 days in office, expressed similar reservations about the effectiveness of the economic team. On the second day of the session, when the parties commented on the progress report of the President, the spokesman for the Golkar Party said: “We understand that 100 days of governing is not sufficient time, but we expected that the government at least could draw up the priorities and problems that should be taken care of, to boost the economic condition.”3 Gus Dur’s party, Partai Kebangkitan Bangsa (PKB), which has taken on the role of the opposition, criticized the co-ordination among the members of the government economic team, saying that in the previous three months, the team had done nothing. On the other hand, most of the parties recognized that the external situation, especially after the 11 September terrorist attacks, had dealt a heavy blow to economic recovery efforts. Among the other economic ministers, there are several from the previous government, such as Purnomo Yusgiantoro, the Minister for Energy and Mines, and Bangaran Saragih, the Minister for Agriculture. They are responsible for part of the real sector and seem to be doing their work well enough, although sometimes they do not show the political courage to make difficult decisions.

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The others are new, such as Rini Suwandi, the Minister for Industry and Trade, and they may sometimes feel lost in the inter-ministerial turf wars. Boediono, the Finance Minister, probably has the most experience working in the upper levels of a complicated Indonesian bureaucracy. He is judged to be the best performer on the team, but his responsibility is restricted to budgetary or fiscal matters. Laksamana Sukardi, the State Minister for Revenues and State Enterprises, has a very important portfolio because he controls all the state assets, and is highly regarded as a professional banker by background. But he has not privatized a single state enterprise and could not break the deadlock on the sale of the majority shares of the Semen Gresik company to Cemex, a Mexican investor company. All the members of the economic team could feel the limitations imposed by the political environment. For some ministers, the limitations imposed by the LoI with the IMF are also burdensome to their task of reviving the sluggish real sector of the economy. There is a schism in economic policy, namely should the economic team give priority to macroeconomic matters, or should it have proactive policies to boost the real sector? The coordinating and the finance ministers, as well as the central bank, tend to focus on the management of the macroeconomy, namely watching closely the financing of the government budget, the rate of inflation, the balance of payments, and the commitments with the IMF. The ministers responsible for the real sector (production, investments, trade, and so on) would like to see more liberal financial policies, protection, and lower interest rates. Under the present circumstances, with a constantly weakening rupiah and stubborn inflationary pressures, the macroeconomists tend to prioritize financial policies to stabilize the macroeconomic equilibrium. The question is whether or not this stabilization can be achieved by monetary and fiscal means, as the major source of instability has been the lack of, or eroding, confidence in the market. This lack of market confidence is also caused by complications in the political and security fields. For instance, the LoI demands that as many as possible state-owned enterprises (SOEs) and Indonesian Bank Restructuring Agency (IBRA) assets be sold to finance the budget deficit. Yet there is

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widespread and public political resistance to the sale of some state enterprises, such as the Padang (West Sumatra) and Tonassa (South Sulawesi) cement plants. If Dorodjatun and Laksamana could not get the support of the parliament, and probably not the immediate and full support of Megawati, and are facing stiff resistance from the two local regions, could they, as well as the whole government, proceed vigorously with the privatization programme? That crucial decision for Semen Gresik was postponed at the October 2001 deadline date. In the ensuing days, there was no additional political support for the sale, and more “caution and patience” were counselled. The point here is that even taking into account the personal weaknesses of the co-ordinating ministers, what is required in the LoI is simply “not on the political cards”. To be fair to the economic co-ordinating minister, the public perception of the effectiveness of the two other co-ordinating ministers, that is, security and social affairs, is also about the same; that is, they are not strong enough to carry the leadership burden for Megawati. Moreover, the three functionaries do not appear to work as a solid team either. Hence, the Megawati leadership suffers from a structural weakness. She is herself not strong enough to carry the burden (unlike, for instance, Soeharto) and her three-legged support is a bit wobbly. The question is, can time improve the effectiveness? We do not know, but people can learn and systems can grow, and there is probably no other option for Indonesia. The other option for Megawati is a Cabinet reshuffle, but because Wahid did too much reshuffling and failed miserably, Megawati is not likely to repeat such tinkering. However, Dorodjatun could also tick off the accomplishments of the economic Cabinet since its inception in August 2001. A new LoI with the IMF was signed on 27 August 2001. Dorodjatun can also claim some credit over the settlement (on more equitable terms) of the OPIC (Overseas Private Investment Corporation) insurance claim between PLN (State Electricity Board) and the U.S. creditors, involving more than US$200 million. Furthermore, the Minister of Finance managed to get People’s Representative Assembly (DPR) approval for the revised budget for 2001 while the major assumptions for the 2002 budget also have the

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concurrence of the parliament. Four major capital-intensive milliondollar projects — the Chandra Asri, the Tuban petrochemical, and the Tanjung Jati B and Paiton power projects — with the Japanese were also concluded. A capital restructuring deal has been negotiated, which is capable of lowering the debt burden for the government. Perhaps not enough appreciation is given for these achievements.

Relations with the IMF Since the drawing up of the new LoI in late August 2001, the Megawati government’s relationship with the IMF has not been too unhappy. On the other hand, at the time of review a few LoI clauses had not been met. The most serious is the failure of the sale of Semen Gresik shares to Cemex, and because of this nothing was achieved of the Rp6.5 trillion (roughly US$650 million) target to finance the 2001 budget deficit. Yet, after two weeks of work, the IMF review team led by Daniel Centrin left Jakarta after issuing a press release that did not indicate any major trouble. It said: The IMF mission and the GOI [Government of Indonesia] have reached an agreement on a new Letter of Intent that sets out policies that the government plans to implement over the course of 2002. The GOI and the IMF team agreed that macroeconomic stability is fundamental to achieving sustained economic recovery in Indonesia. To that extent, there was agreement on setting a fiscal policy course consistent with the goal of striking a balance between supporting economic activity and meeting key social spending needs while embarking on fiscal consolidation that will enable a steady reduction in the level of public debt. The team was also encouraged by the central bank’s resolve to reduce inflation to single digit levels over the course of 2002. Restoration of private sector economic activity is central to sustained recovery. In this respect, reforms to the banking system, corporate restructuring, returning IBRA managed loans, banks, and other assets to

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the private sector, strengthening of decentralization, privatizing state owned enterprises as well as intensifying reform efforts in the justice system are essential. The new Letter of Intent sets out measures in these areas that the mission team believes form a sound foundation for recovery.4 Nothing was said about the effectiveness of the implementation of the then current LoI and the new LoI for 2002 would look strikingly like the old one, perhaps with a more detailed matrix of the homework the Indonesian Government has to do. The third LoI had thirty-five clauses, while the fourth draft has forty-seven. The IMF approach to Indonesia’s restructuring has been alternating between a micro-approach (with a very detailed matrix) and a macro-approach, giving greater leeway to the government. The third LoI was based on a macro-approach. Both have not produced good results. Hence the yo-yo syndrome may continue. For a weak economic team with poor leadership, perhaps an extensive set of commitments may help the internal co-ordination among the ministers and among the ministries.

Relationships with the World Bank and Asian Development Bank The World Bank, the Asian Development Bank (ADB), and the Japanese Government have been the most important sources of development assistance for Indonesia. In normal times each of them contributes slightly over US$1 billion, out of US$4–5 billion annual total assistance. Part of the sum is earmarked for projects but a substantial part takes the form of programme aid, that is, general budgetary assistance. Subsequent Reformasi (post-Soeharto) governments, however, have not been able to absorb fully the financial assistance. There is always a significant amount of undisbursed aid money at the end of the year. With respect to project aid, the required domestic rupiah financing was not always available on time and hence the donor’s commitment could not be disbursed. With respect to

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programme aid, non-disbursement has often been the result of the Indonesian Government not being able to fulfil certain policyrelated or legislative conditionalities. At the end of 2001, again there had been a significant underdisbursement. Out of the US$4.8 billion total international aid committed to Indonesia, only US$2.6 billion had been disbursed so far. During the Wahid presidency, the World Bank scaled down Indonesia’s rating from “high case” to “low (or base) case”. At high case, the full amount of over US$1 billion commitment is disbursed. But both the World Bank and the ADB were complaining about non-performance of the Indonesian Government during Wahid’s presidency; as a result the country was put in the “low case” category, which meant that the bank only disbursed US$400 million of aid — mostly targeted at poverty alleviation. The ADB follows the same line. Because the Japanese Government co-finances certain programmes or projects of the ADB, that part of the Japanese bilateral loan is automatically also non-disbursed. The less than ideal relationships between the international financial institutions (the World Bank, ADB, and IMF) and the Wahid administration were also caused by “political factors”, namely those institutions losing confidence in the government. The relationship between Rizal Ramli, the then economic coordinating minister, and the IMF was ambivalent at best. Nondisbursement became a sanction. On the other hand, the Megawati government, especially in these days of a political grace period, enjoys wide international support. The Wahid government was treated the same way during the initial months. Hence on the eve of the CGI conference on 7–8 November 2001, the World Bank and the ADB were in a quandary as to how to treat the new administration. The fact is that in the previous three months, Megawati’s economic team had not been able to restore the “high case” status of the country. Even a few “triggers”, presented by the World Bank to the Indonesian Government to elevate the country’s position, could not be responded to effectively and timely enough. The “triggers” are:

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1. 2. 3. 4.

5.

Maintain a tight money policy through the rest of the year to bring down the inflation. Privatize Bank Central Asia (BCA), Bank Niaga, and Semen Gresik as planned. Enact an Anti Money Laundering Law that meets the concern of the Financial Action Task Force (FATF). Finalize an action plan to create the right organizational structure for Indonesia’s public procurement system, and also apply it in the regions. Adopt a rice policy which balances the needs of farmers and consumers (especially the poor), and which gives Bulog a medium term, fiscally sustainable role.

The difficulty the economic co-ordinating minister faces in implementing them is that it requires co-operation and support from other ministers and from other branches of the government, that is, the parliament and the judiciary. The economic coordinating minister should be able to manage the other ministers, but tackling the judiciary and the parliament requires more perseverance. It is worth citing part of the concluding statement by the chairman of the CGI conference (Jemal-ud-din Kassum, World Bank Regional Vice-President): The Government requested a disbursement amount from the CGI of between US$3.0 to 3.5 billion to meet the external financing gap in the budget. The total pledge from the CGI in support of the 2002 budget amounted to US$3.14 billion, of which over $1.3 billion will be dependent on policy performance and the remainder will be disbursed in support of development projects. These pledges indicate, perhaps more clearly than words, that the international community would like to see Indonesia succeed and is prepared to support its recovery efforts with substantial amounts of financial assistance — which, in the eyes of the international community, is critical for sustainable, rapid growth. The large differences between pledges and actual disbursements in the past suggest that, while such resources are available, their disbursement

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in 2002 will depend on a significant higher level of reform effort than has been seen in the past few years.5 The main document for the CGI meeting was a report of the World Bank, called “Indonesia, The Imperative for Reform”, written under the supervision of Vikram Nehru, the resident economist at the Jakarta office. It is a frank assessment, and at page 1.10 there is a box entitled “What a difference!”, depicting differences between pledged amounts of aid (years 1998/99, 1999/ 2000, 2000, and 2001) and actual disbursements. Cumulatively, from a total programme aid pledged of US$13.2 billion, actual disbursements were US$7 billion, and hence the difference is US$6.2 billion. For 2000 total pledge was US$2.7 billion for programme aid but disbursements only US$0.2 billion. For project aid, the cumulative total was US$10 billion and actually disbursed US$6.9 billion. For 2000 project aid pledged was US$2 billion and actually disbursed US$1.9 billion. The article concludes: Two conclusions can be drawn from this. First, slow and halting reforms have cost Indonesia dearly in terms of resource availability that could have boosted development spending for the poor. And second, contrary to opinion among some quarters (in Indonesia and abroad), official creditors have withheld finance when policy performance was slow or below par, correctly holding the Government to its commitments.6

Some Speculations for the Near Future In the near future, improvements must be made in policy implementation and in the performance of the whole Megawati government, not only the economic team. The CGI chairman made the remark that “there is a narrow window of opportunity that Indonesia has in the six months to come and it should grab it and put it to good use”.7 The CGI was set to review the situation in April 2002. The IMF reviews the situation every three months. Hence there will be a lot of external, international pressures. Chances are that it will help. Perhaps not in a dramatic way, but

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small improvements repeated frequently enough will at some point produce a systemic impact. Compared to the Habibie and Wahid governments, which were plagued by bad relations with the parliament, the Megawati government has a much more amenable relationship. Megawati will probably last until 2004. Greater stability of leadership by itself will provide incentive and stimulus for improvement of performance at ministerial level. When the international donor community is constantly breathing down the government’s neck, are there domestic pressures? Perhaps not so strong and much less specific, but domestic pressures are definitely at work. Foremost is public opinion, criticism from professional communities, and from the media. Some of them are very critical and outspoken. The parliament plays a very crucial role. The DPR can expedite the passing of laws, triggering the disbursement of programme aid from the World Bank and the ADB. For this to happen, however, ministers must, as a team, work more persistently in lobbying the parliament. Most importantly, Megawati can intervene directly, as she did on a couple of occasions, to expedite matters. An urgent matter now is to provide the ministers with first-echelon aides with whom they will feel comfortable. So far this process has been obstructed by bureaucratic impediments, perhaps even politically motivated. The complaint so far is that Megawati is too indifferent to some of the stymieing obstructions. She has to change her style of leadership. She must interact more closely with the three coordinating ministers, and both levels of government should encourage each other to make the government’s stand on crucial matters more explicit. Today the often-heard complaint is that there is no strong leadership coming from the top. The indecisiveness shown in handling the Semen Gresik case and in handling administrative conflicts with the regions are cases in point. Because of the weakness of the government, is there a possibility that the domestic situation would worsen and the government become untenable? This is only a remote prospect. Presidents in Indonesia have been unseated because of politics,

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not economics. At the moment, there is actually no sense of crisis. The pictures of empty seats and members dozing off at the 2001 MPR session underscore this. The annual MPR session has produced nothing of substance, and the dire state of the economy was not even on the radar screen. Thanks to the LoI commitment with the IMF, the rate of inflation will be at worst in the lower double digits. This cannot be compared to the 70 per cent rate during the crisis year of 1998. The crunch in the economic situation will be caused by the impact of the world recession on exports. There will be retrenchments and lay-offs in labour-intensive industries. But later in the year 2002 there may be some recovery. So, another scenario is that the Megawati government survives by muddling through, or drifting, until “natural solutions” are found to some of the pressing problems. The ultimate resolution of the Semen Gresik case may go that way. Time can resolve many problems. Notes 1. As at 23 November 2001, the rate was about Rp10,500. 2. See Mohammad Sadli, “Comments on Indonesia’s Economic Reform”, in Gus Dur and the Indonesian Economy, edited by Anthony L. Smith (Singapore: Institute of Southeast Asian Studies, 2001), p. 215. 3. Kompas, 2 November 2001. 4. IMF Statements at Donor Meetings, . 5. World Bank, 11th Consultative Group Meeting on Indonesia: Concluding Statements of Jemal-ud-din Kassim, Chairman and Vice President, East Asia and Pacific Region, The World Bank, 8 November 2001. 6. World Bank, “The Imperative for Reform”, Report No. 23093-IND, 2 November 2001. 7. Ibid.

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Reproduced from Governance in Indonesia: Challenges Facing the Megawati Presidency, edited by Hadi Soesastro, Anthony L Smith and Han Mui Ling (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part 196 of this publication may be reproduced without the prior permission of the Institute of Southeast Asian J. SOEDRADJAD DJIWANDONO Studies. Individual articles are available from < http://bookshop.iseas.edu.sg >

10 Role of the IMF in Indonesia’s Financial Crisis J. Soedradjad Djiwandono

Introduction The issues and challenges facing President Megawati’s government, with respect to its dealings with the International Monetary Fund (IMF), originated from the previous governments. An evaluation of the relationship between the Indonesian Government and the IMF should begin with the latter’s early efforts to address the Indonesian crisis through its programmes under the stand-by arrangement.1 Prior to the 1997 financial crisis, the IMF’s engagement with Indonesia was occasioned by the balance of payments’ problems experienced by the country in the late 1960s and early 1970s. After that, for more than two decades, Indonesia had enjoyed a very good working relationship with the IMF without a need for any stand-by loans.2 Faced with the financial shocks that struck Indonesia in July 1997, the government of Indonesia initially reacted by widening the intervention band for the rupiah and then replacing the band with a flexible exchange rate management system. This was supported by other prudent fiscal and monetary policies. 196 © 2003 Institute of Southeast Asian Studies, Singapore

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Unfortunately, this did not restore market confidence in the Indonesian economy. In the end the Soeharto government decided to seek the IMF’s help, requesting the use of its facility. In October 1997 the Indonesian Government signed the first Letter of Intent (LoI), which was approved by the IMF board of executive directors a month later. This arrangement triggered an active involvement of the IMF in the adjustment programmes that the Indonesian Government had to adopt to address the financial crisis. This chapter describes the nature of the IMF’s involvement in Indonesia’s efforts to resolve the financial crisis confronting the nation, its relationship with the Indonesian Government, as well as the likely prospects for the near future. It also gives an assessment of why certain steps were taken while others were not. It is hoped that this will shed some light on the lessons to be learned by both the Indonesian Government and the IMF in resolving the crisis and paving the way towards recovery.

IMF’s Role in the Crisis A member country is entitled to acquire an IMF facility by temporarily using funds held by the institution. To use these funds, the member country must submit a proposal in the form of a LoI. The proposal stipulates the requested loan amount and a detailed policy programme that the government intends to implement to resolve the imbalances facing the national economy, in particular its balance of payments. The programme document is known as the Memorandum of Economic and Financial Policies (MEFP) and it is prepared in the context of the member country’s request to utilize a stipulated IMF facility, generally in the form of a stand-by loan for balance of payments support. The adjustment programme to address the balance of payments imbalance has to be agreed upon by both the IMF and the member country in what is usually called the IMF-supported programme. This programme will be implemented by the member country entering an agreement for a stand-by arrangement with the IMF. The document will be submitted to the managing director of the IMF, who in turn will submit it to the board of executive directors for approval.

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From October 1997 to August 2001, a total of sixteen LoI had been agreed upon by the IMF with Indonesia (see Appendix Table 10.3). There were three from the Soeharto government, eight from Habibie, four from Wahid, and one from Megawati. At the time of writing, the government was negotiating with the IMF for a new LoI.3 The total funds involved in the programme amounted to SDR4 11.8 billion (around US$14.95 billion), with SDR2.75 billion in stand-by loan and SDR9 billion in Extended Fund Facility (EFF).5 So far, the total withdrawals have amounted to a little over US$10 billion. The programme also includes a variety of quantitative and qualitative requirements, which constitute what is technically called conditionality. Conditionality is basically a set of requirements that has to be fulfilled by the member country. Since utilizing the IMF facility is done through withdrawals by stages, the member country has to demonstrate its compliance to the IMF conditionality for the initial withdrawal as well as every other withdrawal within the duration of the arrangement. Conditionality includes performance criteria, structural benchmarks, and programme reviews. It also includes steps to be taken by the receiving country prior to the approval of the arrangement by the IMF’s executive board, which is known as prior action. Due to the complex nature of the crisis, different adjustment policies are included in Indonesia’s IMF-supported programme in addition to the common features for macro stability. They are in the form of comprehensive financial restructuring, economic reforms in the real sector, institution building, as well as measures to improve government and corporate governance and increase transparency. Conditionality in IMF-supported programmes serves as a link between the approval and continuation of the IMF’s financing and the implementation of specified elements of economic policy by the country receiving the financing.6 The requirements that have to be fulfilled by the receiving country are viewed as safeguards by the IMF, so that the use of the facility would achieve the objective of stabilizing the member country’s economy and the funds used would be repaid.

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Working with the IMF Confronted with the financial panic in July 1997, the Indonesian Government took a series of adjustment steps. The initial policy response to the currency crisis was a managed float system to widen the central bank’s intervention band in the foreign exchange market. This decision was made on 11 July 1997, the same day the Philippine peso was floated. The Thai baht had already been floated a week before. The managed float with a crawling band was generally an effective technique to maintain the stability of the rupiah in the face of increasing capital outflows. The rupiah was stable for some period after the last devaluation of September 1986. Bank Indonesia widened the intervention band six times between 1994 and July 1997, with the aim of facilitating the dollar inter-bank market while withdrawing itself from the domestic foreign exchange market. On at least two occasions the Indonesian dollar market experienced disturbances, which were immediately put to rest by the central bank. The two occasions occurred in January 1995, which was caused by the Mexican peso crisis, and in July 1996, occasioned by a riot in Jakarta following the ransacking of the headquarters of Megawati’s Indonesian Democracy Party (PDI-P). Prior to July 1997, every time Bank Indonesia (the central bank) widened the intervention band, the rupiah appreciated. In fact, the dollar exchange rate in the spot market closely followed the lower band, which was the buying rate of Bank Indonesia. In contrast, a completely different market reaction emerged in the financial panic of July 1997. When Bank Indonesia widened the intervention band in July 1997, the rupiah depreciated instead. Worse still, the spot rate of the dollar not only broke the mid-rate, but also the upper band or the selling rate of Bank Indonesia. The latter prompted Bank Indonesia to intervene in the market, first by selling dollars forward, and later, in the spot market. The rupiah’s drastic depreciation continued despite the government’s concerted efforts to strengthen it through a combination of fiscal and monetary steps. The banking sector started to experience distress in the face of some bank runs and

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large amounts of dollar purchases. With the decision by neighbouring governments to float their currencies, the rupiah became the only currency not floated in the region. Even under the system of managed float with crawling band, the rupiah was still very vulnerable and unstable. In order to reduce the danger of fast depleting foreign exchange reserves held by the central bank, the Indonesian Government decided to float the rupiah freely on 14 August 1997. Since then, Indonesia has adhered to a free-floating exchange system. In early September 1997, realizing that the contagion had spread to the banking sector, the government launched a broad economic policy initiative, which encompassed monetary and fiscal measures as well as liberalization in the trade and other sectors. This was a precursor of a IMF-supported programme. Unfortunately, these efforts did not help. The rupiah remained under heavy pressure and continued to depreciate. The market experienced a shortage of liquidity, partly due to the earlier policy of tightening the monetary policy in order to defend the rupiah. The banking sector felt the crunch as the number of banks that violated the mandatory reserve requirement was on the rise. Some banks even experienced a negative balance in their dealings with the central bank. In fact, some important signs of banking distress were beginning to surface. Eventually, in October 1997, the Indonesian Government decided to turn to the IMF. The IMF-supported programme was initiated with the first LoI that was submitted on 31 October 1997 and approved by the IMF on 4 November 1997. The programme was built around three areas: • a policy package for economic reforms in the real sector, including enhancement of transparency and governance; • a strategy for comprehensive financial restructuring that included the closure of insolvent banks; and • a strong macroeconomic policy for balance of payments stability in the form of prudent monetary and fiscal policy. For a short period, the implementation of the programme elicited a positive response from the market. The closure of sixteen insolvent banks and joint intervention in the currency market by

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Bank Indonesia with the Monetary Authority of Singapore and the Bank of Japan were welcomed by the market and resulted in the strengthening of the rupiah, which for a while rose from Rp3,900 to Rp3,200 to the U.S. dollar. However, the domestic reactions to the bank closures were unexpected. Market confidence in the banking sector collapsed. Bank runs were rampant, and many banks lost their deposits. The banking sector suffered from a flight to safety and to quality. In the process many banks lost their deposit base, while the inter-bank money market suffered from compartmentalization. To make matters worse, from January 1998 letters of credit issued by Indonesian banks were not honoured by their counterparts abroad. The crisis of confidence was spreading to include three areas: (1) the rupiah exchange rate, which was weakening dramatically against the U.S. dollar; (2) the banking sector, which was losing its deposit base and creditors; and (3) the business sector that was unable to repay its foreign debts. After various flip-flops in the implementation of the IMFsupported programme, with a record four LoI within seven months, coupled with social unrest sparked off by continuous student demonstrations, the crisis of confidence extended to the socio-political arena, and ultimately the national leadership.7 The market began to doubt the commitment of the Soeharto administration to the implementation of the economic restructuring programme. A simple illustration is the issue of bank closures in November 1997. Initially, the foreign market strongly endorsed the decision to close sixteen insolvent banks, which included three banks partly owned by members of the Soeharto family. However, when the monetary authorities allowed Soeharto’s son and his close associate, a former owner of one of the closed banks, to acquire a new bank, the market began to react negatively. Domestically, the bank closures were badly received. Part of the public anxiety that led to the panic withdrawals of bank deposits lay in the fact that the domestic banking environment was characterized by a lack of transparency, coupled with weak rules on corporate disclosures and weak governance in both the regulator and the private sector. Thus there was no means by which the public could evaluate the status of banks and public

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confidence in the banking system was very fragile. In the absence of reliable official information on banking conditions, rumours were circulating that many more problematic banks would be liquidated. When banks partly owned by elites close to the centre of power were closed, public anxiety increased, as many felt that the other banks were unlikely to be spared. As a result, the public anticipated a second wave of bank closures and a further loss of confidence in the banking sector soon followed. It was indeed ironic that the closing of insolvent banks, a decision that was designed to bring back confidence to the banking sector, had resulted in the collapse of market confidence instead. In fact, the bank closures had plunged the banking sector into chaos. The banking sector, which was already suffering from distress, was now confronted with a full-blown crisis. The negative reactions to the implementation of the reform programme were more pronounced when the decision to postpone a few mega government projects was reversed. At the same time there was a reappearance of monopoly practices and other inconsistencies in the restructuring programme. Market confidence in the government’s ability to undertake, and sincerity about, serious economic restructuring rapidly evaporated. As such, the rupiah’s downward slide was not only difficult to stop, but the economic crisis was developing rapidly into a total crisis. President Soeharto was forced to resign on 21 May 1998 for not addressing the economic problems head-on. In November and December 1997, bank runs were rampant while the inter-bank money market was segmented. The banking sector was collapsing. Confronted with the possibility of total collapse, the government halted its policy of bank closures. As the lender of last resort, Bank Indonesia then provided banks in need of funds with liquidity support — a step that later became controversial. Bank Indonesia maintained that the liquidity support to the banking sector was done to save the banking sector and the payment system from collapsing. Yet because of several bank scandals, provision of liquidity support to the banking sector became a complex and contentious political issue. Another policy initiative that also raised much controversy in the aftermath of the crisis was the full guarantee given by the

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government to the national banks’ assets as well as liabilities. The scheme was introduced on 27 January 1998, on the advice of the IMF, as a salvaging step to avoid total bank collapse. Basically the scheme provided full guarantees for deposits and savings accounts with participating national banks and their creditors. This scheme is known as a blanket guarantee. During the crisis this scheme was used by all three Asian crisis-hit countries adopting a IMFsupported programme — Thailand, South Korea, and Indonesia — as well as Malaysia.8 The problem and policy with respect to corporate debts is also an important factor in the equation. Unsustainable corporate debt has been identified and generally accepted as one of the major causes or complicating factors of the Asian financial crisis. Yet for Indonesia, the resolution of corporate debts was not included in the early agreement of the IMF-supported programme. It has not been clear to me why this has been so. While it was indeed true that the central bank statistics on corporate external debts were lacking, Bank Indonesia had tried to overcome this shortcoming by collecting detailed information on this matter from the corporations from August 1997. By the time the IMF staff came to Jakarta for the preparation of the stand-by arrangement, a preliminary estimate on the total corporate external exposure was available. In fact, the first LoI mentioned that the national debt as of June 1997 amounted to US$140 billion, the public sector owing US$60 billion, and the corporate sector US$80 billion. Of the corporate debt, US$33 billion was short-term. Although the Indonesian Government was ready to deal with the corporate debt problem, it is unclear why the IMF was not prepared to deal with the issue, except to remind the government not to bail out the private sector. Both Thailand and South Korea dealt with problems of corporate debt early in the implementation of their IMF-supported programmes. But, it has not been clear whether this was due to the IMF’s recommendation or otherwise.

Macroeconomic Adjustments The IMF-supported programme for economic reforms essentially comprised economic restructuring of the real sector and financial

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restructuring, complemented by prudent fiscal and monetary policies. This was then extended to include steps to address problems related to social safety net and private-sector debt overhang. Real sector reforms, such as privatization, were aimed at reducing inefficiencies in the economy, uprooting monopolistic and oligopolistic practices, increasing transparency, and abolishing corruption. Many studies have clearly shown the close link between the soundness of the banking system and monetary policy. Neither effective monetary policy nor well-managed macroeconomic policy for achieving growth and stability could be sustainable without the existence of a sound banking system. In this respect Manuel Guitian argues that banking soundness should be treated as an objective for monetary policy, together with price — and exchange rate — stability.9 Despite the increasing awareness about the close link between the micro and macro aspects of monetary policy, more countries have experienced banking problems. For instance, it has been documented that over 130 countries have experienced banking problems, either significant banking problems or banking distress and crises, since 1980. It is also observed that both the nature and the intensity of the problems, as well as their ramifications, have been increasingly severe.10 The above development has resulted in many studies, and resolutions and policy proposals were formulated to cope with the problems.11 The latter came notably from the G-7 communiqué after the Lyon Summit in June 1996 and the Interim Committee’s Declaration, Partnership for Sustainable Growth, in September 1996. It may be important to reiterate: “an appropriate macroeconomic policy stance is unlikely to be sufficient to maintain balance in the economy unless it is supported by sound underlying microeconomic conditions”. This is true on the fiscal front as well as in the area of monetary policy, be it in exchange rate management, external debt management, or monetary policy and banking soundness.12 The need for a higher tax ratio in the budget is also well understood. But this also implies that there is a need to improve the efficiency of tax administration.

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The macro–micro inter-relationship has been somewhat overlooked, even though it seems to be obvious. The macro problem of exchange rate management has an impact on the country’s export competitiveness. Recourse to foreign debt could produce positive impact on domestic demand but it raises the question of how to utilize foreign savings efficiently. After the Asian financial crisis, it is widely accepted that the effectiveness of monetary policy is also determined by the soundness of the banking sector. These propositions have been recognized and widely accepted. They have developed, inter alia, from past experiences in Latin American countries in the early 1980s, savings and loan associations’ problems in the United States, exchange rate problems in Europe with the Exchange Rate Mechanisms (ERM) experiment, and the Mexican crisis.13 In this respect it is a bit of an irony that the IMF’s managing director Camdessus said at the beginning of 1997: Last year, I said that I suspected the next international economic crisis would begin with a banking crisis or almost certainly be compounded by one. Let us hope that all of our efforts to increase the awareness of financial sector problems and to seek solutions to them will lead to serious reforms both nationally and internationally that promote sound banking and market discipline. Through these efforts, including events such as this seminar, we can substantially reduce the possibility of my suspicions becoming reality.14 It turned out that the Asian crisis was already in the making.

Banking Restructuring Despite the continual global competition from other financial intermediaries, the banking sector still plays a dominant role in a national economy, particularly in developing countries. The condition of the banking sector generally reflects the status of the

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financial sector as a whole. Banking soundness is vital for a sustainable macroeconomic management of a national economy. According to the IMF executive board, efforts to strengthen the banking system should be guided by the following principles:15 • the soundness of a bank is first and foremost the responsibility of its owners and managers; whereas the soundness of a banking system is a public policy concern; • bank soundness is crucially linked to sound macroeconomic policies; • a framework for sound banking must include structures to support internal governance and market discipline, as well as official regulation and supervision; and • international co-operation and co-ordination can play an important role, not only in strengthening the global financial system, but also in improving the soundness of the national banking system. At this stage it is useful to summarize how the banking restructuring was conducted in Indonesia with respect to the above principles. Before the latest banking crisis, the most recent experience of dealing with problematic banks was the closure of Bank Summa, a sizable bank, at the end of 1992.16 A significant number of banks, including most state-owned banks, were faced with serious non-performing loans, partly due to the drastic monetary policies implemented during 1991–92 to halt the overheating of the economy. The IMF classified the condition of Indonesian banks then as experiencing “significant problems”. The closure of Bank Summa was an arduous and stressful experience since it took a long time to be resolved. However, in the course of time, banking conditions improved, as shown by the national average of non-performing loans, which declined from 25 per cent of total lending in 1993 to 12 per cent in 1995.17 The banking crisis was preceded by a short period of distress that occurred as domestic banks lost their deposit bases due to a loss in banking confidence. Furthermore, the inter-bank money market suffered from compartmentalization, or segmentation, and functioned poorly. Public confidence in the banking sector declined

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and a “flight to safety” occurred, whereby people transferred their money from banks that were perceived as “unsafe” to others that were perceived to be “safe”. In general the funds moved out from small and medium-sized private banks to state-owned and foreign banks. Due to the scarcity of liquidity, banks that held surplus liquidity were not willing to help others in need of funds. Confidence was completely lost when “flight to safety ” was rampant and a substantial number of banks were confronted with bank runs within a short period. Weak banks in need of liquidity had to rely on Bank Indonesia to keep afloat. Interestingly, in recent Indonesian experience, these events happened right after the closure of the sixteen banks in early November 1997, a move that was originally designed to boost confidence in the banking system. As more and more individual banks became insolvent as a result of mismatched liquidity problems, the entire banking sector went from distress to crisis. When the currency crisis spread and affected the national economy, the government’s efforts to address the banking problems were combined with other policies and treated as integral to the adjustment measures for stability and sustaining growth. But more specific measures were formulated for the banking sector in the IMF-supported programmes, from the first LoI in October 1997 to the most recent one in August 2001. In 1997 the Indonesian Government asked for a three-year stand-by loan from the IMF, which was processed through an emergency procedure. The amount of the stand-by loan was SDR7.3 billion, and together with those provided by the World Bank and the Asian Development Bank (ADB), the total external loans amounted to US$18 billion. This amount, plus US$5 billion of Indonesia’s own reserves set aside for balance of payments support, made a total of US$23 billion available for drawing. Together with bilateral facilities in the “second line of defence”, the total amount of the rescue package for Indonesia amounted to US$43 billion. Basically, the IMF-supported programme comprised a comprehensive policy package to deal with insolvent and weak banks, and to overcome structural rigidities in the economy. This financial restructuring programme, which had been put together

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with technical assistance from the IMF, the World Bank, and the ADB, aimed to restore public confidence in the financial system. It was built around five areas, namely: • the closure of sixteen insolvent banks, which was executed on 1 November 1997; • the establishment of proper procedures and policies to deal promptly with weak but viable financial institutions, so that they can be placed quickly on the road to recovery — some banks were to be put under intensive supervision by Bank Indonesia; • the resolution of specific problems of state and regional development banks; • the strengthening of the institutional, legal, and regulatory frameworks for banking operations to ensure the emergence of a sound and efficient financial system; this programme includes the modification of existing laws such as the central bank law, the law on bank liquidation, and the bankruptcy law; and • the establishment of Indonesia Bank Restructuring Agency (IBRA), after the second LoI. The IMF-supported programme in Indonesia includes a comprehensive restructuring of the banking system. With the help of the ADB, the World Bank, and the IMF, IBRA has been trying to address the problems of weak banks through a combination of mergers, recapitalization, and closures of insolvent banks. Nonperforming bank loans were transferred to an Asset Management Unit (AMU) that was established within IBRA. To strengthen the relatively sound banks, schemes were announced that allowed banks to improve their capital adequacy ratio by selling their bad loans to the AMU. An additional provision was also made for the creation of tier-two capital in the form of subordinated loans to banks whose capital had been increased by their owners. All banks were also required to achieve minimum capital adequacy ratios of 4 per cent (of risk-weighted assets) by the end of 1998, rising to 8 per cent by the end of 1999, and 10 per cent by the end of 2000. Attempts were also made to draw new foreign investments into the banking sector by first lifting all restrictions on foreign ownership

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of banks as part of the prospective amendments to the banking law. As an interim measure, foreign bankers would be retained to strengthen the management of banks under IBRA’s control. These are the necessary basic steps to get the banking sector back to a normal footing. However, for the banking system to be sound, most banks should be solvent and are likely to remain so. The IMF stipulates that the likelihood of remaining solvent will depend, inter alia, on banks being profitable, well managed, and sufficiently well capitalized to withstand adverse events.18 Furthermore, the supporting infrastructures, namely regulations, prudential measures, disclosures, accounting practices, and the legal base, have to be in place in order to develop a sound banking sector. Manuel Guitian (1999) presented a three-pillar paradigm for banking soundness: official oversight (prudential standard), internal governance (risk management in each individual bank), and market discipline (sound banking practices). But this paradigm still has to be complemented with adherence to several principles: responsible owners and managers of banks and professional authorities, prudent macro management and, in a globalized financial system, good international co-operation. The problems confronting the Indonesian banking system seem to be very complicated indeed. The steps that need to be taken are highly problematic. In a way, previous measures to put the prudential regulations in place were wiped out by the crisis. Yet the crisis also created an opportunity to put all the necessary pillars for a sound banking system in place. A comprehensive programme towards that objective seems to be in place. What is desperately needed is the discipline and political will to implement the programme. But the linchpin is still the stability of the rupiah at a reasonable rate. The Indonesian Government has made some progress on this aspect, but the market has still not made any positive moves. In my view, this actually means that somehow a turnaround still has to come before the market players — the traders, investors, and creditors — are willing to react positively to the development of the Indonesian economy. The positive response from the market has to be preceded by positive perceptions. Indonesia has experienced positive

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market perceptions every time a change of government occurred. A positive perception could come when market confidence is back. John Maynard Keynes demonstrated the importance of confidence in an investment decision, aside from the marginal efficiency of capital. However, it is difficult to define what confidence really means. Market confidence is indeed crucial, but confidence is very difficult to describe. We will only know how crucial it is when it is not present. It seems that when confidence is present, the market is not very demanding about policies and regulation. However when it is lost, it is very difficult to get it back again. Market reactions can result in irrational exuberance on the one hand, and extreme pessimism on the other.

Megawati Government and the IMF Megawati started to deal with the IMF during the last few months of Gus Dur’s presidency, in her capacity as Vice-President. This was occasioned by President Wahid’s disgust at the IMF for not agreeing with his decision to replace central bank governor Sabirin. The President then left matters related to the IMF to Megawati. In fact, the relationship between Wahid and the IMF worsened to the extent that the implementation of the different adjustment programmes was stalled. The initial cordial relationship between Wahid and the IMF in the early part of his administration not only did not improve, but deteriorated rapidly towards the end. The Bank Bali scandal and the feud between Wahid and Sabirin had proved to be costly. As a result, the programme review was postponed frequently, causing a prolonged delay in loan disbursement. In fact, there was no loan disbursement from the last LoI of September 2000 until after the change of government to President Megawati in late July 2001. It is fair to say that all the IMF-supported programmes for Indonesia under Presidents Soeharto, B.J. Habibie, and Wahid became sources of frustration for both the respective administrations and the IMF. President Soeharto was never serious or committed in implementing the programmes, including the one instance on 15 January 1998 when he himself signed the LoI.19

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Habibie’s presidency suffered from a lack of legitimacy, because it was viewed as a kind of default administration when President Soeharto resigned in disgrace in May 1998. Habibie’s government was perceived as the continuation of Soeharto’s. The government was powerless in the execution of the programme he inherited from his predecessor. However, it should be noted that Habibie’s friendly relationship with the IMF provided a good environment for a variety of liberalization steps, including the freedom of the press. Habibie’s government also enjoyed favourable IMF reviews that resulted in the signing of eight LoI and smooth loan disbursements during his brief seventeen months in office. At the beginning of Habibie’s administration, the rupiah weakened from Rp11,200 to US$1 in May 1998 to Rp16,300 in June 1998. But it stabilized at Rp7,100 to US$1 in October 1998. The rupiah was hovering between Rp7,100–Rp8,600 for almost a year. It was Rp7,195 to US$1 at the change of government to President Wahid in October 1998. During the presidency of Wahid, Economic Co-ordinating Minister Kwik Kian Gie and Finance Minister Bambang Sudibyo suffered from a similar ambivalence. The next Economic Coordinating Minister, Rizal Ramli, also became infamous because of his ambivalent attitude towards the IMF, which resulted in a virtual freezing of relationships from December 2000. President Wahid then replaced Rizal Ramli as Co-ordinating Minister with Burhanuddin Abdullah, a deputy governor of Bank Indonesia, who had a stint with the IMF in Washington, D.C. as assistant to the Indonesian executive director. Rizal Ramli was shifted to the post of Finance Minister. All these moves, however, did not mend the relationship with the IMF. In fact, the working relationship between the government and the IMF remained sour until the then Vice-President Megawati took charge in May 2001. Under Vice-President Megawati’s leadership, some important decisions were made to fulfil some requirements that were stipulated in the latest agreement with the IMF. The most important one was the reduction of the oil subsidy. This was followed by a series of other steps that further strengthened the government’s dealings with the IMF. The IMF team returned to Jakarta to

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renegotiate the items that had been constraining the resumption of the working arrangement before. The improved relationship between the Indonesian Government and the IMF received a further boost with the change of government from Wahid to Megawati and the appointment of the new Cabinet. The environment was friendlier because of the election of the new President and the appointment of a new economic team that was more IMF “friendly”. The IMF, under the new managing director Horst Kohler, also discarded its old micro-management approach. The IMF streamlined the structural conditionality so that it could focus more on its core programme functions.20 A new LoI was signed on 27 August 2001 and the IMF board approved a new disbursement of US$395 million. The election of Megawati to the presidency and the formation of the new Cabinet were very well accepted by the market, as reflected in the strengthening of the rupiah from around Rp11,000 to Rp8,500 to US$1 in August 2001. Some thorny issues of disagreement between President Wahid and the IMF on the necessary adjustments to the 2001 budget, the amendment of the central bank law, and the privatization and sales of assets held by IBRA had either been resolved or renegotiated. These developments further smoothened the government’s relationship with the IMF. Unfortunately, the sales of IBRA assets, like the sale of BCA (Bank Central Asia) shares, were not smoothly executed. Moreover, the sales of shares of Semen Gresik and Semen Padang have encountered new hurdles from the provincial government. Such delays affected budget revenues and undermined the efforts towards economic recovery. The 11 September terrorist attacks and their aftermath, plus the slowing down of the global economy, have inevitably clouded the prospect of the economic recovery for Indonesia under the IMF-supported programme. These developments have undermined the very good start of the Megawati presidency and retarded the progress of the programme. As economic uncertainty returns after the post-11 September attacks, the prospects for economic recovery seem to have dimmed further.

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Turning Point I subscribe to the idea that in a crisis a turning point, which marks an end to the deterioration process from the crisis, is crucial before a process of recovery can proceed. Unfortunately, a good start is not a guarantee for a sustained recovery, and even less so for sustainable development. In order for a turning point to usher in a process of recovery, other important factors need to be present, namely: • Speedy recognition of the problems — especially in the face of contagion, “the sooner the better”; • Good and consistent policies and consistency of implementation; and • Conducive world economic conditions. In the case of Thailand and South Korea, a turning point was associated with a change of government. Thailand asked for the IMF’s help in August 1997. In mid-November 1997, a change of government occurred. The new government embraced the IMFsupported programme that was just launched and a consistent programme implementation soon ensued. The South Korean Government approached the IMF in early December 1997 at the time when power was being transferred to the new government. The incoming government, which took over the administration in mid-December 1997, was already involved in the initial conceptualization process of the IMF-supported programme. A change of government seems to help ensure the success of the economic readjustment programmes. It does seem easier for a new administration to implement these adjustment programmes which often involve correction of past policies that would otherwise be identified as policy errors of the previous government. That was not how Indonesia’s IMF-supported programmes were implemented. The programmes have been running for close to four years. During this time Indonesia has also experienced several changes in government. Indonesia’s experience with the crisis has been unique. At the inception of the IMF-supported programme, the economic and

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financial condition of Indonesia was in better shape than both South Korea’s and Thailand’s. The initial policy response by the government was also lauded as timely and prudent. Yet, after implementing the programme, Indonesia remains the worst case among the Asian crisis-hit countries, particularly when one examines the rate of currency depreciation, growth prospects, inflation, and the developmental variables in the respective countries. Why is this so? One possible explanation could be the lack of consistency in programme implementation. In Indonesia, the Soeharto administration negotiated and implemented the first batch of the adjustment programmes. In May 1998 President B.J. Habibie took over. But the market perceived his administration as a continuation of the old Soeharto government. A credible change of government happened only in October 1999. Unfortunately, President Wahid, who was well received by the market initially, could not sustain the initial momentum. Recovery did not materialize because he did not implement the programme consistently. President Megawati and her new Cabinet took the right policy steps and the rupiah was strengthened drastically in the first month from Rp11,300 to Rp8,500. But once again, the gloomy economic outlook and diminishing confidence in the new government have pushed the rupiah to its present level of Rp10,500. There has not been an established concept determining what constitutes a turning point that marks the end of a process (of deterioration in this case) and the beginning of another one (recovery). In a business cycle, economic expansion or a boom is followed by a bust, with a turning point in between. A recession or depression is followed by a recovery. In a multi-faceted crisis, like that which Indonesia and several other Asian countries experienced, the turning point that stops the process of deterioration and starts a recovery process seems to depend on the political stability that can only be provided by the presence of a stable government.

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Problems of Consistency The Indonesian experience in implementing IMF-supported adjustment programmes shows that a consistent policy implementation is crucial to bring about economic recovery. Changes in administration did not bring about a turning point. The democratic change of government in Indonesia, which grants it legitimacy, only occurred in October 1999, two years after the first LoI. But the presence of a new and legitimate government does not in itself guarantee an economic recovery either. It only serves as a starting point for a process towards recovery. This has to be followed by consistent implementation of a good programme which has been prepared previously. From the first adjustment programme in 1997 to the most recent one, the main obstacle constraining the success of the programme is inconsistencies in programme implementation. The inconsistency itself may come from, using Stephan Haggard’s analysis, sins of omission from the lack of administrative capacity and expertise. Or it may arise as the result of commission, in the form of forbearance to favoured parties.21 Poor economics and other policies could result from incompetent or corrupt government. The actual result and implication of government policies would depend on policy implementation. The end result would still depend on the bureaucracy that is instrumental in the policy implementation. Incompetent bureaucracy or corrupt officials in a system that is rampant with cronyism could easily produce inconsistencies and wastage that would be detrimental to programme implementation. In the crisis it seemed that the government officials preferred to be inactive and tended to avoid making any decisions for fear of failures and criticism. There have been inconsistencies in programme implementation in every Indonesian administration since the crisis. Several blatant inconsistencies in the programme implementation emerged during the Soeharto government. To some extent, some of these inconsistencies have been carried on to the present day.

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These are examples of inconsistencies in the implementation of the first LoI, which was signed by the Indonesian Government on 31 October 1997: • The reactivation of fifteen major development projects that were previously postponed as a result of interventions by President Soeharto’s family and cronies. • Soeharto family members who owned a few of the closed banks sued the governor of the central bank and the Minister of Finance, in protest at the government’s decision to liquidate their banks. The market perceived this to be reflective of the lack of government commitment to implement the programme. • Soeharto’s intervention also damaged the execution of the decision to liquidate sixteen banks. The monetary authorities succumbed to pressure by allowing one of Soeharto’s sons who owned one of the sixteen liquidated banks to purchase another small bank. • Bank Indonesia faced constraints in implementing the agreed policy for monetary tightening during its initial attempts to defend the rupiah from severely depreciating. The IMF kept asking Bank Indonesia to raise interest rates while Soeharto did not allow the central bank to do it. In fact, Soeharto instructed the central bank to lower lending rates to help the business community resume its activities.22 Granted that the effectiveness of a high interest rate policy is still debatable, this inconsistency did a lot of damage to the credibility of policy implementation. • In January 1998 Soeharto signed a LoI with the IMF, which strengthened and improved the previous measures that were agreed upon in the first LoI. These included discarding monopoly practice in clove trading and Bulog (the state agency for food procurement) imports, abolishing subsidies for the aircraft industry (IPTN), and the national car project. All these were the Soeharto family’s pet projects. However, the actual implementation of all these measures was so arduous that in effect the old practices continued. • At one stage Soeharto was considering a dubious proposal from Professor Steve Hanke to implement a fixed exchange

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system with a currency board arrangement, which created an uproar among the G-7 leaders and the IMF. Instead of abiding by the agreements, Soeharto wanted to follow a different path. However, inconsistencies in programme implementation have not been the monopoly of Soeharto’s administration. All his successors, for whatever reasons, have been committing inconsistencies also, albeit smaller ones. These are some examples: • Banking restructuring has been very slow, to a large extent due to opposing pressures from different parties. The fact that IBRA, in three years of its existence, had already experienced six changes in its management attested to the presence of different interest groups that were fighting for their own interests. Similarly, corporate restructuring has been incredibly slow. • The fight between the government and Bank Indonesia over the central bank management during President Wahid’s administration also reflects a similar problem. • Efforts to eradicate corruption and improve governance and transparency in the government and corporate sectors have been, overall, very disappointing. An ambivalent attitude towards the involvement of the IMF in Indonesia’s efforts to fight the financial crisis has always been evident among certain sectors in Indonesia, including those in public administration. There have been concerns about the IMF’s involvement in government policy formulation in crisis-hit countries. In fact, policies such as reliance on high interest rates to defend the currency, opposition to the use of capital controls or currency board techniques, bank closures, liquidity assistance to banks, and the implementation of blanket guarantees have encountered strong critics in parliament as well as in public debates in Indonesia. Some of these concerns originated from earlier criticisms that the IMF’s policy prescriptions to developing countries are sometimes ineffective because of its reliance on a “one size fits all” programme. To be fair, the IMF has learned to adapt to local conditions and exercises greater flexibility, albeit only slowly.

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However, there are more lessons that the IMF could learn from the Indonesian experience in the four years since the financial crisis: • Based on ex-post analysis, there are two problem areas that have been generally accepted as the causes or complicating factors of the Asian crisis, namely a weak banking sector and unsustainable corporate debts. The Indonesian experience of bank closures in November 1997 and the initial attempts to shy away from dealing with the corporate debt issue seem to suggest that the presence of weak preparatory work stems not just from the government but also from the IMF. • The adoption of the blanket guarantee in the banking sector in late January 1998 was also debatable. While it was the Indonesian Government’s decision to implement the guarantee scheme, the IMF was also involved in the decision-making process. In other words, the IMF should also be held accountable for the policies adopted. Professor Kim Dae-Hwan, who highlighted a similar issue in the South Korean crisis, said that the South Korean problems are “home grown, but not home alone”.23 • The IMF’s stringent and highly inflexible requirement for the Indonesian Government to produce a budget surplus for 1998 turned out to be a disaster. Although the IMF retracted its decision in January 1998 to allow for a budget deficit, it was too late. The rupiah was badly hit because the market perceived the Indonesian Government’s balanced budget as a violation of the IMF’s requirement. • The bickering between the Wahid government and the central bank over the amendment of the central bank law has not yet been resolved. For almost a year now, the status of the five deputy governors of Bank Indonesia has been unclear. Although they have officially resigned from their posts, they are still on active duty even right up to the time of writing. Central bank accountability goes hand in hand with its independence. However, the IMF insisted on guarding the independent status of the central bank by changing the board of governors only in

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accordance with the central bank law, which in turn must be amended. This present gridlock has jeopardized the effectiveness of Bank Indonesia and more efforts must be made by both the Indonesian Government and the IMF to find a solution.

Concluding Notes Changes in government seemed to have produced a critical turning point that stopped further economic deterioration in South Korea and Thailand. To a certain degree it has also been the case with Indonesia. Changes in administration have also brought about changes in the IMF policy. Ever since the change in IMF management, from Michel Camdessus and Stanley Fischer to Hort Kohler and Anne Krueger, serious efforts have been made to improve IMF conditionality. What more could be expected? The working relationship between the Megawati administration and the IMF seems to be in better shape. The IMF has also learned several lessons from managing the crisis in Indonesia, as shown in changes in its views on budget deficits, corporate debt, and the social implications of the crisis. The IMF is also in the process of streamlining its structural conditionality. Similarly, the Indonesian economic team has also been receptive and is willing to make the adjustments required. However, the problems and challenges facing them are much more daunting, due to the past practices of policy inconsistency and worsening world economic prospects. For example, with a slow-down in the national economy, the government cannot automatically resort to the conventional policy of fiscal stimuli or a “loose” monetary policy. Any fiscal stimuli are limited by a budget deficit. With the size of budget deficit already predetermined in the performance criteria, this constraint is even more binding. Likewise, lowering interest rates or adding base money is constrained by the performance criteria. Freedom in macroeconomic management is very limited in Indonesia as a result of the existing IMF-supported programme. Flexibility by both the IMF as well as the monetary authority in Indonesia should be in order here. Yet it is curious that recently

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220 J. SOEDRADJAD DJIWANDONO

the IMF representative in Jakarta made a public statement that, in effect, asked the central bank to raise interest rates. This is despite the fact that several empirical studies have demonstrated the ineffectiveness of high interest rates in stabilizing exchange rates.24 In fact, one could cite how Hong Kong successfully saved its currency against the onslaught of speculative attacks in October 1997 as an example to show that high interest rates may not be an effective tool. High interest rates may not impact negatively on economic growth in a very short period of time although it is definitely detrimental to economic growth. Problems will, however, arise when the high interest rates are extended for a long period. During the crisis Indonesia moved from a problem of bank liquidity to solvency within a very short period. That is to say, a policy of high interest rates may be effective in strengthening the currency in the short run, but can easily create negative implications in the long run. The new IMF policy of focusing on its core functions is definitely a step in the right direction. Part of this policy encompasses the issue of ownership of the IMF-supported programme. The more cumbersome the conditionality, and the more pressures by the large economies to impose their own agenda on the structural conditionality of the IMF-supported programme, the more difficult it would be for the Indonesian Government to stay consistent in the programme implementation. Until the 11 September attacks, all the problems and challenges facing President Megawati originated from the previous administration. However, the terrorist attacks in the United States and the U.S.-led response that triggered off a worldwide economic recession have presented additional challenges to the President and her Cabinet. In 1999 the world economy was in better shape, and the U.S. economy was still actively serving as a locomotive to the world economy. The two other Asian countries implementing a IMF-supported programme seized the opportunity and managed to start on their path towards recovery. Indonesia under President Wahid missed the chance. This time round, there is no strong U.S. economy to serve as

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IMF’S ROLE IN INDONESIA’S FINANCIAL CRISIS 221

a locomotive to provide the necessary stimulus for the Indonesian economy. Megawati’s government, which made a good start in its economic recovery programmes, seems to have stalled and is now unable to follow up on the good start. The past administrations missed the chance to launch a recovery process. The present government made a good start, but the daunting challenges it now faces seem to be so overwhelming that, at times, it appears to have given up even before the economy could enter into a sustained recovery process. If there is any optimism about Indonesia’s economic future, it has to be very cautious indeed.

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222 J. SOEDRADJAD DJIWANDONO

APPENDIX TABLE 10.1 Indonesia’s Financial Position with the IMF (As of 31 October 2001) General Resources Account:

SDR million

% Quota

Quota Fund holdings of currencies Reserve tranche position

2,079.30 9,552.43 145.48

100.0 459.4 7.0

SDR million

% Allocation

SDR Department: Net cumulative allocation Holdings

238.96 84.36

Outstanding Purchases and Loans: Stand-by arrangements Extended arrangements

100.0 35.3

SDR million

% Quota

2,660.11 4,958.50

127.9 238.5

Latest Financial Arrangements:

Type

Approval Date

Amount Amount Approved Drawn (SDR million) (SDR million)

Expiration Date

Extended Fund 4 February Facility 2000

31 December 2002

3,638.00

1,160.80

Extended Fund 25 August Facility 1998

4 February 2000

5,383.10

3,797.70

5 November 25 August 1997 1998

8,338.24

3,669.12

Stand-by

Projected Obligations to the IMF: (SDR million; based on existing use of resources and present holdings of SDRs) Overdue 31 October 2001

Forthcoming 2001

2002

2003

2004

2005

Principal Charges

366.9 72.3

1,834.6 207.8

979.3 159.6

678.1 135.6

774.8 113.2

Total

439.2

2,042.4

1,138.9

813.7

888.0

Source: IMF.

© 2003 Institute of Southeast Asian Studies, Singapore

© 2003 Institute of Southeast Asian Studies, Singapore

309,650,000 851,150,000 1,011,000,000 4,254,348,000 2,201,472,000 0 0 0 0 0 462,900,000 0 0 0

1,009,008,000 0 0 0 0 115,725,000 231,450,000 115,725,000 0 41,962,259 0 0 379,500,000 3,637,741

Repurchases

Purchases

Disbursements

Source: IMF.

2001 2000 1999 1998 1997 1992 1991 1990 1989 1988 1987 1986 1985 1984

Year

298,860,659 398,846,600 267,539,445 133,963,634 0 3,483,910 22,770,767 43,374,701 39,938,336 30,602,157 16,778,898 3,206,764 19,179,361 28,853,985

Charges Paid

General Resources Account

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Disburse- Repayments ments

Loans

0 0 0 0 0 0 0 0 0 0 0 0 0 0

Total

309,650,000 851,150,000 1,011,000,000 4,254,348,000 2,201,472,000 0 0 0 0 0 462,900,000 0 0 0

1,009,008,000 0 0 0 0 115,725,000 231,450,000 115,725,000 0 41,962,259 0 0 379,500,000 3,637,741

Repayments

Purchases and Loans Interest Paid Disbursements

Structural Adjustment Facility/Trust Fund Enhanced Structural Adjustment Facility/ Poverty Reduction and Growth Facility

APPENDIX TABLE 10.2 Indonesia’s Transactions with the IMF (1 January 1984 – 31 October 2001, in SDRs)

298,860,659 398,846,600 267,539,445 133,963,634 0 3,483,910 22,770,767 43,374,701 39,938,336 30,602,157 16,778,898 3,206,764 19,179,361 28,853,985

Charges and Interest Paid

IMF’S ROLE IN INDONESIA’S FINANCIAL CRISIS 223

224 J. SOEDRADJAD DJIWANDONO

APPENDIX TABLE 10.3 Government of Indonesia’s Letters of Intent to the IMF Date of Issue

Title Megawati’s Government

1. 11 June 2002 2. 9 April 2002 3. 13 December 2001 4. 27 August 2001

Indonesia — Letter of Intent Indonesia — Letter of Intent Indonesia — Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding Indonesia Memorandum of Economic and Financial Policies Wahid’s Government

5. 7 September 2000 6. 31 July 2000 7. 17 May 2000 8. 20 January 2000

Indonesia Memorandum of Economic and Financial Policies Memorandum of Economic and Financial Policies, Government of Indonesia and Bank Indonesia Indonesia Memorandum of Economic and Financial Policies Indonesia Memorandum of Economic and Financial Policies Habibie’s Government

9. 22 July 1999 10. 14 May 1999 11. 16 March 1999 12. 13 November 1998 13. 19 October 1998 14. 11 September 1998 15. 29 July 1998 16. 24 June 1998

Indonesia Supplementary Memorandum of Economic and Financial Policies Indonesia Supplementary Memorandum of Economic and Financial Policies Indonesia Supplementary Memorandum of Economic and Financial Policies (Fourth Review under the Economic and Financial Policies) Indonesia Supplementary Memorandum of Economic and Financial Policies Indonesia Supplementary Memorandum of Economic and Financial Policies Indonesia Supplementary Memorandum of Economic and Financial Policies Third Review under the Stand-by Arrangement Indonesia — Second Supplementary Memorandum of Economic and Financial Policies Soeharto’s Government

17. 10 April 1998 18. 15 January 1998 19. 31 October 1997

First Review under the Stand-by Arrangement Memorandum on Economic and Financial Policies Memorandum of Economic and Financial Policies (Request for Stand-by Arrangement)

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IMF’S ROLE IN INDONESIA’S FINANCIAL CRISIS 225

Notes 1. Stand-by arrangements are the IMF’s main instrument by which member countries are assured of being able to purchase foreign currencies from the IMF during a specified period, while the IMF is assured of their ability to repay. (IMF, “Review of IMF Facilities: Preliminary Considerations”, International Monetary Fund, March 2000.) 2. Actually in 1983 and 1986 the Indonesian Government used the compensatory financing facility (CFF), a facility provided by the IMF for its members suffering from balance of payments difficulties as a result of a sudden drop in commodity prices that adversely impact their foreign exchange earnings from exports. Indonesian usage of this facility then was occasioned by a drastic drop in oil and commodity prices that placed severe pressure on the balance of payments. 3. The latest LoI was signed on 11 June 2002. 4. The IMF created the SDR or Special Drawing Rights, an artificial currency unit defined as a basket of national currencies. It is used as an international reserve asset, to supplement member countries’ existing reserve assets. See . 5. These two are similar, except for the duration of the repayment, which is longer in the case of an extended fund facility. 6. See “Conditionality in Fund-Supported Programmes — Overview”, , 20 February 2001. 7. See J. Soedradjad Djiwandono, “Bank Indonesia and the Recent Crisis”, Bulletin of Indonesian Economic Studies 36, no. 1 (1998): 47–72. 8. Carl-Johan Lindgren et al., Financial Sector Crisis and Restructuring Lessons from Asia (Washington, D.C.: IMF, 1999), p. 18. 9. Manuel Guitian, “Banking Soundness: The Other Dimension of Monetary Policy”, in Banking Soundness and Monetary Policy: Issues and Experiences in the Global Economy, edited by Charles Enoch and John H. Green (Washington, D.C.: IMF, 1997). 10. Carl-Johan Lindgren, Gillian Garcia, and Mathew I. Saal, Bank Soundness and Macroeconomic Policy (Washington, D.C.: IMF, 1996). 11. Three books published by the IMF are very instructive for those interested in this subject: Carl-Johan Lindgren et al., Bank Soundness and Macroeconomic Policy, op. cit.; Charles Enoch and John H. Green, eds., Banking Soundness and Monetary Policy: Issues and Experiences in the Global Economy (Washington, D.C.: IMF, 1997); and V. Sundararajan

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226 J. SOEDRADJAD DJIWANDONO

12. 13.

14.

15. 16.

17.

18. 19.

20.

21.

and Tomas J.T. Balino, eds., Banking Crisis: Cases and Issues (Washington, D.C.: IMF, 1991). See Preface and Part I of the book, Lindgren et al., Bank Soundness and Macroeconomic Policy. See Morris Goldstein and Dennis Weatherstone, The Asian Financial Crisis, Institute for International Economics Policy Brief 98-1, 30 March 1998. Michel Camdessus, “The Challenges of a Sound Banking System”, in Banking Soundness and Monetary Policy: Issues and Experiences in the Global Economy, edited by Charles Enoch and John H. Green (Washington, D.C.: IMF, 1997), p. 539. Lindgren et al., Bank Soundness and Macroeconomic Policy, p. 5. In late 1992 the Indonesian Government seized and liquidated Bank Summa, a private bank owned by the Soeryadjaya family when it failed to meet its Rp1.6 trillion financial obligations. It was the first domestic bank to be put in liquidation. The Indonesian Government was totally inexperienced in handling the liquidation of a bank with such a huge amount of liabilities. Depositors were frantic and it took more than a couple of months before the problem was resolved. See Lindgren et al., Bank Soundness and Macroeconomic Policy, p. 26. For the main issues confronting Indonesia in coping with banking system management and banking reform prior to the present crisis, see J. Soedradjad Djiwandono, “The Banking Sector in Emerging Markets: The Case of Indonesia”, in Banking Soundness and Monetary Policy: Issues and Experiences in the Global Economy, edited by Charles Enoch and John H. Green (Washington, D.C.: IMF, 1997), pp. 335–52. Lindgren et al., Bank Soundness and Macroeconomic Policy, p. 9. It became an infamous occasion when many newspapers published the picture of President Soeharto signing a LoI in the presence of the IMF managing director Michel Camdessus, who watched the signing with his arms folded. It is an innocent posture in the managing director’s French culture, but it was seen by many Indonesians as an humiliating posture. See Letter of the IMF Managing Director to IMF Heads of Departments and Offices, “Streamlining Structural Conditionality”, 18 September 2000 and “Structural Conditionality in Fund-Supported Programmes”, 16 February 2001. (.) Stephan Haggard, The Political Economy of the Asian Financial Crisis

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IMF’S ROLE IN INDONESIA’S FINANCIAL CRISIS 227

(Washington, D.C.: Institute for International Economics, August 2000), p. 8. 22. It should be noted that Bank Indonesia did not enjoy its independent status until the enactment of the new central bank law in May 1999. 23. Kim Dae-Hwan, “Globalization and the IMF-Controlled Economy: The Case of Korea” (Paper presented at the Asian Studies Programme, National University of Singapore, July 2001, mimeographed). 24. See, for example, Iwan J. Azis, Modelling Crisis Evolution and Counterfactual Policy Simulations: A Country Case Study, ADB Institute Working Paper No. 23 (Tokyo: ADB Institute, August 2001).

References Azis, Iwan J. Modelling Crisis Evolution and Counterfactual Policy Simulations: A Country Case Study. ADB Institute Working Paper No. 23. Tokyo: ADB Institute, 2001. Boorman, Jack et al. Managing Financial Crisis: The Experience in East Asia. IMF Working Paper No. WP/00/107. Washington, D.C.: IMF, 2000. Djiwandono, J. Soedradjad. “Bank Indonesia and the Recent Crisis”. Bulletin of Indonesian Economic Studies 36, no. 1 (1998): 47–72. Enoch, Charles et al. Indonesia: Anatomy of a Banking Crisis, Two Years of Living Dangerously, 1997–1999. IMF Working Paper No. WP/01/52. Washington, D.C.: IMF, 2001. Goldstein, Morris and Dennis Weatherstone. The Asian Financial Crisis. Institute for International Economics Policy Brief 98-1. Washington, D.C., 1998. Guitian, Manuel. “Banking Soundness: The Other Dimension of Monetary Policy”, in Banking Soundness and Monetary Policy: Issues and Experiences in the Global Economy, edited by Charles Enoch and John H. Green. Washington, D.C.: IMF, 1997. Haggard, Stephan. The Political Economy of the Asian Financial Crisis. Washington, D.C.: Institute for International Economics, 2000. International Monetary Fund (IMF). The IMF at a Glance. Washington, D.C.: IMF, 2001. . “Conditionality in Fund-Supported Programmes — Overview”. Washington, D.C.: IMF, 2001. . “Conditionality in Fund-Supported Programmes — Policy Issues”. Washington, D.C.: IMF, 2001. . “Structural Conditionality in Fund-Supported Programmes”. Washington, D.C.: IMF, 2001.

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228 J. SOEDRADJAD DJIWANDONO

Kim Dae-Hwan. “Globalisation and an IMF-Controlled Economy: The Case of Korea”. Mimeographed, 2001. Lindgren, Carl-Johan, Gillian Garcia, and Mathew I. Saal. Bank Soundness and Macroeconomic Policy. Washington, D.C.: IMF, 1996. Lindgren, Carl-Johan et al. Financial Sector Crisis and Restructuring Lessons from Asia. Washington, D.C.: IMF, 1999.

© 2003 Institute of Southeast Asian Studies, Singapore

Reproduced from Governance in Indonesia: Challenges Facing the Megawati Presidency, edited by Hadi Soesastro, Anthony L Smith and Han Mui Ling (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission ofTHE the Institute Southeast Asian ESCAPING DEBT ofTRAP 229 Studies. Individual articles are available from < http://bookshop.iseas.edu.sg >

11 Escaping the Debt Trap Tubagus Feridhanusetyawan

Introduction The economic crisis in 1997 has led to massive public and private debts in Indonesia. Total public debt tripled from about $55.2 billion in 1996 to $152 billion in 2000, before declining slightly to $141 billion in 2001 (see Table 11.1).1 Much of this increase is mainly due to the unprecedented increase in domestic debt (Rp 700 trillion, or roughly $70 billion) in the form of bond issuance to cover the rising cost of banking bail-out and restructuring. While a massive public debt is highly problematic, mounting private debt has also created other complications. The private foreign debt increased very rapidly from less than $19 billion in 1990 to about $55 billion in 1996. However, the private debt is often underestimated given the lack of proper data. In 1997 private foreign debt increased very sharply by about 50 per cent to $82 billion, but this was mainly because of better debt recording. In 2000 the private foreign debt remained high at almost $67 billion, while the private domestic debt was $60 billion — but this amount included the non-performing loans transferred to the government as part of the bank recapitalization programme of around $40 billion.

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230 TUBAGUS FERIDHANUSETYAWAN

TABLE 11.1 Indonesia: Outstanding Debt, 1996–2001 (In US$ billion) 1996

1997

1998

1999

Total public debt 55.2 Domestic 0.0 Foreign 55.2 Total private debt 182.2 Domestic 127.3 Foreign 54.9 Total debt 237.4 Domestic 127.3 Foreign 110.1 Exchange rate (Rp/US$) 2,300.0

53.9 0.0 53.9 154.4 72.2 82.2 208.3 72.2 136.1

77.3 10.0 67.3 128.4 44.8 83.6 205.7 54.8 150.9

139.7 63.8 75.9 134.8 62.6 72.2 274.5 126.4 148.1

151.9 77.0 74.9 126.8 60.0 66.8 278.7 137.0 141.7

2000 June 2001 140.7 68.7 72.0 129.7 62.8 66.9 270.4 131.5 138.9

5,000.0 10,000.0

8,000.0

8,500.0

9,600.0

Sources: Bank Indonesia, Indonesian Bank Restructuring Agency (IBRA), and the Jakarta Initiative Task Force.

Figure 11.1 illustrates the size of Indonesia’s external debt in terms of GDP, and it is clear that both private and public external debts have increased markedly during the crisis. There was a spike in 1998, mainly because of the massive currency depreciation and a sharp GDP contraction. The foreign debt/GDP ratio has declined since then but it remains high at more than 90 per cent of the GDP. Figure 11.2 illustrates the size of the public debt in terms of the GDP, which clearly shows the huge increase in domestic debt since 1998. Public debt service payments accounted for around 25–26 per cent of the government’s domestic revenue in 2001 and 2002, and this is just for interest alone. Domestic interest payments are expected to be at least twice as large as external interest payments, and the future stream of principal payments on both the external and domestic debts looks like a time bomb waiting to explode. Without further external debt rescheduling and a well-functioning domestic bond market, the principal and interest payments on public debt in 2004 and beyond could easily reach more than 75 per cent of the government revenue. In other words, the possibility that the Indonesian Government could be technically bankrupt is

© 2003 Institute of Southeast Asian Studies, Singapore

ESCAPING THE DEBT TRAP

FIGURE 11.1 Indonesia’s External Debt External Debt: Public and Private 250.00

% of GDP

200.00

150.00

100.00

50.00

0.00 1975 1980 1985 1990 1995 1996 1997 1998 1999 2000 2001 Public

Private

Source: Bank Indonesia.

FIGURE 11.2 Indonesia’s Public Debt

Public Debt: Domestic and External 120 100

% of GDP

80 60 40 20 0 1975 1980 1985 1990 1995 1996 1997 1998 1999 2000 2001 Domestic

External

Source: Bank Indonesia.

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231

232 TUBAGUS FERIDHANUSETYAWAN

not out of the question. Undoubtedly, large interest payments would constrain fiscal flexibility and significantly reduce the government’s capacity to stimulate the economy. The pressure of debt servicing on the balance of payments is also real. The debtservicing ratio, both public and private, increased from 35 per cent in 1996 to 59 per cent in 1999, before declining to around 40 per cent in 2000. A massive debt burden, huge interest payments, inadequate debt management, and a slow economic recovery all make one wonder whether Indonesia will be able to escape from the debt trap in the future. There are many questions to be answered. Could the debt/GDP ratio decline and reach the level prior to the crisis? How long would it take to get back to the pre-crisis level of debt? Is there any chance of escaping from bankruptcy in 2004? What policy actions are needed to escape from the debt trap in the future? This chapter aims to provide an overview and analysis of Indonesia’s public debt problems, starting with the background and the characteristics of Indonesian debt before and after the crisis. This includes an analysis on the origins of domestic debt, which is the main source of massive debt increase during the crisis. The impact of massive debt on the Indonesian economy, and the management of foreign and domestic debts (including debt and fiscal sustainability) will be discussed in the following section. This chapter will then conclude with a number of recommendations and options for resolving the debt problem.

External Debt Characteristics of Indonesia’s External Public Debt2 Prior to the crisis, Indonesia’s external debt position could be characterized as conservative, and in line with its potential to pay, even during the oil boom years in the 1970s and 1980s. After successfully rescheduling the external debt inherited from the Soekarno government, the Soeharto government never reneged on its debt obligations. But in the past, rescheduling programmes were also generous. The principal of the debt was consolidated

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233

for repayment in thirty equal instalments over thirty years at zero interest. In addition, contractual interest, and the interest on earlier Paris Club rescheduling, was deferred until 1985 and to be paid only after fifteen equal instalments with no additional interest.3 Compared to the Soekarno government, which chalked up a large amount of foreign debt, the Soeharto government’s approach towards foreign debt was careful and considered. There was a rule of thumb among the leading economic technocrats that the ratio of debt servicing to total exports should not exceed 20 per cent, and Indonesia did not borrow against its future oil earnings as many other oil producers did. In 1976 Pertamina, Indonesia’s state-owned oil company, incurred debts of $10 billion in a series of large projects with dubious potential. Fortunately, the debts of Pertamina were successfully rescheduled, and the Soeharto government learned its lesson; henceforth all foreign debts of state-owned enterprises were centralized by the government. No state-owned enterprise was allowed to borrow externally without approval from the central government. In 1986, when oil prices plummeted, Indonesia experienced a balance of payments problem, but new loans with an extended grace period were granted (mainly by Japan). The package of devaluation and reforms undertaken subsequently succeeded in boosting non-oil exports and increased private investment, leading to economic recovery, which then provided the resources for the government to service its debt. In the late 1980s and early 1990s, during Indonesia’s economic boom, the danger of escalating foreign debt incurred by stateowned or state-related projects resurfaced. Upon realizing this, the government again stepped in to curb this from getting out of hand by rescheduling and postponing the projects, introducing offshore-borrowing ceilings on state-related projects, and reinforcing the process of central government approval for staterelated projects by creating a committee to review which staterelated projects and state-owned enterprises were allowed to borrow offshore. One important characteristic of Indonesia’s public external debt profile is that it is mostly from official sources and is thus concessional and long term. Official borrowing has also been

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234 TUBAGUS FERIDHANUSETYAWAN

done in a co-ordinated way, initially through IGGI (Inter Governmental Group on Indonesia) and then after 1991 through CGI (Consortium on Government of Indonesia). IGGI was created in the New Order period and annual meetings were held in the Netherlands. After a falling out in bilateral relations, resulting from Dutch aid being linked to non-economic conditionalities, IGGI was converted into CGI with more or less the same mandate and procedures although the meetings were held in different locations. The co-ordination amongst multilateral and bilateral donors is such that the World Bank will prepare a document assessing the Indonesian economic conditions, evaluate the issues, and make recommendations for changes. A CGI meeting will then convene and donors will make pledges. CGI lending is mainly for project loans tied to specific projects, although a smaller proportion of programme loans are not. The Indonesian Government has to provide rupiah counterpart funds for the project loans. The relatively conservative approach to government foreign debt meant that the government debt increased at a modest rate. Table 11.2 shows the amount of total debt, government and private, from 1975 to 1995. The table shows that the annual increase in public external debt was around $1.3 billion on average from 1975 TABLE 11.2 Indonesia: Public External Debt Prior to the Economic Crisis (In US$ billion) Government (Public) Year 1975 1980 1985 1990 1995

Private

Total

Stock

Annual Change*

Stock

Annual Change*

Stock

Annual Change*

6.61 12.99 25.32 45.10 59.59

0.69 1.28 2.47 3.96 2.90

1.83 1.88 9.84 18.85 48.24

n.a. 0.0 1.59 1.80 5.88

8.44 14.87 35.16 63.95 107.83

1.00 1.29 4.06 5.76 8.78

Note: *Average annual change during the previous five years (in US$ billion). Source: Bank Indonesia.

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to 1980, $2.5 billion from 1980 to 1985, and around $4 billion from 1985 to 1990. The stock of public foreign debt still increased, but at a slower rate, from 1990 to 1995. In fact, the government repaid a large amount of debt principal in the mid-1990s just before the crisis started. In contrast, the private external debt increased very slowly up to 1990, but then increased very rapidly from 1990 to 1995 by around $5.9 billion a year on average. The size of the government external debt increased from $53– 54 billion in 1996 and 1997 to around $75 billion by the end of 2000. Prior to the crisis foreign, and in fact total, government debt (since there was no domestic debt) was around 23 per cent of GDP, which is comparable to many other Asian and Latin American economies. At its peak the ratio of external debt to GDP of around 60 per cent was also comparable to those of Mexico and the Philippines in the late 1980s.4 Most of the external public debt was official and noncommercial in nature. For example, out of the $55.3 billion government external debt in 1996, only $2.1 billion came from non-official sources (that is, commercial and leasing). The remainder came from both multilateral and bilateral sources. The major multilateral agency providing loans to Indonesia was the World Bank (close to two-thirds), followed by the Asian Development Bank (ADB) (close to one-third); the major bilateral donor was Japan (about two-thirds). Before the economic crisis bilateral sources of funding, both direct bilateral loans and export credit facility, comprised 65 per cent of funding, and multilateral sources around one-third. In terms of currency composition, around 40 per cent of the total public external debt was denominated in U.S. dollars, around 35 per cent in Japanese yen, and slightly less than 5 per cent in Deutschmark. Most of the foreign borrowing consisted of longterm loans with an average maturity of twenty-two years and a grace period of seven years. The average interest rate was about 5 per cent, which reflects the concessional terms of the loans. After the crisis, the multilateral loan sources increased to around 40 per cent and the bilateral sources accounted for another 55 per cent. Most of the stock of domestic debt came through the CGI group of multilateral donors and the CGI pledge mechanism

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236 TUBAGUS FERIDHANUSETYAWAN

prior to the crisis. Since the crisis, the new loans have come in through the International Monetary Fund (IMF) rescue package rather than through CGI, and this has reduced the stock of debt through CGI to less than 60 per cent. From 1997 to 1998, the external public debt increased from around $54 billion to $67 billion (Table 11.3); much of the increase was due to the IMF bail-out programme for Indonesia. In 1999 official lending increased by another $8 billion as a result of normal CGI lending and the disbursement of the first line of assistance. There has also been an increase in the export credit facility, mainly from Japan, aimed at overcoming the problems Indonesian exporters have been facing in obtaining trade finance due to the collapse of the banking sector and a plummeting credit rating.5

The IMF Reform Programme The IMF programme started in November 1997 when the Indonesian Government signed the first Memorandum of Understanding with the IMF and secured the IMF support fund in the form of stand-by arrangement. The total bail-out package itself amounted to around $43 billion, with $10 billion comprised of funds from the IMF and the rest from the other multilateral agencies of which the World Bank was the largest. The amount committed by the IMF increased to around $11.4 billion in July 1998, and the stand-by arrangement was then replaced by the Extended Fund Facility in August 1998. The main justification for the IMF assistance programme was to shore up investor confidence and to prevent further deterioration in the foreign exchange reserves due to the massive capital outflows in 1997–98. The IMF rescue loan package is linked to an IMF Letter of Intent (LoI) and the IMF team comes at regular intervals to assess the performance of the existing LoI and, if necessary, endorse new ones. The Indonesia–IMF LoI have been comprehensive, covering: macroeconomic measures, such as base money and fiscal deficit targets; structural reforms in the real sector; removal of trade and investment barriers; and financial sector restructuring. Also included are a host of laws, regulations, and institutional changes. In February 2000 the IMF once again increased the IMF fund to

© 2003 Institute of Southeast Asian Studies, Singapore

© 2003 Institute of Southeast Asian Studies, Singapore

55.2 55.2 38.2 17.0 55.2 24.1 21.1 55.2 21.4 17.5 14.3 1.1 1.0 55.2

Preliminary figures Medium-long term (more than one year) 3 September figure 4 January figure

1

2

Source: Bank Indonesia (September 2001).

Notes:

Total government outstanding debt (a) by institution – IGGI/CGI – Non-IGGI/CGI (b) by currency – US$ – yen (c) by category – bilateral – multilateral – credit export facility – leasing – commercial (d) by maturity 2

Items

1996 53.9 53.9 34.7 19.2 53.9 23.1 18.5 53.9 19.5 18.6 13.9 0.9 0.9 53.9

1997 67.3 67.3 38.8 28.5 67.3 25.3 22.6 67.3 22.4 26.0 15.6 0.9 2.4 67.3

1998 75.9 75.9 44.1 31.8 75.9 28.4 27.4 75.9 26.2 30.3 16.1 0.8 2.5 75.7

December

1999 76.5 76.5 45.3 31.2 76.5 29.5 26.7 76.5 25.9 31.3 16.1 0.7 2.5 75.3 3

June 74.9 74.9 44.1 30.8 74.9 29.5 25.0 74.9 24.6 31.5 15.7 0.6 2.4 69.2

December

2000

TABLE 11.3 Indonesia: Outstanding Public External Debt, 1996–2001 (In US$ billion)

72.0 23.3 29.9 15.7 0.5 2.6 69.9 4

20011 June

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around $15 billion (including the disbursed loan). In 2001 the government of Indonesia and the IMF agreed to extend the period of the bail-out programme to 2003 (Table 11.4). The implementation of the LoI has not been smooth, and is reflected in the deterioration of relations between the IMF and the Indonesian Government, especially during the Wahid administration. Many deadlines were missed and the Indonesian Government’s commitment to the process of implementation was questioned, especially with regard to the transparency of debt restructuring and the sales of assets under the Indonesian Bank Restructuring Agency (IBRA). As a result, the disbursement of the IMF support fund to the Wahid government was delayed from September 2000. Up to September 2001, the total disbursement of the IMF fund amounted to $11.7 billion; most of the funds are kept in the central bank as part of the foreign reserves. While the IMF fund is relatively small compared with the total external debt, the disbursement of the fund is taken as an indicator of international confidence in the progress of Indonesia’s economic reforms. Therefore, the key issue here is not the size of the IMF loan, but the credibility of Indonesian

TABLE 11.4 Indonesia: Disbursement of the IMF Support Fund Items Amount disbursed (total) Stand-by arrangement Extended Fund Facility New Extended Fund Facility Remainder of the disbursement

Period

In US$ Equivalent1 (million)

Up to September 2001 November 1997 – July 1998 August 1998 – August 1999

11,726.7 5,001.7 5,202.2

September 1999 – September 2001

1,522.9

October 2001 – December 2003

3,367.0

Total IMF commitment 1

15,093.7

Note: The amounts were originally in SDRs; these are the estimated US$ equivalent. Source: Bank Indonesia.

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economic reforms reflected in the successful and consistent implementation of the IMF programme. The successful implementation of the IMF LoI is crucial because the disbursement of new loans or rescheduling under Paris Club would depend on it. Unfortunately, there has not been any consistency in the implementation of the economic reform programme during the previous and current administrations. Inconsistent implementation leads to sub-optimal outcomes, which potentially results in diminishing political support for the reform programme itself. In fact, there has been growing political pressures in the parliament for not renewing the contract with IMF when it ends by the end of 2003. As such, the prospects of external debt rescheduling are very gloomy. In view of the slow progress of economic reforms in Indonesia, the World Bank has reduced the lending amount it will disburse to Indonesia, removing the budget support for social safety net schemes. In fact, the World Bank has outlined the best-case, medium-case, and worst-case scenarios, on which it will decide the form and size of assistance to Indonesia. These are: (1) a positive scenario of significant progress on reforms, governance, and macroeconomic stability (best case); (2) a “muddling through” scenario of slow progress on economic and governance reforms and signs of macro instability, indicated by lower economic growth and higher inflation rates; and (3) a “collapse” scenario of deteriorating micro- and macroeconomic conditions and failure of government. The amounts disbursed are related to these scenarios, including a temporary suspension of aid in the worst-case scenario. It would appear that Indonesia is still in the second “muddling through” scenario with the World Bank pledge of around $400 million a year. The World Bank has also outlined various actions needed to achieve the best-case scenario. Specific conditionality includes the formulation of comprehensive poverty-reduction strategies, a rice policy, the framework for a public procurement system, the establishment of an anti-corruption commission, and others. Most of these policy actions require massive institutional reforms involving various stakeholders, and the difficult process of achieving political consensus. The failure of the government to

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implement most of the conditionalities in 2001 meant that Indonesia has failed to secure the best-case scenario as defined by the World Bank. The ADB has also been experiencing similar problems with Indonesia. ADB loans disbursed in 2000 came to only about $748 million out of the $1.2 billion available or committed.6 Similarly, potential loans from the ADB in 2001 could reach around $1.2 billion, but the delay in meeting the ADB’s conditionalities, especially for the programme loans, led to a much smaller commitment and even smaller disbursement of about $500 million. ADB conditionalities include the formulation of new laws and regulations on energy policy — including oil, gas, and electricity — investment policy, and money-laundering. Delays in implementing economic reform have led to the delay in the disbursement of foreign loans by multilateral agencies such as the World Bank and the ADB to Indonesia. Out of the more than $23 billion external programme and project loans available for Indonesia from 1998 to 2001, only around $13 billion were disbursed.7 Slow progress in reforms has thus limited the availability of resources that can be used to finance economic recovery in the country.8

Domestic Debt During the Soeharto administration, the government financed the budget deficit with foreign official loans. As such, there was no domestic public debt. This so-called “balanced-budget” policy was conducted to avoid a repetition of the economic crisis in the mid-1960s when the deficit of the government budget was financed partly by printing money, which subsequently led to skyrocketing inflation. But the economic crisis in the 1990s and the collapse of the banking sector have changed the situation dramatically. The bank restructuring and recapitalization programme has been largely financed by issuing government bonds; as a result domestic debt now accounts for around 50 per cent of Indonesia’s GDP. Therefore, to understand the characteristics of the domestic debt, it is important to understand the bank restructuring programme in Indonesia.

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Bank Restructuring Programme On 26 January 1998 the Indonesian Government established IBRA to assist in its banking sector restructuring and recapitalization programme. 9 IBRA was also set up with the provision of deposit guarantee to prevent further bank runs similar to the ones that took place after the closure of sixteen banks in 1997. The key objectives of IBRA are: to restructure banks through closures, recapitalization, mergers, and acquisitions; to recover loans through restructuring and sales; and to monitor and to sell corporate assets related to bank restructuring. Under the law,10 IBRA has been granted extraordinary powers, including certain judicial power to execute agreements in its name; to acquire, manage, transfer, and sell bank assets; and to restructure and to rehabilitate the banks under IBRA’s supervision, with the power to conduct mergers and acquisitions. IBRA has a statutory existence of five years from February 1999, but its term could be extended if required. While IBRA was formally established in January 1998, the blueprint for the banking recapitalization programme was only announced and implemented on 31 December 1998, in the form of Government Regulation No. 84/1998. The programme is basically designed to force closures of troubled banks, leaving banks with viable prospects to continue to operate and grow. To do so, each bank was evaluated according to its capital adequacy ratio (CAR) and placed in one of three different categories: Category A (CAR above 4 per cent), B (CAR between 4 per cent and negative 25 per cent), or C (CAR below negative 25 per cent). Category C banks that failed to increase their CAR to 4 per cent within thirty days were to be shut down. Category B banks were then subject to further classification, to be closed, recapitalized, or taken over by the government. The Indonesian bank recapitalization programme is structured such that the original owners contribute no less than 20 per cent of the recapitalization cost, and the Indonesian Government contributing the remaining 80 per cent. The government pays for its 80 per cent stake by injecting both fixed and floating rate bonds into the banks’ balance sheets in return for non-voting shares and irrecoverable loans or Category 5 loans that are transferred to IBRA. These bonds are basically “I-owe-you” letters in which the

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government pays interest to the banks periodically. The recapitalized banks are required to repay all the liquidity assistance they have received and to correct the legal lending limit violation within a year. If IBRA takes over the management of a bank, it seizes the Category 5 loans, and co-ordinates shareholder settlements, whereby former controlling shareholders are requested to pay all of their liabilities. If the bank qualifies for recapitalization, IBRA would recapitalize by injecting capital. If it is not eligible for recapitalization, IBRA may take other steps, including merger, acquisition, and/or the sale of the bank to investors. In the case of frozen or liquidated banks, IBRA pays all the eligible liabilities of these banks in accordance with the government’s guarantee programme. IBRA also takes over all the loans (good and bad) of these banks, and manages and restructures them. In the event that there are violations of bank regulations by the controlling shareholders of the banks, IBRA would step in to settle these liabilities. In all the above cases, the claim for liquidity support to Bank Indonesia became IBRA’s repayment oligation, and IBRA then assumes the bank shareholders’ repayment obligations. The shareholders of the banks pledge their assets in either cash or industrial property assets to IBRA to secure payment of the amount owed. As the market value of the shareholder settlement assets seized by IBRA declines as a result of deteriorating asset quality, the final value of the shareholder settlement assets becomes significantly less than the amount of liquidity support received by these banks. In this regard, the financial position of the Indonesian Government has weakened significantly. Figure 11.3 shows the bank recapitalization scheme in Indonesia. It shows that the Indonesian Government basically issues bonds to commercial banks as part of the recapitalization programme, and to Bank Indonesia as part of the repayment programme since Bank Indonesia has provided the liquidity support to the banking system. IBRA has closed down, merged, recapitalized, or taken over a significant number of banks as part of its effort to restructure the country’s banking sector. Consequently, IBRA has become the

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▼

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▲

▼

Issues recapitalization bonds to recapitalized and BTO banks; pays the interest payments; provides government guarantee programme

Transfer Category 5 loans and some equity to IBRA

Transfer all loans, equity, and shareholder settlements to IBRA

▼

Recapitalized banks

Banks under IBRA Frozen or liquidated banks (BBO, BBKU), banks taken over (BTO)

▼

Provides liquidity support (1997–99) and blanket guarantee

Bank Indonesia

FIGURE 11.3 Indonesia: Bank Recapitalization Scheme

IBRA Collects loans from banks under IBRA; owns equity in banks in return for capital injection; receives shareholder settlements

Government

Issues repayment bonds to Bank Indonesia; pays interest to Bank Indonesia

▲

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single largest creditor of Indonesian corporations, and thus an important agent in Indonesia’s corporate restructuring efforts. In view of ineffective bankruptcy laws in Indonesia, IBRA was given the special power to seize the worst category of loans of all recapitalized banks and all categories of loans from the closed or taken-over banks. The collection of bad assets has been poor, mainly due to a lack of institutional framework and a weak legal foundation. Many of these bad loans belong to the state banks with politically connected bad debtors. In many cases, the value of the collaterals was marked up when the loans were given. In addition to these assets, IBRA collects other assets in the form of shares or equity in private banks under IBRA, and receives corporate equity as part of the shareholder settlements. Banks are being recapitalized to raise their CAR to 4 per cent, and then further to 8 per cent by the year 2002, through the issuance of government bonds, starting in May 1999. These bonds are supposed to be tradable and are issued to commercial banks to recapitalize them. The bonds are of two types, the variable-rate bond to bring the CAR from negative to zero, and fixed-rate bond to bring the CAR from zero to 4 per cent. The time frames for these bonds are five to fifteen years. But this is not all that is needed. The government needs to issue other bonds to Bank Indonesia to cover the repayment of liquidity support, deposit guarantee, and unpaid liquidity credit that Bank Indonesia, as the central bank, channelled to some banks prior to its independence. These bonds are basically index-linked and are non-tradable.

Size of the Domestic Debt Table 11.5 presents the composition and size of Indonesia’s domestic public debt. The total domestic public debt is equivalent to the total bonds issued by the government as part of the bank restructuring programme. There are two kinds of bonds: recapitalization bonds issued to banks,11 and repayment bonds issued to Bank Indonesia for the guarantees and liquidity supports provided by the central bank.12 In June 2001 the government bonds were worth more than Rp650 trillion, or about 50 per cent of GDP. This is likely to increase further. In fact, it was expected that there would be at least Rp700 trillion in government bonds

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3

2

1

– – 9 9 51 53 59 175

Fixed Rate Bonds

– – – – 27 25 29 35

Hedge Bonds

104 104 282 282 418 427

Subtotal

Bank Guarantee2

100 164.5 164.5 164.5 164.5 164.5 164.5 164.5 – – 53.8 53.8 53.8 53.8 53.8 53.8

Inflation Index Bonds

BLBI1

– – – – 10.0 10.0 10.0 10.0

KLBI3 Variable Rate Bonds

Issued to Bank Indonesia

100 164.5 218.3 218.3 228.3 228.3 228.3 228.3

Subtotal

100 164.5 322.3 322.3 510.3 510.3 646.3 655.3

Total

BLBI (Bantuan Likuiditas Bank Indonesia): Liquidity support given to banks (due to bank runs in 1997–98), including Rp 20 trillion to Bank Export Import Indonesia (state bank) which was then merged into Bank Mandiri. Bank guarantee: Blanket guarantee provided by the government through Bank Indonesia. KLBI (Kredit Likuiditas Bank Indonesia): Unpaid subsidized credit given to the government by Bank Indonesia.

– – 95 95 204 204 330 217

Variable Rate Bonds

Sources: World Bank and Bank Indonesia.

Notes:

December 1998 March 1999 June 1999 September 1999 December 1999 March 2000 June 2000 December 2000

Period

Issued to Recapitalized Banks

TABLE 11.5 Indonesia: Domestic Public Debt (Cumulative, in trillion rupiah)

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by the end of 2001, and possibly more, depending on the performance of the banking sector. The increasing amount of government bonds reflects the problems of bank restructuring. In the first place, this could have been avoided if the closure of the sixteen banks in 1997 was credible and sufficient deposit guarantees were provided. Major delays in banking restructuring programmes contributed to the growing amount of recapitalization bonds throughout 1998 and 1999. The move to close troubled banks was just too little too late, partly because of vested political interests and interferences, including a lack of institutional and legal capacity, which resulted in some high-profile scandals (like the one involving Bank Bali). Figure 11.4 shows the maturity profile of government bonds issued to the recapitalized banks up to the year 2009. It is clear that a large amount of government debt will be due in 2004 and beyond, and if there is no significant development of the secondary

FIGURE 11.4 Indonesia: Maturity Profile of Recapitalization Bonds (In Rp trillion)

80.0

Total at Maturity

70.0 60.0 50.0 40.0 30.0 20.0 10.0 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Ministry of Finance, Indonesia (October 2001).

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bond market by 2004, the repayment burden on the Indonesian Government will be massive.

The Real Cost of Bank Restructuring The net present value of the real cost of bank restructuring is derived from the difference between the bonds that are issued by the government and the value of assets that are collected and then sold by the government when the price is right. The balance sheet of IBRA, calculated based on data in April 2001 and December 2000, is presented in Table 11.6. The estimated book value of total assets held by IBRA is around Rp542 trillion. The total liability, in the form of bonds issued to Bank Indonesia and recapitalized banks, amounts to about Rp655 trillion. The difference between assets and liability at their book values (Rp113.5 trillion) consists of IBRA’s implicit equity in state banks and the difference between the collections of shareholder settlements and the repayment bonds issued to Bank Indonesia.

TABLE 11.6 Indonesia: Real Cost of Bank Restructuring (Net value in Rp trillion) Items

Book Value

Market Value

Recovery Rate (%) 1

Assets (April 2001) Corporate equity as shareholder settlements Core assets from private and state banks Non-core assets from private and state banks IBRA’s investment in recapitalized and taken-over banks2

541.8 131.0 270.3 8.5

207.9 70.7 94.6 3.0

38 54 35 35

132.0

39.6

30

Liability (December 2000) Government bonds to Bank Indonesia Government bonds to recapitalized banks

655.3 228.3 427.0

655.3

–113.5

–447.3

Assets – liability Notes:

1 2

Calculated from IBRA’s strategic plan, October 1999. Excluding IBRA’s investment in state banks.

Sources: Bank Indonesia and IBRA.

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Based on the estimated market value, IBRA is expected to recover about Rp208 trillion from its total assets, or about 38 per cent recovery rate. The difference between IBRA’s assets and liability at their market values represents the estimated net present cost of bank restructuring in Indonesia. These out-of-pocket expenses that the taxpayers have to pay would be around Rp447 trillion at best, or more than 30 per cent of the GDP. With around 210 million people living in Indonesia, the net present value of the cost for banking bail-out for each person would be more than Rp2 million at best. The revenue from asset disposal would automatically finance the cost of bank restructuring as the revenue would go to the asset side of IBRA’s balance sheet and reduce the amount of the government recapitalization bond. IBRA has sold some of its assets, and if the target of the asset sales is more than Rp200 trillion, IBRA should raise at least Rp40 trillion annually for the next five years. But the target of cash recovery in 2000, which was met by IBRA, was Rp20.7 trillion, and the target in 2001 was Rp27 trillion, much lower than what was supposed to be. In other words, it is doubtful that IBRA could meet the Rp208 trillion cumulative cash recovery target over time, and therefore the net present value of the bank restructuring is expected to be higher. The pertinent issue for the Megawati administration is how to finance this burden over time, so that the country could grow out from its domestic debt without the fear of monetary or fiscal collapse in the future.

Managing the Debt Burden There are various options for a country with a massive public debt. The first option is to default, but the consequences of this action would be serious as the country could be isolated from the world community. The second is to inflate the economy, to print money, so that the ratio of domestic debt to GDP could be relatively constant even though the debt is actually increasing in magnitude. This option is not viable for a country with a massive foreign debt because inflating the economy would lead to dramatic currency depreciation, which in turn would increase the size of the foreign debt rather than reduce it. Furthermore, this option brings with it

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hyperinflation, causing severe social stress and unrest. Privatization and asset sales would help to reduce the debt burden somewhat, but if the debt is massive, the proceeds from those efforts would not solve the debt problem in the long run. Thus far, the best option for the country to escape the debt trap is to develop the capacity to roll over debt and to reduce the outstanding debt over time by paying the principal sum. But this option is not achievable without hard work, political commitment, and persistence. The necessary conditions for reducing debt are rapid economic growth and low inflation, but at the same time a massive public debt would constrain the government in stimulating growth and controlling inflation. Under this difficult situation, what is needed are private investments and capital inflows, which depend mostly on investor confidence. The capacity to roll over debt depends on external debt rescheduling and the existence of an effective domestic bond market. But an effective bond market would be difficult without the support of stable macroeconomic conditions.

External Debt Restructuring Paris Club As a result of the increase in rescue loans and loan maturity structures, the external debt-service obligations of the Indonesian Government increased from $2.1 billion in 1996 and $1.2 billion in 1997 to $5.8 billion in 1998 and 1999, and $5.3 billion in 2000 (Table 11.7). Debt servicing was kept down in 1999 and 2000 due to phase one of the Paris Club debt rescheduling. In 1998 the government successfully rescheduled payment on the principal of the loan through the Paris Club and the negotiations went smoothly despite initial resistance from Japan to reschedule the debt-service payments. The Indonesian Government received $4.6 billion in debt rescheduling for the period August 1998–March 2000, with three years of grace period and a maturity period of eleven years at market rates. This rescheduling was, however, on principal payments only, and not on interest payments, and it helped to keep the debt-service payments at around $5 billion instead of $7 billion. Rescheduling reduced the share of debt service of

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TABLE 11.7 Indonesia: Payment Schedule of Government External Debt (In US$ million) Period 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Principal

Interest

Total

1,262 670 3,203 2,569 1,769 4,050 7,502 6,369 5,766 5,941

888 501 2,568 3,219 3,545 3,527 3,468 3,024 2,564 2,318

2,150 1,171 5,771 5,788 5,314 7,578 10,970 9,393 8,330 8,259

Note: The amount of principal in 2002 does not include the second phase of the Paris Club II debt rescheduling. Source: Bank Indonesia.

government revenue to 34 per cent for 1998/99 instead of 45 per cent and 25 per cent for 1999/2000 instead of 38 per cent.13 It also added $2.5 billion to the official capital inflows in 1998–2000, which helped to offset the large outflows of private capital during these years. In April 2000 the government successfully negotiated the second Paris Club rescheduling covering $5.4 billion in amortization due on bilateral debt based on February 2000 exchange rates. The agreement was made conditional on the successful completion of the first review of the IMF programme due on 5 June 2000. With this rescheduling, amortization due in this period would be rescheduled with seven years grace and a repayment period of twenty years. Interest rates would be at least as favourable as the official development assistance (ODA) loans in question. As for the non-ODA bilateral component, there would be a three-year grace and a fifteen-year repayment period, while the interest rate would be bilaterally set at an appropriate market rate.

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The first phase of the Paris Club debt restructuring was successfully completed in 2000, but the second phase amounting to $2.8 billion experienced problems because of delays in implementing the IMF LoI. Negotiations for the implementation of phase two of the Paris Club debt rescheduling should have been completed in March 2001, based on the LoI completed by the end of 2000. However, approval and signing of this LoI experienced considerable delays under the Wahid government and negotiations only resumed after the Megawati administration came into power. Without the implementation of the second phase of the Paris Club debt rescheduling, the government’s debt servicing would increase to $7.6 billion from $4.8 billion in 2001. The Paris Club members were scheduled to meet in September 2001 to decide on phase two of the debt rescheduling, but the change in government in August and the subsequent 11 September terrorist attacks led to further delays in the negotiations. The Megawati government paved the way for a new LoI and better relations were established with the IMF, which led to a smooth implementation of the second phase of the debt rescheduling. However, the new Megawati administration faced the challenge of negotiating for the third phase of the Paris Club debt restructuring and that would be contingent on her government’s ability to implement the latest IMF LoI. Future negotiations for the third phase debt restructuring were expected to take place in April 2002. If the Paris Club rescheduling fails, Indonesia’s debt-service obligations would rise to $11 billion in 2002 and around $8–9 billion in 2003–4, from the previous range of $5–7 billion. Other than rescheduling debt payments, another strategy for the Indonesian Government is to increase the concessional terms of the loans. In fact, with the Paris Club debt rescheduling at less than market interest rates, the average concessionality of the outstanding government debt has been increased. Furthermore, with the fall in Indonesia’s per capita income in 1998, the World Bank has increased the share of its lending at more concessional terms. Similarly, the ADB has also increased the share of Asian Development Fund (ADF) credits in its loans to Indonesia, which again are more concessional. Rescheduling debt service and

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increasing concessionality are important in reducing the burden on the government budget, and concomitantly, the pressure to reduce expenditures on strategic social and human resource investments before economic recovery becomes sustainable.

Alternative Debt Resolution Schemes The Indonesian Government could consider three alternative debt resolution approaches. The first one is to determine whether Indonesia can enter the Heavily Indebted Poor Countries (HIPC) scheme. The second one focuses on considerations over the legitimacy of debts incurred by the Soeharto regime. The third one is a debt for nature swap, in which Indonesia would be able to secure some debt relief with environment-related conditionality.

HIPC The World Bank and the IMF have designed a framework to provide special assistance for heavily indebted poor countries that pursue economic adjustment and reform programmes. Three criteria need to be fulfilled if a country wants to enter the scheme. First, the country must be a member of the International Development Association (IDA). Second, it must face an unsustainable debt situation even after the full application of traditional debt relief mechanisms. Third, the country must have established a track record of successfully implementing economic and social reforms. HIPC-eligible countries must also undertake continuous improvements in their economic management and structural and social policy reforms, especially improvements in basic health care and education. Indonesia is currently not regarded as a HIPC. First, it is not part of the IDA as it is still considered creditworthy. Second, it is still considered by international creditors to be able to manage its debt. A debt level is technically sustainable if the ratio of government debt to GDP is falling over time. Indonesia managed to achieve this between 1988 and 1997 (from 54 per cent to 26 per cent). Given this record, the World Bank has deemed Indonesia to be capable of reducing its debt burden by conservative fiscal

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policies, structural reforms, asset sales, and debt rescheduling under the Paris Club schemes.

Odious Debt A more radical debt resolution approach has been advocated by several non-governmental organizations (NGOs), among them the Indonesian Forum for International Development (INFID). Essentially, the approach is to claim that much of Indonesia’s public debt is odious debt and therefore illegitimate. Under international law, odious debt is defined as loans accumulated by an unrepresentative and oppressive government, which are used to repress a country’s citizens. Advocates of this approach aim to persuade lenders and creditors that loans extended to the oppressive Soeharto regime were not used to serve the public interest and benefited only government officials and business cronies. Therefore, these debts constitute an unjust repayment burden for the country, especially given the fact that a newly installed and democratically legitimate government is in place. They specifically target the multilateral development banks, such as the World Bank, based on the argument that part of the loans given to the Soeharto regime between 1966 and 1998 were stolen or lost due to corruption, with the full knowledge of the World Bank. As the World Bank has a legal mandate to ensure that its loans are used for the purposes for which they were granted, it is also liable for criminal charges. Therefore, odious debt arbitration proceedings should be launched to determine the legitimacy of past loans. Presumably, debt repayments on loans found to be falling into the odious debt category would be cancelled and thus written off. The main problem with this approach is its feasibility. So far, there is no broad-based international support for this approach. First, it attacks the financial system at its core. If the World Bank and other public agencies had to write off odious loans, they would be threatened by a fall in their triple A credit ratings and bankruptcy could be a possibility for these agencies. It is also a fairly uncontested area of international law and there is no clear and solid legal mechanism to pursue this strategy. The reality is

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that the World Bank and the IMF are the only international institutions that could rescue countries from crisis situations. Financial markets use their country assessments as a benchmark for creditworthiness. In the Indonesian case, they also provide the necessary “stick” for domestic policy-makers to ensure the necessary policy reforms.

Debt-for-Nature Swap Another possible option would be debt-for-nature swaps (DNS). A debt-for-nature swap is defined as the cancellation of debt in exchange for a commitment to mobilize domestic resources for the environment. However, the government has not pursued the DNS option intensively. While the debt eligible under a DNS scheme would only have a small impact on Indonesia’s foreigndebt repayment, it would have positive impacts in terms of increasing development funds. A study undertaken by the Natural Resource Management (NRM) Project concludes that debt-fornature swaps are likely to be feasible in Indonesia provided swaps not only finance conservation but also support sustainable development. Donors like the United States, through its Tropical Forest Conservation Act, and the German Government are reportedly willing to cut Indonesia’s bilateral debts through DNS schemes.14

Domestic Debt Restructuring Development of an Effective Bond Market The Indonesian Government has issued almost Rp700 trillion in government bonds and a significant number of the bonds will mature in 2004 and beyond. The creation of a healthy and liquid bond market is needed to reduce the burden of the Indonesian Government in managing the debt repayment in the future and to create another source of long-term financing mechanism in the country. An effective bond market would present a valuable opportunity for the government to roll over its debt and to replace the short-term bonds with those with longer-term maturity. The government must smooth out the maturity profile of the bonds in

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order to avoid the massive bond payments in 2004 and beyond. The existence of a liquid bond market is also crucial to ensure a less costly monetary policy. The current open-market operations by Bank Indonesia are conducted by using the SBI (Bank Indonesia Certificate) of which Bank Indonesia has to pay the interest. The development of an effective bond market would create another monetary instrument for Bank Indonesia to conduct its monetary operations. Unfortunately, the Indonesian bond market is currently very underdeveloped, and the government is running against time to set up an effective and efficient market before 2004. Since 1 February 2000 the fixed and variable rate bonds have been traded, but the volume of transactions remains small. In June 2001 the cumulative total trading of the government bonds in the market was close to Rp56 trillion.15 By September 2001, the cumulative amount had reached Rp70 trillion, but the majority of the investors are institutional investors (primarily from the banks) who accounted for about 75 per cent of the total trade bonds. The Indonesian bond market is still shallow and narrow, which makes the bond an illiquid instrument. There are no market makers, no benchmark yield curve, and no derivative markets. Rising interest rates since the end of 2000 have made the situation worse as the price of the bonds has declined remarkably. The discount rate ranges from 10 per cent to 25 per cent because the interest rate has been around 10 to 25 per cent higher than the coupon rates. As a result, sellers are suffering from capital losses. Banks are reluctant to sell their bonds to avoid losses, and therefore they still rely on the inter-bank money market for liquidity. As bonds are considered risk-free assets, banks are not willing to sell the bonds at a loss, even at the risk of declining CAR. But the banks are not in a position to raise cash or to channel credit to make profits because they can still channel their funds to SBI and benefit from the government’s blanket guarantee, on both the asset and liability sides. The Indonesian bond market also suffers from a lack of supporting infrastructure. There is no firm legal basis to protect investors from default risk and there is a dearth of information on

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rules and regulations regarding trading in government bonds. Government bonds have been issued since 1999, but there is actually no law that provides basic regulation on state debt. Around Rp3.9 billion of variable rate bonds would mature in 2002, and yet the decision to roll over the debt or pay in cash would be dependent on the law regulating the public debt. The government announced the plan to issue short-term bonds, Treasury Bills, to pay for the debt in 2002. But again, the issuance of another type of bonds to pay for the matured bonds would require well-established public debt laws and regulations. The Megawati government presented the draft bill on state debt to the parliament for deliberation in November 2001. It remains to be seen whether the parliament and the government could finish their deliberations and establish the crucial law on time.

Bond-Asset Swap, Asset Sales, and Privatization One way to reduce the amount of domestic debt is to return the assets owned by the government from the recapitalization programme back to the recapitalized banks or to the private sector, through bond-asset swap, asset sales, and other forms of privatization. The bond-asset swap would be helpful, not only to reduce the budgetary burden of the government in financing the debt but also to return the assets to their most productive use. A more productive use of these assets by the private sector would sustain the economic recovery, mainly because the government has no capacity to stimulate economic growth due to its budgetary constraints. But a bond-asset swap would not be easy without any clear mechanism to support the swap. The process of asset transfer from the banks to IBRA has been very slow, complicated, and disorganized because of massive problems related to the bank loans in the first place. It was a painful process to determine the book and market values of the loans when they were transferred to IBRA. Similar complications are expected to take place when the loans are transferred back to the banks, especially when IBRA has no capacity to manage the assets.

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Removal of Blanket Guarantee The blanket guarantee provided to the banking system will have to be removed to reduce the government’s contingent liability in the future. There have been massive moral hazard problems in the banking system, and with the blanket guarantee on both the assets and liabilities in place, the development of the bond market is expected to be excruciatingly slow. Banks have no incentive to manage risk and to seek higher returns on their assets. But the removal of the blanket guarantee will not be easy either, as long as macroeconomic stability and confidence are still in doubt.

Fiscal Sustainability Fiscal Consequences Debt service payments will severely constrain public expenditures and the flexibility of overall fiscal and monetary policy. Table 11.8 presents the amount of debt service payment by the government, for both external and domestic debts, in the government budget. The total government interest payments amounted to almost 30 per cent of government domestic revenue compared with only 10 per cent before the economic crisis. Interest payments on the domestic bonds alone amounted to Rp54 trillion or 20 per cent of domestic revenue in 2001. The total government debt service, principal and interest, increased from 26 per cent of domestic revenue in 1996/97 to 36 per cent in 2001, even after taking into account the effect of external debt rescheduling. External debt servicing payment has been kept relatively low in 2000 and 2001 because of Paris Club debt rescheduling. External debt servicing decreased from 37 per cent of domestic revenue in 1999 to less than 16 per cent in 2000 and 2001. However, the principal payments of the domestic bonds would increase dramatically for the next several years, as the payment in 2004 is expected at more than Rp52 trillion. The peak of the principal payment will take place in 2007 at around Rp74 trillion. Because debt-related expenditure has increased dramatically since the crisis, the government has been forced to reduce the

© 2003 Institute of Southeast Asian Studies, Singapore

© 2003 Institute of Southeast Asian Studies, Singapore

11.3 15.4 12.7 1.8 26.1 35.6 29.4 4.1 0.0 0.0 26.1 4.1 8.1 21.4 3.6 1.8

9.7 12.7 11.0 1.5 38.6 50.4 43.9 5.8 0.0 0.0 38.6 5.8 23.7 46.7 3.3 1.8

27.3 4.3 5.9 12.4 1.9 –0.5

0.0 0.0

27.3 36.1 26.4 4.3

15.5 20.5 15.0 2.4

29.5 12.8 16.7 0.0 0 0.0 29.5

1997/98

37.1 5.2 13.3 25.2 1.1 –2.0

5.7 0.8

42.8 53.0 37.4 6.0

22.2 27.4 19.4 3.1

54.5 30.3 24.2 8.4 0 8.4 62.9

1998/99

21.7 3.5 7.8 17.4 2.2 –1.5

11.8 1.9

33.5 51.1 30.7 5.5

22.7 34.7 20.8 3.7

40.9 20.3 20.6 22.2 0 22.2 63.1

1999/2000

Sources: Calculated from data provided by the Ministry of Finance, Indonesia, and the World Bank.

22.9 13.0 9.9 0.0 0 0.0 22.9

1996/97

27.4 20.5 6.9 0.0 0 0.0 27.4

1995/96

External Principal Interest Domestic Bonds Interest Total Interest payment As % of domestic revenue As % of tax revenue As % of expenditure As % of GDP Total debt payment (P+I) As % of domestic revenue As % of tax revenue As % of expenditure As % of GDP Domestic debt As % of domestic revenue As % of GDP External debt As % of domestic revenue As % of GDP As % of exports As % of gross foreign reserves Primary fiscal surplus/GDP (%) Government surplus or deficit/GDP (%)

Government Debt Payment

TABLE 11.8 Indonesia: Government Debt Service Payment in Budget (In Rp trillion)

13.7 2.8 4.8 10.7 2.5 –3.2

17.9 3.7

31.7 55.3 27.4 6.5

27.5 48.0 23.8 5.7

26.6 8.1 18.6 34.8 0 34.8 61.4

FY2000

15.2 2.8 6.4 14.2 1.7 –3.7

20.3 3.8

35.5 52.0 29.6 6.6

29.1 42.6 24.2 5.4

40.1 17.0 23.1 53.5 0 53.5 93.5

FY2001

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share of development spending and subsidies. As a result, the capacity of the government to be an engine of growth has weakened the government expenditure for development (excluding subsidies, routine expenditure, and debt service payment); for example, development expenditure declined from 42 per cent of total expenditure in 1996/97 to 18 per cent in 2001.16 At the same time the government interest payment increased from 12 per cent of total expenditure in 1996/97 to 24 per cent in 2001. The increase is mainly due to the sharp increase in domestic interest payment, from zero in 1996/97 to 17 per cent of total expenditure in 2001. Despite the huge interest payments, the government expenditure on subsidies has been maintained during the crisis. A major component of government subsidies is fuel subsidy, and because of higher oil prices, expenditure on subsidies has increased dramatically; it hit 26 per cent of total expenditure in 2000. Because of budgetary constraints, the subsidies have been substantially reduced, leading to higher fuel prices, which are in fact more aligned with international prices. However, the share of subsidies in the government expenditure is still high at 17 per cent in 2001. The government is expected to cut more subsidies in anticipation of higher interest payments in the years to come.

Pressures on the Balance of Payments While the fiscal consequences of the debt are severe, the pressure of the massive external debt on the balance of payments is also very alarming. The total external debt outstanding, both private and public, is almost five times the value of gross foreign assets and more than four times of annual exports. The total debt-service ratio has been high at about 40 per cent of exports, with the private debt-service ratio accounting for about two-thirds of it. The massive debt repayment and the lack of capital inflow due to weak investor confidence have led to a continuing deficit in the capital account balance. The net private capital outflow is estimated at about $10 billion a year on average since the crisis (see Table 11.9). In other words, the pressure for rupiah depreciation is expected to continue.

© 2003 Institute of Southeast Asian Studies, Singapore

© 2003 Institute of Southeast Asian Studies, Singapore

Source: Calculated from data provided by Bank Indonesia.

Total external debt/gross foreign assets (%) Public external debt/gross foreign assets (%) Total external debt/exports (%) Debt service ratio (%) Government (%) Private (%) Current account ($ billion) Capital account — net, official ($ billion) Capital account — net, private($ billion) GDP in US$ Exchange rate conversion (Rp/US$) 431.8 215.3 473.1 35.9 15.4 20.5 –7.8 –0.5 11.5 204.6 2,300.0

1996 636.0 384.1 370.0 44.5 11.1 33.4 –5.0 2.9 –0.3 110.6 5,000.0

1997 634.0 351.3 408.3 59.8 10.2 49.6 4.1 10.0 –13.8 68.9 10,000.0

1998 546.5 266.4 535.7 57.0 9.9 47.1 5.8 5.4 –9.9 131.6 8,000.0

1999

2000 482.0 227.2 426.1 41.6 6.2 35.4 8.0 3.2 –10.0 136.2 8,500.0

TABLE 11.9 Indonesia: Effect of the External Debt on the Balance of Payments 2001 472.4 227.6 413.5 39.1 9.9 29.3 n.a. n.a. n.a. 148.4 9,600.0

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Debt Sustainability One important condition to achieve fiscal sustainability in the long run is a declining debt/GDP ratio, so the key question now is how to manage the debt, both domestic and external, to ensure that the increase in debt is smaller than the increase in GDP over time. In other words, a rapid economic growth is a necessary condition for debt and fiscal sustainability. The change in the stock of debt over time is a function of various factors.17 First, the difference between nominal interest rates and the nominal growth of GDP has to be small enough, otherwise the stock of debt would be growing faster than the GDP. Second, the primary fiscal surplus, which is revenue minus expenditure excluding interest payment, has to be high enough to ensure resource availability to repay the debt. A large primary fiscal surplus, such as 3 per cent of GDP or more, would provide enough resources for the government to pay the principal so that the stock of debt could decrease over time. Third, additional capital revenue, such as government resources from the sales of assets and privatization, would play an important role in reducing the stock of debt. Fourth, the absence of new off-budget losses, or the lack of “surprising” new debt, is important to ensure that there would be no unnecessary additional debt. There could be some additional debt in the future, but the new debt would be part of the programme to finance the old debt. The World Bank in 2001 simulated the debt burden for the Indonesian Government budget and the sustainability of the fiscal position in the next ten years. With an assumption of at least 4 per cent annual GDP growth up to 2010, primary fiscal surplus of 3 per cent of GDP, inflation of 5 per cent, interest rate of 13 per cent, a constant real effective exchange rate, revenue from asset sales equalling 6 per cent of the GDP cumulatively over six years, and the absence of non-anticipated off-budget losses, the debt over GDP ratio in Indonesia could decline from around 100 per cent in 2001 to about 50 per cent of GDP in 2010. Other implicit assumptions include a well-functioning domestic bond market that creates the possibility of paying debt by issuing other debt instruments, a well-co-ordinated debt management team, and external debt rescheduling.

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262 TUBAGUS FERIDHANUSETYAWAN

By using another set of assumptions, an alternative estimate of debt stock over GDP up to 2010 can be arrived at under different scenarios of economic recovery such as economic growth, inflation, and exchange rate depreciation. To begin with, there are basic assumptions that are applied equally in each scenario. The basic assumptions stipulate that there is no new unanticipated debt and a well-functioning bond market in which a matured bond can be financed by issuing another bond. In terms of fiscal deficit, the estimation assumes a declining fiscal deficit from about 4 per cent of GDP in 2002 to a balanced budget in 2008, with at least 3 per cent primary fiscal surplus each year up to 2010. From the Paris Club, Indonesia is expected to receive $3 billion a year in debt rescheduling up to 2004, and to seek new loans from the CGI of about $4.5 billion a year up to 2010. The domestic real interest rate is assumed to be 3.5 per cent a year, and the interest rate for foreign debt is assumed to be 5 per cent a year. Figure 11.5 illustrates the debt/GDP ratio from 2002 to 2010 under three different scenarios, while Figure 11.6 presents the composition of domestic and foreign debts under the realistic scenario. The simulation shows that rapid economic growth is critical to reduce the debt/GDP ratio over time because a faster GDP growth means a slower growth of the debt/GDP ratio. But the real effect of GDP is clearly beyond the mathematics, as a faster GDP growth means a rapid increase in income over time, leading to a higher domestic revenue and a lower fiscal deficit. The second factor that matters is the exchange rate. A rapid rupiah depreciation would easily lead to a skyrocketing external debt burden, and in fact the massive currency depreciation since the crisis began contributed to the huge debt increase in Indonesia in 1998. Achieving a strong currency requires a high level of confidence in the country, significant capital inflows, and most importantly, stable monetary fundamentals. Lower inflation is also needed to ensure a lower interest rate burden, and this is crucial to support the development of a domestic bond market. But there is also a crowding-out effect of inflation since higher inflation could also lead to a rapid increase in the nominal GDP growth and a less rapid increase in the debt/GDP ratio. Therefore, it is tempting for a country with a high level of domestic debt to adopt an inflationary monetary policy. © 2003 Institute of Southeast Asian Studies, Singapore

ESCAPING THE DEBT TRAP

FIGURE 11.5 Indonesia: Debt/GDP Ratios under Different Recovery Scenarios

120 100

Percentage

80 60 40 20

19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10

0

Very optimistic: high growth, low inflation Less optimistic: low growth, low inflation Realistic: low growth, high inflation

FIGURE 11.6 Indonesia: Debt/GDP Ratios under the Realistic Scenario

120

Percentage

100 80 60 40 20 0 1996

1999

2002

Domestic Debt

2005

2008

Foreign Debt

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264 TUBAGUS FERIDHANUSETYAWAN

The first scenario is a very optimistic one, which assumes that the economy is growing rapidly at around 6 per cent a year from 2002 to 2010. Monetary variables are also assumed to be fairly stable, with 6 per cent inflation a year and constant real exchange rate depreciation in the same period. Under these very optimistic assumptions, the debt/GDP ratio would decline from around 100 per cent in 2001 to around 50 per cent in 2010. The second scenario is less optimistic, with a slower economic growth of 3.5 per cent from 2002 to 2010. But similar to the first scenario, monetary variables are kept stable, with 6 per cent inflation and constant real exchange rate depreciation. The second scenario predicts that the debt/GDP ratio could decline to around 60 per cent of GDP in 2010. The third scenario is called the realistic scenario, with a GDP growth of 3.5 per cent a year, inflation of 10 per cent, and real exchange rate depreciation of 5 per cent. Under the realistic scenario, the debt/GDP ratio would decline to about 70 per cent of GDP in 2010. In all the scenarios, the debt/GDP ratio is predicted to decline over time, which means that the government debt could actually be sustained. But the sustainability of debt requires various assumptions, and it remains to be seen whether those strong assumptions could be met. The above scenarios assume the existence of a well-functioning secondary bond market in 2002, in which bonds can be traded efficiently and opens the possibility for the government to pay the redeemed bonds by issuing other bonds. The development of the bond market requires institutional and legal support, such as a bond law, that has yet to be established. The development of a bond market requires a supportive macroeconomic environment, such as a low interest rate, which is difficult to achieve under an environment of high inflation. There is also an implicit requirement that the domestic revenue will increase fast enough to maintain a primary fiscal surplus of at least 3 per cent of the GDP per annum for the next ten years. To generate a fiscal surplus, the government has to increase revenue by improving the tax administration, tax policy, and efficiency of the state-owned enterprises. The government has also to lower expenditure by reducing subsidies and abolishing price controls.

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The government is also assumed to be able to prevent the current debt from growing even larger by containing off-budget losses and thus minimize fiscal risk. A prolonged bank restructuring programme and the poor performance of the banking system will be a significant source of further increased government debt. The government has to ensure that the decentralization programme will not complicate the budget management and open the possibility of running up an even larger fiscal deficit. Also, the Indonesian Government has to prepare for contingency liability arising from the massive debt overhang at PLN (state electricity company) and Pertamina. Financial problems in many state-owned enterprises have not been incorporated into the government budget and therefore the management of contingency liability is crucial in the near future. The assumption that the capital revenue reaches 7.8 per cent of GDP cumulatively up to 2004 means that the government has to sell assets aggressively. One way to get extra cash revenue is to sell assets belonging to IBRA and privatize state-owned enterprises. But these moves are politically difficult, especially when the market prices of these companies would be much lower than their book value. Moreover, this process requires strong political support, and a solid legal and institutional framework. The World Bank estimates that if IBRA manages to collect around Rp207 trillion in cash recovery, the total stock of domestic debt would decline by around 15 per cent of GDP. Privatization of various state-owned enterprises would further reduce the public debt by 5 per cent of GDP over the next five to seven years. The assumption that Indonesia would receive further Paris Club rescheduling, and secure about $4.5 billion loan each year from the CGI, requires the government to keep trying to reschedule debt under international rules and seek the best possible terms for borrowing. After the first and second Paris Club agreements, the government will have to try for a further round at the Paris Club in the near future. Finally, the Megawati government needs to establish a solid state institution to manage the government debt, both domestic and external. The information on debt is currently fragmented, while the government officials who are in charge of debt

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266 TUBAGUS FERIDHANUSETYAWAN

management are scattered amongst various institutions. Better co-ordination has to be achieved in order for the government to have an effective and efficient debt management unit.

Conclusion Indonesia’s debt problem is serious but it is manageable if the Indonesian Government is serious and committed to work on a comprehensive approach to resolving it. Macroeconomic stability, good governance, and market-friendly policies are necessities to restore and retain investor confidence, and to promote economic growth. In view of the current situation, a comprehensive and integrated response to the total debt situation, and not an ad hoc one, is urgently needed. The key to reduce government debt and maintain future fiscal sustainability is none other than rapid economic growth. Economic growth is the basic condition to ensure that the primary fiscal surplus could be maintained and even increased to sustain the budget and reduce the deficit. The government has to prevent the current debt from increasing any further by minimizing off-budget losses and fiscal risk, and preventing the creation of any new debt. In addition the government must generate additional domestic revenues, other than just tax collection. An option open to the government is to sell state-owned assets as part of the bank restructuring programme. Progress on this front in the last three years has been slow and fraught with political difficulties, especially when the market prices were generally much lower than the book values. In order to achieve results on this front, there needs to be strong political will as well as a strengthened legal and institutional framework. With respect to foreign debt, the government must seek the best possible terms for debt rescheduling and new borrowings. After the first and second Paris Club agreements, the government should now negotiate for another round of Paris Club rescheduling for 2003 and better concessional terms for any forthcoming loans. But to achieve this, good housekeeping activities are necessary, which can be measured by how consistent the government is conducting reforms.

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There is a compelling need to establish a solid institution to manage the government debt, both domestic and external. Information on debt is currently fragmented, while the government officials in charge of debt management are scattered, which results in an ad hoc approach to the problem. Better co-ordination has to be developed in order to establish an effective, efficient, and coordinated debt management unit. The size and the management of both foreign and domestic debts are important components of macroeconomic policy management. In this regard, it is important that the Indonesian Government should treat the overall debt — domestic and foreign, government and private — not only with the seriousness that it deserves, but by institutionalizing a comprehensive set of approaches. Failure to manage Indonesia’s debt will have dire consequences, and could seriously blight Indonesia’s future. Notes 1. All dollar amounts in this chapter are in U.S. dollars. 2. Part of this section is taken from Mari Pangestu, Tubagus Feridhanusetyawan, and Kurnya Roesad, “Managing Indonesia’s Debt Crisis” (Working Paper, CSIS–North-South Institute, Research on Debt Problems in Emerging Market Economies: The Case of Indonesia, October 2001). 3. Such a rescheduling is unlikely to be repeated. See World Bank, “Indonesia: Managing Government Debt and Its Risks (World Bank, East Asia and Pacific Region, Report No. 20436-IND, 22 May 2000), Annex 5. 4. Ibid. 5. However, the facility did not work well due to the lack of guarantee that the government was willing to provide. It is not clear how much of this facility has been used despite the creation of a new government export bank. 6. For detailed information about ADB’s loans to Indonesia, see Asian Development Bank, “Country Strategy and Program Update, 2002– 2004” (ADB, July 2001). 7. World Bank, “Indonesia: The Imperative for Reform” (World Bank Report No. 23093-IND, Brief for the Consultative Group on Indonesia, November 2001). 8. Ibid. 9. Presidential Decree No. 27, 1998.

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268 TUBAGUS FERIDHANUSETYAWAN

10. Law No. 10, 10 November 1998, amending Law No. 7 of 1992 on Banking and Government Regulation No. 17, 1997. 11. This kind of bond (namely bank recapitalization bond) consists of three types. The fixed bond has a fixed interest rate which ranges from 12 to 14 per cent per annum, and the interest is paid every six months. As bank interest rates had increased to more than 17 per cent, the Indonesian Government had to make a bond-exchange offer to increase the interest rate of the bonds and make them more attractive, even though the weighted average of the coupon rates remained the same. These bonds now carry 10–16.5 per cent coupon rates. These bonds have five to ten years to maturity date, and the first maturity date will be in September 2004. The variable rate bond carries flexible interest rates, which are calculated based on the fluctuations of the three-month SBI (Bank Indonesia Certificate) rates. The interest is paid every three months, and the interest rates of these bonds are around 15–17 per cent at present. These bonds have maturity dates of three to fifteen years, and the first maturity date would be in July 2002. The hedge bond is hedged to the exchange rate (Rp/US$) and is used to cover the exchange rate risk of the banks. Every three months, the interest is paid and the nominal value of the hedge bond is re-evaluated based on exchange rate fluctuations. If the rupiah depreciates, the nominal value of the hedge bond will rise. The interest rate is SIBOR (Singapore Interbank Offered Rates) plus 3 per cent, and currently the hedge bond carries around 6–7 per cent interest rates. The fixed and variable rate bonds are tradable, while the hedge bond is non-tradable. At maturity the hedge bond will be replaced by other bonds. 12. The repayment bonds issued to Bank Indonesia are mostly inflation index bonds, which carry a twenty-year maturity date. For special repayment bonds with the unpaid subsidized credit of around Rp 10 trillion, the bonds have a variable rate with ten years to maturity. 13. World Bank, “Indonesia: Managing Government Debt and Its Risks” (Report No. 20436-IND, 22 May 2000). 14. Jakarta Post, 1 October 2001. 15. Bank Indonesia. 16. Ministry of Finance. 17. The simple equation is: the change in ratio of government debt over GDP = (i–g) *debt over GDP – primary fiscal surplus – capital revenue + new off-budget losses, where i = nominal interest rate, g = nominal growth of GDP. (World Bank, “Indonesia: Managing Government Debt and Its Risks”, Report No. 20436-IND, 22 May 2000.)

© 2003 Institute of Southeast Asian Studies, Singapore

Reproduced from Governance in Indonesia: Challenges Facing the Megawati Presidency, edited by Hadi Soesastro, Anthony L Smith and Han Mui Ling (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproducedCHALLENGE without the prior OF permission of the Institute of Southeast Asian FISCAL SUSTAINABILITY 269 Studies. Individual articles are available from < http://bookshop.iseas.edu.sg >

12 Challenge of Fiscal Sustainability for the Megawati Government Anggito Abimanyu

Introduction The success or failure of the Megawati government will depend heavily on whether her “dream team” economic Cabinet can deliver a sustained economic recovery through to 2004. Accomplishing this will require success on a wide range of policy reforms. However, an issue that could derail the entire process is fiscal sustainability, that is, the ability of the Indonesian Government to finance its expenditures within a specified timeframe. For much of the past thirty years, few observers questioned the sustainability of the Indonesian Government’s finances. But the economic crisis changed everything. Honouring the deposit guarantee that was issued in early 1998 and covering the liquidity support given to the banking system by Bank Indonesia have created over Rp650 trillion in domestic debt (well over 40 per cent of GDP) that must be serviced each year. The depreciation of the rupiah has substantially increased the value of the government’s foreign debt, putting further stress on the government budget. 269 © 2003 Institute of Southeast Asian Studies, Singapore

270 ANGGITO ABIMANYU

The implementation of fiscal decentralization in response to demands for greater regional autonomy has also created significant new demands for expenditures. The Megawati government must decide how to balance these demands for new and expanded spending with the limited fiscal resources that it has at its disposal. This is a significant challenge for the new administration. But fortunately, President Megawati Sukarnoputri has already shown that she can make the tough decisions that are necessary to ensure fiscal sustainability. Even before assuming the presidency, the then Vice-President was able to break the bureaucratic logjam that placed the 2001 budget in jeopardy. When the 2001 budget was passed in late 2000, it was believed that the budget deficit could be kept within the limits of available financing. However, as the 2001 calendar year progressed, concerns arose that the budget might be spiralling out of control. One early problem was the cancellation of certain programme loans that deprived the budget of some of its financing. Then the deficit threatened to balloon with oil prices remaining much higher than predicted, raising expenditures on subsidies. Also, rising domestic interest rates placed additional pressure on the budget. Disputes within the Cabinet over how to address these problems delayed the government’s response. Fortunately, then Vice-President Megawati was able to co-ordinate the Cabinet efforts to address this challenge. In May 2001 an amended budget that was designed to bring the deficit within available financing was presented to the DPR (Dewan Perwakilan Rakyat). The new budget proposal included a number of tough decisions, such as changes in the way in which the transfers to the regions would be calculated as well as increases in fuel prices and the value added tax (VAT) rate. The DPR did not accept the proposal in its entirety and numerous modifications were later made, but a new budget with the core actions required to avoid a fiscal collapse was finally approved. Thus even before becoming President, Megawati showed that she was capable of making the necessary painful political decisions required to guide the government’s fiscal policy under difficult circumstances. This is important, as one of the key economic challenges facing her government is how to consolidate its fiscal

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CHALLENGE OF FISCAL SUSTAINABILITY 271

position in 2001 and secure agreement from the DPR on a budget for 2002.

FY 2001 Budget Implementation1 While the DPR adopted many of the proposals that were made by the government, it rejected the proposal to increase the VAT rate to 12.5 per cent. The DPR then compensated for the loss of revenue from a higher VAT rate by, among other things, projecting lower fuel sales and, therefore, lower subsidy payments. As the year progressed, fuel prices and sales exceeded these estimates, and concomitantly the subsidies exceeded the original amount budgeted. This warranted further changes to the budget in order to ensure that the deficit does not exceed the available non-bank financing. Given the political transition problems, it was also difficult to meet all of the conditions required to obtain budgeted financing from programme loans and it was widely expected that privatization revenues would not reach the budgeted levels. This was particularly the case as much of the privatization revenue expected was to have resulted from the government exercising its option to sell majority control of Semen Gresik, a state-owned enterprise, to Cemex, a decision which was being challenged by the regional government in Padang. As a consequence, the government tried hard to hold down expenditures, increase revenues, and maximize available financing. Efforts include pressing state-owned enterprises to maximize profit distributions and initiating efforts to sell a further stake in PT Telkom in order to generate additional revenues from privatization. Interestingly, the initial estimates of realizations for financial year (FY) 2001 showed that the deficit for FY 2001 would be less than the budgeted 3.7 per cent of GDP projected in the final budget document. Revenues, primarily from oil and gas and the VAT, were higher than expected and expenditures, primarily for development projects, were lower. Unfortunately, foreign financing did not come up with the expected amounts and some extraordinary financing mechanisms were adopted, including modest arrears and delayed interest payments by the central bank.

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272 ANGGITO ABIMANYU

However, net arrears outside of the central bank actually fell over the course of 2001.

Budget Formulation for FY 2002 When the Megawati government took office, much of the groundwork for the 2002 budget had already been laid. The Annual Action Plan (Rencana Pembangunan Tahunan, Repeta), which includes a macroeconomic framework for the year ahead, had already been submitted to the parliament and presented for extensive hearings. Nonetheless, the new Megawati government was able to quickly put together a new budget proposal for 2002 that targeted the budget deficit at 2.5 per cent of GDP, using insights from the Repeta, the Propenas (Program Pembangunan Nasional Lima Tahun, the government five-year programme that emphasizes fiscal sustainability) from 2000, and the preliminary work by the Ministry of Finance on the budget. More importantly, the proposed budget also targeted the retirement of Rp18.3 trillion in expensive domestic bonds.2 After much debate and discussion, the parliament approved the budget for 2002 in November 2001. There were a number of changes to the details of the budget, but its broad outline remained intact. The approved budget targeted a deficit of Rp42.1 trillion (US$4.7 billion) or 2.5 per cent of GDP, with financing coming from both domestic — IBRA (Indonesian Bank Restructuring Agency) and privatization — and foreign sources.3 The main features of the 2002 budget included the following themes:

Macroeconomic Assumptions As usual, there was considerable discussion on the macroeconomic assumptions underlying the government’s budget proposal. The original submission to the parliament assumed that the country’s GDP would grow by 5 per cent, inflation would fall to 8 per cent, and that the exchange rate would appreciate sufficiently to an average level of Rp8,500/US$ for the year. After much discussion, the DPR lowered the government’s GDP growth estimate to 4 per cent while raising the assumption on inflation to 9 per cent. (The

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CHALLENGE OF FISCAL SUSTAINABILITY 273

budget assumptions for real GDP growth, inflation, short-term interest rates, the exchange rate, and oil prices are set out in Table 12.1.) Most of these assumptions were in line with the consensus forecasts from the private sector. However, the weakest assumption may be the average exchange rate of Rp9,000 to the U.S. dollar. Fortunately, any dramatic changes in that assumption would have a direct impact on income, expenditures, and financing and only a limited impact on the deficit and its financing.

Revenues Over the long run fiscal sustainability will depend on the ability of the government to finance its expenditures, including the repayment of the large stock of government debt, from rising tax revenues. While the Indonesian tax revenues are fairly buoyant, that is, they have been growing much more rapidly than the country’s GDP, the tax to GDP ratio is relatively low by international standards, especially in the context of the need to increase expenditures after the crisis. This fact has been recognized by the Indonesian Government since the crisis and the Megawati administration has committed itself, as the Wahid administration had before it, to raising taxes as a percentage of GDP as the necessary adjustment required to maintain fiscal sustainability. This is primarily to be accomplished by improving the tax

TABLE 12.1 Indonesia: 2002 Budget Assumptions Budget Real GDP growth (%) CPI inflation (%) SBI (Bank Indonesia Certificate) rates (%) Exchange rate (Rp/US$) Oil price (US$/barrel)

Consensus*

4.0 9.0

3–4 9–9.5

14.0 9,000 22

14–16 9,000–9,500 n.a.

* Consensus by a number of prominent research houses and international agencies.

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274 ANGGITO ABIMANYU

administration rather than raising the tax rates per se as Indonesia’s tax rates are comparable to (or even above) other countries in the region. The Propenas adopted in 2000 projected an increase in key tax ratios to balance the budget by 2004. If this can be accomplished and if expenditures on items like fuel subsidies are contained, then fiscal sustainability can be assured. For FY 2001 the tax revenue/GDP ratio was 12.6 per cent (Table 12.2), with only 10.8 per cent coming from non-oil and -petrol taxes. The overall tax revenue/GDP ratio increased to 13 per cent in the FY 2002 budget with 12.1 per cent coming from non-oil and -petrol taxes. This assumed an increase of 1.3 per cent of GDP in non-oil and -petrol tax revenues would pose a significant challenge to the tax department but if it were to be accomplished,

TABLE 12.2 Indonesia: 2001 and 2002 Budgets 2001

2002

(Rp trillion) (% of GDP) (Rp trillion) (% of GDP) Revenue and grant Tax revenue Non-tax revenue

286.0 185.3 100.7

19.5 12.6 6.9

301.9 219.6 82.2

17.9 13.0 4.9

Expenditure Routine Subsidies Domestic interest payments External interest payments Development Balance funds

340.3 213.4 66.3

23.2 14.5 4.5

344.0 193.7 41.6

20.4 11.5 2.5

61.2

4.2

59.5

3.5

28.4 45.5 81.5

1.9 3.1 5.5

28.9 52.3 97.9

1.7 3.1 5.8

Deficit Domestic financing Foreign financing*

–54.3 34.4 19.9

–3.7 2.3 1.4

–42.1 23.5 18.6

–2.5 1.4 1.1

* Including Paris Club third rescheduling. Source: Ministry of Finance, Indonesia.

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the budget would be well on track to meet the specified Propenas deficit target. In order to achieve this, the tax department has initiated four programmes to improve tax administration. The largest of these programmes is the establishment of a large taxpayer office that would co-ordinate all the tax administration functions for the 2,000 largest taxpayers in Indonesia. In addition, the tax department is taking steps to improve its information technology infrastructure, rationalize its system of audits, and improve its procedures on collecting arrears.

Expenditures Indonesia’s changing fiscal landscape becomes most apparent when one examines the expenditure side of the budget. For 2002 the new budget allocated 54 per cent of expenditures to interest payments on the government’s debt and transfers to the regions. An additional 12 per cent of expenditures were allocated for subsidies and 15 per cent for development spending. With over 80 per cent of expenditures tied up in these items, control over these key expenditure items had to be the main focus of the government in developing and approving the budget. As noted earlier, rising oil prices in 2000 and subsequent high oil prices in 2001 had caused fuel subsidies to become a serious burden on the budget. While there is a recognition that the fuel subsidies are not well targeted towards the poor, the increase in prices that is required to eliminate the subsidies is so large that it must be implemented over a period of time to prevent outbreaks of social unrest. Thus the government has been systematically raising fuel prices. In all, the Indonesian Government had raised the price of petrol three times in the previous two years. As part of the 2002 budget, the government proposed, and the parliament ultimately approved, that petrol, diesel, and other fuel prices should be raised by an average of 30 per cent, allowing fuel subsidies to drop significantly to an estimated Rp41.6 trillion (2.5 per cent of GDP) from a budgeted Rp53.8 trillion in 2001.4 This should free up substantial resources to be used to fund compensation programmes and to expand other government spending.5

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Interest payments are another key policy area but one which the government has relatively less control over. High domestic interest rates continue to place a significant burden on the economy and the government budget alike. During FY 2002, interest payments were expected to account for 26 per cent of total expenditures (Rp88.7 trillion or 5.3 per cent of GDP), of which Rp59.5 trillion (3.5 per cent of GDP) would be used to cover domestic debt, and Rp28.9 trillion (1.7 per cent of GDP) to meet the interest liability of the government external debt.6 This illustrates an important point that is often overlooked: domestic debt, the stock of which is of the same magnitude as foreign debt, costs Indonesia over twice as much in interest, even before the next Paris Club rescheduling of payment on principal and interest on foreign debt. Once the third Paris Club agreement is in place, interest expenses on foreign debt would fall to Rp22.2 trillion (1.3 per cent of GDP). Unfortunately, it is not possible to reschedule domestic debt. Revenue sharing and transfers of grant allocation to regional governments have also placed significant pressure on the deficit. In the FY 2002 budget these transfers would increase to Rp97.9 trillion (5.8 per cent of GDP) from Rp81.5 trillion in FY 2001 (5.5 per cent of GDP). While part of the increase is simply due to inflation and higher oil prices, the increase is also due to the creation of a special Rp3.4 trillion fund for Aceh and Papua. In addition, the government and the parliament had agreed to the creation of an Rp1.5 trillion contingency fund to cover regions with shortfalls after the allocation of funding from other sources. Development expenditures are another major component of expenditures which the Megawati government wants to increase. For the FY 2002 budget the allocation increased by about Rp7 trillion to Rp52.3 trillion or 3.1 per cent of GDP. This is well below pre-crisis levels but one must remember that this constitutes only central government development expenditures. Expenditures that had previously been made by the regions are now part of the regional grant allocations. In the pre-crisis period, the central government generally spent around 6 per cent of the GDP on development (capital) spending.

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In recent years this has fallen to around 3 per cent of GDP. However, transfers to the regions have risen substantially and some of the transferred funds are available for capital spending. A key question is whether the amounts being transferred are adequate to finance capital spending in the provinces. It has been estimated that approximately Rp27 trillion of potential development spending (in 2001) was available to the regions in aggregate, assuming previous routine and development expenditure levels were maintained. This is almost 2 per cent of GDP and this could be added to the estimated 3 per cent of GDP being consumed by the central government if one compares this with pre-crisis capital spending.7

Financing Slightly more than half of the financing (Rp23.5 trillion) for the FY 2002 budget deficit target of Rp42.1 trillion was to be raised domestically, primarily through asset sales by IBRA. Market skepticism about the plausibility of the asset sales goal for 2002 is understandable, given the likely failure of several key transactions in 2001.8 Subject to that qualification, the budget for FY 2002 included the following asset sales targets: • The target for privatization was Rp6.5 trillion, which is the same as the FY 2001 target. Of that amount, Rp2.5 trillion was earmarked to be used to buy back a portion of the government’s bank recapitalization bonds, leaving Rp4.0 trillion for deficit financing. • The target for IBRA asset recoveries was Rp42.8 trillion, which included some Rp7.5 trillion from asset-bond swaps. Of the Rp35.2 trillion in targeted cash recoveries from IBRA sales, Rp15.8 trillion was to be used for recapitalization bond buybacks, leaving Rp19.5 trillion for deficit financing. Another potential source of domestic financing is domestic debt. However, the Megawati government does not plan to issue bonds to finance the deficit. Instead, it plans to sell new bonds to entities outside of the banking system in order to refinance Rp3.9 trillion in government debt due in 2002. To support this activity,

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the government is seeking approval by the parliament for a new bond law. This law will provide the legal basis for issuing new bonds to refinance the existing recapitalization of bonds. If this law is not passed quickly and a bond market is not created in 2002, the government might not be able to refinance the larger amounts of principal payments that will be due in 2003 and 2004. On the external financing side, the FY 2002 budget assumed a combination of official creditor lending and debt rescheduling totalling US$2.1 billion (Rp18.6 trillion) net.9 The Consultative Group on Indonesia (CGI), Indonesia’s official international creditor group, is anticipated to provide US$4 billion in project and programme loans (US$2.9 billion and US$1.1 billion respectively). Obtaining these programme loans may be difficult as they are conditional on certain policy reforms. The most important of these relate to qualifying for the “high case” lending from the World Bank. To qualify for these loans, the parliament will have to pass new laws on state finance, audit, and treasury while the government must implement new procurement procedures, develop and implement a participatory process for formulating a poverty-alleviation strategy, and adopt a rice price policy that limits the potential negative impact of the rice price stabilization programmes on the budget. The Asian Development Bank (ADB) programme loans also include additional conditionalities on the Indonesian Government.10 Against this new foreign financing are amortization payments on Indonesia’s existing foreign debt. In the absence of the Paris and London Club rescheduling, Indonesia would have US$5.6 billion in amortization in 2002. Fortunately, the two-year consolidation period of the second Paris Club agreement had reduced the amortization due for the first quarter of 2002 by about US$700 million, and that is why amortization for foreign loans in the 2002 budget is limited to US$4.9 billion (Rp44.0 trillion). The Megawati government has indicated that it will seek approval from the Paris Club to reschedule an additional US$2.7 billion of debt servicing capital due in 2002, including US$0.8 billion in interest. This leaves the net amount of US$2.9 billion (Rp26.3 trillion) of principal payments due, after accounting for the

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CHALLENGE OF FISCAL SUSTAINABILITY 279

rescheduling of principal under the second and the anticipated third Paris Club agreements.11

Budget Implementation With the passage of the FY 2002 budget in November 2001, the Megawati administration is now committed to take a number of politically difficult actions. With the Bank Central Asia (BCA) sale completed (with a 51 per cent stakeholding going to U.S. firm Farallon) and fuel prices being raised in January 2002, there is optimism that domestic finances will be back on track. But that will not be enough to guarantee that the foreign financing for the FY 2002 budget will be made available. In order to ensure the inflow of foreign financing, the government must meet the conditions to qualify for “high case” lending from the World Bank as well as the conditions set by the ADB. Of utmost importance is meeting the conditions necessary to obtain principal and interest rescheduling from the Paris Club. This primarily requires maintaining the stringent International Monetary Fund (IMF) programme, a task that the Megawati government has been serious about fulfilling since its appointment. However, accomplishing all of the above will be hard for the Megawati government as not all of what must be done to bring about economic recovery in Indonesia is within its control. But it has shown, at least in its first 100 days, that it understands the challenges that Indonesia faces and it has been able to communicate well with the parliament to begin to implement those policies that are necessary to maintain fiscal sustainability. Now it needs to continue delivering on its promises. If it succeeds in FY 2002 and is able to formulate a tight budget for FY 2003, then fiscal sustainability over the longer run is within reach.

Notes *The views expressed in this chapter are the author’s own; they do not necessarily represent those of the Ministry of Finance. I would like to thank Dr Timothy Buehrer of the USAID for his useful comments.

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1. Unless otherwise indicated, all quantitative data in this chapter are derived from the Ministry of Finance, Indonesia. 2. Although not included as part of the budget, the Indonesian Government has begun its repayments to the IMF. As such, it is likely that Indonesia’s liabilities to the IMF would decrease by about US$1 billion during 2002. 3. This includes approximately Rp6.8 trillion in interest payments that the government hopes will be rescheduled under the third Paris Club agreement. 4. The subsidies were estimated to be Rp68.4 trillion or 5.5 per cent of GDP. 5. Ultimately, the government raised fuel prices by an average of 22 per cent in January 2002 and created a mechanism for monthly adjustments to petrol, diesel, and fuel oil prices based on changes in spot prices in Singapore. This was an important shift in policy as it made domestic fuel prices responsive to changes in world fuel prices. The downside of this approach is that while it reduces the volatility of the expenditure side of the budget, it also increases the volatility of the fiscal deficit. 6. While interest payments are expenditure items, principal payments are financing items and they will be discussed below. 7. It was estimated that the regions or provinces would be spending another 1 per cent of GDP on development expenditures from their own funds, but they could have been spending this amount during the pre-crisis periods. 8. The Indonesian Government stalled on two key sales that had been scheduled for 2001: the sale by IBRA of Bank Central Asia (BCA) scheduled for the end of December 2000 did not occur until March 2002 and the Semen Gresik sale that had been delayed until late 2001. While the BCA deal was completed in the first quarter of 2002, the Semen Gresik sale has been scuttled by protests from the local government. The failure to sell Semen Gresik is quite troubling as it suggests to foreign investors that the government may find it difficult to sell any significant state-owned company without consent from the region in which the company is located. 9. The budget included non-Paris Club amortization payments of Rp26.3 trillion, primarily to the World Bank and the Asian Development Bank (ADB). (Payments to the IMF are made by Bank Indonesia and, like receipts from the IMF, do not show up in the government budget.) These are then subtracted from the new financing of Rp44.9 trillion

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CHALLENGE OF FISCAL SUSTAINABILITY 281

that is being made available, including the rescheduling of interest under the Paris Club. 10. For FY 2001 the ADB conditionalities included passing new moneylaundering and electricity laws. 11. Reconciling these figures with those in the budget is difficult as the budget included the third but not the second Paris Club rescheduling as a financing item. Ultimately, the 2002 budget shows Rp18.6 trillion in foreign financing which represents rescheduling of Rp6.8 trillion in interest payments for 2002 and a net Rp11.8 trillion in new foreign loans.

© 2003 Institute of Southeast Asian Studies, Singapore

Reproduced from Governance in Indonesia: Challenges Facing the Megawati Presidency, edited by Hadi Soesastro, Anthony L Smith and Han Mui Ling (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part282 of this publication may BRODJONEGORO be reproduced without the prior permission of the Institute of Southeast Asian BAMBANG Studies. Individual articles are available from < http://bookshop.iseas.edu.sg >

13 Fiscal Decentralization in Indonesia Bambang Brodjonegoro

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

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doubts about their own capabilities. Regional autonomy and fiscal decentralization have been a crucial political agenda item for both the central and local governments. Law 25/1999 deals with the fiscal decentralization process that will create a new intergovernmental transfer scheme between the central government and the local governments. Some items in the law are new, such as the natural resource revenue sharing and the general purpose grant called the general allocation fund (Dana Alokasi Umum, DAU). The natural resource revenue sharing exists mostly to compensate for the central government’s overexploitation of resource-rich, but troubled, regions such as Papua, Aceh, Riau, and East Kalimantan. On the other hand, the DAU was designed to equalize the fiscal capacity among the regions. Since it is a general purpose grant, the local governments have full freedom in spending it. This grant is totally different from the old scheme, which clearly showed the domination of the central government in determining the spending priorities of the local governments. The new scheme of local budgeting in the fiscal decentralization process has raised high expectations among the local governments. They feel that the new scheme will greatly improve their financing capability, provide a solid foundation for an advance in the people’s welfare, and eventually, increase the local gross regional domestic product (GRDP) and GRDP per capita. At the same time the DAU, as an equalization grant, is seen as a new instrument to help reduce the chronic problem of regional disparity in Indonesia. However, many are still skeptical that the local finance and intergovernmental transfer could contribute towards improving the local macroeconomic performance such as the GRDP and GRDP per capita. Laws 22/1999 and 25/1999, the legal basis for the decentralization process, define the new distribution of government authorities among tiers. Now, there are four local government tiers, from provincial government to village government (see Table 13.1 for a full profile). Even though the population figures for every kecamatan (district) and village are not available, it can be generalized that

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284 BAMBANG BRODJONEGORO

TABLE 13.1 Indonesia: Profile of the Four Tiers of Local Government Tier 1 2 3 4

Type of Local Government

Number of Units

Population Range

Provincial District and muncipality Kecamatan (district) Village/kelurahan/desa

30 348 4,038 68,783

777,500 – 35,500,610 23,650 – 4,147,000 1,394 – 892,540 38 – 436,483

Sources: Central Statistics Agency, Indonesia; various publications.

the least-populated kecamatan and villages are located outside Java island, and that the most-populated ones are in Java. The total population of a kecamatan or a kelurahan in Java, for example, could exceed the total population of either a municipality or a kecamatan outside of Java. The number of units for each tier is subject to change almost every year due to the current tendency to form new local governments. Prior to the decentralization laws, Indonesia had twenty-six provinces and around 290 districts and municipalities. In a period of two years, the figures have increased to thirty provinces and 348 districts and municipalities. Subsequently, the number of kecamatan and villages has also been subject to major changes. The Indonesian decentralization laws emphasize the decentralization from the central government to the kabupaten (district or regency) level and the kota (municipality) level, or directly from the centre to the second tier of local administration. Previously, the province was the most powerful unit of local government, and closest to the central government. Now, the provincial government will be the representative of the central government in the region, handling interdistrict or intermunicipality affairs. The kecamatan has a somewhat smaller role in the current decentralization laws since the laws explicitly define a direct relationship between district and village authorities (that is, from the second tier to the fourth tier of local government).

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Assignment Expenditure Law 22/1999 basically states that the central government will only be responsible for the judicial system, religious affairs, fiscal and monetary affairs, national defence and security, and foreign affairs. Other than those five duties, plus macroeconomic planning and standardization, all government duties have to be handled at the district and municipality level. Law 22/1999 has a list of government services that local governments now have to perform: public works, health, education, trade and industry, investment, environment, agriculture, co-operatives, and labour. To clarify the assignments to the local governments, the central government issued the government regulation (PP) 25/2000 that lists in detail, by sector, the responsibilities of both the central government and regional governments. It assumes that the responsibilities that do not appear on that list belong to the districts and municipalities. For example, higher education is the responsibility of the central government, and to some extent the provincial governments. Elementary and secondary education is clearly the responsibility of district and municipal governments. On road management, the central government is responsible for national roads, the provincial governments for provincial roads or interdistrict roads, while the district or municipal governments are responsible for the district/municipal roads. Although PP 25/ 2000 lists the responsibilities in detail, the assumption that all other responsibilities not on the list belong at the district/municipal level is somewhat disturbing. The district/municipal administrations should be the focus of decentralization but the regulation does not state clearly their detailed responsibilities. It seems that the local governments are left to use their own discretion in managing local affairs. Apart from the decentralization process, the process of deconcentration, or the delegation of responsibilities, from the central government to the provincial governments still continues. To some extent this process gives benefits to the district and municipal governments, although the local governments have little power in making decisions. However, there are some national interests that are explicitly and implicitly mandated to local

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governments without a clear funding scheme. The interests of poverty alleviation, development of isolated regions, improvement of basic education and health services, and so on, are supposed to be the domain of all the local governments, but they need a special funding scheme from the central government. That scheme should be the specific allocation grant (Dana Alokasi Khusus, DAK), but due to the central government’s limited financial capacity, that scheme has not yet fully emerged to support those interests. As a result, the local governments implicitly support these interests through their own limited financial capacity. Consequently, the outcome is not an optimal one. Obviously, the expenditure part of the fiscal decentralization process in Indonesia may be much weaker than the revenue part. One crucial aspect that is still missing in the process is the minimum standard of public services. Although the laws and regulations only give a general guidance to what the local governments have to do in delivering basic public services, the existence of a minimum standard of public services will help the local governments in ensuring proper services are delivered. The minimum standard will also help the local governments in estimating their total needs more accurately, including better estimation for the needs of each development sector. The availability of more accurate total needs will certainly help to give a better estimation of the DAU as the most important part of the intergovernmental transfers.

Revenue Assignment According to laws 25/1999 and 34/2000, aside from intergovernmental transfers, the local governments (provincial and district/municipal) can raise their own revenues from various sources such as local taxes, local charges, profits from locally owned enterprises, and other eligible local revenues. However, the current scheme provides only a small portion of local revenue, compared to the total national revenue. In other words, the Indonesian local governments are still weak in local taxation. The larger part of the total revenue, coming from income tax revenue and value added tax revenue, is still being collected by the central government. At the provincial level, only two types of local taxes

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could be considered significant to the total local revenue, namely car registration tax and car-ownership transfer tax. Two other taxes, petrol tax and water-exploitation tax, contribute insignificant levels of revenue. At the district/municipal level, there are seven local taxes but only a few contribute in a major way to the total local revenue, and they vary from one region to another. In major urban areas, hotel tax, restaurant tax, entertainment tax, and advertising tax may be the major revenue earners, but for more rural areas, the type C mining tax may be more important than others. Not surprisingly, in some rural districts the revenue from local charges could exceed the local tax revenue, although in general the revenue from local charges will be much less than that from local taxes. The local authorities have some power to set local tax rates to maximize their revenue or make their regions competitive for potential investors. Law 34/2000, however, sets the maximum rate for each type of local tax. For provincial taxes, the range is between 5 per cent (car-related taxes) and 20 per cent (waterexploitation tax), while for district/municipal taxes, the range is between 10 per cent (hotel and restaurant taxes) and 35 per cent (entertainment tax). On the other hand, if a local government considers that one or more type of local taxes hold no potential in its region, then that local government is not obliged to collect these taxes. This maximum tax rate rule will implicitly explain the basic behaviour of local governments. Some local governments will focus on maximizing revenue by setting the maximum tax rates without much consideration to the possible effects on the local investment climate. Other local governments will charge less than the maximum rates in order to attract potential investors to their region. The success of local revenue generation will depend on the capability of the local revenue-collecting agency, Dinas Pendapatan Daerah (Dipenda). Dipenda’s administrative capabilities will determine if the actual local revenue collected is anywhere near the potential revenue available. Of course, it is difficult to expect the actual amount to match the potential amount, but at least the gap between them can be narrowed. One example is the administrative capability of the Jakarta Metropolitan Area

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provincial government. It is supposed to be the most capable among the local governments, but what it has achieved in terms of tax revenue is still quite far from the potential gains. There are many reasons behind that problem but two are the most crucial ones: a weak data and information system, and the lack of law enforcement. Because of the former reason, it is clear that the administration has to be completely overhauled, from the registration process to the collection process. For the latter, the strict implementation of law enforcement has to be a priority to ensure fairness. To make local revenue a more substantial part of the total local revenue, some actions need to be taken. First, the situation can be improved by increasing the local taxation power by adding a “pure local tax” to the local tax assignment. Property tax is certainly the main candidate here. Second, the intensification of local tax collection can be achieved by emphasizing the improvement of the data and information system and effective law enforcement, rather than adding new types of taxes and charges that potentially disrupt economic activities. Third, prohibiting and removing all types of new local charges that violate existing laws and regulations and go against existing norms. The central government has the power to force the local governments to change their local regulations. Some obvious cases of “illegal” local charges are “mandatory” charities, a cattle identification fee, public road fees, export fees, and production fees.

Intergovernmental Transfers There are three types of intergovernmental transfers as stated in law 25/1999: revenue sharing, the DAU, and the DAK. Revenue sharing could be further classified into natural resource revenue sharing and tax revenue sharing. Natural resource revenue sharing is a new type of revenue sharing introduced in law 25/1999, and it is intended to give more compensation to resource-rich regions that felt excessively exploited during the Soeharto era. Revenue from four natural resource commodities is to be shared between the central and local governments: oil and gas, general mining,

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forestry, and fisheries. In the local government itself, there is revenue sharing among the provincial government, the producing district/municipal government, and other district/municipal governments within the province. Details of the natural resource revenue sharing scheme are displayed in Table 13.2. The tax revenue sharing is not a completely new scheme except for personal income tax revenue sharing. Prior to decentralization, the property tax and land transfer fee revenues were already being shared between the central and local governments. Through the revision of the income tax law (law 17/2000), the central government added the personal income tax (including payroll tax) as part of tax sharing (see Table 13.3). Under this scheme, 80 per cent of the personal income tax revenue will still be retained by the central government, while the rest goes to the local governments. The second type of transfer, the DAU, is the most important part of most local government revenue in Indonesia. Out of the net domestic revenue (total domestic revenue minus revenue sharing) in the central government budget, 25 per cent is allocated for the DAU. From that amount, 10 per cent will be allocated to

TABLE 13.2 Indonesia: Natural Resource Revenue Sharing Scheme (In percentages) Item

Oil LNG Mining Land rent Royalty Forestry Land rent Resources provision Fisheries

Central Provincial Government Government

Resource- Other Local All Local Producing Governments Governments Local in the Same in Indonesia Government Province (Equal share)

85 70

3 6

6 12

6 6

20 20

16 16

64 32

0 32

20

16

64

0

20 20

16

32

32

Source: Law 25/1999.

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TABLE 13.3 Indonesia: Tax Revenue Sharing Scheme (In percentages) Item

Property tax Land transfer fee Personal income tax

Central Provincial Government Government

District/ Collection Municipal Fee Governments in the Same Province

All District/ Municipal Governments In Indonesia (Equal share)

–

16.2

64.8

9

10

–

16

64

–

20

80

8

12

–

–

Sources: Government regulation 104/2000, law 17/2000.

provincial governments and 90 per cent to district/municipal governments. The allocation of the DAU to the local governments is formula based, with minor adjustments. The basic principle of the DAU formula is the fiscal gap concept in which the DAU that is allocated should fill the gap between the local governments’ needs and capacities (if needs are greater than capacities). Due to the lack of accurate data on local government needs, DAU is estimated by considering population, area, geographical conditions, and levels of poverty. The capacity is estimated by considering the natural resource potential, human resource potential, GRDP, and industrial capacity. The DAU can be classified as a general purpose grant that the local governments could utilize at will. (See Appendix 2 for a more detailed outline of the DAU formula.) The last type of transfer, the DAK, is still a minor part of the centre–district resource transfers. According to the law and its regulations, the DAK is intended to finance special needs, such as national priorities or needs not covered by the DAU. The DAK is sourced from the national budget, except for reforestation activities, which are covered directly by the reforestation fund. Of the reforestation fund collected, 40 per cent is allocated to the producing regions while the rest is kept by the central government

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for reforestation activities in other parts of the country, especially in the non-producing regions. The DAK, unlike the DAU, can be considered as a specific matching grant. It is called a matching grant because the local government that receives the DAK has to provide at least 10 per cent of the total amount from its own budget. This matching rule does not apply to the reforestation fund. With these various types of intergovernmental transfers, it is not surprising that revenue sharing will create huge inequalities among the local governments in Indonesia. Natural resources are concentrated in a few regions and as a result there is a huge inequality between resource-rich regions and the others. The tax revenue sharing only compounds that inequality to a higher level. Due to the current tax administration system, the personal income tax revenue is heavily concentrated in Jakarta. The same is true of property tax, which is based on the land market price. The great inequality among the regions generated by revenue sharing is then improved greatly by the existence of the DAU. The allocation of the DAU itself among the regions should alleviate inequality, and its existence should significantly reduce the inequality of total intergovernmental transfers. It can be concluded that the DAU allocation, to some extent, has successfully equalized the fiscal capacity among the regions (see Table 13.4).

TABLE 13.4 Indonesia: Coefficient Variation of Various Types of Intergovernmental Transfer Type of Transfer Natural resource revenue sharing Tax revenue sharing DAU Total transfer

Province 2.58 3.46 0.62 1.21

District/ Province + Municipality District/Municipality 3.32 1.37 0.44 0.57

2.57 2.57 0.94 0.87

Source: The Institute for Economics and Social Research, Faculty of Economics, University of Indonesia (LPEM-FEUI).

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One crucial issue in the intergovernmental transfers in Indonesia is how to come up with a formula-based DAU without much intervention and/or adjustment from external factors. Although equalization is a major feature of the current DAU allocation, there are still some problems with resource-rich regions that still receive the DAU at higher levels than they should. Another related issue is the DAU concept as a general purpose grant, which is still difficult for the local governments to accept. Because of past practice, they still assume that the DAU is used for paying the salaries of local government employees. If the DAU is not enough to cover the salaries, they request for more funds from the central government without really checking the availability of other sources of local revenue, including their own local revenue. The last issue to be resolved must be the current personal income tax administration which allows Jakarta to receive a huge revenue. There must be some way to link where individuals engage in employment and where they register to pay their personal income tax (at the moment, usually where the headquarters of the companies that employ them are located). Since most of the big companies have their headquarters located in Jakarta, the payroll tax is paid in Jakarta, and as a result, the personal income tax revenue is heavily concentrated in the capital city.

Local Government Borrowing Law 25/1999, supported by PP 107/2000, theoretically allows the local governments to borrow from external sources. The sources could be the central government, financial institutions (banking and non-banking), the public, other local sources, and foreign institutions (bilateral or multilateral). The local governments are allowed to borrow both long- and short-term capital. Long-term loans (more than one year) can only be used for development and cannot be used to solve a cash-flow problem. On the other hand, the short-term loans (one year or less) are intended to solve a short-term cash-flow problem. However, due to the current national debt problem (both domestic and foreign debts), a presidential decree has been issued to halt temporarily borrowing by local governments.

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If a local government wants to borrow from any source, it has to get approval from the local parliament, including the borrowing period and the grace period of long-term loans. The central government cannot interfere if the debt sources are domestic except if the source is the central government itself. In this case, the local government has to get approval from the Ministry of Finance. On the other hand, if the source is from abroad, then the borrowing process has to go through the Ministry of Finance. The Ministry of Finance, on behalf of the central government, will evaluate the feasibility of the proposal; once it is approved, the local government can negotiate directly with a foreign lender. The negotiation result has to be approved by the central government before the local government signs the agreement with a foreign lender. To ensure fiscal sustainability for both the local and central governments, there has to be a limit on local borrowing. PP 107/ 2000 already sets the rule-based limit for long-term debt, and has two parts. The first part is that the total cumulative local debt principal to be paid in a fiscal year cannot exceed 75 per cent of the local budget general revenue of the previous fiscal year (see Appendix 2 for the formula). The second part is that the debt service coverage ratio (DSCR) is at least 2.5 during the borrowing period, based on local revenue and expenditure projections (see the DSCR formula in Appendix 2). For short-term debt, the maximum is one-sixth of the total local budget in the current budget year, and the debt has to be fully paid back in one year. To maintain the national economic stability, the Ministry of Finance can control local borrowing in the national interest, and thus can also influence the amount that local governments borrow, especially from foreign institutions. When local governments borrow, repayment has to be the top priority of the local budget. Local governments cannot utilize public assets as guarantees for borrowing. The ability to pay back the loans has to be based on local budget management, not by mortgaging the assets of a region. The Ministry of Finance can identify local governments that may have serious problems with their borrowing and may produce a national policy that stops the possibility of borrowing for local governments. The local parliament is the legal check on a local government getting into

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serious debt — at least in theory. Since the local parliament’s approval is the first step in the borrowing process, its capability is at stake. Before reviewing each local government’s borrowing proposal, the local parliament, through its budget committee, has to be able to set the maximum borrowing for its local government, given the condition of the current budget.

Accountability Mechanisms Decentralization has minimized the vertical accountability mechanism; now the local governments do not have to report their budget process and implementation to the central government. The state auditor can no longer audit the local governments. Every local government now has its own internal auditor. The reason for minimal vertical accountability can be traced from the structure of local revenue. As previously mentioned, the local revenue now consists of local revenue (tax and charges), natural resource revenue sharing, tax revenue sharing, general purpose grants, and specific allocation grants. Among these types of revenue, only on specific allocation grants (specific matching grants) does the central government have some authority to monitor and evaluate. The local governments that receive this type of grant have to report to the respective ministries and the Ministry of Finance. The other types of revenue fall under the local governments’ full authority in allocating the money to be spent, while the central government has an obligation to allocate the money but not to monitor or evaluate the use of that money. The horizontal accountability mechanism now plays an important role in the monitoring and evaluation process. The local parliament (DPRD) is now the institution that has the right to monitor and evaluate the budgeting process and budget implementation. It is involved in the budgeting process and must approve the proposed annual budget. During the fiscal year, the local government must also present quarterly reports to the DPRD. The report should consist of a local budget implementation report, a cash-flow report, and a local government balance sheet. The local parliament members are selected through a general election. However, the members themselves are not elected directly by the

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local voters since the voters elect the political party, not the candidates. The party then selects its candidates to sit in the local parliament. The local parliament members then elect the head of the district or municipal government (bupati or mayor respectively). The candidates have to be elected as a pair, bupati and wakil bupati or mayor and vice-mayor. Once a pair with the most votes is selected, they have the right to form their own local administration. In the local bureaucracy itself, the post of local government secretary is the most important position. Participatory budgeting, and the associated planning process, is still premature in the Indonesian system due to the lack of communication between government and community. The local parliament currently can be considered as being representative of the society, although many still question its legitimacy. Public disclosure of the local budget is rather limited, so the local community usually gets information about the budget from the local representatives, the media, or from the non-governmental organizations (NGOs). However, the quality of this information is still far from the minimum requirement of what constitutes the practice of good governance at the local government level. There is a lot that can be improved in the horizontal mechanism that is now very crucial in creating good governance at the local government level. Empowerment of civil society and community has to be top priority, so that the community has more interest in being involved in the budgeting process. The local parliament has to initiate its involvement and put pressure on the local government to take into account the opinions of the local community. The entire budgeting process and implementation will, in time, need to be transparent and accessible to all interested parties. In order to support this, the performance budgeting that is mandated by government regulation to be implemented can be a good indicator for the common people to evaluate the local budget.

Local Capacity The current decentralization process has given rise to doubts over the capability of local government staff to deliver the full range of public services. It is no secret that in the past the local government

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staff were subordinate to the central government, and they followed all the directions handed down by the central government. With decentralization, there will not be much direction from the central government. In general, there should not be much effect on the local staff’s capability and skills to shoulder the responsibilities since staff have been transferred from the central government to the local governments. In other words, the skill levels will at least be the same. However, the complexity of the civil servant transfer process (with more than 2.5 million employees transferred), and some local government resistance towards the transfer itself for various reasons, has raised concern over the ability of the local governments to deliver the services at a similar level. The tendency of some regions to favour indigenous personnel clearly has not helped the case. Local governments now play a significant role in enhancing the quality of their civil servants. They appoint all the local employees, including the selection of employees transferred from the central government. Although the basic civil servant salary is determined by the central government, the local government has the right to give a higher salary to an employee as long as it is approved by the local parliament. If a local government has good sources of revenue, part of the revenue could be spent to increase the salaries of civil servants in the interest of increasing productivity. The salaries are paid from the local budget itself. Prior to decentralization, the central government paid the salaries through the autonomous region subsidy that became part of the local government’s revenue. With the new scheme, the fund transfer from the central government (especially the DAU) does not have to be the only source for salary payment. Basically, revenue from any source can be used to pay the salaries of civil servants. To improve the local capacity and to ensure that decentralization will benefit its main “customer”, the local people, some activities are undertaken by both the Indonesian Government and international agencies directly for local employees and the community. The Indonesian Government, through the ministries, has had extensive training sessions in various aspects

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of this changeover. The Ministry of Home Affairs and the Ministry of Finance, for example, have an interest in ensuring that the implementation of the new local financial management will work in the near future. There has been training on the budgeting process, especially about performance budgeting that will soon replace the line-item budgeting. The international funding agencies also have similar activities but with a broader target. They not only conduct training for local government employees, but also for the local community and civil society in general. This includes the media, universities, and NGOs. International aid agencies, including Germany’s GTZ (Deutsche Gesellschaft fur Technische Zusammenarbeit) and Japan’s JICA (Japan International Cooperation Agency), have been involved with enhancing local government capacity. The USAID (United States Agency for International Development) has done some training involving both local government and NGO participants. Some of the training sessions aim to build an awareness of the decentralization process itself, while others teach the technical process. In some provinces there is also a programme to introduce public participation in the budgeting process as well as a programme about good governance at the local level.

Monitoring and Evaluation The central government certainly has a momentous task in monitoring and evaluating the decentralization process to ensure that the process is a success. One major problem, however, is that the number of units to be monitored is increasing quite rapidly. The number of provincial governments has increased from twentysix, prior to decentralization, to thirty, while the number of district/ municipal governments has increased from 290, prior to decentralization, to 348. These increases have occurred in just two years. Before the Regional Autonomy Council and the Ministry of Home Affairs are proposals for new provinces and districts/ municipalities, and it is rather difficult for the central government to stop the creation of new local governments. Monitoring and evaluating an increasing number of units is certainly not an easy

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task. One good example is monitoring and evaluating the local government regulations. Every local government law and regulation has to be sent to the Ministry of Home Affairs fifteen days after getting approval at the local level. The ministry then has thirty days to evaluate the regulation and if necessary, the ministry can cancel it. If the ministry does not have any comment after thirty days, the regulation will come into effect and become legal. With an increasing number of local government units, there is a possibility that the Ministry of Home Affairs will be overwhelmed by the load. Assuming that each local government produces one regulation every month, the ministry will have to review more than 350 regulations every month. It is therefore not surprising that some inappropriate local government regulations have passed review and actually come into effect. As previously mentioned, the central government cannot have direct supervision or review over the affairs of local finance except for the DAK, deconcentration activities, and local borrowing. The local parliament is now in charge and the local government has to make a quarterly report to the DPRD. To ensure better local fiscal management, the combination of local parliament and the central government (the Ministry of Home Affairs and the Ministry of Finance) undertaking monitoring and evaluation would be the best outcome. The local parliament basically monitors the overall performance of the local budget. Since the local government will have to adopt hard budget constraints in the era of decentralization, any proposed borrowing will most likely be intended to fill the budget deficit. In this case the local parliament will still have the power to evaluate borrowing proposals. Once a proposal is approved at this level, the central government (especially the Ministry of Finance) can play a significant role (as mentioned above). If the proposed borrowing is from a foreign institution, the Minister of Finance has to give approval. For other sources, even though there is no direct influence, the central government can have control over the total cumulative borrowing of all the local governments and can take a decision to manage that borrowing. Implicitly, the central government can influence indirectly the budgeting behaviour of local governments throughout Indonesia through this means.

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Fiscal Condition Table 13.5 reveals the dependence of local governments, to finance their expenditure, on intergovernmental transfers (from the centre), both prior to and during decentralization. Local revenue, consisting of local taxes and charges, contributes insignificantly towards total local revenue and expenditure. Intergovernmental transfers then become the most crucial part of Indonesia’s fiscal decentralization. In other words, the success or failure of the process will depend on how good the transfer scheme is. The dominance

TABLE 13.5 Indonesia: Central and Local Fiscal Indicators, 1992 – 2001 (In percentages) Fiscal Year

Local Local Own Local Revenue/ Intergovernmental Transfer/ Expenditure/ Revenue/ Total Revenue3 Total Total Total Local Expenditure1 Revenue2 Expenditure

1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000 20014 Notes:

1

2 3

4

20.99 22.70 23.90 26.02 27.65 23.86 15.81 16.61 17.88 24.82

4.98 5.31 6.00 6.87 6.54 5.66 3.31 3.63 3.10 3.80

33.88 35.48 34.17 35.71 33.81 29.15 22.14 24.90 26.05 46.36

94.20 93.17 97.05 87.95 74.52 75.57 97.19 79.23 85.87 103.04

Total expenditure = National expenditure – Intergovernmental transfer + Total local expenditure Total revenue = National revenue + Local own revenue Local revenue = Local own revenue + Intergovernmental transfer Total revenue = National revenue – Intergovernmental transfer + Local own revenue Estimated data for 2001 using the proposed budget, not the actual one.

Source: LPEM-FEUI (The Institute for Economics and Social Research, Faculty of Economics, University of Indonesia).

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of the central government in raising revenue will still remain even after the full implementation of decentralization. The current situation could be considered healthy from the central government’s point of view, since it may still have strong control over the fiscal decentralization process to ensure fiscal sustainability. But it could also be considered unhealthy since it creates a disincentive for the local governments to find their own revenue sources. If something unexpected occurs, such as the 1997–98 economic crisis, the central government will certainly have a very heavy burden to carry.

Conclusion Decentralization in Indonesia is clearly a gigantic project with a high degree of complexity, and a high degree of risk. Due to the internal political pressures, this massive undertaking has been done with only one year’s preparation and an undetermined transitional period. The combination of the size, complexity, and limited time makes the decentralization process in Indonesia a highly risky policy. If it is successful, then it could become a major reference for other countries. But if it fails, it is possible that Indonesia could face disintegration in a worst-case scenario. To ensure the success of decentralization, the intergovernmental fiscal transfer is a very important element in maintaining a good relationship between the central government and the local governments. Currently, the intergovernmental fiscal transfer system in Indonesia uses the scheme of natural resource revenue sharing, tax revenue sharing, the DAU, and the DAK. Among these, the natural resource revenue sharing, personal income tax sharing, and the DAU are the most significant ones. The natural resource revenue sharing and personal income tax revenue sharing tend to benefit a limited number of regions, so there remains the threat of a worsening regional disparity. The DAU should neutralize that effect by providing a fiscal equalization grant that should fill the fiscal gap — or the gap between fiscal needs and fiscal capacity — in the regions. The current DAU distribution formula is still far from perfect, mostly due to the limitations on expenditure data. However, the

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formula has adopted some basic principles that not only satisfy from a fiscal point of view, but also from a political point of view. The overall pattern should see the equalizing of fiscal capacity for regions outside Java. Some districts in Kalimantan and Irian Jaya, for example, now receive much higher funds. Eventually, the formula for DAU distribution should ensure that all the regions will have equal opportunity to provide public services for their people. Lack of accurate data on government expenditures, and the complexities in decentralizing authority from the central government to the local governments, caused uncertainty for most local governments in planning their spending for the 2001 fiscal year. This uncertainty makes the local governments react in two different ways. The first is to use more local revenue sources such as local taxes, local charges, or other unspecified charges. The release of law 34/2000 that enables the districts to create new local taxes and charges has to be managed carefully, especially by the central government, to avoid a high cost economy and disincentives for potential investors. The second way is to ask the central government to give more DAU to the regions even though the amount has to be determined by the formula. To anticipate this, and to avoid the interruption of continuous public services, the central government has provided Rp6 trillion as a contingency fund. This contingency fund might imply that the central government applies a soft budget constraint to the local governments, but the fund itself may only last during the transition period. When the transition period is over and the full implementation is in effect, the fund should disappear to force the local governments to adopt hard budget constraints in which they have to take responsibility for their own deficits by issuing bonds, or borrowing from other sources. In general, decentralization in Indonesia could be considered as leaning more towards the decentralization of authority, and consequently expenditure. The local governments will have more power and authority to run their administrations and provide public services for their people. The financial source to support it will come from the central government through transfers, at least while the revenue collection capacity is mostly still incumbent on

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the central government. However, the local governments now have much more freedom to make plans and priorities to spend the money by considering the aspirations of the local communities through the local parliaments — with far fewer considerations for the interests of the central government.

Appendix 1 List of Laws and Government Regulations (PP) • Law 22/1999 : Local Government • Law 25/1999 : Fiscal Balance between Central and Local Governments • Law 17/2000 : Income Tax • Law 34/2000 : Local Government Taxes and Charges • PP 104/2000 : Intergovernmental Transfer • PP 105/2000 : Local Finance Management and Reporting • PP 106/2000 : Deconcentration and Assigned Duties Management and Reporting • PP 107/2000 : Local Borrowing

Appendix 2 A. General Allocation Fund (DAU) Formula ❏ Fiscal gap = Fiscal needs – Fiscal capacities ❏ Fiscal capacities = LORadj + (PT + LTF + PIT + 0.75 * NRS) LORadj : Local own revenue adjustment = a + b * GRDP services PT : Property tax revenue sharing LTF : Land transfer fee revenue sharing PIT : Personal income tax revenue sharing NRS : Natural resource revenue sharing ❏ Fiscal needs = ALE (0.4 PI + 0.1 AI + 0.1 RPI + 0.4 CI) ALE : Average local expenditure PI : Population index AI : Area index RPI : Relative poverty index CI : Construction index

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FISCAL DECENTRALIZATION IN INDONESIA 303 ❏ Local DAU weight (LDW) = Local fiscal gap/National fiscal gap ❏ DAUi = AM + (LDW * DAUn) DAUi : DAU for each province or district/municipality DAUn : DAU total, for all provinces or districts/ municipalities AM : Minimum allocation = LS + ( a * CSS) LS : Lump sum (equal for each province or district/ municipality) a * CSS : Proportion of civil servant salaries in 2001 B.

Local Government Borrowing Formula ❏ Local general revenue (LGR) = TLR – (DAK + CF + BF + OR) TLR : Total local revenue DAK : Specific allocation fund CF : Contingency fund BF : Borrowing fund OR : Other revenues earmarked for specific expenditure ❏ Debt service coverage ratio (DSCR) = {(LOR + RS + DAU) – CSS} / {PP + IN + OC} LOR : Local own revenue RS : Revenue sharing (natural resources and tax) DAU : General allocation fund CSS : Civil servant salaries PP : Principal payment IN : Interest payment OC : Other costs of borrowing

Note *This paper was presented at the ASEM-sponsored workshop on Intergovernmental Fiscal Relations in East Asia, in Bali, Indonesia, January 2002.

References Bagchi, Amaresh. “Intergovernmental Fiscal Relations: The Cases of India and Indonesia”. In Macroeconomic Management and Fiscal Decentralization, edited by Jayanta Roy. Washington, D.C.: World Bank, 1995. Bird, R.M. and F. Vaillancourt. “Fiscal Decentralization in Developing Countries: An Overview”. In Fiscal Decentralization in Developing

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Countries, edited by R.M. Bird and F. Vaillancourt. Cambridge: Cambridge University Press, 1998. Brodjonegoro, Bambang. “Indonesian Intergovernmental Transfer in Decentralization Era: A Case of General Allocation Fund”. Paper presented at international symposium on Intergovernmental Transfers in Asian Countries: Issues and Practices, Asian Tax and Public Policy Program, 2001, at Hitotsubashi University, Tokyo. Brodjonegoro, Bambang and Shinji Asanuma. “Regional Autonomy and Fiscal Decentralization in Democratic Indonesia”. Hitotsubashi Journal of Economics 41, no. 2 (2000). Brodjonegoro, Bambang, Raksaka Mahi, Robert Simanjuntak, Karyaman Muchtar, Iman Rozani, and Khoirunnurrofik. “The General Allocation Fund Formula” (in Indonesian). LPEM-FEUI report for the Ministry of Finance. Jakarta, 2000. Mahi, Raksaka, Anton Hendranata, and Khoirunnurrofik. “The Econometric Model of Decentralization in Indonesia” (in Indonesian). LPEM-FEUI report for the Natural Resource Management–USAID. Jakarta, 2001. Simanjuntak, Robert, Khoirunnurrofik, and Muliadi Wijaya. “The Local Government Borrowings and Bonds” (in Indonesian). LPEM-FEUI report for the National Economic Council. Jakarta, 2000.

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Reproduced from Governance in Indonesia: Challenges Facing the Megawati Presidency, edited by Hadi Soesastro, Anthony L Smith and Han Mui Ling (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of BALI the Institute of Southeast Asian EPILOGUE: BOMBING 305 Studies. Individual articles are available from < http://bookshop.iseas.edu.sg >

14 Epilogue The Bali Bombing and Responses to International Terrorism Anthony L. Smith

Introduction On 12 October 2002 a bomb blast destroyed the Sari Club in Bali, resulting in almost 200 deaths, including around 100 Australian tourists to the fabled holiday island. This attack was the single most devastating terrorist attack since the infamous 11 September attacks against targets on the American mainland. No group has claimed responsibility for the attack in Bali, but even before all the evidence is gathered, it is probably not premature to assume that a radical Islamist group was behind it. A threat by Osama bin Laden to Australia in late 2001,1 due to Australia’s involvement in East Timor, adds strongly to the suspicion that Al-Qaeda was behind the attack. Discussions about Southeast Asia as the “second front” in the global war on terrorism by Western officials and media sources have generally been rejected as alarmist by the Indonesian Government itself. Does the Bali 305 © 2003 Institute of Southeast Asian Studies, Singapore

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blast signal that Indonesia is now a home for terrorism linked to Al-Qaeda? In a sense Indonesia’s denial of the presence of an international terrorist element within its borders, and its resulting failure to act against it, has been dramatically undermined by the bombing. Although it remains unknown exactly who planted the bomb, and for what purpose, the Bali explosion has a number of ramifications for Indonesia. A statement by the Indonesian Government that this was the work of Al-Qaeda is an important turning point as it is an admission that Indonesia may be home to a radical fringe. The Bali blast will change, irrevocably, the image of Southeast Asia as a potential home to Islamic radicalism. While the majority of Indonesia’s Muslims have demonstrated a commitment to either a secular state or moderate forms of Islamic governance, there exists a tiny minority element that seems sympathetic to Al-Qaeda’s goals. Outside of the immediate threat of violence, it seems unlikely that radical versions of political Islam can seize political power through legitimate political processes (refer to Azyumardi Azra’s chapter in this volume). Radical versions of Islamism have not found fertile ground in Indonesia, and those political parties which attempted to give Islam a place in the country’s Constitution did not do well in the last election. Those seeking to pursue visions of theocracy outside legitimate processes remain a tiny minority — yet it has been dramatically demonstrated in recent times that even small numbers of committed individuals can create enormous destruction.

The Emergence of Political Islam Indonesia is the world’s largest Muslim nation. Almost 90 per cent of Indonesia’s 220 million people belong to the Islamic faith, and practice varies markedly — although some scholars have noted an emerging orthodoxy in Islamic practice (or “santrization” as it is sometimes known). The impact of this growing orthodoxy has been mixed, as this chapter will show, and need not necessarily undermine democratization. After the 11 September attacks Indonesia gained much media coverage through the images of radicalized mobs burning effigies

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and chanting slogans outside the U.S. Embassy in Jakarta. The foreign affairs’ ministries of a number of Western governments took a conservative approach and advised their citizens to stay away from Indonesia or take precautions when travelling. But the actions of those who grabbed the headlines need to be placed in perspective. The departure of Soeharto from office in May 1998 and the legalization of political parties saw Indonesians returning, in large part, to the voting patterns that existed in 1955. It could be said that Indonesians returned to aliran (cultural stream) voting patterns. Indonesia’s two largest Muslim organizations (also the world’s largest) are Nahdlatul Ulama (NU) and Muhammadiyah, with followers numbering 35 million and 28 million respectively. NU and Muhammadiyah not only represent two aliran (translated into voting blocs in the 1999 election), but also the most important voices of Islam within Indonesia. The current political configuration of Indonesia’s legislature is revealing of the prevailing political culture. In the 1999 election (regarded as largely free and fair), two secular parties won the lion’s share of the votes: Megawati’s PDI-P (Indonesia Democracy Party–Struggle) gained 34 per cent of the votes and Golkar gained 23 per cent. Wahid’s party, PKB (National Awakening Party), based on the NU organization, gained 13 per cent and has consistently promoted a secular state. PAN (National Mandate Party), largely drawing from Muhammadiyah for support but actively recruiting non-Muslims as candidates, has also rejected the Islamicization of the state. There is a tendency to refer to the various political parties in parliament with a Muslim constituency as “Muslim parties” or “political Islam”. In the case of PKB and PAN, it is only their constituency that is “Muslim”, while their philosophy remains firmly behind a secular and democratic state. Some of the other Muslim parties, which together with PAN constitute the Poros Tengah (Central Axis), have been more partisan in religious terms but are far from promoting radical visions of a theocratic state. PPP (United Development Party, of Vice-President Hamzah Haz), PBB (Crescent Star Party), and PK (Justice Party) are minor parties that have urged an alteration to the Constitution, which states that shari’a law applies to all

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Muslims in Indonesia — known as the “Jakarta Charter”. Given that shari’a law already applies, in theory, to Muslims in terms of family and inheritance law, the change being proposed here is largely symbolic. Still, symbols are important to statehood, and this proposed change would alienate non-Muslims, and the majority of Muslims, in Indonesia given that statehood is based on ideals of pluralism enshrined in Indonesia’s state ideology (Pancasila) and Constitution. It would also establish, constitutionally, Islam as the state religion, and perhaps bring Indonesia in line with Malaysia in terms of a link between religion and state. It is true that Megawati has had a difficult relationship with the other parties in parliament, and much of the debate has taken a religious hue. Although both NU and Muhammadiyah ultimately declared that this was possible, there was considerable discussion within the Muslim community about whether a woman could be president of Indonesia.2 The smaller Islamic parties, which argued earlier that a woman could not be the president, changed their minds when they voted to oust Wahid and install Megawati in June 2001. Nevertheless, Megawati’s Muslim credentials have been questioned, and she finds herself having to consider this powerful domestic imperative. Megawati’s opponents have made some political capital out of this, and this helps to explain Megawati’s apparent weakness in dealing with the radicalized groups. However, it should not be forgotten that while Megawati probably took the vast majority of the non-Muslim votes in Indonesia, more than half of all her votes were cast by Muslims, and Megawati herself is a Muslim. At the Upper House (MPR) annual session in 2002, a number of amendments were introduced to strengthen the Indonesian political system, and make it a more orthodox presidential system. Notable, principally by its failure, was an attempt to include the “Jakarta Charter” in the Constitution. The amendment could not even gather a third of MPR members in support — the minimum necessary to place an amendment on the floor. In an embarrassing set-back for hard-line Islamist legislators, the issue is revealed as a non-starter, even amongst the majority of Muslim law makers.3

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Reactions to 11 September Attacks The terrorist attacks of 11 September have had some impact on the domestic situation in Indonesia. Immediately after the attacks, Megawati travelled to the United States and issued a statement of condemnation of the attacks and support for the United States. This alarmed many in Indonesia, the majority of whom would appear to have been opposed to the U.S. counter-attack on Afghanistan. Megawati’s own Vice-President, Hamzah Haz, referred to America’s “sins” 4 as a cause for the attacks — although he subsequently explained this away and declared himself in support of the United States. Haz later lauded Bush for legitimately distinguishing between Muslims and terrorists. Indonesia gained a US$400 million trade-and-aid deal from the United States during Megawati’s visit, but there are indications that elements of the U.S. Government are not happy that Megawati subsequently modified her stance, and opposed the U.S. campaign in Afghanistan. At first Megawati refused to support the U.S. attacks and then subsequently asked the United States to limit the air strikes. In refusing to cut ties with the United States (as hardline groups had demanded) the Indonesian political elite have preferred to largely explain this to the domestic audience in utilitarian terms, namely that Indonesia needs the United States, rather than to portray this as support for the United States in the global war against terrorism (something echoed in the statements of the moderate Muslim groups as well). Suggestions for resolving the terrorist problem have included negotiation, the use of an international court, the producing of “real” evidence, or concentration on addressing America’s “crimes” in the Middle East (such as Palestine, Iraq, and so on). Hasyim Muzadi, a leader of NU, has inherently questioned the conclusiveness of evidence against Osama bin Laden: Proving the evidence is important to distinguishing which is Islam and which is terrorism. After it can be proven, attack the terrorists. Without the evidence... [retaliation] cannot be justified. If it does happen, the case for an attack will fade and be replaced by a war between Islam and Christianity.5

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It is questionable that Al-Qaeda’s attacks on the United States are specifically aimed at U.S. foreign policy alone, but this is how many in Indonesia have interpreted it through this prism. Achmad Sumargono, leader of the Indonesian Muslim Brotherhood, said in a media interview: “But for America, there must also be a correction made by themselves. Firstly, their intelligence was very weak. And secondly, their policies regarding Palestine and their full back-up for Israel must be corrected.”6 This leader clearly identifies U.S. foreign policy, in this case with regards to Israel, as the reason for the attacks. The U.S. Ambassador at the time, Robert Gelbard, responded harshly to a suggestion by Indonesian academic Dewi Fortuna Anwar, who blamed the bombings on the tie-up with Israel, as being “anti-Semitic”. A leader like Achmad, or an academic like Dewi, would condemn terrorism, but they provide the caveat that U.S. foreign policy is the cause of the problem. This reflects widespread beliefs about the cause of the problem, and equally explains why it has been so difficult to mobilize domestic support to deal with radical groups. Outside Indonesia’s largely moderate majority, there are some more hard-line groups. These groups have demanded that the government cut all ties with the United States (a move opposed by both NU and Muhammadiyah). The Council of Ulama (Majelis Ulama Indonesia or MUI) issued a statement even before the U.S. counterattack in Afghanistan, declaring a jihad on the United States — which caused great alarm.7 Although this term has come to mean “holy war” in the West, in Islam it simply means “to struggle” and covers a wide array of activities from Koranic study, personal salvation, political protest, to “defence” in times of war. The MUI later clarified this statement to say it was not referring to a violent jihad, but failed to retract the word or apologize. The MUI is almost certainly aware of the angst the word jihad will cause the U.S. and British diplomatic missions in Jakarta. The MUI also stated: “We condemn the attack of the U.S. in Afghanistan as a manifestation of arrogance and the true evil which challenges human rights and justice and truth.” Although nominally this is the highest body of Muslim scholars and clerics in Indonesia, it was the creation of President Soeharto and is widely regarded throughout Indonesia as a partisan body. Its

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influence is far less than the two aforementioned mass Muslim organizations. The MUI’s statement highlights the political/partisan nature of this debate. Opponents of the current President have been able to use the wider international arena to put pressure on the domestic authorities. The use of fringe Islamic groups, and Islamic bodies created by the New Order state, was a feature of Soeharto’s rule during the 1990s. It has even been claimed that Jemaah Islamiyah (JI) was established by military intelligence during this time8 — although JI may well have taken an independent departure from its military creators in the reformasi era. One Sydney Morning Herald journalist, in the aftermath of the Bali bombing, noted that intelligence chief Ali Moertopo had, during Soeharto’s reign, coopted extremist Islamic elements in order “to justify political crackdowns”.9 The point of this article was that elements of the military may not be clean on this issue — a theory that has some popularity in Indonesia itself. The previous U.S. Ambassador to Indonesia, Robert Gelbard, also accused the Indonesian security forces of being inactive and not taking terrorist threats seriously. Threats to U.S. citizens had occurred in the city of Solo since November 2000, when members of the Islamic Defenders Front (Front Pembela Islam, FPI) raided hotels for guest lists. The police interviewed FPI leaders at the time and expressed their disgust, but failed to arrest any suspects. In that same month the U.S. Embassy briefly shut down due to security concerns. With the events of 11 September, these threats were renewed. The Indonesian police claimed that they were powerless to intervene as no one had been injured. There are a small number of quite radical groups in Indonesia which form a tiny minority within the Muslim community. In this respect groups like FPI — and Laskar Jihad (Jihad Force), which has now been disbanded — have been publicly linked to funding sources in the Middle East. FPI and Laskar Jihad are run by leaders who have ties of blood or friendship to the Middle East (Laskar Jihad’s leader, Ja’far Umar Thalib, is also a veteran of the Mujahideen in Afghanistan during the Soviet occupation). Ja’far Umar Thalib claimed to have met Osama bin Laden during this time, but has, in a number of interviews (including interviews

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with, inter alia, the British Broadcasting Corporation (BBC) and The Economist), dismissed him as having an unsound background in Islamic scholarship. Western intelligence sources claim that Laskar Jihad receives funds, weapons, and personnel from the Middle East and Central Asia, allowing it to wade into the Ambon conflict with several thousand fighters. There is little evidence that Al-Qaeda has made any sort of significant inroads into Indonesia through groups like Laskar Jihad or FPI, in spite of reports that Osama bin Laden’s brother-inlaw has visited Indonesia on business trips. However, even if these groups are not linked to Osama bin Laden, as they claim, they do represent an irritant to the cohesion of Indonesia. They threaten the notion of pluralist society. Lack of police and military action has seen these groups act, until relatively recently, with disregard for the law. Both Laskar Jihad and FPI have caused internal trouble within Indonesia, but their threat is largely domestically confined, and their targets for violent action have also been domestic. The disturbing trend here is that Indonesian law enforcement seems unwilling to curb such groups, and may have contributed to Indonesia’s reputation as a soft touch for terrorist cells.

The Jemaah Islamiyah Threat After the events of 11 September 2001, however, there was a more alarming development within Southeast Asia itself. Several months after the attack, Singapore and Malaysia made the first of a series of arrests of activists associated with a shadowy group called Jemaah Islamiyah (JI), who stand accused of threatening to blow up various targets in Singapore, including the U.S. Embassy. Both Singapore and Malaysia pointed to the existence of the network in Indonesia, in particular its operations leader, Riduan Isamuddin (often known as Hambali), and its spiritual head, Abu Bakar Ba’asyir. Indonesian authorities not only resisted regional pressure to arrest these suspects, but also denied that there was a terrorist problem in Southeast Asia. Statements from Singapore, in particular, caused some angst in Jakarta. Lee Kuan Yew, the Senior Minister of Singapore, has said that Singapore remains vulnerable

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to terrorist action, as leaders of extremist groups remain at large in Indonesia.10 But domestic factors were also important. Megawati, as noted earlier, has been vulnerable to political manoeuvrings from the Muslim parties within the legislature — a number of whom were co-opted into the executive through Cabinet appointments. After the 11 September attacks Vice-President Hamzah Haz and others attempted to downplay the threat of global terrorism posed by Al-Qaeda and like-minded groups in an attempt to undermine the President in the run-up to the 2004 elections. Once the emotionalism of “foreign pressure” died down after June 2002, more sober heads prevailed. Co-operation with the United States increased on a number of fronts. In early August U.S. Secretary of State Colin Powell visited Indonesia and announced aid of US$50 million over three years to assist Indonesia in counter-terrorist operations. Most of the money was tagged for assistance to the police. However, the money was not given without reservation. In the words of U.S. Ambassador, Ralph Boyce: “If this [wider military-to-military relations] comes to pass, this does not represent a clean bill of health for past TNI [Indonesian military] actions which continue to be of concern to us.”11 Several prominent arrests were made in Indonesia, and the suspects delivered into U.S. custody. Prior to the Bali bombing, Indonesia had planned to introduce a new, more robust, anti-terrorism law. For a number of years, Indonesia’s two most infamous radical Islamist groups, FPI and Laskar Jihad, as mentioned earlier, have been able to break the law with virtual impunity. The leaders of both groups have now been arrested for clear violations of the law, including Laskar Jihad leader, Ja’far Umar Thalib, who incited a riotous crowd to attack a church. Laskar Jihad disbanded about a week prior to the Bali blast, but announced its dissolution immediately afterwards. A major breakthrough in undermining terrorist operations in Indonesia came with the arrest of Al-Qaeda operative Omar alFaruq in June 2002. Omar al-Faruq’s revelations included: involvement in the 2000 Christmas Eve bombings in which churches were targeted in ten cities across Indonesia; an assassination attempt on Megawati; and plans for “large-scale attacks against U.S. interests in Indonesia, Malaysia, [the]

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Philippines, Singapore, Thailand, Taiwan, Vietnam and Cambodia”.12 The goal of these plans, to be carried out by JI, was to create an Islamic state in maritime Southeast Asia — with the church bombings aimed at sparking widespread communal– religious violence. Omar al-Faruq’s evidence also led to the closing of the U.S. Embassy in Jakarta on the eve of 11 September 2002. Hamzah Haz criticized the United States for closing its embassy, saying it unnecessarily damaged Indonesia’s reputation. Vice-President Hamzah Haz, who had undermined the Indonesian Government’s attempts to deal with such extremists, publicly embarrassed Megawati by openly associating with Ba’asyir and Ja’far Umar Thalib (the latter he visited in jail). Haz also openly questioned evidence of radical Islamic groups and expressed contempt for both U.S. policy and the reliability of reports from the U.S. Government. In light of the Bali incident, Haz’s attempt to reach out to the “extreme right” of his political support base has badly backfired, and Haz has now turned volte face. Denial was not confined to those courting the Islamic rightwing. Even a well-regarded Cabinet moderate, Foreign Affairs Minister, and career diplomat, Hassan Wirayuda, is reported to have remarked in February 2002 that the Cabinet laughed at suggestions from other countries that there may be a threat within Indonesia from radical Islamist groups.13 It is also well known that many Indonesians regard warnings of terrorist cells within Indonesia as an American fabrication. One prominent articulator of this view is the President’s own sister, Rachmawati Sukarnoputri, who has dismissed reports of radicalism within Indonesia as CIA “rumours” designed to undermine Islam and place Indonesia further under U.S. control.14 The head of the moderate NU, Salahuddin Wahid (brother of the former President of Indonesia), accused Washington of engaging in “propaganda tricks”.15 Yet there had been, before the Bali bombing, some recognition that there may be a problem. On the first anniversary of the 11 September attacks, Indonesia’s National Police chief General Da’i Bachtiar said that although local terrorist groups existed in Indonesia, Ba’asyir’s alleged involvement in terrorism had not

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been proven.16 He did, however, hedge a guess that when Hambali is arrested, there would be evidence pointing to Ba’asyir. In late September 2002 Indonesian military officials also acknowledged that there were terrorist groups in Indonesia. Army chief of staff Lieutenant General Ryamizard Ryacudu confirmed the existence of such groups at a press conference, but denied that they were linked to Al-Qaeda.17

The Bali Blast The Bali blast seemed to come at a time when a number of lowerlevel terrorist attacks had occurred around the world. With regard to Southeast Asia, The Economist recently noted: “Even before the bombing in Bali last week, South-East Asia had already earned a reputation as a hotbed of terrorism.”18 The governments of Malaysia, the Philippines, and Singapore have warned for some time now of the dangers of international terrorism in the region. What the Bali attack means is that the Indonesian Government is now forced to confront the problem of terrorism — in fact Indonesia’s Minister of Defence has announced that the Bali attack was the work of Al-Qaeda — and moderate Islamic groups in Indonesia have moved to condemn the attack. The Bali attack represents a departure from earlier terrorist attacks in Indonesia and the region (for example, the 2000 Christmas Eve church bombings throughout Indonesia) in that Westerners were the obvious target of the Bali attack. Winding up Bali’s tourist industry, which was once booming and is now totally moribund, was clearly part of the equation. The Indonesian Government’s response has been the following. First, a warrant was issued for Ba’asyir’s arrest immediately after the bombing, as evidence was found to detain him (a detention that was delayed due to a health complaint). Ba’asyir continues to deny that he is linked to Al-Qaeda, yet his protestations are qualified by sympathy for Osama bin Laden. He told Time magazine: “I don’t have any link whatsoever with al-Qaeda, … but if al-Qaeda’s struggle is for the best interest of Islam, I support it.”19 Second, new laws were rushed through the legislature that would allow for the detention of a terrorist suspect for up to six

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months, and the use of intelligence sources as evidence in court cases. It should be noted, however, that groups like FPI and Laskar Jihad could have been prosecuted under existing laws for their blatant crimes some years ago — but for a long time there was no will to counter such groups. Third, the Indonesian Cabinet has issued its strongest statement yet on the problem of terrorism within Indonesia. Hamzah Haz, a new-found convert to the war against terrorism, stated that the attack was designed to break up Indonesia and ruin its economic recovery.20 In what was seen as a reference to Haz, Co-ordinating Security Minister Susilo Bambang Yudhoyono stated that “[t]he government urges that statements that are not objective, that there are no terrorists in Indonesia, should not be repeated again”.21 Bambang most likely delivered this rebuke on behalf of the Cabinet. With Indonesia’s support, the United States added JI to its list of international terrorist groups. The evidence concerning the Bali blast is still being gathered, and authoritative statements are premature. Yet the blast bears all the hallmarks of Al-Qaeda or a like-minded group. The target was Western, but the perpetrators have allowed the subtext of the violence to speak for itself — no one has claimed responsibility for the action. Osama bin Laden’s threats to Australia over its role in East Timor add considerably to the suspicion. Informed media sources have read into the Bali incident a new pattern of global terrorism, one that may be increasingly more nebulous: [W]estern intelligence officials increasingly believe that the nature of al-Qaeda has changed, and that the Bali bombing demonstrates it. Weakened by the disruption of its finances and communications, with its base destroyed and its leaders in flight, it has become a loose ever-shifting alliance of like-minded groups. These, though they may share a common militant Islamist ideology, are essentially independent cells working locally. Rather than enormous orchestrated set-pieces, like the attacks of September 11th, their operations are smaller and — for all the wild rhetoric — less ambitious.22

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The BBC’s Islamic Affairs analyst, Roger Hardy, makes a similar observation: “[T]he phenomenon of Islamic extremism is complex. Some groups have no links with al-Qaeda. Others may have links of one kind or another, without being part of its network in any meaningful sense.”23 Therefore, the Bali blast signals that the world faces a far more nebulous threat from jihadi groups — which may or may not have concrete links to Al-Qaeda — than the one that attacked the United States on 11 September 2001.

What It Means for Indonesia’s Future The Bali bombing will mean a number of changes for Indonesia and the region: The Indonesian Government, and important groups within civil society, has been forced to confront this problem. Although a number of Indonesian commentators have noted a surprising reluctance, even now, to accept the problem of radical Islamist groups, some important steps have been taken. The Indonesian Government has continued to move against radical groups that are clearly opposed to a pluralist Indonesia. NU and Muhammadiyah have both spoken out plainly against the more radical versions of political Islam, in contrast to the hesitation previously. Indonesia’s reputation has also been tarnished. This will affect its relations with near neighbours, particularly Australia, Singapore, the Philippines, and Malaysia. Since the 11 September attacks all of these neighbours (and now Australia most acutely since the Bali blast) have had cause to fear Indonesia’s lack of capacity and political will to confront a possible terrorist problem. Now that Australia is so clearly a target of such groups, Australia will have to devote considerable time and energy to confronting this threat. The Bali blast is not only a major embarrassment for Hamzah Haz (as already indicated), but represents another setback to Megawati herself. Although she is not one to have courted radical figures, her failure to deal with many issues, including the problem of terrorism, has caused many people to once again question her ability to lead. Her muted and unemotional reaction to the Bali

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incident even had her own party members questioning her ability to lead Indonesia in such a time of crisis — her two visits to Bali in the aftermath have not helped. Megawati’s laissez-faire governing style has continued to see her popularity drop markedly in opinion polls conducted over the last year. This may have ramifications for the 2004 elections, although as yet there seems to be no candidate who can appeal to a broad section of society to defeat the incumbent. One member of the Cabinet who has clearly taken a public leadership role on this issue is Co-ordinating Security Minister, Susilo Bambang Yudhoyono, a man well known for his presidential aspirations. The International Crisis Group (ICG) has gone further to suggest that disillusionment will not only be confined to individual leaders, but to the whole reformasi process itself — something which may benefit the military.24 A more confident military, one less restrained by civilian leaders, may involve harsher crackdowns in Aceh and Papua, while popular demand for more stable times may allow the military to undermine democracy itself.25 The threat of terrorism could become a useful tool to justify an increased military role in internal security. What may mitigate against this is a widespread suspicion about the role of the military in Indonesia’s pockets of regional instability (as ICG says of the military, it “leaks information and weapons like a sieve”), and suspicion that an element of the military, through active support or sale of matériel, was involved in the Bali blast. The blast was caused by C4 explosives, for which the most ready supply in Indonesia is from military sources. Investigators will determine the source of the C4 in time, but potentially the military’s reputation could plummet further over this incident. Democratization will also be hampered by the looming threat of another serious economic meltdown. The Bali blast will impact seriously on Indonesia’s economic growth as its important tourist industry disappears and foreign investors divert their attention to more stable marketplaces (and locations which are not potential terrorist targets). The Bali blast also contains the potential to create further communal tensions, most likely in Bali itself. This predominantly Hindu community, where dislike of transmigrants (generally

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Muslim) is not unknown, could express greater resentment of “outsiders” following this event. There is a pattern of terrorist groups attempting to cause communal violence, in areas such as Ambon and Poso for example. An attempt to create inter-religious violence across Indonesia with the bombing of churches in 2000 across ten cities failed when Christian and Muslim leaders quickly moved to show signs of solidarity with each other. Only time will tell how this plays out in Bali, but it is now important for the Indonesian Government to manage any ethno-religious fallout from the Bali bombing, and for community leaders in Bali not to allow this event to cause a cycle of violence. A crucial question that emerges is whether or not the Indonesian Government can sustain anti-terrorism measures currently being enacted or under consideration. Megawati faces a number of competitive pressures on how to respond to this threat. First of all there is a sizeable element within the Indonesian public which is doubtful about the nature of the terrorist threat, and may interpret the arrest of Ba’asyir as an anti-Muslim act. Media reports suggest that many Indonesians believe that U.S. agents were behind the Bali attack.26 Second, for those within the elite who accept the gravity of the problem, including leaders of her own party, Megawati has failed to demonstrate the leadership necessary to carry the public with her on this issue and instil confidence during this time of national crisis. Third, international expectations have to be met, and Megawati will find herself under considerable pressure, both public and private, both regional and extra-regional, to take this problem seriously. The Megawati administration, including the hitherto sceptical Vice-President, has indicated, rhetorically at least, that there is a threat from international terrorism, and has taken steps to tackle the problem. However, serious doubts loom over the capacity of the Indonesian state to alter the conditions that have allowed terrorist cells to operate within Indonesia in the first place.

Conclusion The terror attack in Bali may well have changed Indonesia forever, and represents one of the gravest crises to confront the Association

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of Southeast Asian Nations (ASEAN) in recent times. The Indonesian Government, perhaps lulled into a false sense of security due to the pluralist nature of its Muslim majority, has now faced up to a very real problem in the shape of local terrorist cells. It is plainly evident that Indonesia’s Muslims do not constitute a fertile landscape for even mild versions of Islamist governance, let alone violent theocratic movements. Yet certain conditions in Indonesia may have unwittingly made it possible for a small number of jihadi27 or jihadist groups to operate within the archipelago. The failure to enforce the law against FPI and Laskar Jihad — a combination of poor policing and lack of political will — does not bode well for surveillance and enforcement against even more shadowy groups. The challenge that confronts Megawati adds another complex issue to the considerable number that Indonesia already faces. For the Megawati government, the Bali blast makes Megawati’s tenure less certain, and her lack of leadership on the issue adds to erosion of her support. While once she was regarded as the number one contender for the presidential election in 2004, this must now be open to doubt. Notes * Some of the initial sections of this chapter first appeared in Anthony L. Smith, “September 11 and the Implications for Indonesia”, in Trends in Southeast Asia (Singapore: Institute of Southeast Asian Studies, 2001). The author would like to thank Han Mui Ling for helpful comments on this chapter. The views expressed in this article are those of the author and do not reflect the official policy or position of the Asia-Pacific Center for Security Studies, U.S. Pacific Command, the U.S. Department of Defense, or the U.S. Government. 1. “Bin Laden threatened Australia in videotape: Report”, Agence France Presse, 26 October 2002. 2. For an analysis of this debate, see Bernhard Platzdasch, “Islamic Reaction to a Female President”, in Indonesia in Transition: Social Aspects of Reformasi and Crisis, edited by Chris Manning and Peter van Diermen (Singapore: Institute of Southeast Asian Studies, 2000). 3. The prospect of Islamic law in Indonesia does seem to cause alarm in the outside world. By way of an anecdotal example, despite the fact that implementing shari’a law is a complete non-starter in the Indonesian parliament, it was the focus of the New York Times feature

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4.

5. 6. 7.

8.

9. 10.

on constitutional changes (“Jakarta Rejects Muslim Law and Alters Presidential Voting”, 11 August 2002). By contrast, an article summarizing the same constitutional amendments adopted by the Upper House (MPR) in the Jakarta Post ran the headline “MPR forces military out, allows people to elect president” (13 August 2002), and made no mention of attempts to include shari’a law. “Megawati off to US Amid Controversy over Deputy’s Remarks”, Associated Press, 17 September 2001. Haz’s full statement to Kompas was: “Hopefully, this tragedy will cleanse the sins of the United States. … We are also concerned and regret deeply and condemn the act of terrorism toward the United States. But we also ask America not to make Islam a scapegoat.” Heri Retnowati, “Interview — Indonesian Muslim chief warns U.S. of backlash”, Reuters, 27 September 2001. Vaudine England, “America Under Attack”, South China Morning Post, 14 September 2001. The English translation of the appropriate paragraph as part of a wider statement is: “According to the call for jihad, the MUI urges the entire Islamic world, especially the Islamic people in Indonesia, to unite and make a real effort to put pressure on all U.S. interests, another way to stop the evil of the U.S. and also to make humanitarian action to help the Afghan people.” Slobodan Lekic, “Indonesian Intelligence Set Up Group in 1970s Now Accused of Terrorism, Report Says”, Associated Press, 12 August 2002. Hamish McDonald, “Jakarta has played with fire of Islamic extremism”, Sydney Morning Herald, 17 October 2002. “Indonesia says rift with Singapore due to differing perceptions”, Jakarta Post, 25 February 2002. Lee Kuan Yew also created a stir in Indonesia when he delivered a speech in which he lamented the growing piety of Islamic observance in Southeast Asia: Over the last three decades, as part of a world-wide trend, Muslims in the region, including Singapore, are becoming stricter in their dress, diet, religious observances, and even social interaction, especially with non-Muslims. Increasingly Muslim women will not shake hands with males. The generation of convivial and easy-to-get-along-with Muslim leaders in the region has given way to successors who observe a stricter Islamic code of conduct. See “The East Asian Strategic Balance After 9/11”, Address by Senior Minister Lee Kuan Yew at the First International Institute for Strategic

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11. 12. 13. 14.

15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27.

Studies Asia Security Conference, 31 May 2002. (.) “US Ambassador: Aid To Indonesia Military To Support Reform”, Associated Press, 7 August 2002. Taken from CIA documents seen by Time magazine. See “Confessions of an al-Qaeda Terrorist”, Time, 15 September 2002. Mark Steyn, “They want to kill us all”, The Spectator, 19 October 2002. “Rachmawati: Rumors Disseminated by CIA Are Like Rumors Disseminated Prior to G30S/PKI”, Tempo Interactive, 20 September 2002. It should be noted that Rachmawati is a political opponent of Megawati, even to the extent of publicly condemning her sister’s ascension to the presidency in 2001. Raymond Bonner, “Indonesians Distrust Report By C.I.A. On Qaeda Suspect”, New York Times, 24 September 2002. “No evidence of Baasyir’s involvement in terrorism: Police chief”, Jakarta Post, 11 September 2002. “No Al-Qaeda network found in Indonesia, says Army Chief”, Jakarta Post, 27 September 2002. “When local anger joins global hate”, The Economist, 19 October 2002. “Confessions of an al-Qaeda Terrorist”, Time, 15 September 2002. “Attacks aimed to break up Indonesia, says Hamzah”, Straits Times, 24 October 2002. Ibid. “An ever-shifting web”, The Economist, 19 October 2002. Roger Hardy, “Analysis: Is al-Qaeda to blame?”, BBC, 25 October 2002. International Crisis Group, “Impact of the Bali Bombings”, 24 October 2002. Ibid. See “Who are the terrorists in Indonesia? Conspiracy theories over Bali bombing are rife in Indonesia”, The Observer, 27 October 2002. The term “jihadi” is used to refer to Islamist groups that have singlemindedly stressed the primacy of jihad (Holy War) in their operations.

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Reproduced from Governance in Indonesia: Challenges Facing the Megawati Presidency, edited by Hadi Soesastro, Anthony L Smith and Han Mui Ling (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute INDEX of Southeast Asian 323 Studies. Individual articles are available from < http://bookshop.iseas.edu.sg >

Index Abdullah, Burhanuddin, 211 Aceh, 318 autonomy, 167, 173, 176, 177 conflict, 176, 177 humanitarian pause, 18 negotiation, 173–74, 176, 177 peaceful resolution, 178, 179 political context, 170–75 Daerah Operasi Militer (DOM), 169, 170 discontentment, 167–70 human rights abuses, 169, 170 identity, local, 169 Islamic law, 65, 66 justice, 170, 172, 176, 178, 179 natural resources, 168 rebellion, 103 roots of, 167–70, 176 referendum, 17, 18 rights, special, 176 secessionist challenge, 165–79 claims, 15–20 Special Autonomy Law, 176 terrorism, 177 Advocacy Team for Military and Police Officers’ Human Rights, 120, 125 Afghanistan conflict in, 54 Taliban government, 46, 49 U.S. military strikes in, 44, 46

al-Mawdudi, Abu al-A’la, 58 Al-Qaeda, 46, 67, 73, 305, 306, 310, 312, 313, 315, 316, 317 Ambon conflict, 312 incident, 180 Annan, Kofi, 23, 125 Asia, Southeast terrorism, 312, 315 Asian Development Bank (ADB) and Indonesia, 190–93, 235, 240 conditionalities, 240, 278, 281 loans, 251 Association of Southeast Asian Nations (ASEAN), 78, 79, 80, 81, 82 Summit, 90 Atambua killings, 23, 135, 136, 137 Attorney General’s Office (AGO), 115, 162 investigation, 127–38, 161 Australia, 125, 147, 159 –Indonesia relations, 87–88 Tampa incident, 88 terrorism, 317 threat to, 305 autonomy, regional, 16, 282, 283 Ba’asyir, Abu Bakar, 312, 314, 315 arrest, 315, 319 Bachtiar, Da’i, 314 323

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Badan Kordinasi Bantuan Pemantapan Stabilitas Nasional (Bakorstanas) disbanded, 28 Bali bombing, 305–20 effect, 317–19 communal tensions, 318–19 tourist industry, 315 Bank Central Asia sale, 212, 279, 280 Bank Indonesia, 199, 201, 202, 203, 208, 216, 217, 219, 242, 243, 244, 247, 269, 280 Bank Indonesia Certificate (SBI), 255 board of governors, 218 independence, 227 monetary operations, 255 repayment bonds, 245, 268 Bank Summa closure, 206 liquidation, 226 banking, 199, 200, 201, 202 blanket guarantee, 203, 218, 257 closures, 200, 201, 202, 207, 216, 241 crisis, 206–7 deposit guarantee, 269 liquidity support, 202, 269 loans, 206 recapitalization, 241–44 restructuring, 205–10, 217, 241–44 cost, 247–48 runs, 201, 202, 207 soundness, 204, 205, 206, 209 bankruptcy laws, 244 Beureueh, Muhammad Daud, 59, 165 Bimantoro, Surojo, 21, 35

Boediono, 186, 187 bonds, 272 government, 244, 245, 246, 254, 256, 277 market, 249, 254–56, 257, 264, 278 supporting infrastructure, 255–56 recapitalization, 244, 245, 246, 268 Bosnia conflict, 48 Boyce, Ralph, 313 Brunei scandal, 32, 33 budget, 188, 189, 218, 219, 265 2001, 270, 274 deficit, 270, 271 implementation, 271–72 revenues, 271 subsidies, 270, 271 2002, 272–79 deficit, 272 development expenditures, 276, 277 expenditures, 274, 275–77 financing, 277–79, 281 implementation, 279 interest payments, 276 revenues, 273–75 subsidies, 275, 280 transfers to regions, 276, 277 debt service payment, 257–59 deficit, 11 surplus, 264, 266 tax ratio in, 204 Bulog scandal, 29, 32, 33 Bush, George, 46, 84, 85 caliphate, 57–58 Camdessus, Michel, 226 Chaniago, Djamari, 28

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China, 87 Cold War, 72 Commission of Inquiry for Human Rights Violations in East Timor (KPP-HAM Timtim), 22, 23, 115, 138, 147, 150 establishment, 116–20 mandate, 120 members, 120 performance, 120–26 report, 124, 153 Commission of Peace and Stability (KPS), 121 Communist Party, 93 Consortium on Government of Indonesia (CGI), 234, 235, 236, 262, 265 lending, 234 Constitution 1945, 15, 38, 39, 64, 65, 93, 96, 107, 155, 156 amendments, 32, 107–8, 109 Article 28I, 23 human rights, 131–32 Jakarta Charter, 56, 64, 65, 66, 308 Preamble, 77 reforms, 96, 106–13 Consultative Group on Indonesia (CGI) aid, 193 conference, 183, 192–93 loans, 278 review, 193 Crescent Star Party. See Partai Bulan Bintang (PBB) da Costa, Williem, 143 Darul Islam (DI), 59, 165, 167 debt, 229–67

corporate, 203 domestic, 240–48, 269 bond-asset swap, 256 restructuring, 254–57 size, 244–47 external, 231, 232–40 amortization payments, 278, 280 on balance of payments, 259, 260 currency composition, 235 /GDP ratio, 235 interest rate, 235 maturity, 235 restructuring, 249–54 service, 249, 250, 251, 257 /GDP ratio, 261, 262, 263, 264 Heavily Indebted Poor Countries (HIPC) scheme, 252–53 information on, 267 managing burden, 248–57 national, 203 –for-nature swap, 254 –service ratio, 232, 259 sustainability, 252, 261–66 decentralization, 282–302 accountability mechanisms, 294–95 local government tiers, 283, 284, 285 monitoring and evaluation, 297–98 deconcentration, 285 democracy, 73, 75, 89, 106, 107, 318 system, 108 transition, 170–72 Department of Home Affairs, 94 development assistance, 190–93 Dewan Perwakilan Rakyat (DPR), 2, 13, 39, 40, 107, 130, 138,

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139, 142, 149, 155, 156, 157, 160, 194, 270, 271, 272 on Aceh, 172, 174 Central Axis, 31, 63, 307 on foreign policy, 147 human rights tribunal, 24 powers, 32, 109, 110–11 relations with Wahid, 30–37 di Tiro, Hasan, 167 Dinas Pendapatan Daerah (Dipenda), 287 East Timor, 16, 80 human rights violations, 22–24, 100, 114, 116 trials, 138–43 independent, 114, 116 issue of justice, 114–48 Popular Consultation, 24 reconciliation, 143 repatriation, 100 economic development, 71, 72 policy, 187 reforms, 239, 240 economy, 7–11, 73, 182–95 activities, 8 capital inflow, 8 growth, 8, 9, 10 investments, 9 foreign, 9 recovery, 8, 221, 269, 279 restructuring, 92 education, 285 election, general 1955, 62, 63, 93 1999, 62, 63, 75, 76, 307 Eluay, Theys Hiyo, 19 murder of, 104 ethnic conflict, 171

European Union –Indonesia relations arms embargo, 136 expenditure, government, 259, 270, 271, 273 development, 259 subsidies, 259, 270, 271 exports, 183 fiscal decentralization, 270, 282–302 expenditure, 285–86 general allocation fund (DAU), 283, 289–90, 291, 292, 300–1, 302, 303 intergovernmental transfers, 288–92, 299, 300 revenue, 286–88 natural resources, 288–89, 291 sharing, 288–89, 291 tax, 289, 290, 291 specific allocation fund (DAK), 286, 290–91 fiscal indicators, 299 fiscal sustainability, 257–66 challenge of, 269–79 foreign policy, 70–72 Forum Komunikasi Ahlus-Sunnah wal-Jamaah (FKAWJ). See Laskar Jihad Free Aceh Movement. See Gerakan Aceh Merdeka (GAM) Free Papua Organization. See Organisasi Papua Merdeka (OPM) Front Pembela Islam (FPI), 44, 47, 56, 311, 312, 313, 316 fuel prices, 275, 279, 280

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INDEX 327

G-7, 204 Gama’ah Tafkir wa al-Hijrah, 57 Gelbard, Robert S., 123, 159, 310, 311 Gerakan Aceh Merdeka (GAM), 18, 103, 104, 166, 173, 177 human rights abuses, 170 rebellion, 180 Gerakan Pemuda Islam Indonesia (GPII), 48 globalization, 72, 73 Golongan Karya (Golkar), 5, 15, 32, 34, 35, 36, 37, 61, 62, 63, 95, 163, 172 Gomes, Ana, 136 government, 215 co-ordination, 7 expenditures, 11 on jihad in Afghanistan, 55 local accountability, 294–95 borrowing, 292–94, 298, 303 budget, 295, 297, 298, 301 capacity, 295–97 civil servants, 296 contingency fund, 301 fiscal condition, 299–300 laws and regulations, 298 number, 297 parliament (DPRD), 294–95, 298 responsibilities, 285, 286 revenues, 286–88, 294, 299, 300, 301 services, 285, 286, 295–96 taxation, 286, 287 tiers, 283, 284 model, 39 Gumelar, Agum, 25, 35 Gunawan, Bondan, 29

Gus Dur. See Wahid, Abdurrahman Gusmão, Xanana, 80, 137, 148, 160 Guterres, Eurico, 23, 127, 133, 137, 161 Habibie, Bacharuddin Jusuf, 14, 16, 60, 61 presidency, 61, 95, 108, 119, 144, 146, 155, 172, 214 on East Timor, 116, 117, 118, 129, 149 and IMF, 211 legitimacy, 211 Hamka, Rusydi, 32 Hasanuddin, Basri, 31 Hasibuan, Albert, 22 Hatta, Mohammad, 16, 72 Haz, Hamzah, 6, 27, 30, 37, 55, 67, 82, 147, 163, 309, 314 on Afghanistan, 54, 66 on terrorism, 313, 314, 316, 321 Hendropriyono, 140 Hizb al-Tahrir, 45, 57, 58 Holbrooke, Richard, 123, 159 Hong Kong currency, 220 Horta, José Ramos, 160 Howard, John, 53, 87, 88, 147 visit to Indonesia, 88 human rights, 137 ad hoc court, 139 Human Rights Courts Act, 127, 130, 132, 133, 138, 156 Human Rights Law, 130 human rights violations, 119, 148, 139, 140 Criminal Code, 130 Hurgronje, Snouck, 60

© 2003 Institute of Southeast Asian Studies, Singapore

328 INDEX

Ikatan Cendekiawan Muslim Se-Indonesia (ICMI), 60, 61 Ikhwan al-Muslimun, 57 imports, 183 Indonesia anti-U.S. sentiments, 44, 45, 46, 47, 54, 55, 56, 75, 85, 86 and Asian Development Bank, 190–93 –Australia relations, 87–88 Tampa incident, 88 –China relations, 87 –European Union relations arms embargo, 136 foreign policy principles, 86 –IMF relations, 74, 83, 189–90 on Israel–Palestinian question, 84 strategic importance, 75 –U.S. relations, 83–86, 309–11, 313, 314 military co-operation, 136, 148, 159, 313 and World Bank, 190–93 Indonesian Bank Restructuring Agency (IBRA), 11, 187, 208, 209, 238, 241–44 Asset Management Unit (AMU), 208 asset sales, 212, 265, 277 asset transfer, 256 balance sheet, 247, 248 management, 217 objectives, 241 Indonesian Democratic Party– Struggle. See Partai Demokrasi Indonesia– Perjuangan (PDI-P) Indonesian Forum for International Development (INFID), 253

Indonesian Muslim Brotherhood, 310 inflation, 9, 10, 195, 262, 264 intelligence bodies, 101–2 Inter Governmental Group on Indonesia (IGGI), 234 interest rates, 9, 10, 11, 216, 217, 219, 220, 255, 270, 276 Interfet, 151 International Commission of Inquiry on East Timor (ICIET), 118, 124, 125, 126, 138, 153 Report, 23 International Crisis Group (ICG), 318 International Monetary Fund (IMF), 75, 252, 254 compensatory financing facility, 225 –Indonesia relations, 74, 83, 189–90 Letters of Intent (LoI), 183, 187, 188, 189, 190, 197, 198, 200, 201, 203, 210, 211, 212, 216, 224, 236, 251 LoI implementation, 238, 239, 251 liabilities, 280 payments, 280 reform measures, 7 reform programme, 236–40 review, 193 role in financial crisis, 196–224 –supported programme, 197, 198, 200, 201, 203–4, 207, 208, 213–14, 220, 279 management, 219

© 2003 Institute of Southeast Asian Studies, Singapore

INDEX 329

policy, 220 policy prescriptions, 217 stand-by arrangements, 225 –supported programme conditionality, 198, 219 implementing, 215–19 investment foreign, 74, 75, 89 Iraq attack on, 48 Irian Jaya, 72, 93 secessionist claims, 15–20 Isamuddin, Riduan (Hambali), 312 Islam cultural, 60, 63 political, 63, 306–8 fragmented, 56–58 Islamic parties, 61–64 state, 57–58, 59, 60, 63, 64 Ismail, Chairuddin, 36 Ismail, Nur Mahmudi, 64 Jakarta Metropolitan Area administration, 287 tax revenue, 287–88 Jamaah Tarbiyah, 58 Japan assistance for Indonesia, 190, 235, 236, 249 Jemaah Islamiyah (JI), 311, 316 threat, 312–15 jihad, 50, 51 Jundullah, 48 Justice Party. See Partai Keadilan Kalla, Yusuf, 31 Kartasasmita, Ginandjar, 35 Kartasasmita, Syafiuddin assassination, 162

Kartosuwirjo, 59 Kiemas, Taufik, 36, 87, 140 Komando Cadangan Strategis Angkatan Darat (Kostrad) corruption, 29 Korea, South, 73 and IMF, 213 Kuntjoro-Jakti, Dorodjatun, 182, 185–86, 188 Laskar Jihad, 45, 49, 85, 311, 312, 313, 316 disbanded, 311, 313 dissolution, 313 Law of Islamic Court, 60 Law of Nanggroe Aceh Darussalam (NAD), 66 Law of National Education, 60 Lee Kuan Yew, 90, 312 on Islamic observance, 321 loans external, 207 Lopa, Baharuddin, 36, 162 Love the Nation Democratic Party. See Partai Demokrasi Kasih Bangsa (PDKB) Lumintang, Johny, 35 Maarif, Syafii, 50, 51, 52, 64 Mahathir, 82 Mahendra, Yusril Ihza, 140, 156 Majelis Permusyawaratan Rakyat (MPR), 13, 39, 40, 93, 109, 149, 157 amendments, 32, 308 annual session, 2, 195 composition, 108 functions, 1 members, 40 powers, 109, 110 relations with Wahid, 32–37

© 2003 Institute of Southeast Asian Studies, Singapore

330 INDEX

Majelis Ulama Indonesia (MUI), 45, 50, 310 call for jihad, 50, 51, 310, 321 Makarim, Zacky Anwar, 133, 157, 154 Malaysia and Indonesian workers, 82, 83 terrorism, 312 Manan, Bagir, 140 Mangkoedilaga, Benjamin, 140 Marasabessy, Suaidi, 28 market confidence, 210 Marzuki Darusman, 21, 35, 116, 118, 119, 120, 122, 127, 128, 129, 133, 134, 150, 152, 154, 158 Masjumi Party, 59 Mass-Organization Law, 61 Matori Abdul Djalil, 5, 147 Megawati Sukarnoputri, 13, 14 assassination attempt on, 313 Cabinet, 3, 163 charisma, 3 destiny, 5 foreign policy challenges and opportunities, 73–76 on justice obstacles, 146–48 leadership, 3, 185, 188, 194, 318, 319, 320 as PDI leader, 104 political challenge, 5 survival, 3–4, 6 presidency, 1–11, 76, 139, 163, 308, 313 on Aceh, 166, 172, 175–78 achievements, 182 on Afghanistan, 53, 54, 86, 90, 309

challenge of political Islam, 44–67 on China, 87 and East Timor, 80 foreign policy, 70–89 on human rights violations, 139, 140 and IMF, 210–12 on justice, 146–48 performance, 2 priorities, 76 progress report, 2 and restive provinces, 104 territorial integrity, 175 on terrorism, 6, 53, 317–18 and TNI, 99, 103, 104–5 visit to the U.S., 53, 84, 85, 98, 309 visits to ASEAN capitals, 81, 82 relations with Wahid, 34, 36, 37 Wahid’s impeachment, 4–5 vice-presidency, 4, 14, 32, 34, 159, 270 Ministry of Finance, 293, 294, 297, 298 Ministry of Home Affairs, 297, 298 Ministry of Justice and Human Rights, 140 Moertopo, Ali, 311 monetary policy, 204 Muhammadiyah, 6, 50, 308 membership, 307 Munir, 119, 121, 134, 150, 153, 156, 157 Munir, Rozy, 31 Muslim parties, 307, 308 Muslims, 75 moderate, 49–52

© 2003 Institute of Southeast Asian Studies, Singapore

INDEX 331

radical, 44–67, 85, 86, 99, 306, 311, 317 defending Afghanistan, 48, 50 solidarity, 48 Muzadi, Hasyim, 50, 52, 64, 309 Nahdlatul Ulama (NU), 6, 14, 31, 50, 62, 308 membership, 307 National Awakening Party. See Partai Kebangkitan Bangsa (PKB) National Commission on Human Rights (Komnas HAM), 23, 26, 115, 116, 119, 147 National Council for SocioPolitical Affairs, 94 National Economic Council, 184 National Mandate Party. See Partai Amanat Nasional (PAN) Negara Islam Indonesia (NII), 165, 167 Netherlands, 41 East Indies, 16, 60, 93 New Order government, 168–70, 172 New York Agreement, 41 Non-Aligned Movement (NAM), 80 non-governmental organizations (NGOs), 107 Organisasi Papua Merdeka (OPM), 19 Organization of the Islamic Conference (OIC), 54, 80 Osama bin Laden, 46, 47, 49, 67, 73, 84, 305, 309 Overseas Private Investment Corporation (OPIC), 188

Pancasila, 56, 59–61, 308 pillars, 59 Panigoro, Arifin, 36 Panjaitan, Luhut, 31 Papua, 318 autonomy, 104 Papua New Guinea, 79 Paris Club debt rescheduling, 239, 249–52, 262, 265, 266, 276, 278, 279, 280 Partai Amanat Nasional (PAN), 14, 31, 34, 63, 307 Partai Bulan Bintang (PBB), 63, 307 Partai Demokrasi Indonesia– Perjuangan (PDI-P), 3, 4, 13, 32, 34, 35, 36, 61, 62, 63, 75, 99, 163, 199, 307 Partai Demokrasi Kasih Bangsa (PDKB), 34 Partai Keadilan (PK), 45, 64, 307 Partai Kebangkitan Bangsa (PKB), 5, 13, 30, 31, 34, 35, 37, 63, 78, 135, 186, 307 Partai Persatuan Pembangunan (PPP), 5, 15, 30, 31, 32, 34, 61, 63, 65, 66, 307 People’s Consultative Assembly. See Majelis Permusyawaratan Rakyat (MPR) People’s Representative Assembly. See Dewan Perwakilan Rakyat (DPR) Perdanakusumah, Ian Santoso, 26 Pertamina debts, 233 police, 94, 95, 97, 101 political system, 40, 110 politics liberalization, 61 population, 75

© 2003 Institute of Southeast Asian Studies, Singapore

332 INDEX

Powell, Colin, 313 presidency election, 108 impeachment, 109, 111 powers, 108, 109, 111 privatization, 187, 188 Rachman, M.A., 128, 129, 140, 158, 162 Rachmawati Sukarnoputri, 314, 322 Rais, Amien, 5, 14, 17, 31, 36, 50, 66, 131 on Islamic state, 64 Ramli, Rizal, 83, 211 Rasyid, Ryaas, 16 reforestation fund, 290, 291 reformasi, 8 revenues, government, 271 riots against Chinese, 74 road management, 285 Robinson, Mary, 116, 125, 137 rupiah depreciation, 199, 259, 262, 269 devaluation, 199 exchange rates, 9, 11, 183, 196, 199, 200, 201, 211, 212, 214, 216, 218, 272, 273 Rusdihardjo, 21 Ryacudu, Ryamizard, 29, 315 Sabarno, Hari, 132 Sabirin, Syahril, 158 Saragih, Bangaran, 186 Semanggi–Trisakti case, 147, 160 Semen Gresik sale, 187, 188, 195, 212, 271, 280 Semen Padang sale, 212 separatism, 171

shari’a, 64–66, 307, 308, 320–21 Shihab, Alwi, 18, 78, 131 Shihab, Habib Muhammad Riziq, 56 Simanjuntak, Marsilam, 27, 36 Singapore, 78 terrorism, 312 Sjamsoeddin, Sjafrie, 157, 164 Soares, Abilio Osorio, 143 Soeharto, 4 corruption investigation, 20–22 destiny, 5 leadership, 8, 188 presidency, 65, 72, 94, 107, 108, 216, 310, 311 budget, 240 foreign debt, 233 foreign policy, 89 and IMF, 210, 215, 216, 217, 226 and Islam, 60, 61 loans, 253 on Muslim hard-liners, 48 and TNI, 93 resignation, 202, 211, 307 Soeharto, Tommy arrest, 41 corruption charges, 21–22 Soekarno, 4, 65, 72, 93, 104 presidency foreign debt, 233 foreign policy, 72, 83, 87 South Sulawesi, 66 sovereignty, 71, 73 Special Forces Command (Kopassus), 151 state unitary, 16 state-owned enterprises privatization, 277 sale, 187, 188, 271

© 2003 Institute of Southeast Asian Studies, Singapore

INDEX 333

Subianto, Prabowo, 93 Sudarsono, Juwono, 25 Sudarto, Tyasno, 26, 27 Sudrajat, 17, 26, 122, 152 Sukardi, Laksamana, 31, 187 Sumargono, Achmad, 310 Suparman, Djadja, 28, 122, 135 Supreme Court, 110 Sutarto, Endriartono, 28, 35, 163, 164 Suwondo, Alip Agung, 33 Syafii, Abdullah, 177 Syamsuddin, Din, 51 Tandjung, Akbar, 5, 15, 17, 32, 35, 36, 117, 132, 145 on Aceh, 174 Tanjung Priok incident, 24, 139 tax administration, 273, 274, 275, 291 /GDP ratio, 273, 274 local, 286–88 collection, 288 personal income, 289, 291, 292 property, 291 rates, 274 revenues, 274, 286 value added, 270, 271 Tentara Nasional Indonesia (TNI), 24, 35, 36, 37, 135, 146, 151, 311, 313, 318 on Aceh, 17, 172, 174, 177, 178 budget, 102, 105 civil–military relations, 24–29 civilian supremacy, 96, 97, 99 defence strategy, 97–98 and democracy, 98–99 demoralized, 97 on East Timor, 20, 22, 121, 122, 142 future agenda, 100–3

on human rights, 148 human rights abuses, 94, 96, 100, 164 on Irian Jaya, 19 leadership, 98, 99 in Maluku, 180 in MPR, 99, 102, 157 new paradigm, 94 in Papua, 104 professionalization, 92, 95 reform, 97, 100, 101–3, 105 reorganization, 94–95 role, 91–105 political, 92–97, 102 rule of law, 102 on separatist movements, 146 on terrorism, 318 and U.S. military, 100 territorial integrity, 71 terrorism, 313, 314, 315 11 September attacks reactions to, 309–12 anti-terrorism law, 313 attacks, 220 communal violence, 319 global, 316 government response, 315–16, 319, 320 resolving problem, 309 responses to, 305–20 U.S. foreign policy, 310 Thailand, 73 Constitution, 112 and IMF, 213 Thalib, Ja’far Umar, 49, 311, 313 transmigration, 168–69 turning point, 214, 215 United Development Party. See Partai Persatuan Pembangunan (PPP)

© 2003 Institute of Southeast Asian Studies, Singapore

334 INDEX

United Nations, 23 Commission on Human Rights (UNCHR), 117, 118, 137, 149 and East Timor, 114, 116, 136, 137, 145 Transitional Administration in East Timor (UNTAET), 129, 137, 138 human rights violations, 138, 141, 142 United States, 47, 78, 106, 125, 309 Agency for International Development (USAID), 297 –Indonesia relations, 83–86, 309–11, 313, 314 military co-operation, 136, 148, 159, 313 threats to U.S. citizens, 311 on terrorism, 316 terrorists’ attacks on, 44, 46, 50, 84 retaliation against Afghanistan, 44, 46, 47, 52, 85, 86, 309 Usodo, Graito, 26, 28 Vieira de Mello, Sérgio, 137 Wahid, Abdurrahman, 63, 64 on Afghanistan, 51 behaviour, 14, 37–38, 78 health, 14 presidency, 2, 4, 5, 13–40, 75, 76, 95, 98, 111, 135, 136, 144, 152, 159, 172 on Aceh, 173, 174, 175 Aceh’s secessionist claims, 15–20 aid, 191 “Bruneigate”, 158

“Buloggate”, 158 civil–military relations, 24–29 and East Timor, 80, 134 East Timor human rights violations, 22–24 economic performance, 184 foreign policy, 77–78, 87, 90 on human rights violations, 139 and IMF, 74, 210, 211, 212, 214, 238 impeachment, 32, 34, 35, 36, 37, 109, 111 Irian Jaya’s secessionist claims, 15–20 judicial process, interventions in, 158 leadership style, 38 relations with DPR, 30–37 relations with IMF, 7 Soeharto’s corruption investigation, 20–22 and TNI, 99, 121, 135, 159, 173 –Wiranto showdown, 122–23, 126, 134, 152 Wahid, Salahuddin, 51, 314 West Irian. See Irian Jaya West Pacific Forum, 78, 79, 90 West Papua, 41 West Timor killings, 100 Widodo Adi Sucipto, 17, 25, 28, 121, 126, 151 Wirahadikusumah, Agus, 28, 29, 35, 135, 152, 159 Wiranto, 15, 17, 22, 23, 25, 26, 27, 28, 95, 97, 149, 152, 153 and East Timor, 117, 118, 120, 121, 123, 124, 125, 126, 127, 133, 157

© 2003 Institute of Southeast Asian Studies, Singapore

INDEX 335

resignation, 26, 27 as TNI commander, 151 –Wahid showdown, 122–23, 126, 134, 152 Wirayuda, Hassan, 54, 76, 78, 79, 147 on terrorism, 314 World Bank, 252, 254 and Indonesia, 190–93, 234, 235, 236, 239, 261

conditionality, 239–40 loans, 251, 278 debt, odious, 253–54 Yayasan HAK, 151 Yudhoyono, Susilo Bambang, 25, 35, 55, 316, 318 Yusgiantoro, Purnomo, 186 Zoellick, Robert, 83

© 2003 Institute of Southeast Asian Studies, Singapore