day 1: governance and economic crisis -the case of indonesia-

Governance and Economic CrisisGovernance and Economic Crisis--The Case of IndonesiaThe Case of Indonesia----The Case of IndonesiaThe Case of Indonesia--

Day 1Day 1

G d t S h l f A i d P ifi St diGraduate School of Asia and Pacific StudiesWaseda University, 13 February 2007

Class IntroductionClass IntroductionClass IntroductionClass Introduction

Course : Governance and Economic Crisis, the Case Title of IndonesiaLecturer : Prof. Ginandjar KartasasmitaOffice Hours

: Tuesday-Saturday, 15.00-17.00Faculty Room Waseda University GSAPS 7th

Fl.Email : [email protected] : www.ginandjar.comAssistants : Dadang Solihin, HP 08034338627

email: [email protected]: www.dadangsolihin.com

GSAPS-2007-Day1 www.ginandjar.com 2

BackgroundBackgroundBackgroundBackground

The Asian economic crisis of 1997 1998 was a singularThe Asian economic crisis of 1997-1998 was a singular and most dramatic event in the region’s postwar economic history. Countries, which had enjoyed rapid economic growth in the preceding decades, which were affected by the crisis, set their developments back several years. p yThese countries responded to the economic crisis in different ways. This course will look into the fundamental changesThis course will look into the fundamental changes brought on by the economic crisis with Indonesia as the case study.


BackgroundBackgroundBackground . . .Background . . .

It i id l t d th t I d i ’ i i th tIt is widely accepted that Indonesia’s crisis was the most severe. What factors influenced the ferocity of the crisis?What factors influenced the ferocity of the crisis? How has the economic crisis interacted with political reforms? What are the prospects of consolidation of the economic and political reforms in term of the short and medium run?run?


The aimThe aimThe aimThe aimThe aim of this course is to discuss issues in order toThe aim of this course is to discuss issues in order to enhance understanding of the political economy of changes set upon by economic crisis. W ill di th d d thWe will discuss the causes and consequences, and the national responses to the economic crisis. We will analyze the interaction between economic crises yand political reforms. The course will attempt to discover what lessons are to be learned from the crisis and what are the prospectbe learned from the crisis, and what are the prospect and challenges to the consolidation of democratic governance and sustainable growth.In the final parts this co rse ill disc ss the iss es ofIn the final parts, this course will discuss the issues of governance as the important element that will ensure the endurance of democratic form of government.


MethodMethodMethodMethodThe course will be conducted through a combination ofThe course will be conducted through a combination of lectures and class discussions. The main requirements are attendance, completion of q passignments, and active participation in class discussion and debate. Accordingly grading will be based on 30% classAccordingly, grading will be based on 30% class attendance and participation, 35% class assignments and papers, and 35% final paper. Students are expected to come to the class preparedStudents are expected to come to the class prepared with the subject to be discussed at the respective session. The day will typically start and end with class discussions.


MethodMethodMethod . . .Method . . .

On the final day, the class will turn into a seminar to hear, and comments on, the presentation to be given by each groupgroup.


Course materialCourse materialCourse materialCourse materialThe course will draw its materials basically from aThe course will draw its materials basically from a monograph:REINVENTING INDONESIAStudents are required to read the basic materials as the course sessions will be conducted around the monographmonograph. Students are also encouraged to look at other sources, among others (but not limited to) as listed in the selected bibliography of the monographbibliography of the monograph.


Reinventing IndonesiaReinventing Indonesia

O th R d t DE i C i i d D ti

Economic Crisis and Political Change Dawn of a New Era• On the Road to Democracy• Democratic Reversal• Constitutional reform• Practicing Democracy

• Economic Crisis and Democratic Transition in Indonesia

• Indonesia Under the New Order• The Crisis

E l i i th D i• Explaining the Demise

Indonesia ReboundsIndonesia ReboundsMacroeconomic DevelopmentOutlook 2007Policy Reform Initiatives

Indonesia ReboundsIndonesia Rebounds

• Improving economic performance• Strengthening the political

institutions

The Challenges Ahead

Policy Reform Initiatives

Governance

institutions• Keeping the country together

• Good Governance• Administrative Reform• Debureaucratization


Class ScheduleClass ScheduleClass ScheduleClass ScheduleNoNo DateDate TimeTime TopicsTopics

1 Day-1 09:10-10:30 • Course Introduction • Economic Crisis and Democratic

Transition in Indonesia 2 10:40-12:10 • Indonesia Under the New Order

The Crisis• The Crisis 3 13:00-14:30 Explaining the Demise 4 Day-2 09:10-10:30 On the Road to Democracy4 Day-2 09:10-10:30 On the Road to Democracy 5 10:40-12:10 Continued 6 13:00-14:30 Democratic Reversal 6 3 00 30 e oc at c e e sa


ContinuedContinuedContinued. . .Continued. . .NoNo DateDate TimeTime TopicsTopics

7 Day-3 09:10-10:30 Presentation of individual mid-term paper

8 10:40-12:10 Continued9 13:00-14:30 • Constitutional Reform

Practicing Democracy• Practicing Democracy 10 Day-4 09:10-10:30 Indonesia Rebounds11 10:40-12:10 Challenges Ahead11 10:40-12:10 Challenges Ahead12 13:00-14:30 Continued13 Day-5 09:10-10:30 Governancey14 10:40-12:10 Discussion of the Final Paper 15 13:00-14:30 Conclusion


Reinventing IndonesiaReinventing IndonesiaReinventing IndonesiaReinventing Indonesia

IntroductionIntroduction


Economic Crisis and Democratic Economic Crisis and Democratic Transition in IndonesiaTransition in Indonesia

IntroductionIntroduction

Why after 32 years of continuous and seeminglyWhy after 32 years of continuous and seemingly successful rule, the Soeharto’s government fell? Before attempting to answer these questionsBefore attempting to answer these questions, one may find the following a useful starting point:

Politics in pre-Crisis IndonesiaWhat is the nature of the Indonesian system of

t d th N O d dgovernment under the New Order, and How did those in power justify their rule?



P liti iP liti i C i i I d iC i i I d iPolitics in prePolitics in pre--Crisis IndonesiaCrisis Indonesia

The Indonesian Archipelago The Indonesian Archipelago

• a country of 242 million (2005 est.), • an archipelago strung 5000 kilometers along the equator• an archipelago strung 5000 kilometers along the equator. • more than 13,000 islands, 5,000 are inhabited. • more than 200 ethnic groups and 350 languages and dialects.

85 t 90% M liGSAPS-2007-Day1 www.ginandjar.com 16

• 85 to 90% are Muslims.

Birth of a nationBirth of a nationBirth of a nation Birth of a nation

All th l t f i d d t tiAll the necessary elements for an independent nation had already existed when the Japanese surrendered to the Allied powers.pAugust 17 1945, Sukarno and Hatta on behalf of the people, proclaimed the independence of Indonesia.August 18, 1945: The promulgation of the 1945 Constitution, and the establishment of government with Sukarno as President and Hatta as Vice PresidentSukarno as President and Hatta as Vice President.Indonesia under the 1945 Constitution: A nationalist non-sectarian, unitarian republic with a presidential system of p p ygovernment.


War of IndependenceWar of Independence1945 1945 -- 19491949

The Dutch refused to recognize the independence of their former colonyindependence of their former colony.Assisted by their allies put an attempt to

t bli h t lreestablish control.The fledgling nation had also to face domestic challenges: Muslim extremists and communist revolt in 1948.


Recognition of IndependenceRecognition of IndependenceRecognition of IndependenceRecognition of Independence

In December 1949, the Dutch finally recognized the independence of Indonesia in the form of a federated republicrepublic.August l950 the federal state was abolished and the unitarian Republic of Indonesia reestablished.unitarian Republic of Indonesia reestablished.Provisional Constitution of 1950: a parliamentary system of government headed by a Prime Minister responsible to a parliament, while the President was only the head of state and had almost no political power.


An Attempt at Liberal DemocracyAn Attempt at Liberal DemocracyAn Attempt at Liberal Democracy An Attempt at Liberal Democracy In 1955 a free and fair multiparty election in the first general election to elect the Parliament and thegeneral election, to elect the Parliament and the Constitutional Assembly (Konstituante).The weak short-lived governments created a leadership g pvacuum and indecisiveness at time when strong leadership was needed.In 1957 the government declared a state of emergencyIn 1957 the government declared a state of emergencyThe Konstituante failed to reach the necessary majority to get an agreement on a new constitution.O J l 5th l959 th P id t S k di l d thOn July 5th, l959, the President Sukarno dissolved the Parliament and Konstituante with a Presidential Decree and restored the 1945 Constitution.Sukarno declared that liberal democracy, had failed in Indonesia and had brought only disunity and misery to the people.


the people.

The Turbulent YearsThe Turbulent YearsThe Turbulent YearsThe Turbulent Years

Central authority being challenged by separatist movements in the regions.Th D l I l i d i blThe Darul Islam continued to pose security problemsConflict with the former colonial master had resumed, as the Dutch kept their hold on West Irianthe Dutch kept their hold on West Irian.Since most western countries supported the Dutch position on the West Irian issue, Indonesia turned to the p ,Eastern Bloc to procure the military equipment. The rise of the military role in politics: the dual functions f ilitof military.


Guided DemocracyGuided DemocracyGuided DemocracyGuided DemocracyS k l i d “G id d D ” th it blSukarno proclaimed “Guided Democracy” as the suitable system for Indonesia.The Provisional MPR conferred upon Sukarno the title ofThe Provisional MPR conferred upon Sukarno the title of the Great Leader of the Revolution, which in effect carried more power than what the mere title may suggest.Sukarno ended Indonesia’s first attempt at democracy. Indonesia now joined the group of countries to reverse from democracy to authoritarianismfrom democracy to authoritarianism.


The Confrontation Against the WestThe Confrontation Against the WestThe Confrontation Against the WestThe Confrontation Against the West

P id t S k d t th t bli h t fPresident Sukarno was opposed to the establishment of a new Malaysian state, and accused it as no more than a western neocolonial ploy. p yTo undertake military confrontation, Indonesia became more dependent on economic and military aid from the S i t BlSoviet Bloc.Sukarno developed the idea of forming the New Emerging Force as a counterweight to western-Emerging Force as a counterweight to western-dominated international politics.Isolation from the rest of the world reached its peak pwhen Sukarno announced Indonesia’s withdrawal from the United Nations in January l965.


Sukarno: The Romantic RevolutionarySukarno: The Romantic RevolutionarySukarno: The Romantic RevolutionarySukarno: The Romantic Revolutionary

The ordinary Indonesian people loved Sukarno.He was a man of vision, an ardent nationalist albeit a

ti id li tromantic idealist. He imbued among the people the pride of being Indonesian and spent all his adult life projecting theIndonesian and spent all his adult life projecting the dignity of a nation with long history, culture, and tradition.He was regarded in many parts of the world as a greatHe was regarded in many parts of the world as a great leader and a world statesman.


Sukarno: The Romantic RevolutionarySukarno: The Romantic RevolutionarySukarno: The Romantic Revolutionary . . .Sukarno: The Romantic Revolutionary . . .

Indonesia under Sukarno took a leading role in Asian African countries solidarity and fight against colonialism.Sukarno together with third world leaders initiated the Non-aligned movement, which until today still exists.But his misguided economic policies based on the notion of a “guided economy” brought chaos to the economy and increased suffering for the common peopleand increased suffering for the common people.


The End of Guided Democracy and The End of Guided Democracy and the Rise of the New Orderthe Rise of the New Order

On September 30th 1965, an aborted coup d’etat was allegedly staged by the communist party.g y g y p yTwo military figures escaped from the assassination attempt, General Nasution and Mayor General Suharto.Proceeded to mobilize the loyal military forces, and neutralized the units that were involved in the mutiny. The rift of President Sukarno and the military came into the open.


The End of Guided Democracy and the Rise of The End of Guided Democracy and the Rise of the New Order . . .the New Order . . .

On May 11th 1966 President Sukarno, under pressure from the military and the public issued a Letter offrom the military and the public, issued a Letter of Instruction to accede authority of day-to-day government to General Suharto.In the 1968 the Provisional MPR dismissed Sukarno as President and appointed General Suharto as his successor hence rise of the New Ordersuccessor, hence rise of the New Order.



Indonesia Under the New OrderIndonesia Under the New OrderIndonesia Under the New OrderIndonesia Under the New Order

Political StabilityPolitical StabilityPolitical StabilityPolitical StabilityP liti l St bilit l tl l d dPolitical Stability was relentlessly pursued and successfully maintained.The military the bureaucracy and Golkar (theThe military, the bureaucracy and Golkar (the government party) constituted the political pillars of the New Order.The floating mass depoliticizing of the masses, constituted an important aspect of the political strategy to sustain long-term political stabilitysustain long-term political stability. The political system had produced the intended result: political stability that had endured for three decades, p ysustaining economic growth which in turn further reinforced its claim to legitimacy.


Economic DevelopmentEconomic DevelopmentEconomic DevelopmentEconomic DevelopmentP liti l t bilit d d ith if it fPolitical stability assured, and with uniformity of purpose and method the New Order earnestly embarked on economic development, which wasembarked on economic development, which was widely considered as successful using various standard of measurements. Development Trilogy:

StabilityGrowthGrowthEquity


East Asian MiracleEast Asian MiracleEast Asian MiracleEast Asian MiracleThe economic performance of pre-crisis Indonesia couldThe economic performance of pre crisis Indonesia could be seen as part of a general pattern of successful economic development in Asia.HPAEs are:HPAEs are:

Japan (The Leader)Hong Kong, the Republic of Korea, Singapore and Taiwan (The Four Tigers )Four Tigers ).Indonesia, Malaysia and Thailand (Newly Industrializing Economies of Southeast Asia / NIE).

Since 1960 the HPAEs have grown more than:Since 1960 the HPAEs have grown more than: twice as fast as the rest of East Asia.three times as fast as Latin America and South Asia.


CharacteristicsCharacteristicsCharacteristicsCharacteristicsHi h t f i thHigh average rate of economic growthDeclining income inequality.Rapid productivity growthRapid productivity growth.High rates of growth of manufactured exports. Declines in fertilityDeclines in fertility. High growth rates of physical capital, supported by high rates of domestic savings and investment. gHigh initial levels and growth rates of human capital.


Indonesia’s Economic LiberalizationIndonesia’s Economic Liberalization

In the early stage of development, Indonesia depended fon oil income and foreign assistance.

1980: Indonesia embarked on various economic reforms to embrace globalization.to embrace globalization. Elements of economic liberalization pre-1980.

Adoption of an open capital account.Th b l d b d t liThe balanced budget policy.Competitive real exchange rate with periodic adjustments.

Elements of economic liberalization post-1980:pDeregulation of foreign trade.Reduction and removal of restrictions on foreign direct investment.Liberalization of financial sector.Adoption of a modern, simplified tax system.


The OutcomesThe OutcomesThe OutcomesThe Outcomes

Rising per capita income. Decreasing rate of inflation. Increasing food supplies and the attainment of rice self-sufficiency. A i i h f f t i t t i GDPA rising share of manufacturing output in GDP. Sharply declining levels of poverty.


Rising Per Capita IncomeRising Per Capita IncomeRising Per Capita IncomeRising Per Capita Income

Over the period 1965-95 real GDP per capita grew at an annual average rate of 6.6%. I th id l960 I d i th I diIn the mid l960s Indonesia was poorer than India. By mid 1995, Indonesia’s GDP per capita exceeded $ 1 000 over 3 times India’s$ 1,000, over 3 times India s.


Decreasing Rate of InflationDecreasing Rate of InflationDecreasing Rate of InflationDecreasing Rate of Inflation

The very high levels of inflation seen in the mid- to late-1960s were brought under control. I th i di t l di th i i I d iIn the years immediately preceding the crisis, Indonesia had managed to keep inflation in the single digit range.


Increasing food supplies and the Increasing food supplies and the attainment of rice selfattainment of rice self--sufficiencysufficiency

Market interventions that helped reduce price instabilityMarket interventions that helped reduce price instability and inflation, combined with strategic investments that increased agricultural productivity, resulted in rising rural g p y, gincomes and welfare, and reasonably stable rice prices.


A rising share of manufacturing A rising share of manufacturing output in GDPoutput in GDP

The share of the manufacturing sector in GDP rose from 7 6% in 1973 to nearly 25% in 19957.6% in 1973 to nearly 25% in 1995. This was driven by the rapid growth of manufactured exports.Non-oil exports, which were predominantly manufactured products, grew by roughly 22% per annum over the decade from 1985 when trade liberalization was firstdecade from 1985, when trade liberalization was first implemented, to 1995; a rate four times faster than the growth of world trade.


Sharply declining levels of povertySharply declining levels of povertySharply declining levels of povertySharply declining levels of povertyThe proportion of the population living below the nationalThe proportion of the population living below the national

poverty line fell from around 60% in 1970 to 40% in 1976 to 15% in 1990 and to 11.5% in 1996.

The Proportion of the Population Living Below the National Poverty Line

60%

80%

20%

40%

0%1970 1976 1990 1996


Indonesia’s broad based, labor-oriented growth strategy,Indonesia s broad based, labor oriented growth strategy, backed by a strong record in human resource development, brought about one of the sharpest reductions in poverty in the developing world.reductions in poverty in the developing world. At the same time, this strategy resulted in real wages rising about as fast as per-capita GDP and, among others benefited women by providing them with rapidlyothers, benefited women by providing them with rapidly growing paid employment in the formal sector, that allowed them to switch out of unpaid work in the rural sectorsector. Social indicators, such as infant mortality, fertility and school enrollments, also showed significant gimprovement.

World Bank document (l997)World Bank document (l997)


Indonesia in year 2005Indonesia in year 2005Indonesia in year 2005Indonesia in year 2005

It di t d th t b th 2005 I d i ’ GDPIt was predicted that by the year 2005, Indonesia’s GDP would have reached $2,300, and Indonesia would have become a middle income industrialized country.yBy then, the incidence of poverty would have been reduced to less than 5%, which would be about the

l l th l i d t i li d t isame level as other newly industrialized countries.



The CrisisThe Crisis

The Unexpected ThunderstormThe Unexpected ThunderstormThe Unexpected ThunderstormThe Unexpected Thunderstorm

The depth and duration of the economic crisis in Indonesia were arguably unique. F 1989 t 1996 l l GDP th d 8From 1989 to 1996, annual real GDP growth averaged 8 percent, spurred by strong investment behavior. The overall fiscal balance was in surplus after 1992.pPublic debt fell as a share of GDP, the government used privatization proceeds to repay large amounts of foreign debtdebt. Inflation was below 10%.


The Crisis UnfoldsThe Crisis UnfoldsThe Crisis UnfoldsThe Crisis Unfolds

On 2 July 1997, the central bank of Thailand was forced to abandon its fixed exchange rate regime and the baht immediately depreciated by almost 20%immediately depreciated by almost 20%.As questions began to be raised about the structural soundness of the East Asian economies there was a sudden and dramatic reversal of capital flows as inflowssudden and dramatic reversal of capital flows as inflows turned into massive capital outflows and banks that were once eager to lend to nearly any Asian investor suddenly refused to renew short term credit linesrefused to renew short-term credit lines.


The Crisis UnfoldsThe Crisis UnfoldsThe Crisis Unfolds . . .The Crisis Unfolds . . .

D i th th th b t J l dDuring the three months between July and September 1997, the Asian financial crisis gathered full force and began to affect Indonesiagathered full force and began to affect Indonesia despite continued expressions of confidence that the soundness of its economic fundamentals and management would see itfundamentals and management would see it through with little damage.


The Initial ResponsesThe Initial ResponsesMid July 1997 widening the intervention margins of the crawling peg regimecrawling peg regime August 1997 free floating the rupiah Raised interest rates and tightened liquidity by g q y ytransferring a large amount of public sector deposits out of commercial banks September 1997 “ten policy-measures” covering theSeptember 1997, ten policy measures covering the financial, monetary and banking sectors, as well as the real sector. In the banking sector two important decisions wereIn the banking sector two important decisions were made: 1) To bail out healthy banks facing temporary liquidity difficulties,

andand 2) Unhealthy banks should be merged with other banks or be

liquidated.


The Initial Responses . . .The Initial Responses . . .

The decision also included the postponement of theThe decision also included the postponement of the implementation of large projects (projects with a total cost of $13 billion) that needed overseas loans.And even though the government had announced furtherAnd even though the government had announced further economic reforms and deregulation measures in early September, including a commitment to renewed efforts toward strengthening and enforcing bank prudentialtoward strengthening and enforcing bank prudential regulations, the initial announcement were not followed by implementation measures, providing further evidence that the government was no longer unified on measuresthat the government was no longer unified on measures needed to stem the impact of the crisis.


The Initial ResponsesThe Initial ResponsesThe Initial Responses . . .The Initial Responses . . .

The markets now realized that the deregulation program would not regain its dynamism any time soonwould not regain its dynamism any time soon. Analysts now questioned whether the government had the political will to carry through on the needed reforms. p y g



The currency continued to depreciate and by earlyThe currency continued to depreciate, and by early September had moved beyond 3000 per dollarOctober l997 the Indonesian government turned to the gIMF for assistance. The initial IMF program was based on the assumption that the crisis was essentially a moderate case ofthat the crisis was essentially a moderate case of contagion—an overshoot of the exchange rate (IMF, 2003: 78)—and designed a program that was standard and conventional for such a “mild” crisisand conventional for such a mild crisis.



The program focused on allowing for a heavy emphasisThe program focused on allowing for a heavy emphasis on tightening money supplies in order to raise interest rates and prevent capital from fleeing and attracting the l d fl i it l b k i t th talready fleeing capital back into the country.

Misjudgment by both the government and the IMF of the depth and nature of the crisis. p


Criticism Against the IMFCriticism Against the IMF

Paul Volker criticized the IMF imposed structuralPaul Volker criticized the IMF imposed structural conditionality as irrelevant to financial stabilization, cynically calling the conditions on market regulations in cloves, oranges and other foodstuffs as a “recipe”.There is some speculation that the negative assessment on the IMF package coming from a person with suchon the IMF package coming from a person with such distinguished background may have influenced President Suharto’s attitude towards subsequent IMF programs.


Criticism Against the IMF . . .Criticism Against the IMF . . .

Joseph Stiglitz critized the IMF for applying the LatinJoseph Stiglitz critized the IMF for applying the Latin American case to the Asian crisis resulting in wrong diagnosis which led to the wrong --and in Indonesia’s g gcase fatal-- prescription in the handling of the crisis. He maintained that in the highly inflationary environment of Latin America, what was needed was a decrease in demand; while in the case of East Asia, the problem was not excess demand but insufficient demandnot excess demand but insufficient demand.


The Economic CrisisThe Economic CrisisThe Economic CrisisThe Economic CrisisThe exchange rate drops from 2,400 Rp/$ (July 1997)

16 000 R /$ (J 1998)to 16,000 Rp/$ (June 1998). 1998:

GDP Growth: 13 6%GDP Growth: -13.6%.Inflation: 77.6%.

Collapse of the banking system: Cost of restructuring the p g y gbanking system: Rp. 650 trillion (US$65 billion).Total external debt (1999):

$$148 billion, or 104% GDP.Half of it private sector’s.+ $ 30 billion short term.$ 30 billion short term.


The Economic CrisisThe Economic CrisisThe Economic Crisis . . .The Economic Crisis . . .

Non-oil exports growth:1998: + 9,9%1999: 7 2%1999: - 7,2%

Millions of individuals lost their jobs.Children left schoolChildren left school.Poverty increased.In May 1998 riots erupted against the ChineseIn May 1998, riots erupted against the Chinese. community. This led to massive capital flight and the breakdown of the distribution system.breakdown of the distribution system.


A renewed mandate: A renewed mandate: wasted opportunity for changewasted opportunity for change

In July 1997 the sixth general elections under the New Order were held in which the government party GolkarOrder were held in which the government party Golkar returned with an overwhelming majority.Voting followed a fierce and violent election campaign which numerous casualties, a portent of the growing restlessness among the polity and reflecting mounting opposition against the Government and Golkaropposition against the Government and Golkar.


A renewed mandateA renewed mandateA renewed mandate …A renewed mandate …

Reflected in the general election of 1997, Suharto still held a strong grip on the political systemheld a strong grip on the political system.He was ready to step down and spent the rest of his life in religious pursuit if the people really did not want him anymore.March 11th, 1998 Suharto was indeed re-elected for another five year term by the MPRanother five-year term by the MPR.Past performances of development was no longer seen as a panacea, while a growing number, including many p , g g , g ywho were in the government, were already looking for an alternative to the existing system.


A renewed mandate:A renewed mandate:A renewed mandate:A renewed mandate:

The time had come for political reforms, but changing the leadership at the time of crisis was not regarded as aleadership at the time of crisis was not regarded as a good idea.Suharto’s choice of Habibie as his Vice President, appointment of his daughter and some cronies to the cabinet was met with wide spread criticism and accusation of nepotismaccusation of nepotism.An opportunity for a renewed start to rebuild the confidence of the people and engaged in concerted efforts to regain control of the economy was wasted.


Efforts at economic recoveryEfforts at economic recoveryEfforts at economic recoveryEfforts at economic recovery

Disregarding the political controversies the newDisregarding the political controversies the new economic team set out to get the economy moving again.Major Policy Initiatives:Major Policy Initiatives:

repairing the relations with the international community, and restoring market confidence.

All the major creditor countries were ready to give support to Indonesia’s efforts at recovery, through or in

ti ith th IMFcooperation with the IMF.


Efforts at economic recovery. . .Efforts at economic recovery. . .

The first priorities were directed at both the restructuring f h fi i l d b ki d l i hof the financial and banking system and resolving the

corporate debt problem.The government economic team immediately reThe government economic team immediately re-established dialogue with the IMF to work on a renewed program.program.Structural reforms were embraced by the economic team as their own.The need to protect the poor from the worst of the crisis.Closing insolvent banks to stop the bleeding of the g p gfinancial system.


Efforts at economic recoveryEfforts at economic recoveryEfforts at economic recovery. . .Efforts at economic recovery. . .

Strengthened the efforts to deal with corporate debt problem which had actually began in 1997.Note: It was not easy for the economic team to get the reform program through the various government agenciesagencies.They also had to go around the President’s reluctance at some of the reform agenda. gResult: Although inflation was still high, the rupiah exchange rate was strengthened from 10,000 at the start f th bi t t 7 500 b id A il d i dof the new cabinet to 7,500 by mid April and remained

below 8,000 until the May troubles occurred.


The flash pointThe flash pointThe flash pointThe flash point

Whil th h d i t i thWhile the economy showed same improvement, in the political front, the situation deteriorated.Suharto had no intention to undertake reforms as theSuharto had no intention to undertake reforms as the political and economic situation demanded.However, the elites and leaders of the various reform movements were still wary of Suharto’s power. The hike in fuel prices changed everything.Th l i i f li i l f i h dThe culmination of political confrontation was reached when in early May 1998 under strong pressure from the IMF, the government announced a rise in fuel prices,IMF, the government announced a rise in fuel prices, with the accompanying consequences of a rise in public transportation fares.


The flash pointThe flash pointThe flash point . . .The flash point . . .

During the confrontation between the security apparatusDuring the confrontation between the security apparatus and the student on May 12, four students were shot to dead (Trisakti Incident).The flash point was reached on May 14th 1998, in what was then known as the May riots. The May 1998 riot had a particular significance asideThe May 1998 riot had a particular significance aside from the intensity of the violence.The riots had devastating effects on the Suharto governmentgovernment.It set the stage for the endgame of the political drama.


The final curtainThe final curtainThe final curtainThe final curtainMay 17th 1998 the students had practically occupied theMay 17th 1998 the students had practically occupied the parliament building to pressure parliament to act.The call for reform and for the resignation of the gPresident grew louder and was joined by a wider circle.The support from the military, which up to now had been the foundation of President Suharto’s political powerthe foundation of President Suharto s political power, had also begun to crack.May 18th1998 the leadership of the Parliament announced their collective opinion that Suharto had toannounced their collective opinion that Suharto had to resign.


The final curtainThe final curtainThe final curtain. . .The final curtain. . .

On May 19th after meeting with the moderate MuslimOn May 19th after meeting with the moderate Muslim leaders President Suharto told a press conference about calling an earlier general election that would facilitate hiscalling an earlier general election that would facilitate his earlier resignation, of repealing the political laws that had been the target of many of the reformers’ demands and the creation of a Reform Committee. He also stated his intention to reshuffle the cabinet and f R f C biform a Reform Cabinet.


The final curtainThe final curtainThe final curtain. . .The final curtain. . .Some ministers realized that the status quo could notSome ministers realized that the status quo could not be maintained any longer.May 20th 1998 the economic ministries met:

T i th i it ti d th liti lTo review the economic situation and the political complications, and decided thatthe President should be made aware of the grave gsituationif a political solution could not be reached within a week the economy would collapseweek the economy would collapseforming a new cabinet would not solve the problemthey would unanimously decline to join in the new (reform) cabinet.


The final curtainThe final curtainThe final curtain. . .The final curtain. . .

Suharto also failed to get the support from parliamentSuharto also failed to get the support from parliament leaders on establishing the reform committee.Losing the support of the military, the cabinet, the g pp yparliament, and the failure to establish the Reform Committee, on May 21st 1998 President Suharto resigned his presidency.p yVice President BJ Habibie assumed the presidency.Thus ended the era of the New Order.



Explaining the DemiseExplaining the Demise

The Political System The Political System under the New Orderunder the New Order

The New Order regime relied heavily on a set of structures of ideas based on Indonesian cultures, especially Javanese cultureespecially Javanese culture.The New Order carried over the “guided democracy” principles of the preceding regime, through a more

fi d d btl th drefined and subtle method.The communists and their ideology became “public enemy number one”; Islamic extremism ranked second.enemy number one ; Islamic extremism ranked second.The New Order tried to define its political ideology between “western” individualism and “eastern” collectivismcollectivism.


The Political System under the New OrderThe Political System under the New OrderThe Political System under the New Order...The Political System under the New Order...

In the “Pancasila democracy” system, the western idea of opposition was rejectedof opposition was rejected. The Suharto regime went to great lengths to establish democratic institutions such as political parties generaldemocratic institutions such as political parties, general elections, and elected parliament.


To what extent was Indonesia a democracyTo what extent was Indonesia a democracy ??To what extent was Indonesia a democracyTo what extent was Indonesia a democracy ??

Golkar, the ruling ‘party’, was established in 1964 originally as an extended arm of the military to combat the communist party (PKI) through political means.p y ( ) g pThe first election under the New Order was held in 1971 participated by nine political parties and Golkar.In 1973 the “fusion” was completed in which the IslamicIn 1973 the fusion was completed, in which the Islamic parties merged into PPP, and the nationalist and Christian parties “fused” into PDI.

fIn every general election from 1977 to 1997 was contested by these three parties.Golkar unfailingly winning every election, garnering atGolkar unfailingly winning every election, garnering at least two third of the votes.


““Fusion” of Political Party (1973)Fusion” of Political Party (1973)Fusion of Political Party (1973)Fusion of Political Party (1973)

GOLKARGOLKAR

PPP:PPP: PDI:PDI:

ParmusiNU

PPP:PPP:

K t likParkindo

PNIPDI:PDI:

PertiPSII

MurbaIPKI

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Democratic or NonDemocratic or Non democratic?democratic?Democratic or NonDemocratic or Non--democratic?democratic?

Th th t k d d i th N O dThe way the system worked during the New Order obviously did not meet the basic principles required in a democracy in terms of political parties, elections and y p p ,representation as argued by most scholarly literature.The existence of civic organizations and interest groups

hi hl l t d d l th th twas highly regulated, and only the ones that were established or recognized by the government were allowed to exist, these including the business, labor, a o ed o e s , ese c ud g e bus ess, abo ,journalist, youth, and women organizations.The absence of effective opposition is one of the

ti l t f ti th N O d ’ l iessential arguments refuting the New Order’s claim to democracy.


What kept the regime in power so long?What kept the regime in power so long?What kept the regime in power so long?What kept the regime in power so long?

If I d i t t d ti t fIf Indonesia was not a true democratic system of government, what kept the system in power for so long and what was the source of its resilience? Pabottingi (1995: 225) reflecting the view of many analysts suggests that “…incumbents and supporters of th N O d it l iti t k dthe New Order argue its legitimacy on two key grounds: political stability and economic development.” The endless political strife of the previous system ofThe endless political strife of the previous system of parliamentary democracy and guided democracy created acute political instability that rendered development ff t i ibl d th t d th i l fefforts impossible and even threatened the survival of

the state.


What kept the regime in power so longWhat kept the regime in power so longWhat kept the regime in power so long…What kept the regime in power so long…

Huntington argues that many authoritarian regimesHuntington argues that many authoritarian regimes initially justify themselves by what he calls a “negative legitimacy,” basing their claim of legitimacy on the failure of democratic systems and promising that the newof democratic systems and promising that the new regime is combating internal subversion, reducing social turmoil, reestablishing law and order, eliminating corruption and venal civilian politicians and enhancingcorruption and venal civilian politicians, and enhancing national values. These were the exact rationales the New Order put forward when it emerged in 1966 with the support offorward when it emerged in 1966 with the support of students, intellectuals and various mass and religious organizations. And indeed those observations help explain why the New Order government under Suharto had been able to stay in power for so long: it delivered!


y p g

What kept the regime in power so longWhat kept the regime in power so longWhat kept the regime in power so long…What kept the regime in power so long…

At it i ti th N O d id d it lf t bAt its inception the New Order considered itself to be a reformist government supported by popular movements of students and intellectuals. Its drive had three main thrusts: a return to the 1945 Constitution; to create political stability; and to ameliorate the people’s suffering through economic developmentthrough economic development. The New Order credo of “the Development Trilogy,” referred to political stability, economic growth, and e e ed o po ca s ab y, eco o c g o , a dequity. This became the battle cry of the New Order with everything else subordinated to it.A d t f i d th N O d hi d it lAnd to a fair degree the New Order achieved its goals.


Development TrilogyDevelopment TrilogyDevelopment TrilogyDevelopment Trilogy

Stability

Growth Equity


Political stabilityPolitical stabilityPolitical stabilityPolitical stability

The political system had produced the intended result: p y ppolitical stability that had endured for three decades, sustaining economic growth which in turn further

freinforced its claim to legitimacy.


Economic growth and equityEconomic growth and equityEconomic growth and equityEconomic growth and equity

Political stability assured, and with uniformity of purpose and method the New Order earnestly embarked on economic development which was widely considered aseconomic development, which was widely considered as successful using various standard of measurements. Average annual growth in excess of 7% led to a moreAverage annual growth in excess of 7% led to a more than 10-fold rise in Indonesians’ per capita income and a decline in the number of people in poverty from an estimated 70% of the population in the l960s to around 11% by the mid-1990s.


Economic growth and equityEconomic growth and equityEconomic growth and equity . . .Economic growth and equity . . .

Life expectancy rose and infant mortality declined dramatically. yEight out of ten of the population had access to health care and two out of three to safe drinking water, self-sufficiency in rice production.


What went wrong?What went wrong?What went wrong?What went wrong?

H ti t (1991 54 55) k th i t th t thHuntington (1991: 54-55) makes the point that the legitimacy of an authoritarian regime might be undermined even if it does deliver on its promises. p“By achieving its purpose, it lost its purpose. This reduced the reasons why the public should support the

i i th t ( l k f f d )regime, given other costs (e.g. lack of freedom) connected with the regime”(1991: 55). He posits that economic development provided the basisHe posits that economic development provided the basis for democracy.


What went wrong?What went wrong?What went wrong? . . .What went wrong? . . .

He cites the famous—albeit much contested-- LipsetHe cites the famous albeit much contested Lipset hypothesis concerning the relationship of wealth and democracy: the wealthy countries are democratic and the most democratic countries are wealthy.the most democratic countries are wealthy.He argues that: “in poor countries democratization is unlikely; in rich countries it has already occurred. I b t th i liti l t iti t iIn between there is a political transition zone; countries in that particular economic stratum are most likely to transit to democracy and most countries that transit to d ill b i th t t t ” (1991 60)democracy will be in that stratum.” (1991: 60).


What went wrong?What went wrong?What went wrong?...What went wrong?...

He maintains that a social scientist who wished to predict future democratization “would have done reasonably well if he simply fingered the non democratic countries in theif he simply fingered the non-democratic countries in the $1,000-$3,000 (GNP per capita) transition zone” (1991: 63).)Further studies, in particular an extensive quantitative research and analysis done by Przeworsky et.al. (2000: 92) has lent support to Huntington’s threshold argument.



I hi t bilit h t th MPR M h 1In his accountability speech to the MPR on March 1, 1998, President Suharto (1998: 16) reported that in1996, the year before the economic crisis swept Indonesia, its y p ,GNP per capita had reached $1,155. According to Huntington’s theory, at that stage Indonesia h d t d th t iti hi h t th thad entered the transition zone, which meant that eventually sooner or later political change would happen.



Three decades of development had significantlyThree decades of development had significantly increased the level and reach of education across the nation and social classes. With education came enlightenment and emancipation from cultural restriction, freeing people from the shackles of old inhibitions and traditions. With education people recognized that there were more needs than just primary needs of food, clothing and sheltershelter.



I t ti l b ht b t th iInternational commerce brought about the opening up not of only the Indonesian market to foreign goods but also the Indonesian society to foreign ideas. y gWith globalization came not only the integration of markets but also the introduction and eventual i t ti f idintegration of ideas. With the improvement of living standard resulting from widespread benefit of economic development andwidespread benefit of economic development and education a strong middle class had been formed soon to become the back bone of the forces for political

i ti d femancipation and reform.



The supposed ultimate victory of democracy against allThe supposed ultimate victory of democracy against all other systems of government (see Fukuyama, 1992) has changed the people’s political attitudes, or at least the lit ’ ti f lib l d il telite’s perception, of liberal democracy as an evil system.

Thousands of Indonesians who studied at foreign universities most of them in western countries learneduniversities, most of them in western countries, learned first hand the socio-cultural values that has been the driving force behind the scientific and technological d th t lt d i th ffl f th tadvances that resulted in the affluence of the western

societies. They returned home imbued with the spirit of freedomThey returned home imbued with the spirit of freedom, which was a potent source of inspiration and motivation to change.



Th b kd f b i t i ti th iThe breakdown of barriers to communication, the main force behind globalization and the drive toward a higher degree of civilization, swept Indonesia with readily g , p yavailable and up to date information. It freed the individuals from the constraints of time and space.Censorship was no longer relevant, because one could access information through the Internet CNN or cableaccess information through the Internet, CNN or cable TV, or just travel. The diffusion of democratic ideals by the end of the 20th ycentury was unstoppable.The information Berlin wall was crumbling down.



When the Government closed down the popular Indonesia magazine, Tempo, because of it critical tone, it simply resurfaced as an Internet websitesimply resurfaced as an Internet website. People closely followed the fall of non-democratic systems of government in the former communistsystems of government in the former communist countries, the Philippines and Korea.



At the height of the praise for the New OrderAt the height of the praise for the New Order achievement, many Indonesian scholars and critics noted the lack of distributive justice as one of the major

iti i f th N O dcriticism of the New Order.They argued that the Indonesian economic success had benefited the urban and industrial sector while (relatively) marginalizing the rural and traditional sectors. An Indonesian social scientist, Pabottingi, noted that New Order economic policies and practices that hadNew Order economic policies and practices that had resulted in “inordinate dominance of the non-pribumi in the national economy, particularly in the urban and modern sector” and offers a prediction that themodern sector , and offers a prediction that the antagonism between the pribumi and the non-pribumi“could well be the Achilles heel of the New Order”.



The tightening control over policies and decision making processes in the hands of the President had not only strengthened the forces of change within society but alsostrengthened the forces of change within society but also disillusioned his original and traditional supporters, even those within the government. gWhile economically the government was committed to and intently pursuing open policies, politically the government kept a tight a grip.



The emerging role of Islam as a force of change should also not be underestimated. Uhli (1997 82) th t I d iUhlin (1997:82) agues that many Indonesian pro-democracy activists are more than nominally Muslim and they often use Islamic discourses to motivate thethey often use Islamic discourses to motivate the struggle for democracy.


What went wrong?What went wrong?What went wrong?...What went wrong?...Among the social forces that were poised against the

ONew Order, the most consistent and militant were the students. In the history of the nation, even before independence,In the history of the nation, even before independence, the Indonesian youth and students played pivotal role. They participated in every important event in the nation course of historycourse of history.


What went wrong?What went wrong?What went wrong?...What went wrong?...There is no major political change in Indonesia that did not involve the youth and students.By the 1970s, student activism had been directed against the New Order government.against the New Order government. In 1974 students staged huge demonstrations, against corruption and against Japanese foreign investment; many of the leaders of the incident known as Malari weremany of the leaders of the incident known as Malari were tried and jailed.


What went wrong?...What went wrong?...In l978 there was again a wave of student protests. Student activism continued into the 1980s and 1990sStudent activism continued into the 1980s and 1990s some taking up national issues like corruption, human rights and democracy, others local issues, such as eviction of people from areas designated for development projects, and environmental and labor i l t d t th iissues related to their area.


What went wrong?...What went wrong?...Although the student movements most of the time were widely scattered, unfocused and un-coordinated and were isolated from broad popular support, they were successful in galvanizing the silent majority to be concerned about current political issues confronting theconcerned about current political issues confronting the nation. Uhlin notes that the student activism of the late 1980s and early 1990s has contributed to a radicalization of the democratic opposition in Indonesia.



With ll th h i i l t t d dWith all the changing social structures and norms, and the forces arrayed against the New Order, from outside and within its own rank, it was only a matter of time , ybefore Huntington’s prediction would be realized. It would, however, still need a catalyst to quicken the

f hpace of change. The economic crisis was the trigger that would set the chain of events that eventually lead to the politicalchain of events that eventually lead to the political change. Empirical observations led Huntington (1991: 59) to p g ( )believe that crises produced by either rapid growth or economic recession weakened authoritarianism.



E t l di t th f ll f th N O d h d hEvents leading to the fall of the New Order had shown the symptoms observed by Haggard and Kaufman (1999: 76) that economic crises undermine the ( )‘authoritarian bargains’ forged between rulers and key sociopolitical constituents. Th f il f P id t S h t t l hiThe failure of President Suharto to salvage his government and to withdraw voluntarily followed their general observation that “the resulting isolation (of an ge e a obse a o a e esu g so a o (o aeconomic crisis) tends to fragment the ruling elite further and reduce its capacity to negotiate favorable terms of exit” (ibid )exit (ibid.).



H it t th fi t ti th t th N O dHowever, it was not the first time that the New Order was faced with serious crises. Although arguably the 1997/98 crisis was the severestAlthough arguably the 1997/98 crisis was the severest and the most devastating in terms of its impact on the general populace --the negative growth of almost –15%

lti i th d ti f l i d i iresulting in the reduction of real income and increase in poverty and unemployment-- still other non-democratic (by western liberal democracy standards) regimes in the (by es e be a de oc acy s a da ds) eg es esame geographical region such as Malaysia and Singapore could weather the crisis and their regimes survived and outlasted the crisissurvived and outlasted the crisis.



Many of the opposing forces identified above were longMany of the opposing forces identified above were long present, latent in the undercurrent of Indonesian politics for years. By themselves however, they did not present a sufficient challenge capable of ending Suharto’s rule.The New Order’s centralized power structure and carefulThe New Order s centralized power structure and careful control of political competition would have ensured the security of the President position. The social contract in this view has certain inertiaThe social contract, in this view, has certain inertia.



B t th N O d did f llBut the New Order did fall. Many studies have been undertaken thereafter, attempting to find the answer to the question of whyattempting to find the answer to the question of why President Suharto failed to overcome this particular crisis. Many observers agree that for President Suharto, who y grested his claim to rule on his ability to deliver economic growth, the economic crisis deeply undermined his legitimacy and left him after so many years in power atlegitimacy and left him after so many years in power, at last, vulnerable to credible challenge for power.



During the 1997/98 crisis President Suharto wasDuring the 1997/98 crisis President Suharto was deliberating between policy actions, and his indecisiveness had caused the crisis to deepen and

t ll l d t hi f lleventually led to his fall. It was in contrast with the decisiveness shown by Malaysia’s Mahathir and the leaders of Singapore in y g pdealing with the financial crisis in their respective countries. Bresnan (1999) for one remarks that the President “whoBresnan (1999) for one remarks that the President, who had made many hard decisions over the previous three decades, was unable to do so in 1998.”



Ob i l th i t ti l di i t thObviously there was an international dimension to the political and economic crisis occurring in Indonesia in 1998. The US and IMF had often been blame for the prolonged crisis that eventually led to the fall of President Suharto. Many observers have argued that the West had done their best in assisting the Indonesian government in fighting the crisisfighting the crisis.



Some analysts however would not discount the role theSome analysts, however would not discount the role the US play in the downfall of Suharto. Although for many years Indonesia --as a staunch anti g y ycommunist nation-- had always been able to count on the support of the West, by the mid 90’s Indonesia’s relations with the West had somewhat soured. After the Cold War ended, without a communist threat western donor countries were increasingly less concerned about bailing out in inefficient foreignconcerned about bailing out in inefficient foreign economies especially that are facing social and political problems.



M ti iti i th I d i h dl d thMounting criticism on the way Indonesia handled the East Timor question and the allegations of human rights abuses had precipitated stringent calls in the US p p gCongress to link aid and assistance to human rights records. B f th i i th l d f i f fBefore the crisis there were already forces, in favor of political change, arrayed against the New Order regime.



However in the absence of the necessary catalyst thoseHowever in the absence of the necessary catalyst those elements were inert, and even if change should happen it could take a long while, such as when Suharto pass

S h t b h i ll i bl t l daway or Suharto became physically incapable to lead. The financial crisis provided the catalyst that set off a process of change. p gThe halving of per capita income translated into social misery: unemployment, hunger, riots, and death.


ConclusionConclusionConclusionConclusion

While the economic crisis undoubtedly was theWhile the economic crisis undoubtedly was the immediate cause of the political unrest that ended Suharto’s long reign, the failure of the New Order

t t d l ith th liti l k f thgovernment to deal with the political weaknesses of the society contributed to its demise. Suharto, who had shown considerable flexibility in , yagreeing to numerous economic reforms, although admittedly not all were fully implemented, showed little inclination to follow through on a parallel rebuilding of the c a o o o o oug o a pa a e ebu d g o epolitical system. Whether Suharto could have weathered the economic crisis if the New Order regime had evolved into a morecrisis if the New Order regime had evolved into a more representative and open political system will never be known.


ConclusionConclusionConclusion…Conclusion…

But there is little doubt that the failure to create channelsBut there is little doubt that the failure to create channels for political dissent laid the groundwork for the desire to see the New Order regime end, even if that entailed a i k f fli t b t i il i t d th drisk of open conflict between civil society and the armed

forces. The cracks in the ranks of the New Order had come to the surface, as the New Order supporters within and outside the government, including those in the military had grown alienated by the way he handled the crisis, ad g o a e a ed by e ay e a d ed e c s s,and by his inability to recognize the weaknesses in the government’s policies and institutions and the urgent need to embark on reforms.need to embark on reforms.


ConclusionConclusionConclusion…Conclusion…

It i id t th t th i bilit f P id t S h t tIt is evident that the inability of President Suharto to bring Indonesia out of the crisis, combined with the growing domestic and international awareness that his g gresponse to the crisis—economic as well political-- was digging the country into a deeper abyss, destroyed the Hobbesian compact that had kept the country united andHobbesian compact that had kept the country united and politically stable on the path of development.The conclusion: crisis forced a rewriting of the social e co c us o c s s o ced a e g o e soc acontract.


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Terima KasihTerima KasihTerima KasihTerima Kasih


day 1: governance and economic crisis -the case of indonesia-

Technology

indonesia day

indonesias crisis

case of indonesia

indonesia rebounds

course materialthe course

class introduction course

final day

rapid economic growth