Indonesia is important to the safety,
stability, and prosperity of Southeast Asia. The world's fourth
most populous country, Indonesia controls strategic sea-lanes
through which pass 40 percent of the world's commerce, including 80
percent of Japan's oil supply and 70 percent of South Korea's.
Before falling victim to the effects of the Asian economic crisis
in August 1997, Indonesia's economy had averaged 7 percent growth
over the previous 25 years despite being riddled with corruption
Asian economic crisis hit Indonesia harder than any other country.
The value of the currency plummeted from around 2,450 to the dollar
before the crisis to 17,000 to the dollar at the worst point.
Interest rates soared to over 50 percent in 1998, and inflation to
over 77 percent. Because of the tremendous depreciation in the
value of the currency, businesses were unable to repay their debts
and insolvent banks were unable to extend credit. The Indonesian
economy eventually would shrink by 13.7 percent in 1998.
tremendous economic hardship led quickly to major changes in the
political system. Indonesians had seemed willing to tolerate
political repression during economic good times; they were not so
tolerant toward what they saw as their government's ineffective
response to the effects of the economic crisis. They took to the
streets in violent demonstrations that killed over 1,000 and
culminated in the May 1998 resignation of President Suharto, who
had ruled with an iron grip for 32 years.
political system was liberalized dramatically under B. J. Habibie,
Suharto's successor as president. Habibie has released political
prisoners, relaxed restrictions on the press, and allowed the free
formation of political parties. The president's tenure was fixed at
two five-year terms. Important parliamentary elections were set for
June 1999, with selection of the next president to follow in
November. In a surprise development, Habibie announced that the
restive Indonesian province of East Timor, invaded and annexed by
Jakarta in the mid-1970s, would be given the opportunity in August
1999 to decide between independence and greater autonomy within
major political development has been marred, however, by Indonesian
military support for pro-Jakarta militias in East Timor which have
been killing and intimidating supporters of independence.
Indonesian military support for these militias is particularly
disturbing because violence of any kind makes investors wary of
Indonesia. The peaceful and credible conduct of the referendum on
East Timor and Indonesia's other major elections in 1999 would be a
significant milestone in the re-establishment of investor
Indonesia's record on much-needed economic
reform also undermines investor confidence. Jakarta has been slow
to implement the kinds of reforms needed to restore the economy.
These include pruning and restructuring the bloated and crippled
financial sector, implementing meaningful bankruptcy reform, and
reducing barriers to trade and investment. These reforms are the
minimum required to regain the faith of international
Indonesia's economic and political
challenges go hand in hand. An Indonesia mired in economic
stagnation is less likely to be able to settle its political
differences peacefully and more likely to be beset by ethnic,
religious, and sectarian violence. This harms Indonesia's future
economic prospects, creating a vicious cycle of economic and
political degeneration that threatens the stability of the
Southeast Asia region.
important economic and security interests in Southeast Asia, the
United States has a stake in preventing Indonesia's devolution into
chaos. Chaos in Indonesia could threaten nascent economic
recoveries underway elsewhere in the region. It also could put at
risk the critically important sea-lanes under Jakarta's control,
jeopardizing the commercial interests of the United States, the
world's largest trading power.
Although Indonesians ultimately are
responsible for their own political and economic fate, there are
steps that Washington can take to facilitate Indonesia's
transformation to a more open economic and political system:
Offer assistance to
appropriate non-governmental organizations to help assure that
Indonesia's three major votes during 1999 are conducted peacefully
and credibly, and contribute to the strengthening and consolidation
Declare that the
United States and the world will be watching the process and
outcome of Indonesia's votes in 1999.
commitments in East Timor, which would be more likely to freeze the
conflict in place than to solve the underlying differences between
Press Indonesia to
implement badly needed economic reforms and not rely on
International Monetary Fund assistance to solve its economic
Promote reforms in
Indonesia's military and consider rebuilding ties with the military
if it acts responsibly during all three of Indonesia's votes during
1999. Restoration of Indonesia's participation in the International
Military Education and Training program could help move the
Indonesian military toward greater professionalism, civilian
control, and respect for human rights.
America's interest in a peaceful and
prosperous Southeast Asia requires that it assist Indonesia's
further evolution toward democracy and free-market economics. An
Indonesia restored to economic growth and progressing toward
genuine democracy is in the interest of Indonesians and Americans
John T. Dori is a former Research Associate in
The Asian Studies Center at The Heritage Foundation.