Steps Toward Stability in Indonesia


By Joyce Barnathan It has been a tough road for Indonesia. Since the Asian financial crisis led to the toppling of its long-time corrupt strongman Suharto in 1998, the world's fourth-largest country has faced one major test after another. Its great challenge is to demonstrate that democracy can grow and thrive in a moderate Islamic state.

Indonesia has made some political progress, but the nation's new-found freedoms also underscore the weak political institutions in Jakarta, which have given rise to a succession of less-than-stellar leaders. Attacks against the ethnic Chinese business community, insurgent uprisings, the devastation from last year's tsunami, bird flu, and two suicide bombings in Bali -- one in 2002, one this year -- have only compounded the country's problems (see BW, 10/17/05, "Indonesian Reform: The Markets Vote Yes").

So how is Indonesia -- an archipelago with a population of 242 million and nearly three times the size of Texas -- doing now? And what are the country's attitudes toward the U.S.? On a trip in late November, I met with Jusuf Wanandi, head of the Centre for Strategic Studies and one of the most prominent political and economic analysts on Indonesia.

VIOLENCE CONTINUES. On the face of it, Jakarta now looks far better than it had when I had last visited, in 1998, shortly after buildings and shops owned by ethnic Chinese had been set ablaze and many of the country's best and brightest had bolted for safer havens. The charred buildings have been restored, and the downtown area is well-maintained, with its lovely parks and kitschy monuments to the founding President, Sukarno.

But law and order hasn't been fully restored in Indonesia. Wanandi cites as an example the October beheadings of three girls on their way to a Christian school in Sulawesi. And the U.S. State Dept. has continually issued travel warnings, urging Americans to defer all nonessential trips to Indonesia. Business executives who do visit routinely get extra security.

Hope is widespread that President Susilo Bambang Yudhoyono will turn things around. Wanandi gives this former military man -- a candidate he didn't support in the elections -- good grades for restoring peace to the restive region of Aceh, for ending fuel subsidies that were eating up the national budget, and for presenting a favorable face of Indonesia to the international community (see BW, 7/4/05, "Yudhoyono's 'Triple-Track Strategy'").

CORRUPT LEGACY. The bad news is the economy. Though growth is relatively brisk at 6%, Wanandi argues that such a rate won't be sustainable without future reforms. Inflation is on the rise, and fuel prices have skyrocketed. Above all, Yudhoyono hasn't been able to attract the necessary foreign investment to keep the country humming.

Though the nation is rich in raw materials and has a relatively cheap labor base, it's no competition for China, where the population is better educated, the infrastructure superior, and high technology more advanced. Wanandi says it would be "very dangerous" for Indonesia to be perceived as an economic laggard.

Another huge issue is corruption, something that has long defined the Indonesian economy. This is a legacy from the Suharto era, when the first family and other key officials managed to cash in handsomely. "The bureaucracy is a corrupt, unwieldy, and rotten thing," Wanandi said in a speech in October. The President has called for better training, but Wanandi argues that bureaucrats "don't need training. They need to be fired" (see BW, 5/16/05, "Indonesia: A Scandal That's Almost Welcome").

"FICKLE ATTITUDE." Yudhoyono seems to be heeding that advice. On Dec. 5, he announced a major Cabinet reshuffle of his top economic lieutenants. He named the respected Boediono Economy Minister, and made his highly effective Planning Minister, Sri Mulyani Indrawati, the new Finance Minister. While Wanandi hailed those appointments in an e-mail on Dec. 9, he lamented the fact that the President put a "nobody" in the position of Manpower Minister. Unless the country loosens up its rigid labor laws, foreign investment won't head to Indonesia because costs are simply too high compared with cheaper alternatives such as Vietnam or even India, he says.

As for relations with the U.S., Indonesians clearly have mixed feelings -- "a fickle attitude," as Wanandi puts it. After the U.S. invaded Iraq, only 11% of Indonesians (88% percent of whom are Muslim), had a favorable attitude toward the U.S., he says. "They were not happy with the way that issue was handled." Undersecretary of State for Public Diplomacy Karen Hughes, who recently visited Indonesia, didn't help much, because she didn't have a good grasp of either her audience or the facts when she spoke at the University of Islamic Studies, he adds.

Perceptions of the U.S. did dramatically improve after the American military offered assistance in the remote regions of Indonesia hit hardest by the tsunami. Favorable attitudes jumped to 38%, according to Wanandi. One deeply saddened security guard I spoke with in Jakarta said he lost 68 family members in Banda Aceh, leaving only four survivors. He brightened up when he mentioned the humanitarian aid given by the U.S. military, which he says saved the lives of thousands.

Getting Indonesia on the right track is no easy job, but many feel Yudhoyono has what it takes to succeed. If he gets it right by cleaning up the bureaucracy and attracting new foreign investment -- and those are very big ifs -- this could be the world's best hope for a thriving modern economy for Muslims.

Barnathan is an executive editor for BusinessWeek in New York


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