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INDONESIA
>> Regional Overview >> Indonesia Overview 
Introduction
Indonesia stands at a crossroads. The economic crisis that began in late 1997 produced a public outcry over corruption and cronyism in President Suharto's government, leading to his resignation and, in October 1999, to Indonesia's first free elections in more than 45 years. The country is now commencing a political transformation, from autocracy to democracy, while at the same time trying to recover from a deep economic recession. The advent of democracy has opened unprecedented possibilities for fundamental change, which introduces substantial risks to Indonesia's social and political stability.The new President, Abdurrahman Wahid ("Gus Dur"), has named a coalition cabinet that includes a number of leading reformers. The reform agenda seeks to curb corruption, increase competition, promote civilian control of the military and civic reconciliation, and reformulate the balance between central power and local government. But, the Government faces serious challenges in building a democracy and restoring economic growth across an archipelago that includes 350 ethnic groups and 17,500 islands and spans across an area equal to the distance from Oregon to the Bahamas. Indonesia has the opportunity to become a thriving democracy. Growing unrest, and religious and ethnic conflict, however, could lead to a potentially chaotic and bloody breakup of the world's largest Muslim nation. International assistance, particularly well-targeted aid from the United States, can make a critical difference.
Indonesia's importance to the United States and its allies should not be underestimated. Landmark elections have made it the world's third largest democracy. In addition to commanding the Pacific's major trade routes, including the energy lifelines of Japan and Korea, Indonesia is a major supplier of Asia's natural resources and an important emerging market for U.S. trade and development.
The Development Challenge
Indonesia's new government, installed in October 1999, faces enormous political, economic, and social challenges. The new government takes over a country battered by an economic recession that wiped out 15 percent of its gross domestic product (GDP) in a year and hobbled by pervasive corruption that affects everything from major policy decisions to village relationships. It needs to move swiftly to rebuild the economy, resolve social tensions, and strengthen the political institutions that can provide greater transparency and accountability, improve governance, and attack corruption. It needs to restore the confidence of both domestic and foreign investors, increase civilian control of the military, develop processes for reconciling abused and abusers, and institute major constitutional changes that will reform the judicial systems, decentralize power, and increase the authorities of local governments. All this needs to be done while maintaining a social safety net that provides a modicum of social services to a population with growing expectations.The end of the Suharto era loosed negative as well as positive forces. Long-simmering perceptions of injustice among ethnic, religious and economic groups have flared across the country, raising fears of Indonesia's "Balkanization," particularly following East Timor's overwhelming vote for independence in August 1999. Centrifugal forces have been unleashed in provinces such as Aceh and Papua (Irian Jaya) where rebels have increased their efforts for independence. Violence has erupted in Ambon, Northern Sumatra, East Java, Sulawesi, and West Kalimantan, because of conflicts over land rights, labor issues, migrant workers, resources, and religion, class and ethnicity.
A source of much of the unrest is the historic lack of institutional recourse for violations to personal and property rights. To ameliorate this situation, the government is attempting to reallocate responsibilities and authorities across political levels, decentralize powers to the district level and increase regional autonomy; it is also attempting to reform its justice sector, by improving judicial and prosecutarial capabilities.
Just as justice sector reform is important to assure human rights and access to the political process, it is also critical to providing the environment for economic recovery. Although recent indicators are hopeful, Indonesia still has much work to do to restore its economy to pre-crisis levels. The successful elections of a new government with unquestioned legitimacy and a commitment to reform renewed optimism among potential investors. Growth during the second and third quarters of 1999, the first positive growth since 1997, confirmed hopes that the economy may have bottomed out. Other important macro indicators point to a successful stabilization of the economy--inflation is zero for the year to date, benchmark interest rates are currently at 12-13%, having fallen from a high of more than 70%, and the exchange rate has strengthened.
Despite such positive signs, full recovery remains a distant prospect. The country's external foreign debt (public and private) reached a total of $144 billion as of June 1999, and little progress has been made on restructuring corporate and bank debt. The financial sector remains moribund-no banks are lending. Unemployment remains high and could go higher as restructuring takes hold and corporations cut back. Institutions are still not in place to ensure legal certainty for investors, and disputes over past contracts, particularly in the electricity sector, have cut sharply into the confidence of potential new investors. It appears that the Government has begun to take the necessary steps to get the Indonesian Bank Restructuring Agency (IBRA) to dispose of the non-performing assets which it holds and put performing companies back into private banks.
The economic and political crisis has had a dramatic social impact. Official figures show that the number of individuals living below the poverty line has more than doubled (now 80 million people) since the beginning of the crisis. High inflation and widespread unemployment have reduced the ability of many households to purchase basic medicines and meet minimum nutritional requirements, resulting in an increase in micronutrient deficiencies. The United Nations Children's Fund (UNICEF) confirms that the human cost of the economic crisis has been highest for Indonesia's poorest women and children. The GOI estimates that nearly half of the nation's population is unable to afford adequate food. A contributing factor to the May 1998 riots was the rise in food prices and shortages of staple food items such as rice, cooking oil and sugar.
The rapid decline in household income in combination with declining government resources, specifically for the provision of health services, imperils the health of many Indonesians. The prolonged economic crisis has drastically reduced purchasing power as food prices have skyrocketed, while millions have lost their jobs. As a consequence, many, particularly urban dwellers, cannot afford to purchase adequate food, and the nutrition of mothers and children has suffered. Children are continuing to drop out of school, suggesting that the long-term impact of the crisis may not yet be fully realized. Health care services are less frequently sought, as stretched family budgets go to other priorities. Sexually transmitted diseases are on the rise, as a result of inadequate condom use, delayed treatment, and an increase in prostitution as a source of income.
USAID's Role
The election of a new government in October 1999 opened up a wealth of new opportunities for USAID's FY 2000 program, focusing on supporting the democratic transition, economic reform, natural resource management, health, and humanitarian assistance. USAID is supporting a major, multi-donor effort on justice sector reform as part of a program to build the institutions and processes that will facilitate Indonesia's transition to democracy. It is working with new ministers-and in some cases new ministries, with parliamentarians at the national and local level, with media and with civil society organizations to strengthen legal processes and institutions, providing training and technical assistance to improve access, transparency and accountability. Building on a most successful elections support program, involving more than 200 local and international NGOs, USAID has launched a civic education campaign to encourage accountable government. USAID partners are conducting political party and parliamentarian training-about 85 percent of the 15,000 newly elected parliamentarians have never served in office before-on legislative and constituent representation. They are also providing training to the media in news broadcasting and working with both government and civil society organizations on conflict resolution and reconciliation.The new decentralization laws-moving toward full implementation in the year 2001-afford new opportunities and risks, as well, that cut across all of USAID's areas of interest-democracy, economic reform, natural resources management, and delivery of health and humanitarian services. USAID is working with local governments now to prepare them for their increased roles under decentralization. USAID consultants are advising on fiscal issues, natural resources management, and on environmental governance, and health advisors are looking at the implications of these laws for health service delivery.
USAID continues assistance to the agencies responsible for corporate and bank restructuring and the ministries involved in trade and competition policy and regulation. There are growing opportunities here as well, as the government begins to establish independent regulatory agencies (competition and anti-corruption are the first) which are in need of donor support. And as part of USAID's work on justice reform, USAID consultants are involved in a variety of programs to strengthen governance and provide investors with greater certainty.
Events in East Timor and unrest in pockets across Indonesia have imposed special burdens on USAID's health and humanitarian assistance program. Through its longstanding partnership with local and international NGOs and with the World Food Program, USAID has been able to target food resources-and continues to do so-to allow Indonesia to deal with the needs of what has become a population of some 700,000 internally displaced people. At least in the near term, until there is greater certainty that social unrest is under control, there will be a need for continued humanitarian aid.
Other Donors
The donor community in Indonesia can be divided into two groups: (1) donors with annual program budgets of $1 billion or more and (2) those with annual budgets of $250 million or less. Multilateral organizations - the International Monetary Fund (IMF), the World Bank, the Asian Development Bank (ADB) and the Islamic Bank - and the Japanese bilateral program constitute the big donors. USAID is the largest contributor in the group of smaller donors, which also includes the European Union, the bilateral programs of Australia, Germany, Britain, France, Italy, the Netherlands, Canada, New Zealand and South Korea, and private U.S., German and Dutch foundations.The U.S. role as a leading member of the IMF, the World Bank, and Asian Development Bank provides USAID an important opportunity to work closely with multilateral donors on development issues. In addition, as part of the Consultative Group for Indonesia, USAID collaborates with both multilateral and bilateral donors. This collaboration was particularly close in the donor program to support the Indonesian elections in 1999. Despite our level of assistance, USAID's flexibility and country presence provide it a unique opportunity to play a leadership role in donor assistance. USAID has accepted this role most notably in the development of civil society organizations and in its work, as noted above, on democracy and governance, economic reform, natural resources management and health and humanitarian assistance.
Country Background Information Resources CIA Factbook
Library of CongressNational Geographic Country Maps
State Dept. Country Information
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Last Updated on: November 17, 2000 |
