Testimony by Adam Schwarz Before the Asia and Pacific Subcommittee on International Relations, U.S. House of Representatives

June 4, 1998

Testimony by CFR fellows and experts before Congress.

Thank you, Mr. Chairman, for inviting me to speak today at the hearing on current developments in Indonesia. I am the Edward R. Murrow Fellow at the Council on Foreign Relations, specializing in Southeast Asian studies. I spent ten years as a foreign correspondent in Southeast Asia, including the period 1987-92 in Indonesia. I have recently returned from a three-week trip to Jakarta.

Even by the standards of a tumultuous year, the past month in Indonesia has been chaotic. Demonstrations have become daily fare in Jakarta and other major cities, mixed in with sporadic rioting and looting. More than 500 Indonesians died in the rioting, which caused damages exceeding $1 billion. Ethnic Chinese and foreigners fled in panic. President Suharto has been replaced by his vice- president, while his son-in-law, the powerful General Prabowo Subianto, has been removed from direct troop command.

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Suharto deserves credit for standing down without causing further bloodshed. If he had ordered the military to clear the student-led demonstrators from the Indonesian parliament by force in the third week of May, the death toll could have been horrendous. The world should be grateful he chose another option.

But he has left his successor, B.J. Habibie, IndonesiaDs third president, up against a situation eerily similar to the one he confronted at the start of his rule 32 years ago: facing simultaneously a profound economic and political crisis.

I would like to discuss the severity of each of these crises before turning to U.S. policy on Indonesia.

The dramatic political events of the past month have deflected attention from the economic crisis, which is unfortunate. Already dire even before May, the economy has deteriorated still further in the intervening month. Unemployment is now expected to reach almost 20 percent of the 88 million workforce by the end of the year. The number of Indonesians living under the poverty line is forecast to double to 40 million. Inflation is expected to go from single digits to triple digits in the space of a year.

Many poor and newly poor Indonesians can no longer afford health care, and all Indonesians are suffering from a lack of medical supplies. The supply and distribution of essential food supplies has been severely disrupted, raising the prospect of a sharp rise in malnourishment. Family planning targets have been set back as many Indonesians can no longer afford contraceptives. School enrollment rates among poor Indonesians are dropping. All these trends will erode IndonesiaDs productivity for many years to come.

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Punitively high interest rates, the debt overhang and the unavailability of export financing have damaged large segments of the modern economy. Analysts now estimate that IndonesiaDs economy could shrink by as much as 20 percent this year. At its current pace of revenue collection, the Indonesian government will be hard pressed even to pay civil servant salaries by year-end.

The task of rebuilding IndonesiaDs political institutions and creating a more democratic society would have been extremely difficult even against a backdrop of a growing economy. To do so in the current economic climate makes the challenge all the greater.

In his 32 years in power, President Suharto centralized power in the executive branch and significantly eroded the effectiveness of the countryDs political institutions. His departure, not surprisingly, has created a political vacuum in Indonesia.

Major societal questions have burst through the surface, including the role of the ethnic Chinese in the economy, the relationship between Islam and the state, and the distribution of political and economic power between Java and the outer islands. There are no easy answers to these questions, and the desperate economic climate makes answers all that much harder to come by.

President Habibie has begun the process of political reform, but it is unlikely he can satisfy public demands for a clean sweep with the past. He has removed the ban on new political parties, released from jail a number of political prisoners, lifted controls on the media, and promised elections in 1999.

But he is handicapped by the same problem that ultimately forced Suharto to step aside; that is, the lack of a legitimate mandate from the Indonesian people. Absent that, it is unlikely he will be able to deal effectively with the economic crisis. Bankers will not lend and investors will not invest until the political situation clarifies. This is true both for Indonesians and foreigners.

The United States and other world powers can play an important role in helping Indonesia to recover economically and politically, although it should be kept constantly in mind that Indonesian problems will require Indonesian solutions on an Indonesian timetable. It would be unreasonable to expect that the pent- up frustrations from 32 years of authoritarian rule could be dealt with overnight, even by the most enlightened of governments.

In my view, the U.S. could play a constructive role in the following areas.

One, the Clinton administration should urge the Habibie government to move as quickly as possible to put in place a government with a fresh mandate from the Indonesian people. A full resumption of international economic assistance would not be effective until this happens. The decision to begin with new general elections or a special meeting of the People's Consultative Assembly is one for Indonesians to decide. The focus for the U.S. should be the emergence as soon as possible of a government able to deal effectively with the economic crisis.

When a timetable for elections is set, the U.S should consider allocating a portion of its pledged financial commitment to Indonesia to helping fund the electoral process, including support for an international poll monitoring team.

Two, in light of the severity of the economic situation in Indonesia, the U.S. should support the immediate disbursement of the next $1 billion tranche of the IMF package. Many Indonesians have expressed the valid concern that a resumption of IMF aid at this point may reduce the pressure on the Habibie government to accelerate the process of political reform. However, in my view, the more serious concern is that a further deterioration of the Indonesian economy will lead to still more hardship and social unrest, trends that pose an even greater risk to the democratization process. The comparison to Weimar Germany is apt. U.S. pressure to postpone the next IMF disbursement would be helpful neither to the U.S.-Indonesia relationship or the vast majority of Indonesians. However, future disbursements of IMF aid should be considered in light of progress achieved by the Indonesian government in establishing popular support.

The U.S. should also move ahead immediately with humanitarian assistance, especially the provision of rice, soybean and medicine. Financial support to IndonesiaDs family planning program would also be warranted. Humanitarian aid should be channeled, where possible, through Indonesian non-governmental organizations. Relying on NGOs will help build civil society institutions and provide for more oversight on the use of humanitarian funds. However, the U.S should recognize that Indonesian NGOs are limited in their distributional capacity and that the Indonesian government will need to continue to play a major role in this area.

The US. should also put into place quickly its promised export-financing guarantee scheme. A quick resumption of Indonesian exports is one of the keys to Indonesia's economic recovery. The effectiveness of this facility would be enhanced if the scheme were not restricted to U.S. imports or to specific commodities.

Three, the U.S. should recognize that in the absence of well-functioning political institutions in Indonesia, the Indonesian military has a crucial role to play in the current transition. A debate in Indonesia on the redefinition of the military's dual-function role is already under way. Intervention by the U.S. in this debate would be counter-productive. On balance, the Indonesian military has acted responsibly in the past month and the Armed Forces Commander, General Wiranto, is perceived as pro-reform by many Indonesians.

Maintaining open links of communication with the Indonesian military is essential if the U.S. is to stay usefully engaged with Indonesia. As the political situation becomes clearer, the U.S. should reinitiate the IMET and J-CET programs. Both these programs would benefit from additional monitoring and oversight, as well as from curriculum changes that would encourage greater military support for institutionalizing the democratization process.

Four, the U.S. should support U.S. and Indonesian NGOs working to promote ethnic and religious pluralism in Indonesia as well as those sponsoring civilian-military dialogue. The U.S. should condemn any further violence targeted at Indonesia'ss ethnic Chinese minority or any of IndonesiaDs religious communities. The U.S should encourage the Habibie government to investigate the widespread allegations that renegade units of the Indonesian military instigated the violence witnessed in mid-May.

Five, the U.S. should encourage the release of political prisoners jailed for their non-violent opposition to the Suharto government.

Six, The U.S. should consider expanding funds available for scholarships for Indonesian students studying in the United States. This would be a cost- effective approach to stemming the productivity losses Indonesia is almost certain to encounter in the medium term.

Seven, the U.S. should recognize that dealing with the corruption issue in Indonesia will be a highly disruptive process. How quickly and how comprehensively Indonesia wants to tackle the corruption issue is a political decision for Indonesia to make. The U.S. should stand ready to assist in an anti-corruption investigation initiated by Indonesia, but should be leery of acting in advance of an Indonesian request.

Eight, the U.S. should recognize that the indebtedness of Indonesia's non-bank private sector is arguably the greatest obstacle to Indonesia's economic recovery. Attempts by banks to hold out for full repayment of their loans to Indonesia firms will prolong Indonesia's economic crisis and therefore put at risk the political reform process. The U.S. administration should urge the IMF to remain firm in insisting that neither IMF funds or scarce Indonesian government resources are used to bail out foreign bankers.

Thank you for inviting me to testify today.

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