For the past few years, most news reports from Indonesia have featured terrorists, regional insurgencies, and human rights violations. They portray a government that is dealing ineffectively with these problems and an economy that is falling further behind its Asian neighbors. Developments beneath the surface, however, lead to a more hopeful view: Indonesia-the world's fourth most populous country and the largest by far with a Muslim majority-is undergoing a profound political transition. Over the past five years, its democratic system has been overhauled quietly but brilliantly, and the foundations for a better system of governance have been put in place. The government that takes office on October 20 will be the people's choice more than ever before.

Indonesia's democratic transformation, known as Reformasi, began in 1998. In the wake of ten years of flamboyant dictatorship under President Sukarno and more than three decades of iron rule by President Suharto, the country's political institutions were weak. Reformasi may have been more of an elite coup than a people's revolution, but its objective was to find a viable path to a just and prosperous society. In 1999, a new national parliament was chosen in the first openly contested elections since 1955, and Abdurrahman Wahid became president through an indirect vote. In mid-2001, Wahid was forced out of office due to his erratic leadership, and Megawati Sukarnoputri-Sukarno's eldest daughter-ascended to the presidency.

The results of a national election last April 5 showed just how profound an effect Reformasi has had on Indonesia's political system. Going into the election, President Megawati had all the advantages of incumbency, but the outcome reflected broad disappointment in her leadership. Her party-the secular nationalist PDI-P-won less than 20 percent of the popular vote for the 550-seat national parliament, down from 34 percent in 1999. Golkar-the centrist bureaucratic party nurtured by Suharto-came out on top, finishing with the most seats in parliament, although its share of the vote had fallen slightly since 1999. The poor showing of these two leading parties especially benefited the secular, progressive Democratic Party (PD), led by former general Susilo Bambang Yudhyono, and the Prosperous Justice Party (PKS), an urban-based Islamic party campaigning on a platform emphasizing clean government.

At the heart of Reformasi was a constitutional amendment that requires the direct election of the president for a five-year term beginning this year. Through a complex, finely tuned set of rules, the April 5 parliamentary election yielded the five tickets-for president and vice president-that competed in the first-round presidential election on July 5. The results were a sign of the electorate's growing sophistication. Susilo Bambang Yudhyono (known as S.B.Y.) came in first with 34 percent of the vote. Based on an almost complete count, Megawati finished seven percentage points behind, edging out the Golkar candidate, retired General Wiranto, to claim the second spot in the runoff election scheduled for September 20.

The April and July elections reaffirmed the strength of moderate Islam in Indonesia. Five of the eight parties that captured more than two percent of the vote in April were Islamic parties, but all of them had moderate leaders and platforms. Four of the five tickets that competed in the July 5 election included a moderate Muslim candidate, and yet a third of the voters picked the entirely secular ticket headed by S.B.Y.

For the past generation, political succession has been a major challenge for Asian countries, and it has also become a burning issue in the Muslim heartland of the Middle East. Together with a successful transition out of International Monetary Fund tutelage and Paris Club debt relief, a smooth transition to a new government on October 20, whether headed by S.B.Y or by Megawati, will be a major achievement for Indonesia, providing it an opportunity to set itself firmly on the road to good governance and an improved standard of living for its 235 million citizens.


The keystone of Indonesia's political system, rooted in the constitution of 1945, is a strong presidency. But in a stunning exercise in political architecture, a set of constitutional amendments adopted between 1999 and 2003 injected critical checks and balances into this framework.

The constitution of 1945 provided for the election of a national parliament (DPR), composed of party representatives, every five years. The DPR, together with a group of regional representatives, the military, and other "functional groups," formed the People's Consultative Assembly (MPR), the primary function of which was to choose the country's president. The president appointed the cabinet and governed largely by decree.

Suharto formed and manipulated the three parties that "competed" in the DPR elections held between 1977 and 1997 and controlled the selection of the other representatives who filled out the MPR. His favored party vehicle was Golkar, which evolved in the early 1970s out of an army-led anticommunist organization. The DPR routinely rubber-stamped legislation put forward by Suharto's cabinet, and the MPR dutifully reelected Suharto to the presidency every five years without opposition.

In addition to instituting the direct election of the president and vice president, the amendments adopted after 1998 eliminated the "functional" representatives in the MPR. These were replaced by a senate composed of 128 directly elected, nonpartisan members, four from each of Indonesia's 32 provinces. The MPR now consists of the DPR and the senate together, and its powers have been sharply curtailed to include only amending the constitution, swearing in the president and vice president, and dismissing them for specified violations. The amendments also created a constitutional court to review laws and resolve disputed results of general elections, provided for a "general election commission of a national, permanent, and independent character," and set forth basic human rights protections.

In 2001, Indonesia underwent one of the most radical decentralizations of power in the world. Bypassing the provinces, subnational authority is now concentrated in the country's 349 kabupaten (districts) and 91 kota (cities). Although it is too soon to say to what extent such institutional changes will contribute to better governance, they are the chief legacies of Reformasi and should improve the prospects for routine transfers of power while reducing the potential for a return to authoritarian rule.

The 1945 constitution was part of the deal Indonesia negotiated to win independence from the Dutch. In 1950, it was replaced by a federal constitution that instituted a parliamentary government with a titular president. The governments formed under the 1950 constitution, however, were fractious and short-lived; regional rebellions broke out, and the public became increasingly disaffected. In 1959, Sukarno restored the 1945 constitution by decree.

In his classic study of why the 1950 constitution was abandoned, the Australian political analyst Herbert Feith stressed the unintended consequences of the 1955 elections: "[They] served both to undermine faith in parliamentary democracy and to stay the hand of those who had an interest in its overthrow. Once the elections were over, the long-term factors working against the parliamentary system and its creed asserted themselves." These factors-especially tension among different social and ethnic groups across the archipelago-still exist and represent the principal challenge for the Reformasi system. The party structure is still in flux and may not settle into a viable pattern before voters' patience runs out.

Political analysts often link Indonesia's party structure to its social structure, through the concept of aliran, usually translated as "current." There are, according to such thinking, three "primordial" currents: the rural peasantry (abangan), the secular aristocracy (priyayi), and the Islamic clerics (santri). In the 1955 elections, the three currents were reflected in the rough parity among the Communist Party (PKI), the Nationalist Party (PNI), and the two parties that split the Muslim vote. (After a failed coup in 1965, the Communist Party leadership was exterminated and the party was banned.)

The most extraordinary result of the April and July elections was the success of S.B.Y despite his lack of a close identification with any one aliran. But even with his first-place finish in July, S.B.Y will be the underdog in the September runoff unless he is able to get the backing of Golkar. If Golkar instead throws its weight behind Megawati, he will be hard-pressed to build enough support from Islamic parties to prevail.

Sukarno's nationalist party, PNI, was recast as the PDI during Suharto's rule and then split in 1996 when Suharto tried to force Megawati out of politics. Her new party, PDI-P, garnered a third of the votes in the 1999 election on the strength of its deep roots and close association with the nationalist sentiment of the Sukarno era. The April 2004 election, however, was a catastrophe for the PDI-p that was only somewhat mitigated by Megawati's second-place finish in July. The party's future now rides on how Megawati fares in the September runoff. If she loses to S.B.Y, there is no obvious successor to pick up the pieces, and it will likely take more than a year for new leadership to emerge.

Under Suharto, Golkar prospered because of its use of patronage and its ability to deliver on campaign promises. Even after his downfall and disgrace, the strength of the Golkar machine enabled it to finish in second place in the 1999 elections, well ahead of the strongest Islamic party. In this year's parliamentary election, Golkar emerged on top, but only because of the poor showing of Megawati's party and the split in the Muslim vote. Golkar's future is hard to predict for several reasons, beginning with the surprising defeat of long-time party leader Akbar Tanjung as the party's nominee for president, followed by the poor showing of the man who defeated him, Wiranto, in the July election. Wiranto's failure to make the September runoff puts Tanjung back in command of the party machinery, and also in a good position to use the party's weight to decide who will be Indonesia's next president. An alliance with Megawati would be tempting, as it would perpetuate the implicit partnership of the past three years. However, such an alliance might also push S.B.Y's campaign into high gear and rally anti-Megawati and anti-Golkar sentiment enough to produce a humiliating defeat for the country's two largest parties.

The five leading Muslim parties won a combined 36 percent of the vote in the 1999 election, outpolling Megawati's party by almost two points. Last April, the same five parties held their collective share at 35 percent but increased their margin over the single strongest party, Golkar, to more than 12 points. These numbers suggest that a coalition of Islamic parties supporting a single ticket could have won the presidency. But such a coalition is unimaginable. The Islamic aliran breeds leaders with an independent streak who would rather lose than unite behind a competitor.

Although most of Indonesia's leading political parties go back several generations, they should be viewed as new parties created (or re-created) during Reformasi and defined more by personalities than by issues. As the parties become more institutionalized, they will begin to occupy more distinct zones in the political spectrum. Under strong cultural pressure to avoid confrontation, the smaller parties are likely to join broad cabinet coalitions rather than combine with others in an opposition group. One possible outcome is an extended period of rule by PDI-p or Golkar, along the lines of Mexico's PRI (the Institutional Revolutionary Party). Another is that half a dozen parties will rearrange themselves into a new pattern every five years, with only minor changes in the overall direction of policy.


The Indonesian armed forces (known by their acronym, TNI) still cast a long shadow over the political life of Indonesia today. In most accounts, the TNI is portrayed as the dominant force in government policymaking, with an effective veto over important decisions. The fact that retired generals led two of the tickets competing in the July 5 election reinforced this view. On closer inspection, however, the TNI looks operationally lame and well past its prime.

The TNI's image as Indonesia's supreme power has a solid basis in history. It is still revered for its role in winning independence from the Netherlands in 1950 and given credit for the stability and economic growth of the Suharto era. But as an institution, the TNI has been declining for 20 years or more. Its share of the national budget has fallen to less than 4 percent, compared with more than 25 percent in the early years of the Suharto regime. This is equivalent to less than one percent of GDP-half of what most of the TNI's Southeast Asian counterparts get.

Under Reformasi, the military has also become weaker operationally. This is in part an outcome of various reforms, including the formal separation of the police from the armed forces. It has also resulted from problems recruiting and training high-quality officers and procuring new equipment. There is currently no plan to develop the TNI into an effective fighting force subject to civilian control. At the beginning of 2003, the minister of defense issued a white paper that sought to set a reform agenda, but it glossed over fundamental issues such as the large amount of off-budget funds that go to the military (an amount some estimate to be twice as large as its formal budget allocation).

Since independence, the TNI has maintained a command structure that parallels the civilian government down to the village level. Although it stresses the importance of defending the nation against external enemies, it has deployed its forces mainly to combat domestic insurgencies. Indonesians generally support the TNI's actions to suppress insurgencies in Aceh and Papua, but the TNI's approach appears more consistent with permanent occupation than winning the hearts and minds of the people in these regions.

The TNI's economic influence has also waned in recent years. Since the birth of the Indonesian nation, military units have operated a mix of legitimate and illegal businesses. In the 1970s and 1980s, a sprawling network of military foundations and cooperatives sprang up, running a range of murky activities and drawing on questionable sources of funding. The TNI's resulting economic power probably peaked in the mid-1980s and then declined as the network of businesses owned and controlled by Suharto's relatives and close friends gained prominence. Counterintuitively, the vacuum in the economy resulting from the collapse of Suharto, Inc., has been filled by thousands of small and medium-sized enterprises, not by the military. In contrast to other Asian countries such as South Korea and Thailand, not a single successful military-operated business can be found in the top ranks of Indonesian companies.

As a political force, the TNI is often portrayed as single-minded in pursuit of narrow interests. The military's participation in this year's election campaigns, however, belies such cohesion. Although active military personnel were ordered to remain neutral-to the point of waiving their right to vote-retired military officers were highly visible as candidates and supporters. Instead of coalescing behind a single party, however, they were scattered widely among all 24. This pattern reflects opportunism on the part of former officers (who see in politics the prospect of large financial rewards for minimal effort) and of parties (which find that military experience gives a candidate fund-raising clout and organizational acumen). Meanwhile, a strong undercurrent of opposition to military leadership represents a credible check on creeping militarism.


When she became president in 2001, Megawati inherited an extremely weak economy. GDP remained below its pre-financial crisis peak, reached in 1996. Relations with the International Monetary Fund (IMF), the World Bank, and the donor consortium were strained. The country was seeking more debt relief from Paris Club and London Club creditors instead of phasing it out. And essential reforms were stalled, due to a power struggle between President Wahid and the parliament.

Since then, the turnaround has been remarkable. The economic ministers appointed by Megawati were less political and more technocratic than their predecessors. Quickly labeled the "Dream Team," they lived up to expectations in several key areas. In particular, led by Coordinating Minister Dorodjatun Kuntjoro-jakti and Finance Minister Boediono, they set the stage for a successful transition during 2004 out of IMF balance-of-payments financing and debt relief. This step signaled the end of the recovery from the 1997-98 financial crisis and the return to normal relations with official and private sources of external financing.

All of Indonesia's macroeconomic indicators improved from mid-2001 to early 2004, despite internal shocks such as the terrorist attacks on Bali in October 2002. Inflation fell from over 12 percent to 5 percent. Interest rates dropped from 17 percent to 7 percent. Foreign exchange reserves rose from $29 billion to $36 billion while the rupiah appreciated in real effective terms. The ratio of government debt to GDP declined from more than 100 percent in 2000 to less than 70 percent at the end of last year. The $1 billion international bond issue successfully floated by the Indonesian government in March 2004, barely a month before the parliamentary elections, underscores this exceptional record.

Indonesia's macroeconomic performance has been all the more surprising because it has been achieved without the active support of President Megawati and over the objections of at least two members of her economic team. The key to success was fiscal discipline, which Boediono was able to maintain with a combination of charm, pedagogy, and toughness.

Macroeconomic stability in the near term cannot be taken for granted, however. In the second quarter of this year, leading indicators began moving in unfavorable directions, presumably because of uncertainty about the elections. External factors are also now in a correction phase after an exceptionally favorable period. Rising interest rates in the United States will increase the cost of servicing external debt. The efforts of the Chinese authorities to moderate the pace of growth and the expiration of the Multi-Fiber Agreement at the end of this year could translate into weaker demand for Indonesian exports. A steep decline in oil prices could depress new investment in the oil and gas sector just as the government is clearing away the last major hurdles. The new government that takes office at the end of October will thus have to act quickly and skillfully to keep the economic transition on track through 2005.

The bigger challenge for the next government will be overcoming Indonesia's current economic malaise, which is palpable. This malaise arises from a number of fundamental questions about the country's economic potential. With a diverse array of ethnic groups scattered over 6,000 islands, can Indonesia develop the social consensus to achieve reforms to produce rapid growth over a sustained period, or will it slip into the Latin American pattern of high consumption and recurrent debt problems? Will resentment of the commercial power of the Indonesian-Chinese business community block this source of job creation? Will Indonesia be able to escape the curse of having abundant natural resources, an obstacle to broad growth in other countries that lies at the heart of the separatist movements in Aceh and Papua?

Pessimism about Indonesia stems largely from the government's inability since the financial crisis to push the GDP growth rate back above 5 percent in order to match the rapid pace maintained throughout most of the Suharto era. Consequently, a third of the labor force-40 million people-remains underemployed, and that number is growing. Most analysts blame Indonesia's sub-par growth on impediments to domestic and foreign investment, and they stress the government's slow and inconsistent approach to removing such impediments.

In the near term, economic progress will depend on Indonesia's success in tackling three devils: an unreliable judicial system, a weak banking system, and corruption. Fortunately, the starting point for the next government is further advanced in each of these areas than daily news reports suggest.

Reformasi promised to replace Suharto's system of contract enforcement by fiat with enforcement by impartial judges. Lacking a tradition of impartiality, commercial court decisions are still often delivered to the highest bidder. The saga of the Indonesian arm of the British insurance company Prudential-declared bankrupt based on an absurd claim-is just the latest of dozens of egregious rulings since 1997. During the same period, however, most of the worst rulings have been overturned in higher courts, the judiciary has been separated from the government and has started to assert its independence, and a credible blueprint for judicial reform has been adopted.

The banking system's basic problem is that many leading Indonesian business groups defaulted on their loans and participated reluctantly in workout negotiations with their creditors, including the Indonesian Bank Restructuring Agency (IBRA), which inherited a huge stock of bad loans when it recapitalized the insolvent banking system. As long as they were in workout mode, these business groups were unable to obtain new financing to expand their activities. The banks are being kept afloat with the interest being paid on the recapitalization bonds they received from the government in exchange for the loans that went into default in the 1997-98 crisis. Although the workout process has been far from satisfactory from a broad social perspective, it has come to an end. IBRA was shut down in March. The corporate sector and the banking system are now positioned to engage in job-generating investment.

In the 1990s, corruption was particularly rampant; since Reformasi began, it has become more diffuse. The electorate clearly demonstrated its intolerance of corruption in the April election by defecting from Megawati's party and staying away from Golkar in favor of S.B.Y's PD and the "clean" PKS. Institutional improvements recently implemented include the creation of an anticorruption commission. More significant is the fact that Indonesia's exceptionally vibrant press and dynamic nongovernmental organizations are learning how to expose corruption and propose sensible remedies. Decentralization may have increased corruption initially, but it represents a giant step toward accountability. The direct election of regional leaders, due to begin soon, will be another important step.

It is unrealistic to think that the momentum of recent reforms will overcome these fundamental problems quickly. Hard work over a decade or more will be required for Indonesia to achieve an investment climate comparable to Malaysia's or Thailand's. Much of the groundwork has been laid, however, and the country may not be far from a tipping point at which the reform process and business confidence become mutually reinforcing.


Indonesia has attracted attention from abroad in recent years primarily in the context of the war on terrorism. But whereas Americans are preoccupied with the global terrorist threat, Indonesians are not. In a June survey, less than one percent of respondents listed terrorism as a priority for the next government. From the U.S. perspective, Indonesian support for the war on terrorism has been half-hearted. Americans would be wrong, however, to condemn the Indonesian government for a lack of cooperation. In the context of the country's historical experience and the population's current attitudes, the Megawati government has moved more aggressively against terrorists than could be expected, and the next government is likely to do even more to prevent foreign terrorist organizations from operating in Indonesia.

Violence against innocent civilians has been a feature of political life in Indonesia since its struggle for independence against the Dutch. It has been committed by secessionist movements in Sumatra and elsewhere, by Christian and Muslim fanatics, by indigenous people threatened by migrants, and by the TNI in numerous operations to quell dissident forces. Hundreds of thousands of unarmed civilians were slaughtered by ideologically driven mobs during the mayhem following the failed September 1965 coup that led to the demise of the Sukarno regime. For most Indonesians, the Bali bombings in October 2002 and the Marriott Hotel bombing in August 2003 were background noises, not burning issues. The secessionist sentiments in Aceh, Papua, and elsewhere, which are seen as threats to the nation's territorial integrity, are of much greater concern.

Nevertheless, terrorism could derail the political and economic transformations currently underway. With the train bombings in Madrid fresh in mind, the risk of a major attack may be greatest in the weeks leading up to the presidential runoff election on September 20. If there is an incident, the instinct in the West will be to point the finger at Jemaah Islamiyah and its sympathizers. The perpetrator, however, is just as likely to be a nonreligious group, such as a military faction. Its objective could be to tip the balance in the September runoff in favor of the candidate who is more inclined to maintain the status quo or let the country slide back toward authoritarian rule.

Several challenges just as grave as terrorism will face Indonesia's next government. The massive damage being done to Indonesia's tropical forest and ocean resources belongs at the top of the list. Others are piracy in the Strait of Malacca and nearby waters, worrisome trends in education and health, and a bevy of human rights problems. Fortunately, each of these is recognized as a critical problem by the country's leaders, and domestic constituencies advocating essential policy reforms are gaining strength.

Thanks to the brilliance of the recent political restructuring, the odds are good that Indonesia's transformation will proceed smoothly. It is worth bearing in mind, however, that Indonesia's first experiment with constitutional democracy failed in 1957, after seven years of bickering among politicians and escalating protests in the streets. The current experiment is now six years old, and it has a better record. But if the next government is unable to deliver more employment opportunities and to reduce corruption and senseless violence, Indonesia's political transition could stall and slip into reverse-a prospect that should be equally troubling to Indonesia's people and to the rest of the world.

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