Promise of a new dawn

The disenchantment which many Indonesians felt with the reform process, and with the leadership of President Megawati Soekarnoputri, was reflected in the results of the parliamentary elections held in April 2004. The political party which emerged with the largest number of votes, 21.6 per cent of the total, was Golkar, which had dominated the political scene through the Suharto years. The Indonesian Democratic Party of Struggle (PDIP), the party of Megawati, managed to come second with 18.6 per cent of the votes, but this was a sharp decline from 1999 when the party gained one-third of the total vote. The remaining votes were spread among a number of parties, some of them Islamic in orientation and some secular (Marks 2004: 152). These results reflected growing frustration on the part of many Indonesians with the slow economic recovery since the crisis of 1997/1998, and a nostalgia for the greater economic progress during the Suharto years.

The presidential election which was held in July 2004 marked a historic shift away from the past practice of indirect presidential elections through an augmented parliament, the Peoples’ Representative Council (MPR). For the first time, Indonesia would have a directly elected president and vice-president. The strongest ticket was widely considered to be that of Susilo Bambang Yudhoyono (SBY), a retired general and former cabinet minister under Megawati, and Jusuf Kalla, a businessman from South Sulawesi and member of Golkar. SBY had come up through the military under Suharto; he had graduated from the Magelang Officers’ Academy in the 1970s and had also studied in the USA. He was widely considered to represent the moderate, secular wing of the armed forces, which had opposed the spread of Islamic views in the military in the last years of the Suharto regime. Fluent in English and well travelled (he had commanded the Indonesian contingent to the UN Peacekeeping Force in Bosnia in the 1990s), he presented himself with considerable success as a ‘thinking general’, who was well informed about world events and also capable of implementing much-needed reforms at home. Even while he was a cabinet minister, he had continued to study economics at the Bogor Agricultural University, and had set up his own think tank (the Brighten Institute) to advise him on policy issues.

The onset of the economic crisis

By early 1997, episodes of ethnic and religious violence were erupting in several parts of the country, while the ongoing problems in Aceh, Irian Jaya and East Timor appeared incapable of resolution. Many were wondering for how much longer Suharto could continue to rely on the loyalty of the army in carrying out brutal and unpopular ‘pacification’ activities in far-flung parts of the country. But to most observers, both within Indonesia and abroad, the economy still appeared strong. Both domestic and foreign economists, including respected economic journalists and multilateral lending organisations such as the World Bank and the Asian Development Bank, praised the Indonesian government for its adherence to sound macroeconomic management. Budget deficits had been kept low, inflation was well under control, and the balance of payments deficit at around 4 per cent of GDP seemed far less worrisome to most observers than the much higher deficits in Malaysia and Thailand. Certainly there was some concern that there was a growing reliance on short-term capital inflow to fund the current account deficit but again this trend did not seem nearly so pronounced as in Thailand. It was known that some conglomerates were borrowing large sums offshore but this was not seen as something the government could or should concern itself with.

The problems in Thailand came to a head in early July 1997, when the Thai authorities were forced to float the baht, which then depreciated rapidly. The rupiah came under pressure soon after the Thai decision to float the baht, and after apparently futile attempts by Bank Indonesia to stabilise the rupiah, it was decided that from 14 August, the rupiah could float freely. This was a decisive break with previous exchange rate management in Indonesia, and IMF officials were quoted as applauding the move. The president and other senior officials stressed that economic fundamentals in Indonesia were sound, and that there was no reason for panic (Lindblad 1997: 5–8). But by early October, serious problems were emerging. Capital outflow was accelerating, and the rupiah was trading at 3,600 to the dollar, compared with 2,500 in July. The government then turned to the International Monetary Fund (IMF) for a standby loan.