Democratizing Indonesia: Reformasi Period in Historical Perspective

Introduction : Triggered by the Asian currency crisis, Indonesia plunged into the times of violent change. With the downfall of the long-standing Soeharto rule in May 1998, changes of　the state order started with great magnitude and rapidity under a new banner of　“reformasi” (reform). What changes have occurred in this reformasi period? What do　these changes signify? To answer these questions, it would be better to have a certain　yardstick to allow us comparison. One possibility is to use a yardstick of history. What　picture will emerge if we see the current array of changes in long-term historical　perspectives is a main question of this paper. This paper intends to provide a bird’s-eye picture illustrating where in the Indonesian history the current restructuring of the state order is located. Rather than focusing on a specific area, I here attempt to broaden our outlook on Indonesia’s political, economic and social arenas in order to identify what are happening in these arenas, how they are mutually related, and what those events signify in the Indonesia’s historical context.

Decentralization in Nation State Building of Indonesia

Introduction：Today, many countries, regardless of developed or developing, are trying to promote decentralization. According to Manor, as his quoting of Nickson’s argument, decentralization stems from the necessity to strengthen local governments as proxy of civil society to fill the yawning gap between the state and civil society (Manor [1999]: 30). With the end to the Cold War following the collapse of the Soviet Union rendering the cause of the “leadership of the central government to counter communism” meaningless, Manor points out, it has become increasingly difficult to respond flexibly to changes in society under the centralized system. Then, what benefits can be expected from the effectuation of decentralization? Litvack-Ahmad-Bird cited the four points: attainment of allocative efficiency in the face of different local preferences for local public goods; improvement to government competitiveness; realization of good governance; and enhancement of the legitimacy and sustainability of heterogeneous national states (Litvack, Ahmad & Bird [1998]: 5). They all contribute to reducing the economic and social costs of a central government unable to respond to changes in society and enhancing the efficiency of state administration through the delegation of authority to local governments. Why did Indonesia have a go at decentralization? As Maryanov recognizes, reasons for the implementation of decentralization in Indonesia have never been explicitly presented (Maryanov [1958]: 17). But there was strong momentum toward building a democratic state in Indonesia at the time of independence, and as indicated by provisions of Article 18 of the 1945 Constitution, there was the tendency in Indonesia from the beginning to debate decentralization in association with democratization. That said debate about democratization was fairly abstract and the main points are to ease the tensions, quiet the complaints, satisfy the political forces and thus stabilize the process of government (Maryanov [1958]: 26-27). 　　　What triggered decentralization in Indonesia in earnest, of course, was the collapse of the Soeharto regime in May 1998. The Soeharto regime, regarded as the epitome of the centralization of power, became incapable of effectively dealing with problems in administration of the state and development administration. Besides, the post-Soeharto era of “reform (reformasi)” demanded the complete wipeout of the Soeharto image. In contraposition to the centralization of power was decentralization. The Soeharto regime that ruled Indonesia for 32 years was established in 1966 under the banner of “anti-communism.” The end of the Cold War structure in the late 1980s undermined the legitimate reason the centralization of power to counter communism claimed by the Soeharto regime. The factor for decentralization cited by Manor is applicable here. 　　　Decentralization can be interpreted to mean not only the reversal of the centralized system of government due to its inability to respond to changes in society, as Manor points out, but also the participation of local governments in the process of the nation state building through the more positive transfer of power (democratic decentralization) and in the coordinated pursuit with the central government for a new shape of the state. However, it is also true that a variety of problems are gushing out in the process of implementing decentralization in Indonesia. 　　　This paper discusses the relationship between decentralization and the formation of the nation state with the awareness of the problems and issues described above. Section 1 retraces the history of decentralization by examining laws and regulations for local administration and how they were actually implemented or not. Section 2 focuses on the relationships among the central government, local governments, foreign companies and other actors in the play over the distribution of profits from exploitation of natural resources, and examines the process of the ulterior motives of these actors and the amplification of mistrust spawning intense conflicts that, in extreme cases, grew into separation and independence movements. Section 3 considers the merits and demerits at this stage of decentralization implemented since 2001 and shed light on the significance of decentralization in terms of the nation state building. Finally, Section 4 attempts to review decentralization as the “opportunity to learn by doing” for the central and local governments in the process of the nation state building. 　　　In the context of decentralization in Indonesia, deconcentration (dekonsentrasi), decentralization (desentralisasi) and support assignments (tugas pembantuan; medebewind, a Dutch word, was used previously) are defined as follows. Dekonsentrasi means that when the central government puts a local office of its own, or an outpost agency, in charge of implementing its service without delegating the administrative authority over this particular service. The outpost agency carries out the services as instructed by the central government. A head of a local government, when acting for the central government, gets involved in the process of dekonsentrasi. Desentralisasi, meanwhile, occurs when the central government cedes the administrative authority over a particular service to local governments. Under desentralisasi, local governments can undertake the particular service at their own discretion, and the central government, after the delegation of authority, cannot interfere with how local governments handle that service. Tugas pembantuan occur when the central government makes local governments or villages, or local governments make villages, undertake a particular service. In this case, the central government, or local governments, provides funding, equipment and materials necessary, and officials of local governments and villages undertake the service under the supervision and guidance of the central or local governments. Tugas pembantuan are maintained until local governments and villages become capable of undertaking that particular service on their own.

Politics of the 1945 Constitution:Democratization and Its Impact on Political Institutions in Indonesia

Introduction : Before 1998, no one could think about the amendment of the 1945 Constitution. The 1945 Constitution was a product of nationalist who had hard fought for independence from the Dutch colonization. This historical background made it the symbol of independence of the Indonesian nation. Thus, it has been considered as forbidden to touch contents of the 1945 Constitution whereas political leaders have legitimized their authoritarian rulership by utilizing a symbolic character of the Constitution. With the largest political turmoil since its independence, that is, a breakdown of authoritarian regime and democratic transformation in 1998-1999, however, a myth of the "sacred and inviolable" constitution has disappeared. A new theme has then aroused: how can the 1945 Constitution be adapted for a new democratic regime in Indonesia? 　　　The Indonesian modern state has applied the 1945 Constitution as the basic law since its independence in 1945, except for around 10 years in the 1950s. In the period of independence struggle, contrary to the constitutional provision that a kind of presidential system is employed, a cabinet responsible for the Central National Committee was installed. Politics under this institution was in practice a parliamentary system of government. After the Dutch transferred sovereignty to Indonesia in 1949, West European constitutionalism and party politics under a parliamentary system was fully adopted with the introduction of two new constitutions: the 1949 Constitution of Federal Republic of Indonesia and the 1950 Provisional Constitution of Republic of Indonesia. Since a return from the 1950 Constitution to the 1945 Constitution was decided with the Presidential Decree in 1959, the 1945 Constitution had supported two authoritarian regimes of Soekarno's "Guided Democracy" and Soeharto's "New Order" as a legal base. When the 32-year Soeharto's government fell down and democratization started in 1998, the 1945 Constitution was not replaced with a new one, as seen in many other democratizing countries, but successively reformed to adapt itself to a new democratic regime. In the result of four constitutional amendments in 1999-2002, political institutions in Indonesia are experiencing a transformation from an authoritative structure, in which the executive branch monopolized power along with incompetent legislative and judicial branches, to a modern democratic structure, in which the legislative branch can maintain predominance over the executive. However, as observed that President Abdurrahman Wahid, the first president ever elected democratically in Indonesian history, was impeached after one and a half years in office, democratic politics under a new political institution has never been stable. 　　　Under the 1945 Constitution, how did authoritarian regimes maintain stability? Why can a democratic regime not achieve its stability? What did the two constitutional amendments in the process of democratization change? In the first place, how did the political institutions stipulated by the 1945 Constitution come out? Through answering the above questions, this chapter intends to survey the historical continuity and change of political institutions in Indonesia along with the 1945 Constitutions and to analyze impact of regime transformation on political institutions. First, we examine political institutions stipulated by the original 1945 Constitution as well as historical and philosophical origins of the constitution. Second, we search constitutional foundations in the 1945 Constitution that made it possible for Soekarno and Soeharto to establish and maintain authoritarian regimes. Third, we examine contents of constitutional amendments in the process of democratization since 1998. Fourth, we analyze new political dynamics caused by constitutional changes, looking at the impeachment process of President Abdurrahman Wahid. Finally, we consider tasks faced by Indonesia that seeks to establish a stable democracy.

Industrialization in Indonesia since the 1970s

Introduction: During the period from the latter half of the 1980s until just before the Asian currency crisis in 1997, Indonesia’s economic development had drawn expectations and attention from various quarters, along with Malaysia and Thailand within the same Association of Southeast Asian Nations (ASEAN). In fact, the 1993 report by the World Bank, entitled “East Asian Miracle: Economic Growth and Public Policy,” recognized Indonesia as one of the East Asian economies with the strong economic performance, i.e. sustained economic growth (World Bank [1993]). And it was the manufacturing industry that had been the driving force behind Indonesia’s economic growth during that period. Since the 1997 outbreak of the Asian currency crisis, however, the manufacturing sector in Indonesia has been mired in a situation that rules out the kind of bright prospects it had emanated previously. The Indonesian economy is still in the developing stage, and in accordance with the history of industrial structural changes in other countries, Indonesia’s manufacturing industry can still be expected to serve as the engine of the country’s economic development. But is it really possible in an environment where economic liberalization and globalization are forging ahead? And, what sort of problems have to be dealt with to make it possible? To answer these questions, it is necessary to know the current conditions of Indonesia’s manufacturing sector, and to do that, it becomes important to think back on the history of the country’s industrialization. Thus, this paper is intended to retrace and unlock the track of Indonesia’s industrialization up until the establishment of the manufacturing sector in its present form, with the ultimate goal being to give answers to the above-mentioned questions. Subject to an analysis in this paper is the period from the installment of President Soeharto’s administration onward when industrialization of the modern industrial sector2 moved into high gear. 　　　The composition of this paper is outlined below. Section 1 first shows why it is important to examine import substitution and export orientation, both of which are used as the measures of the analysis in this paper, in tracking the history of the industrialization, and then discuss indicators of import substitution and export orientation as well as statistical data and resources needed to develop those indicators. Section 2 clarifies the status of the manufacturing industry among all industries by looking at the composition ratio of the manufacturing industry in terms of value added, imports and exports. Section 3 to 5 cover three periods between 1971 and 1995 and make an analysis of import substitution, export orientation and changes in the industrial structure for each period. Section 3 analyzes the period from 1971 through 1985, when Indonesia pursued the import substitution policy amid the oil boom. Section 4 covers the period from 1985 through 1990, when the packages of deregulatory measures were announced successively under structural adjustment policies made necessary by the fall in oil prices. Section 5 examines the period from 1990 through 1995, which saw the alternate shifts between the overheating of the economy by sharply rising investment by both domestic and foreign investors in the wake of the liberalization of investment, trade and financial services, and polices to cool down the economy. Section 6, which covers the 1995-1999 period straddling the economic crisis, is designed for an analysis of the changes in production trends before and after the economic crisis as well as the changes in the industrial structure. Section 7, after summing up the history of Indonesia’s industrialization examined in the previous sections, discusses problems found in respective sectors and attempts to present future prospects for the country’s manufacturing industry.

Transformation of the Financial Sector in Indonesia

Introduction : The source and deployment of finance are central issues in economic development. Since 1966, when the Soeharto Administration was inaugurated, Indonesian economic development has relied on funds in the form of aid from international organizations and foreign countries. After the 1990s, a further abundant inflow of capital sustained a rapid economic development. Foreign funding was the basis of Indonesian economic growth. This paper will describe the mechanism for allocating funds in the Indonesian economy. It will identify the problems this mechanism generated in the Indonesian experience, and it will attempt to explain why there was a collapse of the financial system in the wake of the Asian Currency Crisis of 1997. History of the Indonesian Financial system The year 1966 saw the emergence of commercial banks in Indonesia. It can be said that before 1966 a financial system hardly existed, a fact commonly attributed to economic disruptions like the consecutive runs of fiscal deficit and hyperinflation under the Soekarno Administration. After 1996, with the inauguration of Soeharto, a regulatory system of financial legislation, e.g. central banking law and banking regulation, was introduced and implemented, and the banking sector that is the basis of the current financial system in Indonesia was built up. 　　　The Indonesian financial structure was significantly altered at the first financial reform of 1983. Between 1966 and 1982, the banking sector consisted of Bank Indonesia (the Central Bank) and the state-owned banks. There was also a system for distributing the abundant public revenue derived from the soaring oil price of the 1970s. The public finance distribution function, incorporated in Indonesian financial system, changed after the successive financial reforms of 1983 and 1988, when there was a move away from the monopoly-market style dominated by state-owned banks (which was a system of public finance distribution that operated at the discretion of the government) towards a modern market mechanism. The five phases of development The Indonesian financial system developed in five phases between 1966 and the present time. The first period (1966-72) was its formative period, the second (1973-82) its policy based finance period under soaring oil prices, the third (1983-91) its financial-reform period, the fourth (1992-97) its period of expansion, and the fifth (1998-) its period of financial restructuring. The first section of this paper summarizes the financial policies operative during each of the periods identified above. In the second section changes to the financial sector in response to policies are examined, and an analysis of these changes shows that an important development of the financial sector occurred during the financial reform period. In the third section the focus of analysis shifts from the general financial sector to particular commercial banks’ performances. In the third section changes in commercial banks’ lending and fund-raising behaviour after the 1990s are analysed by comparing several banking groups in terms of their ownership and foundation time. The last section summarizes the foregoing analyses and examines the problems that remain in the Indonesian financial sector, which is still undergoing restructuring.