In Jakarta's main business district, thousands of supporters of Indones opposition leader Megawati Sukarnoputri ran through the streets in mid-May, beating and kicking anyone who dared brandish the yellow flag of the ruling party, Golkar. Hundreds of miles away in the city of Yogyakarta, a 16-year-old Megawati supporter who strayed into the wrong neighborhood was beaten to death while mobs overturned food carts and smashed the windshields of passing motorists. Nearby, in the town of Jepara, four supporters of Islamic cleric Abdurrahman Wahid were hacked to death with machetes by members of a rival Muslim party.
Such scenes suggest that Indonesia's passage into democracy with the June 7 legislative elections won't end the violence that has gripped the country since the downfall of strongman Suharto last May. The dangers are real. With a populace bitterly divided among four dozen political factions, there's a chance that violence will erupt again in this seething, ethnically diverse nation of 200 million, no matter who wins. If Suharto's handpicked successor, President B.J. Habibie, clings to power through unfair means, warns economist Hadi Soesastro, "it could be an explosive situation again."
It's a dark scenario--but by no means the only possible one. For the scary headlines obscure much that has been going right lately. Taken together, the positive developments could lay the foundation for a new Indonesia. The most important question for the long term is not who wins more votes on June 7. It is whether the rival factions can put aside their feuds and seize the immense opportunity to rebuild this shattered country.
The seeds of a brighter future have already been sown. Democracy, though still imperfect, is taking firm root. The indigenous peoples of Indonesia's many provinces are set to win more autonomy and a greater share of the fruits of economic growth, addressing grievances in provinces that have endured decades of ferment and military atrocities. Pressure from the International Monetary Fund has given reformers in the government the cover they need to tackle serious structural problems created during Suharto's 32 years of corrupt rule. The government also is replacing policies that pushed growth at all costs with a more sensible development model that addresses the population's true needs.
Underpinning these trends is an economy that finally appears to be bottoming out after 20 months of free fall. Gross domestic product rose 1.3% in the first quarter of this year, the first such increase since the rupiah started to crash in 1997. The currency has stabilized at about 8,000 to the U.S. dollar, up more than 50% since the depths of the crisis in early 1998. Monthly inflation, once in danger of raging out of control, is near zero. And the central bank's cleanup of the bombed-out banking system is well under way. "Indonesia has achieved stability," boasts Kadhim Al-Eyd, head of the IMF's Jakarta office. The economy is getting an extra boost with payments of $400 million every two months from the fund, in addition to the $43 billion package approved last spring.
The most hopeful development doesn't show up in opinion polls. It comes from talking to Indonesians across a broad swath of society. Most have grown tired of revolt, instability, and poverty and want to get on with their lives. "People are fed up with trying to get jobs," says longtime Suharto critic Lukman Sutrisno, an economist at Yogyakarta's Gadja Mada University. They also know jobs will come only if foreigners believe Indonesia is stable, he adds. Taruno, a 40-year-old Jakartan, says he has grown wary of raucous Megawati rallies. "People like me want to be able to work," he says. "We don't want violence."
But to move forward, Indonesia's factions must first bury their machetes. That's what makes June 7, the first democratic vote since 1955, such a watershed. Habibie could exercise his legal authority to appoint 238 of the 700 seats in the electoral college, which meets in August to choose the President. Thus, it's possible for him or another Golkar candidate to become President even if Golkar wins only a quarter of the seats in the smaller House of Representatives (chart, page 33).
Many experts think that a coalition formed on May 21 by the three biggest opposition parties--Megawati's Indonesian Democratic Party-Struggle, Wahid's National Awakening Party, and the National Mandate Party led by Muslim leader Amien Rais--stands a good chance of winning at least 40% of the House seats. If so, a Habibie presidency would be seen as illegitimate and he would have another fight on his hands.
Yet the rival parties do have incentives to forge a pact. Should Golkar win fairly, it still will have to reach out to the major opposition leaders. Likewise, should the opposition alliance pull off an upset, it will have to cut some sort of deal with Indonesia's old guard to make the bureaucracy work and to placate the military.
That may be hard to stomach for Indonesians who demand justice after decades of brutality and graft. But the only way out may be a deal similar to the one made in Chile after dictator Augusto Pinochet stepped down in 1991. In other words, Suharto would be pardoned for corruption and human rights crimes. Opposition leaders told BUSINESS WEEK they could live with such a compromise to achieve national reconciliation. If elected, says Rais, "I'll give Suharto due process of law, but I'll pardon him because he's old."
The next government can ill afford a prolonged period of infighting because Indonesia is hardly in a healthy state. Although the economy is much improved since last year, full recovery could still be years away. Middle-class families have shrunk from 10% of the population to 5%, and per capita income has slumped from $1,200 to $400 since the economy collapsed in late 1997.
DAILY RIOTS. With $90 billion in bad debt on local banks' books, reform must stay on track. A bank cleanup in process will cost "much more" than the $34 billion first projected, says Bank Indonesia Governor Syahril Sabirin. The restructuring of some $80 billion in foreign corporate debt began as late as January, with two major deals involving only $1 billion.
Social strife will remain a concern as well. Riots erupt and soldiers shooT civilians almost daily in the provinces of Aceh, Irian Jaya, East Timor, Maluku, and East Kalimantan. Thousands of businesspeople from Indonesia's Chinese minority, a target of riots in the predominantly Muslim archipelago, were scared into exile by the riots and gang rapes of 1998. They, and the estimated $100 billion they have parked offshore, must be lured back.
Yet if an all-out brawl between Golkar and the opposition can be averted, Indonesia may be able to dig itself out of the mess. Although they don't advertise it, opposition leaders Rais, Megawati, and Wahid have not radically disagreed with Habibie on major issues. All three say they would continue with the IMF's program of tight money, transparency, and bank restructuring. They have not challenged the move toward regional autonomy, which would, for example, give provinces 15% of revenue from oil in their territories and 80% from other resources, such as gold and timber.
Neither have any of the big opposition parties called for the jailing of Suharto for corruption. Even more remarkably, all three are trying to recruit army chief General Wiranto, a career officer and former Suharto aide, as their candidate for vice-president. That seems to indicate that even longtime dissidents are willing to accept that the military still has a role in government, for now. "Indonesia needs an evolution, not a revolution," says Avi Dwipayana, president-director of Trimegah Securities in Jakarta, summing up the mood.
TRANSFORMATION. Habibie and Golkar have also proved more politically adept than skeptics had assumed. Even though Habibie owes his career to Suharto, he put the former President's son Hutomo Mandala Putra, known as Tommy, on trial for corruption and stripped away protection for many of the Suharto children's businesses. In just 13 months, he has allowed the creation of 45 new parties, ended press censorship, released political prisoners, and offered a referendum on independence to the military-occupied territory of East Timor.
Golkar is also undergoing a transformation. Since Suharto's downfall, the average age of its leadership has dropped by 10 years, to 45. Many ethnic Javanese right-wingers above 60 have retired or formed their own parties. The new blood in the leadership includes figures like the well-respected human rights lawyer Marzuki Darusman, a Golkar vice-chairman. Akbar Tandjung, the new party chairman, hails from Sumatra.
The government has rethought Suharto-era economic policy, too. Wasteful plans for national car programs, new petrochemical complexes, and a local aerospace industry--the brainchild of Habibie--have been shelved. There is wide agreement that Indonesians must be more realistic about how they compete globally. That means focusing on basics: agribusiness and labor-intensive manufacturing.
Despite its abundant pool of cheap labor, Indonesia is at a disadvantage vs. countries like China and Vietnam in luring foreign investment to low-end industries such as footwear and garments. That's because 47% of Indonesian factory workers have no more than junior high school educations. The crisis has forced millions more families to pull children out of school because they could not afford tuition. Education & Culture Minister Juwono Sudarsono, one of Golkar's most progressive figures, has made improving secondary education his top priority, initially using a $400 million grant from the World Bank to return three million dropouts to class.
NEW CRONIES? Cronyism certainly won't vanish in Indonesia, as the resurrection of the Riady family's Lippo Group illustrates. But it is likely to be much less egregious. Conglomerates that once thrived on favors from Suharto are fighting for their lives with little help from Jakarta. The once mighty Salim Group, headed by Liem Sioe Liong, has lost such prized holdings as Bank Central Asia.
There is a danger, of course, that the next government will simply expropriate businesses from old Suharto pals and hand them over to a new set of cronies. Politicians may be tempted to give lucrative franchises once held by the resented ethnic Chinese minority to indigenous Muslims. But Golkar and the top opposition parties realize they can't afford to alienate the ethnic Chinese, still the country's most experienced businesspeople. Persecution of the Chinese also would turn off wealthy neighbors Taiwan, Hong Kong, and Singapore. "We need to bring back foreign investors because we need foreign money and foreign technology," comments Rais, who says he would name two Chinese to his Cabinet if elected.
Greater regional autonomy, meanwhile, could dramatically change the role of state enterprises, such as national oil company Pertamina, as cash cows for Jakarta's ruling elite. Pertamina, says former Finance Minister Fuad Bawazier, has been living on borrowed time for years. Now, the oil company will have to share its revenues with regional governments that need the funds for education, medical care, and public transportation. To remain viable, Pertamina must restructure.
Multinationals are waiting to see how the political maneuvering plays out. Some have pulled out of Indonesia, but most foreign companies are hunkering down. Two years ago, for example, French cosmetics maker L'Oreal bought a large site in Jakarta for a $30 million hair-care products factory. That plan is on hold, but not dead. And L'Oreal is keeping its existing 800-worker cosmetics operations running because it expects sales to pick up next year. "Just look out the window, and you'll see that the city is not dead," says Philippe Bocchino, president-director of Yasulor Indonesia, L'Oreal's local subsidiary. "The people are fighting to recover from this crisis."
Serious investment won't resume until business is convinced that stability has returned. "The private sector won't kick in before the election," says the IMF's Al-Eyd. One major test of stability will be how well the opposition alliance holds up after the election. Already, the violence at opposition rallies raises doubts about how well they control their own supporters. "These guys show up at rallies armed with machetes," observes Sutrisno. "Is that democracy?"
Unresolved is the delicate issue of which leader would challenge Habibie for the presidency before the electoral college on Aug. 24. That could tear the alliance apart. Its most popular figure is Megawati, 52. Her father, the late President Sukarno, was overthrown by Suharto. But Megawati's leadership skills and thinking on many key issues are unknown. Concedes Pius Lustrilanang, a former student activist who is a parliamentary candidate in Megawati's party: "The opposition leaders don't trust each other." To pull the country together, the opposition will have to exhibit more discipline than it has so far.
If Golkar prevails, its challenge will be to win back the support of Indonesians alienated by decades of abuse. "Much depends on whether the electorate will forgive Golkar for its sins and give the party a second chance," says Education Minister Sudarsono. That's a lot to ask. But if Indonesians can answer the call for reconciliation, they may give their tortured country a new beginning.