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Political and Economic Lessons From Democratic Transitions

Author: Joshua Kurlantzick, Senior Fellow for Southeast Asia
June 18, 2013


This preview highlights the main points of the Indonesia chapter from Pathways to Freedom: Political and Economic Lessons From Democratic Transitions, a publication of the Civil Society, Markets, and Democracy Initiative. For previews of other chapters, please see the Table of Contents.


Since the Asian financial crisis precipitated Major General Suharto's fall in 1998, Indonesia has adopted a more inclusive political system, reduced the military's authority, empowered local jurisdictions, achieved stability across the archipelago, and sustained strong economic growth. Yet these remarkable successes may have reached their limit, and daunting economic and political challenges remain.

After Indonesia's independence from the Netherlands in 1949, founding father Sukarno presided over political instability and slow growth. The tenets of his "guided democracy" (actually a precarious authoritarianism) included the use of the Indonesian language and the concept of pancasila, a mix of nationalism, support for different types of monotheism, and socialism employed to enhance Sukarno's power and limit the strength of Islamists.

Suharto seized power from Sukarno in 1967. His one-party developmental state brought three decades of sustained growth but also political slumber. Though authoritarian, Suharto's technocratic regime invested in infrastructure, education, health, and agriculture. He shifted the country from an agrarian base to low-end export-oriented manufacturing. Economic growth averaged over 7 percent between 1985 and 1997, and the poverty rate fell from almost 60 percent in 1968 to 13 percent in 1997.

Nonetheless, Suharto's economic policies had weaknesses, including unsustainable foreign debt, poor corporate governance and financial regulation, and massive corruption. Estimates of his and his family's alleged take from the treasury range as high as $35 billion.

The Asian financial crisis, which began in 1997, exposed these weaknesses. As it intensified, Indonesian companies—many controlled by Suharto and his allies—could not service their debts. Investors fled, depressing the rupiah. Scores of banks collapsed, wiping out savings. The price of oil, one of Indonesia's chief exports, reached record lows even as China was challenging Indonesia's advantage in low-end manufacturing.

The economy shrank by 13 percent in 1998, and an additional 10 percent of Indonesians fell into poverty between 1998 and 2000. Suharto was forced to seek a rescue package from the International Monetary Fund (IMF). At its direction, the government broke up several monopolies and consolidated banks, though the reforms were limited. The image of then–IMF chief Michel Camdessus towering over Suharto made the dictator look weak and inept.

Protests mounted in Jakarta and elsewhere as citizens lost their fear of Suharto's security forces. In 1998, Suharto stepped down, handing power to his vice president, B. J. Habibie. An accidental change agent, Habibie was surprisingly open to real reform. He allowed free legislative elections in 1999, which, contrary to many predictions, were largely peaceful. He also allowed East Timor to leave the country and initiated political and economic decentralization that proved critical to Indonesia's survival.

Following Habibie, Indonesia suffered through the short, weak presidencies of Abdurrahman Wahid and Megawati Sukarnoputri. However, the country's reform process has accelerated since 2004. After winning that year's presidential election, former general Susilo Bambang Yudhoyono made fighting corruption a centerpiece of his administration. He also bolstered infrastructure and advanced business-friendly reforms. Foreign investors returned to Indonesia and growth accelerated to more than 6 percent per year, although Yudhoyono has slowed his commitment to reforms since his reelection in 2009.

Pathways to Freedom: Political and Economic Lessons From Democratic Transitions, a new book from the Council on Foreign Relations, explores Indonesia's progress and challenges in six areas of economic, political, and social development.

Socioeconomic Exclusion and Inclusion

Inequality helped spark the 1997–98 unrest that presaged Indonesia's transition. Although Suharto's policies vastly improved citizens' lives, he and his cronies amassed wealth ostentatiously. Many believed he privileged ethnic Chinese industrialists and excluded non-Javanese from senior positions. These perceptions—though rooted primarily in racism—led to broad anti-Chinese violence and contributed to the chaotic atmosphere of the late 1990s.

After Suharto's fall, income inequality widened significantly as the economic downturn fell hardest on the poor. Governments in the 2000s expanded transfer programs and subsidies for rice, healthcare, and education. These efforts, combined with strong growth, have reduced poverty. But inequality remains a problem. Wages in low-income fields such as agriculture and apparel manufacturing are stagnant even as educated Indonesians command high salaries in areas such as finance and information technology. Indonesian leaders have failed to manage expectations that democracy would immediately bring prosperity, and some elites worry that if Indonesia democratizes without significantly reducing poverty, populism might take hold.

Economic Structure and Policies

Indonesia has recently benefited from a resumption of strong economic growth. Although rising commodity prices have helped, the country is diversifying away from resource extraction. Leaders have worked to tackle corruption and strengthen regulation and corporate governance while maintaining pro-growth macroeconomic policies. The country's GDP surpassed $1 trillion in 2010 for the first time.

Still, economic challenges remain. Greater local control and improved practices by foreign firms have cooled public anger over resource extraction, but tensions persist, especially in mineral-rich Papua. The Yudhoyono government has passed laws designed to nationalize part of many extraction ventures, and in the past year economic nationalism has spiked significantly. While popular, this could deprive Indonesia of technology and expertise. Graft, poor government coordination, and protectionist policies also present obstacles. Foreign investment is rising sharply, but Indonesia still attracts less U.S. investment than Belgium. Finally, the economy has struggled to ascend the value-added scale and make its resource exploitation more sustainable. As decentralization has given them a greater share of resource income, local leaders have shown little interest in environmental protection.

Civil Society and Media

The street protests of 1997–98 and massive participation in the 1999 election made Indonesians feel that popular mobilization had been critical to the transition. This made them willing to endure the period of economic and political uncertainty that followed. The media also helped poke holes in Suharto's fading regime and generate support for the transition.

Building on this shift, Indonesian media flourished in the 2000s. Local radio stations, newspapers, and Web outlets helped citizens understand the devolution of new powers to local authorities and became essential to holding them to account. Mobile phones, the Internet, and low-cost airlines also helped knit the country together. In 2011, Indonesia had the world's third-highest number of Facbook users.

In the civil society sphere, Indonesia's moderate Islamic organizations, some of which count tens of millions of members, were critical in ensuring a peaceful transition that led to secular democracy. Their leaders helped uphold the concept of a nation that is Muslim-majority, but not Muslim-only.

Still, radicalism remains a problem. Political decentralization has allowed harder-line Islamic parties to dominate some local politics, and schools formed by Jemaah Islamiah (JI) and other militant groups became effective recruiting grounds. President Yudhoyono has used speeches, a television campaign featuring former militants, and a deradicalization effort to combat militancy. By the late 2000s, the government had effectively dismantled JI, though militant attacks against religious minorities are on the rise.

Legal System and Rule of Law

A major priority since Indonesia's transition has been corruption. President Yudhoyono has supported the Corruption Eradication Commission (KPK) created in 2002, defending its independence and saying that no one, including his family, should be outside its reach. Indonesia's global ranking in perceptions of corruption has improved, but some activists believe the KPK is too cautious. Moreover, though Yudhoyono is regarded as personally clean, graft scandals have ensnared senior officials in his party.

Indonesia has also failed to address serious human-rights abuses, particularly by military leaders. During the transition, civilian leaders made clear to senior officers that if they accepted political change, the government would not prosecute officers for abuses in Timor, Aceh, or Papua, or against Suharto's political opponents. Special courts created after Suharto to address abuses have produced no convictions. This whitewashing may have been necessary to persuade the military to relinquish political power. However, it perpetuated a climate of impunity that many believe has contributed to continuing abuses in places where the military retains substantial power, such as Papua.

Government Structure and Division of Power

Amid concern over restive regions in the late 1990s, Jakarta's elites came to see devolution of power away from the central government as the least-worst solution to keeping Indonesia unified, preserving secular government, avoiding more violence, and jump-starting the economy. The process allowed subnational governments to keep and use a greater percentage of tax and natural-resource revenues, brought public services closer to the people, and increased the scope and frequency of local and provincial elections. Some regions also gained special rights that allowed them to incorporate some political traditions into the modern day. Devolution helped cool separatist sentiments, improve services, boost budget transparency, and consolidate a democratic culture. However, it decentralized graft as well.

Indonesia's transition also brought the civilianization of the armed forces. Under Suharto, military-controlled corporations operated with minimal civilian oversight and committed massacres in outlying regions. Officers faced no public accountability and enjoyed a constitutionally guaranteed political role. Successive civilian governments convinced military leaders that a divorce from politics would preserve the military's positive reputation, which was endangered by human-rights abuses. Governments also essentially offered senior officers financial incentives, including pensions and an increased military budget, to leave the political sphere.

Education and Demography

Nearly 60 percent of Indonesians are younger than thirty. This youthful population constitutes a major economic advantage. But to capitalize on it, Indonesia must improve its education system. Few schools have Internet connections and other technology, and, despite increasing budgets, many are forced to collect fees from parents. Decentralization was supposed to help the education system by opening local politicians to parental pressure, but these politicians have not generally prioritized schools. As a result, Indonesia's economy depends too heavily on lower-skilled resource extraction and agriculture.

Urbanization is another critical trend. In the 1960s, Suharto and his security forces used Indonesians' isolation to spread disinformation. By the 1990s, growing urbanization and expanding communications technology made this more difficult. The country's young and increasingly urban population has caused significant tension in recent years as a growing disconnect emerges between young, educated Indonesians and political elites, who have not absorbed young activists into their senior ranks.


Indonesia has much to be proud of, especially given its perilous state in the late 1990s and early 2000s. However, security forces continue to act brutally in some regions, schools are not producing knowledge workers and entrepreneurs, and the successful transition created high expectations that elected politicians are struggling to meet. Leaders will have to deliver freer politics and more inclusive growth to preserve and extend Indonesia's gains.

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