What A Way To Reform.

Amid the chaos, Indonesia is inching toward political and economic change.

Since the outbreak of the financial crisis of 1997, reports of economic, political, ethno-religious, and military conflict occurring in Indonesia regularly appear in the world's newspapers, giving the impression of a nation in chaos. To many, Indonesia is already a failed state. Foreign investment has been driven away by the absence of law enforcement, effective bureaucracy, and fair taxation. The government has been unable to prevent violence between Muslims and Christians or to stem separatist movements in Aceh and Irian Jaya. The depoliticization of the military has only just begun, and President Abdurrahman Wahid lacks budgetary levers to discipline the armed forces, which are still funded from off-budget expenses. As a consequence, Wahid cannot depend on military loyalty to quell violence in the provinces.

Unable to stem corruption, Wahid is suspected of cutting deals with crony conglomerate owners in back rooms. The President seems to be building a war chest for the next election, and there is suspicion that he is extending special treatments for the purpose of mobilizing funds. More than half of the government's budget leaks away unaccounted for. The land that is tilled by small farmers is very rarely registered, and many of the nation's urban dwellers do not possess titles to their homes. The head of the opposition was a minister in Suharto's cabinet; thus many question his loyalty to reform as well.

But what critics see as a country pulling itself apart can also be viewed as a nation reinventing itself. Although lacking managerial ability, Wahid is praised for overall good leadership. He leads by principles. His most significant contribution is the building of the missing piece in Indonesia's development equation: He is slowly nurturing civil society into existence. Under Wahid, popular action is beginning to persuade government to pay more attention to local concerns. He is pushing decentralization to dispel the impression that nationhood means serving only Java, the most populous island. He has made progress .on intangible areas, including religious toleration, ethnic homogeneity, and sending the military back to the barracks.

The balanced federalism needed to keep the nation unified is emerging. The President is seriously interested in restraining extremist Islamic tendencies and creating a safe home for the nation's diverse religious and ethnic groups. The triumph of a tolerant Islam is essential for future national and regional security. Although the conventional wisdom is that the elites are poised to gain back the control they lost during the crisis, the reality is that a process of change is underway that no one can control. Even if these elites temporarily regain power, they will not be able to take the country back to where it was because fundamental changes are taking place.

Conglomerates are no longer a useful form for business because they offer a fat target to the democratic opposition; exports are booming without them. Information access and increased literacy have connected Indonesia's students and middle classes to global movements for transparency and accountability. Significant foreign investors now have access to the local media and the political leadership. The distribution of special privileges to old players now provokes a strong reaction. When a local Parliament tried to allocate governmental funds to itself, for example, it was occupied by students.

Clearly, a profound process of deep systemic change is underway. Where is that process going? As political coalitions form and reform, part of the answer can be found in the dynamics of bargaining between key stakeholders.

During the course of Suharto's thirty-two-year dictatorship, the state dominated the economy. In the late 1980's, his regime instituted basic economic reforms that led to ten years of economic expansion, yet little expansion of political rights was granted to Indonesia's citizens. Economic growth and liberalization without rule of law or appropriate institutional constraints allowed Suharto, his family, and associates in government to seize control of much of the nation's resources and businesses.

After the collapse of the rupiah, Suharto bowed to pressure to step down from power. He was believed to have mismanaged the economy and thus brought on the crisis. B.J. Habibie, his handpicked successor, replaced him only to face massive protests and rioting. In 1999, popularly elected Wahid replaced Habibie and introduced democratic reforms. While the new constitution protects some political rights and the country aspires to a cleaner, more open economy, it has also set up many expectations that the government is not equipped to meet. Wahid has begun to introduce democratic reforms, but economic competition is hobbled by a system where the lines between public and private ownership are blurred.

Some observers believe that two distinct coalitions will form on political reform. Extensive reform will be supported by Wahid, his chief rival Vice President Megawati Sukarnoputri of the Indonesian Democratic Party of Struggle (PDI-P), and liberals from within the Golkar party, the ruling party under Suharto. Their objective is to institutionalize democracy and create greater constitutional protection for citizens' rights. However, they face a formidable--although disorganized--opposition comprised of Amien Rais, Head of the National Mandate Party (PAN), Islamic extremists, Golkar Conservatives, and the military old guard, all of whom support a weak democracy.

Among the opposition groups, none wants a strong democracy, but they disagree over the form of an alternative regime. Rais and the radical Islamic group prefer a weak democracy with an Islamic orientation. The military old guard and Golkar Conservatives prefer a more secular weak democracy with more control by the military. While support exists for further political reform, no major changes in the political structure are anticipated. Until the ideological split between the different stakeholders is overcome, a weak democracy will persist in Indonesia for the foreseeable future. Unitary centralized control is unlikely to re-emerge, but the present situation is a far cry from the chaos depicted by the international media. In fact, because basic political stability and law and order are not in jeopardy, leadership can and should concentrate on institutionalizing good governance, beginning with the introduction of checks and balances at all levels of governmental decision-making.

Indonesia's critical stakeholders support substantively different degrees of political reform. This disagreement takes shape largely along religious lines. Rais, along with smaller factions of Islamic extremists, wants an authoritarian government. The remaining key stakeholders favor more institutionalized protection of political rights. Wahid will have to convince the more liberal elements--students, non-government organizations (NGOs), the media, etc.--to settle for institutionalized democracy in order to block the Islamists' demand for a fundamentalist state. Concurrently, Golkar Conservatives will try to persuade the military old guard and Islamic extremists to support a weak government, limiting the extent of possible reforms.

A liberal economy is supported in Indonesia, but, again, change is prevented by disagreement over the extent of reform. The Golkar Conservatives anchor opposition to economic reform and will continue to do so. The military old guard favors the status quo, which is a cartelized economy. Having once dominated the economy, the military prefers to hold on to as much of it as circumstances will allow. Some opponents of economic reform--state enterprises and the national bureaucracy--will move away from cronyism and accept a degree of liberalization. Wahid, Megawati, and Golkar Reformists such as Marzuki advocate a liberal economy with open trade relations.

The debt restructuring process is dragging due to pressure from high government officials who advocate delaying asset sales to protect their original owners. Wahid has already directly intervened on behalf of particular conglomerate owners. One government spokesperson remarked: "They have the entrepreneurial skills we do not want to kill." Many believe Wahid's interference was motivated by political aims. Looking ahead to the next election, he may be trying to line up electoral support from groups that can support his campaign. However, reviving the old conglomerates risks choking the growth of new entrepreneurial initiatives that promise to be the engine of future growth. The greatest hope for the future is to unleash the creativity of the nation's poor by supplying and enforcing property rights to enhance access to capital. The greatest downside risk is a return to the solutions of the past.

The government is not able to agree on how to deal with secession. Wahid takes a conciliatory position, advocating that the regions should be granted constitutionally protected autonomy and rights. This position is rejected by other powerful interest groups. The military, Islamic fundamentalists, Megawati, and to a lesser degree the military old guard, support the current centralized government structure. All of these groups remain inflexible on potential concessions to further autonomy for the regions.

Ultimately, the secessionist movements may propose a confederation as a compromise. This offer will not receive support, as even Wahid would opt for a more centralized government. Thus, the government will not deal comprehensively with the problem of secession, and this conflict will continue for the foreseeable future.

Political change is taking precedence over economic change. Ethnic heterogeneity and religious tolerance have been Wahid's two key issues. Many blame him, in fact, for failing to concentrate on the economy and for focusing instead on keeping his forces together and amassing the resources he needs to stay in power.

This focus makes investors uncomfortable, but it also promises the foundations of a more viable future society. The future will be unstable unless the new order succeeds where Suharto failed by expanding the number of people who profit from the system and who wield power within it.

The tension between centralized government and the need for more decentralized power will take years to work out, but that progress has begun. While the outcome is likely to be uneven, it promises something more equitable and therefore more durable in the end than what existed in the past. Power will seep out to regional leaders whether they are ready for it or not. Some of the advantages of centralization may temporarily be lost, but Indonesians object more strongly to domination by a single group than they object to the general idea of staying together. Still, if a balanced federalism emerges that allows the nation to stay together without Javanese domination, the nation will survive.

The biggest obstacle to future stability will be convincing the elite to accept the rules of the new democratic regime rather than using their resources to discredit Wahid and destabilize the forces of democratic reform.

Indonesia is not unique; throughout East Asia the people in charge seem to lack the power to bring about necessary change. In Korea and Thailand, reformers have been elected, but they too seem unable to overcome the obstacles before them. Powerful moneyed interest groups that want recovery on their own terms compromise the authority of these leaders. Throughout East Asia, the winners of the past are willing to arouse discord in hopes of climbing back into power. Similarly, Indonesia is locked into a social arms race between the forces of the past and those whose support the new democracy of the future. Indonesia's future stability depends on how it consolidates democratic reform while reconciling its past history of military rule.

Hilton L. Root is Director of Global Studies for the Milken Institute, a nonprofit economic think tank in Santa Monica, California.