Indonesia's slide toward disaster is continuing unabated, with deeply worrying implications for its neighbors. Yet, this is a situation that outsiders, the United States included, have little scope to influence. The stark reality is that conditions in Indonesia are unlikely to improve until there is a change in political leadership. The good news is that, in all likelihood, such a change is not far off.
There is no disguising the parlous state of Indonesia's economy. Much business activity has all but come to a halt. There has been a huge flight of foreign and local capital. With the exchange rate so far below what it was just a few months ago, a foreign-debt moratorium is effectively in place, since no firms are able to meet their debt obligations. Foreign and local banks have stopped lending. Exporters are unable to open letters of credit with foreign banks needed for trading. Companies depending on imported goods have either ceased operations or soon will. In short, the country teeters on the edge of hyperinflation and the number of unemployed rapidly escalates.
Amid this economic carnage, Indonesians and the outside world were treated last week to the strangely serene spectacle of the meeting of the country's Consultative Assembly to reappoint President Suharto to a seventh five-year term. That there was not even a murmur of dissent is due to the president's domination of the assembly, in particular (he appoints most of the delegates charged with appointing him), and Indonesian political life, in general.
This year, the assembly's proceedings were even more carefully choreographed than usual. All delegates were reportedly required to give signed commitments of their intention to endorse Suharto in advance of the vote. To guard against the possibility of trouble on the streets, an estimated 25,000 troops were brought in to patrol the streets of Jakarta.
No amount of political choreography will be able to maintain this calm, however. While Indonesians may have been unwilling to disrupt their country's constitutional rules last week, now that Suharto has been reappointed, economic and political realities will begin to bite again. Unless Suharto and his new Cabinet can quickly convince investors, particularly local investors, to bring their money back, serious political trouble will erupt.
It is, of course, possible that Suharto will reverse the country's decline. He has, after all, successfully steered Indonesia through previous economic crises. Were he to appoint an impressive Cabinet, begin cooperating actively with the International Monetary Fund and adopt measures to reassure investors, it is conceivable that he could restore trust in his leadership.
But this seems extremely improbable: All his actions in the past few months have been in the opposite direction. So much damage has been done to investor confidence that it is difficult to imagine that enough money will return in time. It is not just international fund managers who are staying out of Indonesia; Indonesian companies have sent all their available liquid assets to safer currencies and safer havens.
Still, it is testimony to the highly centralized nature of Indonesia's political system and Suharto's political acumen that he remains in office. Along with investors, most members of Indonesia's elite understand that he has gone from being a key ingredient in the solution to the fundamental obstacle to recovery. Thus far, no one has been willing to take the first step in moving against him. But this will not last much longer. The reversal of economic fortunes has been so dramatic and so widespread that it is difficult to believe public tolerance will endure.
How will the change come? There are many possible scenarios, but whether it be organized middle-class student groups in major cities or sections of the disparate but swelling ranks of the urban poor, public anger probably will lead to intensified outbreaks of protest, then violence. The armed forces will continue to remain loyal, but there will come a point at which they will not sacrifice the country for Suharto. Precisely what will snap and precisely when this will happen remain to be seen, but the fundamental reality seems clear: Suharto is finished.
It is not just Indonesians who are viewing their country's rapid decline with horror. Indonesia so dwarfs its regional neighbors that chaos there spells crisis for them. For Singapore, Malaysia and Australia, this is the most threatening development since the height of the Cold War in Asia. While some of the feverish scenarios under discussion in these countries--a repeat of the widespread political violence that gripped Indonesia in 1965-66 following the collapse of the previous regime or a huge exodus of Chinese Indonesians fearful of an ethnic-cleansing campaign--seem unlikely, there are grounds for deep anxiety.
In the short term, the greatest threat to neighboring countries is economic refugees--ordinary Indonesians seeking work. One little-noticed facet of Asia's rapid industrial growth has been the emergence of a remarkably fluid regional labor market, with workers crossing borders in search of job opportunities. Malaysia and Singapore are frantically preparing themselves to deal with a surge of Indonesians seeking work and perhaps even a square meal in their prisons. Americans periodically worry about an influx of migrants from Mexico, but spare a thought for Malaysia, with a population of just 20 million, and tiny Singapore, with 3 million, which have 200 million Indonesians on their doorsteps and tens of millions of them now out of work.
Not surprisingly, these countries have been quick to support Indonesia and urge moderation on the part of the IMF and the U.S. government. While the United States has important long-run economic and strategic interests in Southeast Asia, its key consideration today is whether the turmoil in Indonesia threatens to undo economic recovery elsewhere in Asia. In early January, senior IMF and U.S. officials rushed to Jakarta to construct a rescue package primarily because of fears that Indonesia might destabilize the rescue in Korea. But the risk of renewed contagion seems to be declining now, with markets starting to differentiate more effectively between countries making real efforts to turn things around and those that remain paralyzed.
Suharto has shown that he will not be pushed around by the IMF, the U.S. government or anyone else. As such, there is little that outsiders can--or should--do, beyond ensuring essential humanitarian aid. Indonesian's government is exercising its sovereign right to run policy as it sees fit. Markets will react accordingly and, before too much longer, so will Indonesian political forces.
Suharto's departure will carry real uncertainty and risk, but that's no reason to fight it. Once there has been a change, Indonesians and the international community can begin to reconstruct one of Asia's most remarkable success stories.