During the 1990s, Indonesia's economy recovered from petroleum pricing fluctuations and appeared to thrive despite widespread corruption. Then Indonesia's economic prospects met disaster in the fall of 1997 as an Asia-wide economic crisis struck. The rupiah's value declined as much as 90%, and foreign investors fled. The crisis resulted in food riots, inflation and an International Monetary Fund (IMF) bailout that many Indonesians believe infringed on their national sovereignty. Decades of wholesale looting of the economy by the Suharto family and associates came to light in 1998. The Wahid and Megawati administrations have been faced with the tasks of trying to sell off bankrupt assets and attempting to reform the country's economy along IMF guidelines.
With Megawati in office, the country remains heavily in debt, with high unemployment. Agriculture is depressed, necessitating rice imports, and infrastructure is decaying. The IMF's US $5 billion bailout continues, with Megawati inspiring increased confidence as she goes along with economic reforms, including the sale of bank assets. She replaced the head of the banking restructuring agency and appears to be spurring the slow-moving agency to move faster. She stopped a scheme that would have allowed slower debt repayment by business owners. Some Indonesian business sectors, including telecommunications, were finally making something of a comeback as of early 2003. Inflation decreased during the first year of Megawati's administration but was still relatively high at 11.5% in 2001. Although the economy grew 4% in 2002, wages were still stagnant, exports were lagging, and foreign investors were wary.
A free-for-all in natural resource extraction has taken place after the fall of Suharto, as his economic holdings fall into the hands of others who use the same ruthless techniques. Severe deforestation has resulted throughout Indonesia. Megawati's administration has shown a new willingness to crack down on the illegal timber trade that is destroying the rainforests of Kalimantan (Indonesian Borneo), but corrupt provincial officials still block such efforts.
When she assumed the presidency, Megawati launched an anticorruption drive. She is perceived as a person of integrity, although some analysts describe her husband as corrupt. A high-profile case was made against Golkar party leader and parliamentary speaker Akbar Tanjung and two others; the three were accused of embezzling millions intended for poverty aid; millions of dollars have been returned by those on trial. The case has been pursued despite Golkar being allied with Megawati's party in the coalition government. Tandjung was convicted in September 2002, but his sentence was suspended while he waited for his appeal to be heard. His conviction did not appear to affect the strength of Golkar.
Megawati has not yet shown a willingness to bring reform to Indonesia's notoriously flawed judicial system. The trial of Suharto's son Tommy for the murder of a judge is seen as a test of the legal system's vulnerability to bribery and influence. Tensions arose between underfunded military and police forces, with clashes between the two forces in late 2002. The conflict appeared to stem from the involvement of both army and police elements in criminal activities such as drug trafficking. Also, the police forces had been removed from direct army control, which led to resentment.
Constitutional reform is also dangerously slow in implementation. The People's Consultative Assembly is supposed to be finalizing reforms of the 1945 Constitution, but it is moving so slowly as to place the changes made so far in jeopardy, and there is significant opposition to the whole process both inside and outside of the legislature. In particular, Megawati's own Indonesian Democratic Party is against the reforms that she is charged with carrying out. The reforms are intended to make elections and parliamentary representation more fair. They would limit the power of the People's Consultative Assembly, which as shown in its ouster of Wahid, is very powerful indeed. The reforms would also take away guaranteed seats for the military and police.
Another major area of domestic concern is ethnic conflict and its impact on national unity. After Megawati took office, grievances continue to emerge which were developed over many years of human rights abuse and economic exploitation of other islands by the Java-based central government under Suharto. The depressed economic situation contributed to ethnic and social divisions. Violence was especially intense between settlers brought from crowded Java and Madura to outlying islands during Suharto's transmigration programs, and the indigenous people of those regions. These conflicts often have religious overtones, as most settlers are Muslim and many local people are Christian or Animist.
By the end of Megawati's first year in office, outright violence had lessened considerably, possibly because her good relations with the military stopped it from helping to stir up destabilizing ethnic chaos. Wahid had been known for his conciliatory approach towards rebellious East Timor and Aceh, and for weakening the role of the military in decisionmaking. During his administration, however, ethnic violence continued to spiral out of control, particularly in the Malaku Islands and Kalimantan, and the Aceh conflict was far from being resolved. Some observers believe that these flashpoints were used by the military to provide a pretext for getting rid of Wahid and replacing him with the more pro-military, nationalist Megawati.
Megawati has been unenthusiastic about East Timor's independence and reluctant to hold the Indonesian military accountable for human rights abuses committed there, implying that she would have handled the situation differently than did Habibie and Wahid. Arrests of high-ranking Indonesian military officers, including General Wiranto, for war crimes in East Timor, have not materialized; and Indonesia is seen as protecting them, although lower ranking officers have been put on trial. Human rights trials of officers implicated in the Timor actions were held in Indonesia, but resulted in few conditions and were internationally condemned as a sham. Still, Megawati has had cordial relations with Prime Minister Mari Alkatiri and President Xanano Gusmao, the leaders of the new nation of East Timor; she attended East Timor independence celebrations in May 2002.
The western half of the island of New Guinea, annexed by Indonesia as the province of Irian Jaya during Suharto's rule, was subjected to transmigration, resource extraction, human rights abuse, and pollution. A separatist movement grew there, coming out in the open after the fall of Suharto and encouraged by East Timor's achievement of independence. An important leader of that independence movement, Theys Hiyo Elouy, was killed in 2001; the Indonesian military was suspected in his murder. In early 2002, Megawati's administration offered the province new levels of autonomy including a name change from Irian Jaya to Papua and a greater share of natural resource revenues, but the deal was rejected and independence demands continue.
In a rare public statement, when she was vice president, Megawati made an appeal to rebellious Aceh, the petroleum-producing region in the north of Sumatra, to be patient, pledging that she would honor local concerns in a "motherly" way. She began her term in office with a public apology to Aceh for past human rights abuses, and has offered an autonomy package, including allowing Islamic law in Aceh and letting the province keep a greater share of resource revenues. While Megawati offers incentives for dropping independence demands, Indonesian troop strength has increased in Aceh, with a regional military command reinstated. An internationally monitored peace accord was signed with the Free Aceh Movement in Geneva, Switzerland, on 9 December 2002. The Indonesian military stopped campaigns against the Achenese militants, and a real, if fragile, calm was restored to Aceh. As of early 2003, it remained to be seen whether offers of autonomy and demands for independence can be truly reconciled.