Indonesia - Politics, government, and taxation

The Republic of Indonesia consists of 23 provinces, 2 special regions, and the capital-city district. In August of 1999, a referendum approved independence for East Timor, the area formerly known as Propinsi Timor Timur, but its status remains in transition. The president, who is both chief of state and head of government, is elected by the People's Consultative Assembly for a 5-year term, as is the vice president. Legislative power is vested in a unicameral House of Representatives of 500 seats, 462 of whom are elected by popular vote and 38 are appointed from the military. The People's Consultative Assembly, which meets every 5 years to elect the president and vice president and broadly approve national policy, is comprised of the House of Representatives plus 200 members chosen indirectly. Judicial power is vested in a Supreme Court, whose judges are appointed by the president. Major political parties include the Crescent Moon and Star Party (PDB), the Development Union Party (PPP), the Indonesia Democratic Party (PDI), the Indonesia Democracy Party-Struggle (PDI-P), the National Awakening Party (PKB), and the National Mandate Party (PAN).

The former Dutch East Indies proclaimed independence on 17 August 1945, and fought a lengthy war with the Dutch, who were not ready to give up their colony. After 4 years of fighting and negotiations, the territory was formally recognized as the independent nation of Indonesia. Under Indonesia's first president Sukarno (who like many Indonesians used only one name), Indonesia experimented with socialism , and the government controlled most markets, foreign trade, and banking. A violent change in government in 1965 brought General Suharto to power. He presided over the extermination of what had been the world's third largest communist party, a process that killed at least half a million suspected communists and arrested a million more. Most of those arrested were deprived of their civil rights for decades. Suharto's "New Order" government also appointed a group of U.S.-trained economists (sometimes known as the Berkeley Mafia) to guide economic policy in a more technocratic and non-political way. The government directed state investment and protected favored industries from competition, but the system was decidedly capitalist. At the same time, state corporations and private conglomerates, mostly owned by Suharto's family and supporters (many of them ethnic Chinese), were built through government-granted monopolies and preferential access to credit, licenses, and products.

The New Order adopted as its slogan a "trilogy of development" consisting of stability, growth, and equitable distribution. Stability was enforced by the harsh repression of dissent from students, journalists, workers, or politicians. Elections were scheduled every 5 years, but no meaningful opposition was allowed. Suharto maintained power through the support of the military and control of the bureaucracy but also in part through the perceived legitimacy that came with significant economic growth.

That legitimacy fell with the onset of the Asian financial crisis in 1997, which also revealed the deep-seated corruption, cronyism (favoritism shown by public officials to their political supporters) and nepotism (favoritism shown by public officials to their relatives) that had left the economy so vulnerable. The economic crisis led to massive student protests that forced Suharto to step down. His vice-president assumed power and announced the first democratic elections in 44 years, which took place in June 1999. After years of restrictions on parties and campaigning, 45 new parties participated in the elections. Despite fears of instability and corruption, the vote was considered a fair representation of the electorate, 93 percent of whom participated. The party winning the most votes (37.4 percent) was the Indonesian Democratic Party (PDI). Led by Megawati Sukarnoputri, the daughter of Indonesia's first president, this nationalist party was unable to form a coalition in the People's Consultative Assembly, where the president is selected. Abdurrahman Wahid, the moderate head of the National Awakening Party (PKB) party, was sworn in for a 5-year term in October 1999, with Megawati as vice-president. Wahid, usually known by the nickname "Gus Dur," is nearly blind and has suffered a stroke, but he is a shrewd politician who led the largest Muslim organization in Indonesia. Wahid's policies have generally supported foreign investment but have also been erratic, sparking fears of instability and economic uncertainty.

The Wahid administration reversed some of the Suharto-era restrictions on free expression: it released political prisoners, eliminated the feared security coordination body BAKORSTANAS, and increased freedom of the press. There is still very weak commitment to investigating and prosecuting human rights violations, which continue to be a problem, particularly in conflict areas such as Aceh, at the northern tip of the island of Sumatra and in East Timor. Moreover, Wahid failed to put a stop to the economic slide that began in 1998. By 2001 the legislature, responding to popular protests, proceeded with impeachment proceedings against Wahid. Ignoring Wahid's threats to dissolve the parliament, the legislature impeached Wahid and replaced him on 26 July 2001, with vice-president Megawati Sukarnoputri.

Although Indonesia has generally pursued a free-market approach to economic development, the government has kept state control over enterprises in sectors such as oil, plantations, and some areas of technology. The role of state-owned enterprises increased during the first decades of the New Order, contributing 30 percent of the GDP by 1990 and remaining dominant players in banking, plantations, transportation, and some areas of manufacturing. The bankruptcy of nearly all the major conglomerates and the subsequent bailout has left the government officially owning major segments of the economy at the dawn of the 21st century. There is pressure from the IMF to sell off assets and privatize the state-owned companies, but movement in this direction has been slow.

Wahid's policies aimed to encourage foreign investment and, in accord with IMF agreements, to take steps to strengthen the weak banking and corporate sectors. But President Wahid was distracted in pursuing these goals by such factors as the ongoing violence in certain regions, allegations of government corruption, the difficult problem of reforming the political role of the military, and battles with parliament. It is uncertain how Megawati, as the new president is known, will solve these problems, but it is clear that she will do so with the backing of the military, long the prop for political power in Indonesia. Indonesian voters will have a chance to voice their approval of Megawati's measures in elections in 2003.

Government revenues in fiscal year 1999-2000 were estimated at US$25.4 billion (including US$6 billion from international financial institutions such as the IMF). Tax revenues have historically been small, with revenues from the personal income tax falling from 6.5 percent of total revenues in 1968 to 2.9 percent in 1984. To boost revenue, the government changed the personal and corporate tax system in 1983 and introduced a value-added tax (VAT) in 1985. The 2000 budget called for the government to broaden the tax base, end most VAT exemptions, and review tax holidays , which guarantee some businesses a period of several years of tax-free operations.

New decentralization laws scheduled to take effect in 2001 will shift most functions from the capital to the provincial and district levels and redistribute a much higher share of profits from oil, gas, forestry, mining, and fishing to local governments. This process has significantly slowed down, however, due to concerns from Indonesian authorities and foreign investors that the local governments were not ready to assume control.

The legal system is based on Roman-Dutch law, modified by indigenous concepts and recent reforms. The court system is extremely corrupt and vulnerable to political influence. Weak courts make it even harder to reform the economic system, as influence and corruption block attempts to resolve the crisis.

Under the New Order, the military was given "dwifungsi," or "dual function," in which it played a social and political role as well as a military one. Active-duty officers occupied important positions in the executive branch, including serving as governors and ministers. The military was also given appointed seats in the national assembly. In their self-described roles as "guardians of development," the military participated in such activities as reforestation and family planning, which led to some charges of coercion or other human-rights abuses. The military also played a pervasive but unofficial role in the economy by placing officers on the boards of private and state-owned enterprises. In exchange for political protection for the businesses, the military was given access to funds for personal and official uses. Military-owned companies also operated in the open market. For example, a holding company tied to the important Army Strategic Reserve Command owned a film company, an airline, and an automobile assembly plant. While its political function has been much reduced since the end of the New Order, the military still has 38 out of 500 seats in the National Assembly, although this may be reduced in the future. Military expenditures in fiscal year 1998-99 were estimated at $1 billion, or 1.3 percent of the GDP. The police force was only recently separated from the armed forces and are not yet seen as an effective or accountable agent of law enforcement.