U.S. GOVERNMENT PRINTING OFFICE

64–418 CC WASHINGTON : 2000

INDONESIA: CONFRONTING THE POLITICAL AND

ECONOMIC CRISES

HEARING

BEFORE THE

SUBCOMMITTEE ON ASIA AND THE PACIFIC

OF THE

COMMITTEE ON

INTERNATIONAL RELATIONS

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

FEBRUARY 16, 2000

Serial No. 106–99

Printed for the use of the Committee on International Relations

(

(II)

COMMITTEE ON INTERNATIONAL RELATIONS

BENJAMIN A. GILMAN, New York, Chairman

WILLIAM F. GOODLING, Pennsylvania

JAMES A. LEACH, Iowa

HENRY J. HYDE, Illinois

DOUG BEREUTER, Nebraska

CHRISTOPHER H. SMITH, New Jersey

DAN BURTON, Indiana

ELTON GALLEGLY, California

ILEANA ROS-LEHTINEN, Florida

CASS BALLENGER, North Carolina

DANA ROHRABACHER, California

DONALD A. MANZULLO, Illinois

EDWARD R. ROYCE, California

PETER T. KING, New York

STEVE CHABOT, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

MATT SALMON, Arizona

AMO HOUGHTON, New York

TOM CAMPBELL, California

JOHN M. MCHUGH, New York

KEVIN BRADY, Texas

RICHARD BURR, North Carolina

PAUL E. GILLMOR, Ohio

GEORGE P. RADANOVICH, California

JOHN COOKSEY, Louisiana

THOMAS G. TANCREDO, Colorado

SAM GEJDENSON, Connecticut

TOM LANTOS, California

HOWARD L. BERMAN, California

GARY L. ACKERMAN, New York

ENI F.H. FALEOMAVAEGA, American

Samoa

MATTHEW G. MARTINEZ, California

DONALD M. PAYNE, New Jersey

ROBERT MENENDEZ, New Jersey

SHERROD BROWN, Ohio

CYNTHIA A. MCKINNEY, Georgia

ALCEE L. HASTINGS, Florida

PAT DANNER, Missouri

EARL F. HILLIARD, Alabama

BRAD SHERMAN, California

ROBERT WEXLER, Florida

STEVEN R. ROTHMAN, New Jersey

JIM DAVIS, Florida

EARL POMEROY, North Dakota

WILLIAM D. DELAHUNT, Massachusetts

GREGORY W. MEEKS, New York

BARBARA LEE, California

JOSEPH CROWLEY, New York

JOSEPH M. HOEFFEL, Pennsylvania

RICHARD J. GARON, Chief of Staff

KATHLEEN BERTELSEN MOAZED, Democratic Chief of Staff

SUBCOMMITTEE ON ASIA AND THE PACIFIC

DOUG BEREUTER, Nebraska, Chairman

JAMES A. LEACH, Iowa

DANA ROHRABACHER, California

PETER T. KING, New York

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

JOHN MCHUGH, New York

RICHARD BURR, North Carolina

PAUL GILLMOR, Ohio

DONALD A. MANZULLO, Illinois

EDWARD R. ROYCE, California

JOHN COOKSEY, Louisiana

TOM LANTOS, California

HOWARD L. BERMAN, California

ENI F.H. FALEOMAVAEGA, American

Samoa

MATTHEW G. MARTINEZ, California

SHERROD BROWN, Ohio

ROBERT WEXLER, Florida

JIM DAVIS, Florida

EARL POMEROY, North Dakota

GARY L. ACKERMAN, New York

ALCEE L. HASTINGS, Florida

MICHAEL P. ENNIS, Subcommittee Staff Director

DR. ROBERT KING, Democratic Professional Staff Member

MATT REYNOLDS, Counsel

ALICIA A. O’DONNELL, Staff Associate

(III)

C O N T E N T S

WITNESSES

Page

The Honorable Timothy F. Geithner, Undersecretary for International Affairs,

United States Department of Treasury .............................................................. 8

The Honorable Stanley Roth, Assistant Secretary for East Asian and Pacific

Affairs, United States Department of State ...................................................... 4

Mr. Michael Gadbaw, Chairman, United States-Indonesia Business Committee, United States-ASEAN Business Council ............................................... 23

Mr. Theodore Friend, Senior Fellow, Foreign Policy Research Center ............... 26

Mr. Eric C. Bjornlund, Director of Asia Programs, National Democratic Institute (NDI) ............................................................................................................. 28

APPENDIX

Prepared statements:

The Honorable Doug Bereuter, a Representative in Congress from Nebraska .. 44

Hon. Stanley Roth ................................................................................................... 47

Hon. Timothy F. Geithner ....................................................................................... 53

Mr. Michael Gadbaw ............................................................................................... 70

Mr. Theodore Friend ................................................................................................ 75

Mr. Eric C. Bjornlund .............................................................................................. 81

Additional material submitted for the record:

Information provided for the record by Mr. Michael Gadbaw ............................. 96

Statement submitted to the record by the American Chamber of Commerce

in Indonesia .......................................................................................................... 106

Questions submitted to the record to Hon. Roth by Hon. Doug Bereuter .......... 109

Question for the record Stanley O. Roth by Congressman Douglas Bereuter

Joint Hearing of the Senate Subcommittee on East Asian and Pacific Affairs and the House Subcommittee on Asia and the Pacific ............................. 111

(1)

INDONESIA: CONFRONTING THE POLITICAL

AND ECONOMIC CRISES

Wednesday, February 16, 2000

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON ASIA AND THE PACIFIC, COMMITTEE ON INTERNATIONAL RELATIONS, Washington, D.C.

The Subcommittee met, pursuant to notice, at 10 a.m., in room

2200, Rayburn House Office Building, Hon. Doug Bereuter (Chairman of the Subcommittee) presiding.

Chairman BEREUTER. [presiding] The Subcommittee will come to

order. We will proceed, at least initially, without Mr. Lantos, our

Ranking Member, with the approval of the staff.

The Subcommittee on Asia and the Pacific meets today in open

session to receive testimony on the ongoing transition to democracy

in Indonesia, and the prospects for achieving political and economic

stability and maintaining national unity in that country.

When the Subcommittee last held hearings on Indonesia, on September 9, 1999, we were faced with a crisis situation in East Timor

as military-sponsored militia were systematically killing, looting,

burning, and destroying the country. Attention was naturally focused on that crisis situation. At the same time, Indonesia was preparing for historic democratic elections which, against considerable

odds, were conducted in a free and fair manner. They then had to

select a new president and vice president, which resulted in the establishment of the first democratically-elected government in that

country in many decades.

Last week, the Subcommittee held a hearing on East Timor

which they discussed the situation and prospects for that newly

emerging country. Today, I emphasize for Members of the Subcommittee, and I will emphasize it again if necessary, it is my intent that we focus our attention on the serious political and economic crisis facing Indonesia as it struggles to institutionalize a

new democratic and decentralized system of government. Members

had their chance to speak on East Timor last week. We want to

focus this time on Indonesia.

Undoubtedly, this is a critical juncture in history for Indonesia,

and the stakes are high for it and for the entire region. Indonesia

is both the fourth most populous nation in the world and the country with the largest population of followers of the Muslim faith. It

is a country of stunning geographic and ethnic diversity, occupying

an archipelago stretching over an area wider than the continental

United States. In fact, I think it is the most complicated country

on Earth.

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Moreover, Indonesia is key to the entire Southeast Asia region.

It was the original founder of ASEAN, the Association of Southeast

Asian Nations, and has emerged as a natural leader in that organization’s emergence as an important contributor to stability and economic progress in that part of the world.

Finally, Indonesia has been a good friend and important trading

partner of the United States. I believe that most surely it is in

America’s national security interest to help Indonesia achieve the

economic and political reforms necessary to ensure future stability

and prosperity.

However, the situation in Indonesia remains troubling. The consequences of further economic and political collapse would be extremely serious and would adversely impact regional stability and

U.S. national security. Necessary and painful economic reforms Indonesia must undertake would be daunting even for a well-established democracy. Indonesia must boldly undertake this action

while at the same time, with the most minimal experience, undertake massive political reform.

To date, I believe that President Wahid has made a promising

beginning in guiding Indonesia during this difficult transition and

in dealing with the myriad problems facing the country. He has

taken appropriate steps to help end the violence in Timor and exceeded to the majority will of the people of East Timor to become

independent. He has given priority to resolving regional conflicts

and opened the dialogue with disaffected groups in such regions as

Aceh and Irian Jaya. He has moved to reestablish the rule of law,

undertaken judicial reform, established a commission to investigate

serious human rights violations, and indicated that those found responsible will be held accountable.

In this context, former armed forces chief General Wiranto has

removed from his position in the cabinet as Coordinating Minister

for Politics and Security on February 14, 2000, after being found

importantly culpable for the mayhem in East Timor by the Indonesian commission which investigated that catastrophe.

This assertion of civilian control over the military, I believe, is

a welcome and historic step. President Wahid has also begun to

take important steps to stabilize the fragile economy and has thereby won international financial support from the IMF, the World

Bank, the Asian Development Bank (ADB), the International Consultative Group on Indonesia, and other multilateral and bilateral

sources. He has begun the daunting task of re-capitalizing the

banking and corporate sectors through the Indonesian Bank Reconstruction Agency (IBRA) and dealing with the enormous problems

of corruption and cronyism.

While these reforms have been welcome, they are tenuous and

face determined opposition from determined, entrenched interests.

The newly-appointed ministers, though intelligent and well-meaning, have little experience in managing the deeply suspicious bureaucracy.

In my judgment, the U.S. is correctly providing financial, technical, and political support for Indonesia in an effort to bolster

their positive efforts. Yet the separatist unrest and religious and

ethnic strife in Acheh and elsewhere, and the resistance of some

military and political leaders to the winds of change underscore

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how fragile and volatile the situation is in Indonesia. Given the

many serious problems facing the country, it appears probable that

the armed forces will continue to be a key stabilizing force to ensure the security of the region, the secular integrity of Indonesia.

I believe that previous well-intentioned congressional actions—

which were reactions to the violence and focused on East Timor,

such as the suppression or suspension of the International Military

Education and Training Program (IMET), and the denial to Indonesia of EIMET Program, which was specifically aimed at human

rights training—have largely been counter-productive and have resulted in America losing access and leverage in Indonesia, particularly with the military. That was made apparent by our limited

ability to influence and temper the military’s actions in East Timor.

The need for response for U.S.-Indonesia military-to-military engagement is even more important today because the Indonesian

military is already undergoing significant changes and because

President Wahid has transferred reform-minded generals and admirals into new positions of authority. For the first time since the

1950’s, Indonesia has a civilian defense minister. That is a move

we should applaud and should do what we can to reinforce. Responsible U.S. assistance and engagement could help promote and

shape these positive developments.

I am pleased today that we will have the opportunity to hear

from the Administration and a distinguished panel of private witnesses. Testifying for the Administration will be Undersecretary for

International Affairs at the U.S. Department of the Treasury, the

Honorable Timothy F. Geithner, and the Assistant Secretary of

State for East Asia and Pacific Affairs, the Honorable Stanley

Roth, who was with us last week.

We welcome both these distinguished gentlemen, and look forward to hearing their testimony.

We will begin with Undersecretary Geithner, and then hear from

Assistant Secretary Roth, who was, as I said, here to testify on

East Timor last week.

We are also honored to have an excellent second panel of distinguished witnesses Dr. Theodore Friend is President Emeritus and

Trustee of the Eisenhower Fellowships, and is Senior Fellow at the

Foreign Policy Research Institute. He has tremendous expertise on

Indonesia. He served as President at Swarthmore College. He has

recently visited Indonesia, he speaks the language fluently, and he

is the author of several important recent articles on the country.

We are also pleased to have as a witness Mr. Eric Bjornlund,

Senior Associate and Director of Asian Programs of the National

Democratic Institute (NDI) for International Affairs. Indonesia is

currently NDI’s largest program. Mr. Bjornlund has recently returned from a visit to Indonesia to oversee the program there. Mr.

Bjornlund, I wish to offer my congratulations on your third child

born Monday. Our heartiest congratulations for that. We look forward to your testimony.

In addition, we are fortunate to have with us Mr. Michael

Gadbaw, Chairman of the U.S.-Indonesia Business Committee of

the U.S.-ASEAN Business Council. He is the Senior Vice President

for General Electric Corporation and recently led a large business

4

delegation to Indonesia, which met with senior business and political leaders.

Secretary Geithner, as we have two panels today, I would ask

you and Secretary Roth, if you can, to limit your comments to

about 10 minutes each. Your entire statements will be made a part

of the record. You may proceed as you wish.

Secretary Geithner.

Mr. GEITHNER. If it is OK with you, Mr. Chairman, I was going

to defer to the State Department, as we always do and invite Stanley to go first. It is good to start—when you are talking about economics, it is good to start with politics, anyway. I understand he

can do that better than anybody.

Chairman BEREUTER. It is a courteous and good move. Ordinarily

with equal rank, we would have recognized the State Department

first. Since you are the Undersecretary, however, we have given

you the opportunity to be courteous and pass the buck to Mr. Roth.

Secretary Roth, you may proceed.

STATEMENT OF STANLEY ROTH, ASSISTANT SECRETARY FOR

EAST ASIAN AND PACIFIC AFFAIRS, UNITED STATES DEPARTMENT OF STATE

Mr. ROTH. Thank you very much, Mr. Chairman. I hope you do

note, for the record, this extreme example of cooperation of two departments of the Executive Branch.

Chairman BEREUTER. By the way, I want to reassure my colleagues, when Mr. Lantos arrives, we will hear from the Democratic side of the aisle.

Please proceed as you wish.

Mr. ROTH. It is normally my practice not to go through my written testimony at great length. But I learned, somewhat to my surprise this morning, that the statement didn’t go up last night. So

you haven’t had much chance to look at it. Would you like me to

go through it in greater detail or would you still prefer that I give

you the shrunken version?

Chairman BEREUTER. I think, unless I hear objection by colleagues, we would prefer the maximum time for questions. Some

of us had seen it as we were in the other session.

Mr. ROTH. My apologies for the delay.

You will notice a considerable degree of overlap, which has come

to be a regular feature, rather than a surprising feature between

your opening statement and my prepared testimony.

Chairman BEREUTER. I have learned.

Mr. ROTH. But many of the same points are in there, so I will

try not to be duplicative and just add the supplemental ones.

I think where I would like to begin with a statement that I made

before this Subcommittee several times last year, which was that

having a free and fair electoral process in Indonesia, which resulted in the selection of a legitimate government, was a necessary

but not sufficient condition for Indonesia beginning to be in a position to address all its problems.

I go back to that statement, because I think there has been

something of a tendency, more in Indonesia than in the United

States but even in the United States, to hold Indonesia to an incredible standard, to look at the first 100 days and say, ‘‘What is

5

going on? They haven’t fixed this. They haven’t fixed that.’’ When

in fact, I think it is no surprise to anyone who has followed Indonesia, they have a rather daunting array of problems. We certainly

didn’t have any expectation that these were going to be solved in

as short a period as 100 days. Indeed, I would be thrilled if they

could solve them in a 1,000 days.

But what has taken place, and what you have referred to and is

well known, is that they did have this legitimate process resulting

in the first time we had an election where we didn’t know the results before the election was cast. That was the first time in Indonesia since the 1950’s that that happened, an election that has

been accepted on the street, in terms of the people who voted for

change and got change. So you certainly have a legitimate government which is now facing the task—a multitude of daunting tasks.

But I think it is worthwhile just briefly highlighting the fact, before we get to the problems, that there has been a whole lot of good

news as well, and you mentioned some of those in your opening testimony. In addition to the election itself, I think the encouraging

trend in terms of civilian supremacy over the military, President

Wahid has moved very skillfully and carefully to put in his own

people in key positions. You flagged the fact, for example, that you

had an admiral as commander of the armed forces for the first

time. You have a civilian, for the first time in many years, as defense minister. He has put in several people in other key ministries

and officers in the military including intelligence. You have just

seen the outcome of the struggle with General Wiranto, who has

been suspended from his cabinet position at the request of the

president. This of course relating to the naming of the general, and

many others, in the investigation of the abuses in East Timor that

we discussed last week.

But the important point is major progress toward civilian supremacy. We never saw any evidence—I want to stress this point.

Congressman Faleomavaega asked me about it last week. We never

saw any evidence that the Indonesian military was planning for a

coup. There were many public statements by key generals that

there would not be a coup. In fact, while we spoke out quite strongly about what the consequences would be if it occurred, for purposes of deterrence, it is very important to indicate that we

shouldn’t be blaming the Indonesian military for something it

didn’t do under these circumstances. So, I think important strides

have been made on the principle of civilian supremacy.

On the economic side, I won’t go into great detail given Undersecretary Geithner’s presence here. But I think what I want to emphasize is, first of all, some refreshing differences from the past.

For example, the rather quick decision to release the Bank Bali report, which had held up IMF negotiations previously under the

Habibie regime, as an indicator of a different pattern of behavior.

I think the clarification during President Wahid’s trip to the

United States that he was firmly interested in foreign investment

and saw that as a model for economic development. There had been

some concern about what his economic policies and his cabinet’s

policies might be, but I think he laid a lot of those concerns to rest

during his trip to the United States, early in his presidency.

6

As a result, there has been some dramatic progress, and I think

Tim will talk in detail about the IMF agreement and World Bank

disbursements in general policy. But the stage has been set for economic progress.

In terms of democracy, you now have a parliament that, in the

terms of one Indonesian cabinet minister, has come alive. This is

a bona fide parliament, not a rubber stamp. The same is true at

the provincial levels. You now have 27 provincial assemblies that

are not parking places for retired military people and Suharto cronies, but legitimate instruments of local government. So you have

a lot of democracy taking place in Indonesia.

We have seen the freeing of the remaining—almost all of the remaining political prisoners. To be fair, this was a process that certainly began under President Habibie, and has been expedited by

President Wahid. You mentioned in your own statement that

progress was being made in Aceh—and I will come back to Aceh

in more detail since it is one of the more serious challenges—but

at least efforts have been made to get a negotiating process under

way.

This is the context in which I would like to start then considering some of the problems but making it very clear that the discussion of problems doesn’t—shouldn’t set the tone of suggesting

that we are facing a crisis. It is rather more the long-term haul.

We are in a long-term situation that Indonesia is going to have to

deal with.

I started my written testimony with the economy, because I believe it is very important that we acknowledge that, ultimately,

getting the economy revived and coming out of the impact of the

Asian financial crisis where Indonesia has certainly been the slowest of the Asian countries to emerge, it is ultimately going to be

critical to stability. Over the last year, year and a half, we necessarily focused either on East Timor with all the drama going on

there or on the electoral process and much less on the economy.

But the government no longer gets a bye, and so what they do in

the economy will be critical.

Next, I turn to the issue of civilian supremacy. I have made the

key points in my opening remarks about, one, the fact that civilian

supremacy prevailed. The United States position was always clear,

as Ambassador Holbrooke spoke very forcefully, and I think productively, warning against the consequences of a coup. But also

that we see no evidence that one took place.

On Aceh, I go into considerable detail in my testimony, and I

would like to take just a little bit of time now, because I think that

is one of the greatest challenges. It is one of those cases where I

think one has to recognize what has changed and what hasn’t

changed. What has changed is that for the first time that I can recall, you have a serious negotiating process. You have the government engaging with Acehnese leaders in Aceh, in exile, in Jakarta,

and trying to come up with a process where they can actually get

down to the negotiating table and try to work out a political resolution.

This has not been an easy process, and it has not gone on a

straight line. In fact, there was a great deal of consternation about

early remarks by President Wahid that he would support a refVerDate 11-MAY-2000 10:19 Jun 20, 2000 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 64418.TXT HINTREL1 PsN: HINTREL1
7

erendum, creating the impression that the government would support a vote on independence, which could have been very destabilizing in terms of the territorial integrity of Indonesia. As you

know, in the face of considerable criticism from virtually every

quarter in Indonesia, President Wahid has changed course and now

made it clear there will not be a referendum on independence, that

he is prepared to see a referendum on the application of Islamic

law, but not on political status.

After that shaky start, though, I think things have improved considerably. We have seen the government—primarily through the

minister for human rights, Hasballah Saad, himself an Acehnese—

working very closely with a wide range of Acehnese leaders to try

to put together something called an All Aceh congress, the purpose

of which is to come up with a group of people who can represent

the Acehnese. You have student groups, business groups, revolutionary groups. There are so many different parities in Acehnese,

that President Wahid has said to me, ‘‘What is the address? Who

am I supposed to talk to negotiate?’’ So this is a very important effort by his government to see if they can help facilitate, with the

Acehnese, the emergence of leadership.

There is also a very dramatic progress with the help of an NGO

in Switzerland, which has been meeting, actually, with several—

held broker meetings between the Indonesian government and two

of the factions of the GAM, the Free Aceh Movement, to see if there

could be an agreement on a cease-fire and humanitarian assistance. This took place just before Gus Dur’s visit to Davoz a few

weeks back, and there is another round scheduled for later in this

month. There is no agreement yet, but there is an agreement to

meet again, and obviously, if there could be a cease-fire, that would

be a very positive development.

In the meantime, though, just to be accurate, there is still a very

disturbing level of violence going on in Aceh itself, many fatalities

each week on every side, meaning police, military Acehnese civilians, guerrillas. So, this is not yet a situation one could say is stable, but at least there is a diplomatic process which might achieve

results, and that is a major change for which the government deserves credit. We will have to see if it all works.

I wish I had a good answer for what I know is of interest to you,

Mr. Chairman, on the sectarian violence, particularly what we

have seen take place in the Malukus and elsewhere. What I tried

to point out in my testimony is, first, the obvious: What are the

downsides of this violence in terms of decreasing confidence in the

government’s competence, leading to extremist Islamic elements

trying to piggy-back on these developments to get more support,

and of course, affecting the investment climate by making it appear

that Indonesia is not safe?

The more difficult question, and one in which I have not yet seen

the magic answer is, what is the fix? There is no simple solution

that I am aware of. The government faces a real dilemma, which

is, on the one hand, it has an obligation to protect its citizens and

not allow this kind of violence to continue and escalate. At the

same time, the government is fully aware of the previous track

record of the military and police going into situations like this and

committing numerous human rights abuses and making the probVerDate 11-MAY-2000 10:19 Jun 20, 2000 Jkt 000000 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 64418.TXT HINTREL1 PsN: HINTREL1
8

lems worse. So merely the sending of troops is not in and of itself

a comprehensive fix.

So this is going to be a long-term process involving improving the

caliber of the police and the military, of getting people more quickly, not allowing it to escalate, of trying to rebuild where there has

been violence so you don’t have permanent separation of communities. But I can’t give you what I myself would consider a satisfactory answer.

Finally, I review in the statement just the key points I made last

week on East Timor, but in the interest of time, I will leave that

for the record.

[The prepared statement of Mr. Roth appears in the appendix.]

Chairman BEREUTER. Thank you very much.

We have a vote on an amendment, possibly followed by final passage. Undersecretary Geithner, I think we may be able to hear a

complete testimony before I turn the Chair over to Mr.

Faleomavaega.

Undersecretary Geithner, would you please proceed as you wish?

STATEMENT OF TIMOTHY F. GEITHNER, UNDERSECRETARY

FOR INTERNATIONAL AFFAIRS, UNITED STATES DEPARTMENT OF TREASURY

Mr. GEITHNER. Absolutely. Thanks for having me up here today.

This is an important issue for us, for this country, and we welcome the attention you are giving it.

I will focus my oral remarks on just two things: what we see as

the major economic challenges facing Indonesia, and the things we

think on the economic front the international community can be

most effective in supporting.

Indonesia experienced, in 1997 and 1998 what you might call a

perfect storm. They experienced a powerful combination of three

forces: external contagion from Thailand in the north, a compelling

set of domestic economic and financial vulnerabilities, and a serious political crisis, a succession crisis which led to a break-down

of the basic institutions that are necessary to make any economy

function.

These factors made the economic contraction much deeper and

much more protracted in Indonesia than was the case in other

countries hit by the crisis. Over the course of 1998 and 1999, the

government—the previous government and this government—have

taken some important steps to lay the foundation for recovery. As

a result of these steps, the macroeconomic environment has stabilized a bit, and growth has started to resume. The government

expects the economy to grow between 3 and 4 percent this year. Inflation is down to zero. Interest rates have fallen substantially. The

rupiah has recovered significantly, although it is still about 25 percent below its pre-crisis level in real trade terms.

The new government has laid out a new framework for economic

policy, which we think holds considerable promise. The main challenges they face are in four areas: macroeconomic policy, the financial corporate sector restructuring agenda, installing the rule of

law, and promoting a functioning legal system, and, finally, bolstering the social front, investing in human capital.

9

Let me just review these briefly. On the macroeconomic front, I

would just emphasize two points. The immediate challenge is to

find the right balance between the need to support the economy,

to fund adequate investment in basic health care, education, and

social safety nets, and to finance an adequate re-capitalization in

the banking system without making an already unsustainable fiscal situation worse.

In the program laid out with the IMF, the government has targeted a fiscal deficit of about 5 percent this year, which is about

the same level as last year. They want to avoid a substantial expansion in the short term, which we think is appropriate.

Their hope is that, with an ambitious program of privatization,

the sale of the assets the government now holds, they will begin

to make some progress in reducing the public debt burden. Over

time, of course, as the economy recovers, they are going to have to

put in place a more forceful, credible program of fiscal consolidation. That is going to be a difficult task for them to manage, particularly in light of their plans to decentralize a substantial part

of economic responsibility to the sub-national level.

It is very important, as they go forward, that the government

commit to preserve the independence of the central bank, whose

policies have been really critically important in Indonesia’s return

to stability.

The second challenge is on the financial and corporate sector restructuring front. There is no way economic growth is going to recover with any strength in Indonesia without a recovery in private

sector activity. I think it is unlikely you are going to see any recovery in private investment on a meaningful scale until we see more

progress toward repairing the financial sector and restructuring

the corporate sector.

The government’s efforts in this area have been painfully slow

and inadequate, and the cost to the economy and to the budget

itself has been substantial as a result. The program they have

agreed to with the IMF has a variety of important and promising

commitments in both areas, and I will just summarize them. In the

financial sector, they are focusing appropriately on how to privatize

the state-owned banks, how to improve supervision and governance

in the financial sector generally, and how to develop deepen a debt

and equity markets, to allow them to reduce their reliance on what

is going to be a very weak banking sector for some time to come.

On the corporate debt front, the IMF Program is trying to make

sure that the Indonesia Bank Restructuring Agency has stronger

powers, is able to move ahead without political interference, and

can send non-cooperative debtors to the bankruptcy court. They are

focused on trying to make sure the bankruptcy regime actually

works, and they are trying to make sure there is a creditable effort

to combat corruption in the judiciary for obvious reasons.

This brings me to the third challenge, which is the challenge of

creating a legal system that works, restoring some basis of fairness

and predictability before the law. Again, I think it is very unlikely

you are going to see any recovery in private enterprise and investment until you see greater confidence in the legal system. That is

why the work of the newly appointed attorney general is going to

be so important to the success of the economic program. That is

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why the U.S. and other countries working with the World Bank

made judicial reform a centerpiece of the recent consultative group

meeting of donors.

In the social area, I think our view is that unless the government

is able to deliver a broader, more substantial improvement in the

general welfare of the people, they are unlikely to be able to continue to enjoy the support they need to carry out a program of economic reform. Given how difficult the government’s fiscal position

is now, it is very important that they move to concentrate their investments in the social sector, in areas where people need it most

and where it can be used most effectively.

Chairman BEREUTER. Excuse me, Mr. Geithner, I am going to

have to excuse myself. Please continue. I am going to turn the

Chair over to Mr. Faleomavaega.

Mr. GEITHNER. I am going to move quickly to the end.

In my written statement, I laid out a number of steps which we

think would be useful and important for the government to take in

the short term to begin to restore some credibility with their citizens in the economic area and with foreign investors, generally.

They have started to move in some of those areas. Some of those

steps are encouraging, but we have a long way to go.

Indonesia’s future is critical to the stability and prosperity of

Southeast Asia and to the region as a whole. We of course have a

major stake in the success of the political transition now underway

and seeing the foundation laid for a strong and durable recovery.

In our view, we need to be prepared to help this new government

with this ambitious reform agenda, and we think we can be most

effective by supporting the following things, and let me just mention four.

First, we can be helpful in supporting an adequate scale of official finance to this government in this period of transition. In this

context, the new IMF Program will make available roughly $5 billion of assistance over the next 3 years. The pipeline of assistance

from in the World Bank, and the Asian Development Bank totals

about $7.8 billion now. I think we can be reasonably confident that

will satisfy Indonesia’s medium-term financial challenges externally; that is very important. Of course, all that money is conditioned on Indonesia delivering on the commitments they have

made. But if they are prepared to deliver, I think they can count

on having adequate supply of external financial assistance.

It is also very important that we continue to focus the IMF the

World Bank, and the Asian Development Bank on the main challenges facing this new government to make sure that the reform

conditions and the program they support are the right kind of conditions. As I said, all these reforms need to be focused on creating

an environment conducive to private enterprise and new investment, on financing an adequate social safety net with investments

in health care and education, and of course, growth-oriented macroeconomic policies.

It is also important that we do what we can to support giving

this new government an appropriate breathing space on its external debt obligations to the official sector. We are going to work

with other Paris Club creditors to give them another 2 years of

11

breathing space on the external debt front, which I think will free

up another $4 to $5 billion in external payments.

Finally, we are working to develop and expand a program of

technical assistance, working closely with the State Department

and other agencies. I think we at the Treasury will try and focus

on what we know something about, and we will try to target our

assistance on public debt management, and fiscal decentralization,

on financial and corporate debt restructuring, and in the law enforcement area.

In many ways, Indonesia’s economic challenges are now fundamentally political. They are fundamentally political in the sense

that progress depends critically on this new government’s demonstrating it has the capacity to act, and to act forcefully and

quickly. They have outlined a credible program for political change

and economic reform, and we think that this program is strong

enough to create the promise of a significant improvement in economic activity over the next few years.

Thank you very much.

[The prepared statement of Mr. Geithner appears in the appendix.]

Mr. FALEOMAVAEGA. [presiding] Thank you, Mr. Secretary.

I have been given the honorable task of continuing the dialogue

while we wait for some of my Republican friends on the other side

of the aisle to return to conduct the hearing. Nevertheless, the

Chairman has asked me to raise my own set of questions that I

have prepared, and hopefully, both of you gentlemen will be able

to help me with.

It is always a pleasure for me, to welcome my good friend, the

former Staff Director of this Subcommittee, Secretary Roth. Secretary Geithner, I also offer you my personal welcome.

I think in terms of numbers, we know that Indonesia is the most

populous Muslim nation in the world, with well over 200 million

people. It is also the fourth most populous country of the world.

Perhaps we need to add another additional, unique number given

the fact that after 30 years of military dictatorship in Indonesia we

finally have a duly elected a civilian administration and governing

body. To that effect, we have come a long way.

At the height of the Cold War, it seems to me that our basic foreign policy was we didn’t care whether Indonesia’s dictators were

the worst abusers of human rights as long as they were anti-Communist. As long as they were pro-Western, the U.S. pretty much

turned the other way when it came to a check on the activities of

some of these dictators. The two dictators that come to mind as we

talk about Indonesia today, of course, first Sukarno and then

Suharto. As both of you gentlemen know, there are no simple solutions to the problems with Indonesia.

There are some historical things that I would like to bring to

your attention and hopefully that you will share with me for the

record. Although it is probably getting to be somewhat tedious for

my good friend, Secretary Roth, always hearing me raise this issue,

as we discussed early last week at the East Timor hearing, I want

to review with you the problems with West Papua New Guinea.

Some people have asked me why am I so concerned about the situation in West Papua New Guinea? It just irks the hell out me—

12

if you will excuse the expression that I learned here in America—

the fact that 10 years previous to the military take-over of East

Timor in 1974, 1975, there was the same type of activity conducted

by the Indonesian military in 1963, where well over 100,000 West

Papua New Guineans were tortured, murdered, or simply disappeared. These atrocities were committed against these people for

the simple reason that Indonesia decided that West Papua New

Guinea was going to be part of their country, both of which were

formerly Dutch colonies.

Gentlemen, I hope you will bear with me, but I do have some

questions that I want to share with you and my concerns for West

Papua New Guinea. The reason why I am committed to remain serious about West Papua New Guinea is because some of my relatives have served as missionaries in Papua New Guinea. Moreover, the Pacific Island relationship that we have with those people, gives me the sense of concern and a sense of kinship with the

people living in West Papua.

In 1969, a vote entitled the Act of Free Choice which many

Papuans call the Act of No Choice—was held to determine whether

West Papua would be an independent country or part of Indonesia.

This was a fraudulent process characterized by devastating Indonesian military repression and shameful neglect on the part of the

United Nations. It is well documented that the United Nations’

personnel overseeing the progress at that time revealed the extent

to which the United Nations knew of the illegitimacy of the voting

results. Only 1,000 West Papua New Guineans hand selected by

the military junta under Suharto who allowed the vote. With a barrel of a gun to their hands, they say you will vote in favor of Indonesian rule on behalf of 800,000 West Papua New Guineans who

had no voice.

In light of the continuing gross human rights violations committed by the Indonesian military in West Papua, the still strong

indigenous movement for independence there and the role the U.S.

played in the creation of the 1962 New York agreement, I would

like to ask what is now being done both by the United States, as

well as the United Nations, to revisit the process of a genuine act

of self-determination for the people of West Papua New Guinea?

Mr. ROTH. I am afraid I am going to have to disappoint you, Congressman, because I think we disagree rather sharply on this issue,

that I believe that the starting point for U.S. policy is the preservation of the territorial integrity of Indonesia. That is the position

that President Clinton has articulated to President Wahid on his

visit here, as well as many other occasions at many other levels.

I think we will rue the day if we start going down the path of reexamining whether or not all the pieces of Indonesia should be allowed to stay there or not. I think the point we are beginning with

is we support the country as it is. East Timor was suigeneros by

virtue of the different legal status and the fact that its incorporation was never accepted by anyone, including not by the United

Nations. It was also not considered part of Indonesia by most Indonesians. Basically, it is a totally different status.

But that should not be used as a precedent for West Papua. So

we are simply not looking at re-opening this issue, and we are certainly not looking at taking this up in the United Nations. I don’t

13

think we should leave the impression with the independence advocates that there is in any way U.S. support for this, because from

the point of view of the Administration—and I can only speak for

the Administration—there isn’t.

Having said all that, I don’t want to appear to be in way justifying the horrific abuses which did occur in what used to be called

Irian Jaya and now which President Wahid has agreed to call

Papua. Those are well known, and those are things which I believe

need to be investigated by the current regime. I think there is a

need for accountability as much in Papua as there is in Aceh, as

there is in Timor. That is something that the government of Indonesia has to address, that many of the same military units that

brought us the violence, or figures that brought us the violence in

Timor and Aceh, were also active in Papua. I think that that has

to be brought to justice.

I also think, and the government of Indonesia has indicated that

it is willing to engage in a dialogue in terms of a different degree

of autonomy, a different deal, different sharing of the resources,

different levels of political control. The government, I think, has

demonstrated its good faith simply by the very symbolic act of

changing the name, which is something that of course you know

had been resisted by the dictatorships that you referred to.

So, I think one can be sympathetic to the people, one can be sympathetic to their needs and their cause of justice, but I think one

also has to look at the over-arching national interest of whether we

want to be a party to the disintegration of Indonesia, which I think

would have devastating consequences for stability in all of Southeast Asia. The answer to that is, in our judgment, is no.

Mr. FALEOMAVAEGA. So your response is the Administration says

it is OK to grant the plebiscite and the right of self-determination

for the people of East Timor, but not for the people of West Papua

New Guinea? Is that basically the Administration’s position?

Mr. ROTH. The position I expressed was that there is a different

legal status for the two entities, and that that was driving our policy, that East Timor’s incorporation had never been accepted by the

United Nations or by the United States, or for that matter by any

country in the world with, I think, the sole exception of Australia.

It was a completely different legal status.

Mr. FALEOMAVAEGA. I happen to differ with you on that as a

matter of history. So, you are saying that this Administration accepts as proper the fact that 1,000 West Papua New Guineans

voted with a gun to their heads, on behalf of 800,000 West

Papuans? That this sham vote made it legitimate for West Papua

to become a part of Indonesia, even though it was done under military dictatorship?

Mr. ROTH. What I said is that we accept the process, the U.N.

process that led to the incorporation of Papua New Guinea into—

sorry, Irian Jaya into Indonesia, and we are not prepared to support the re-opening of that decision because of the consequences it

would have for Indonesia and for stability in the region.

Mr. FALEOMAVAEGA. What happens if there are historical records

in the United Nations documenting those shameful acts the United

Nations committed against the West Papuans. The United Nations

literally just turned its back when this issue was raised, including

14

Ezra Bunker, our Ambassador to the United Nations, who simply

just turned the other way and refused to recognize the fact that

these people were never given the right of self-determination?

Mr. ROTH. Yes, I don’t have anything more to add to what I said,

Congressman. This is not an issue that the Administration is prepared to re-open and revisit.

Mr. FALEOMAVAEGA. I am going to have to differ very, very critically with the Administration’s position on this. It is proper to give

East Timor its right of independence and self-determination, but

the same is not true for West Papua, whose people, culture, ethnicity, and background, history have no relationship whatsoever to

Indonesia. I consider this very shameful on the part of the Administration to hold that policy, to tell you quite frankly.

Indonesia’s House of Representatives recently asked their government to review its contract with Freeport, Indonesia. Eighty-one

point three percent of Freeport, Indonesia is owned by a U.S. mining company, Freeport McMoran Copper and Gold. In addition to

claims that the contract violates investment regulations as well as

the 1945 state constitution, the two House commissions which visited the Freeport mines in December found, and I quote, ‘‘The mining operations had also resulted in social economic injustice, rampant human rights abuse, and political tensions’’. Needless to say,

the mining has also caused gross environmental destruction and

environmental injustice. The Freeport Mining operation in West

Papua New Guinea is the largest gold mining operation in the

world.

I would like for the Administration to respond to that. What is

being done about Freeport’s activities in West Papua New Guinea?

Mr. ROTH. I am not sure that I accept the premise of the question that is there is something to be done about Freeport. I mean,

I think you are acting on the basis of allegations rather than on

the basis of how they behave now. This is not an area of great expertise on my part, but it is my impression—and I will get you a

much more detailed answer for the record—that there has been

considerable change and improvement in the activities of Freeport

with respect, for example, to the environment.

I also make the point that there has been no request from the

government of Indonesia to in any way abrogate change with the

contract with Freeport Moran. You cited some activity by the

House Committee, but in terms of the government of Indonesia,

they have not asked us to do anything, have not issued any complaints. So, I think one has to be careful in the allegations one

makes. But beyond that, I will be happy to get you a more detailed

answer for the record.

Mr. FALEOMAVAEGA. Please, I would like more information on

that.

[The information referred to appears in the appendix.]

Mr. FALEOMAVAEGA. Regarding the relationship between President Wahid and General Wiranto is Wiranto now no longer the

minister of security or does he still have an important position

within the security chain of command?

Mr. ROTH. No, he has been suspended from the position he—and

a successor has been sworn in. So, he is out of the cabinet for now.

15

He has already resigned his military commission previously. So, he

is neither in the military nor in the cabinet.

Mr. FALEOMAVAEGA. There was a recent report in the media that

the Dutch government has taken a definite interest in revisiting

the question of West Papua New Guinea. What is the Administration’s position on this?

Mr. ROTH. I think I have already stated it, no desire to revisit

the status.

Mr. FALEOMAVAEGA. So it is the Administration’s position, as it

also seems to be the position of the Australian government, the

fear that you don’t want to Balkanize Indonesia. Am I correct on

this?

Mr. ROTH. Absolutely. We have said, unequivocally, that we support the territorial integrity of Indonesia. We said that East Timor

was suigeneros based on a different legal status, and we are working in support of Indonesian’s government policy to preserve territorial integrity. We certainly support efforts to engage in political

dialogue with provinces with very legitimate grievances. Certainly,

Aceh is in that category, certainly Irian Jaya and now Papua is in

that category. But that is far short of saying supporting independence.

Mr. FALEOMAVAEGA. Secretary Geithner, you mentioned a couple

points about trying to give assistance to Indonesia. Is this the format the Administration takes in giving assistance to countries like

Indonesia? You mentioned financing and covering external debts.

Indonesia’s external debts now number well over $3 to $4 billion.

Mr. GEITHNER. Indonesia has got substantially more external

debt outstanding to the governments of the world, as a whole. I

think it owes the United States, now, roughly $3 billion.

Mr. FALEOMAVAEGA. What is the total U.S. investment right now

in Indonesia?

Mr. GEITHNER. I don’t know the answer to that, but I would be

happy to get you the number. I suspect it is probably somewhere

north of $3 billion.

Mr. FALEOMAVAEGA. I see.

Mr. ROTH. May I commend a bit on aid? I was neglectful in my

statement in my rush to meet the bell, seeing the chairman looked

at his watch, that I skipped the section on U.S. policy.

But, clearly, in our desire to support the new democratic government, we have taken a number of steps, some of have been on the

diplomacy side—inviting President Wahid to the Oval Office, sending two cabinet members, Richard Holbrooke and Larry Summers,

out early in the new Administration. But some of it has been on

the aid side as well, and we are looking to increase traditional development assistance and economic support for money for Indonesia. The numbers are a little bit tricky, but if you—basically,

from a base of $75 million last year, to $125 million this year—the

reason I am using that funny formulation of a base is there is onetime-only money on top of last year’s aid for the elections. But if

you factor that out, it is roughly a 50 percent increase, and we will

be seeking a slightly larger increase for 2001. We have also sent

out an assessment team, an inter-agency assessment team to Indonesia, to try to look at some of their aid needs. Secretary Albright

has a particular interest in institution building.

16

As you know, and you mentioned in your statement, under the

two previous dictatorships there wasn’t a hell of a lot of institution

building in Indonesia. So when you look at all kinds of institutions,

whether it is courts, police, journalists, NGO civil society, it is very

poorly developed in Indonesia. So we would like to concentrate our

resources, which admittedly are quite modest if you compare it to

Japanese aid, or to aid from the IMF, the World Bank, and the

ADB, and see if we could use that more effectively to help support

some of these institutions which are key to democracy.

So, Tim has the big bucks. In terms of the multilateral development banks, the IMF, we are talking about billions. In terms of our

bilateral aid, we are talking about fairly modest sums, but we are

trying to use that as effectively as we can to help Indonesia support democracy.

Mr. FALEOMAVAEGA. If I remember correctly, if this is the same

assessment team when we met with Secretary Albright, that the

assessment has been requested in the amount of $500 million for

assistance. Is this in the realm of what is being discussed in the

Administration?

Mr. ROTH. The preliminary recommendation of the group, which

has not issued it is report, is suggesting that over 3 years it should

be about a $500 million level of assistance. I feel a little awkward,

not having read the report yet, to pass judgment about whether

that is right or not. But the key point is what we are trying to do

is to increase our aid within the budget constraints that we have

to give as much support as we can for shoring up democratic institutions in Indonesia.

Mr. FALEOMAVAEGA. Mr. Chairman, I appreciate you giving me

the time to determine exactly where the Administration stands on

West Papua New Guinea. It seems that my good friend, Secretary

Roth, and I differ extremely on this. I am definitely going to be

pursuing this, as I will promise both gentlemen, in the coming

weeks and months on this issue of West Papua New Guinea.

Thank you, Mr. Chairman.

Chairman BEREUTER. [presiding] Thank you, Mr. Faleomavaega.

I would be disappointed and surprised if you didn’t.

I an sorry to have missed the last part of your testimony.

Mr. ROTH. You didn’t miss anything, Mr. Chairman.

Chairman BEREUTER. We will have a rebuttal on that. But, the

good news is that is the last recorded vote of the day, so we will

be able, hopefully, to continue uninterrupted.

Secretary Geithner, I would like to ask you your ideas about the

commitment and ability of the Indonesian government to take the

steps necessary for privatization and for meeting some of the fairly

ambitious conditions that have been provided to them by the IMF

and also some from the ADB. What is different? There have been

a lot of promises that have not been kept, to be fair to them, because of extraordinary circumstances that they faced.

Mr. GEITHNER. I think we will only know as we see how they act

over the next few weeks and months. It is hard to make a judgment at this point. I think what is reassuring, in what we have

seen so far is the following: We have a new government with a

president who is committed to the kind of broader reforms that are

really essential to making sure economic policy can work. There is

17

a new economic team with a general orientation which is quite

positive and quite reassuring, quite pro-market, quite realistic.

They say all the right things in terms of recognizing how dark it

is, how big the challenges are, and having an appreciation for what

has to happen. So, I think one can be reasonably hopeful. But, as

in any case, you have to look at what they do, not just at what they

say. They have taken a few important steps over the last several

weeks to begin to unload some of the assets they now hold, and

that is encouraging.

Chairman BEREUTER. You mentioned the desirability and their

intention to go ahead in creating an equity market, which of course

is important. What kind of steps would you expect them to take if

they were to be able to successfully begin such a construction of an

equity market?

Mr. GEITHNER. They have an equity market that is relatively

small now, but functions. I think that, as is true in much of the

rest of the economy, in some ways what you really need to do is

to make sure you have a legal system that works. You have a set

of requirements for transparency that are imposed on people that

issue debt and raise equity, so that investors feel confident that

they know what they are buying, and so they will be able to enforce

their rights in court if things go bad. That is why I try to say that

all these things—in the investment climate, in the financial sector,

in the corporate sector—all these things rely really fundamentally

on whether they can take steps that try to give people redress

against corruption, make the court system work, give investors the

sense there is going to be a basic fairness before the law. Without

that, I think, it is going to be very difficult for them.

Chairman BEREUTER. Do we have any good idea of what the

monthly capital flight is, and whether or not in fact it is begun to

be reduced?

Mr. GEITHNER. I think it is very hard to tell from the overall

numbers to get a real sense of that. So really what we have is anecdotal and I think what the anecdotal evidence suggests is that

there is very little return of flight capital and relatively little new

investment coming in from overseas. I think that is, in part, because people are still waiting to see, they are still willing to take

the measure of the new government and to see how credible they

are going to be in their actions. It is in part because, as Stanley

said, the broader image presented by sectarian violence on a broad

scale and the broader concerns about political stability have encouraged people to wait and see.

But it is a government that has tried to send a lot of positive signals, in particular to the Chinese community, which is so important to the economy of Indonesia. So I think if they can continue

on this path, you would see that they will begin to gradually put

together the confidence they are going to need to be able to attract

some of that money back.

Chairman BEREUTER. As you point out, the Chinese ethnic-Indonesian is a very important part of the retail and business sector

generally in Indonesia. Do you see any indication that the ChineseIndonesian capital is returning, that they have some confidence in

this government and in President Wahid?

18

Mr. GEITHNER. I don’t think the total information gives you much

confidence that it is coming back on any significant scale yet, but

the government has made a real investment in trying to reach out

to them. They’ve brought prominent Indonesian-Chinese businessmen into an advisory capacity on the economic team, which is a

useful symbol. As I said, they’re trying to make sure that they give

confidence to all citizens in Indonesia that they’re going to have

equality before the law, and that helps. But I still think it is too

early to tell, too early to see much positive response.

Chairman BEREUTER. Secretary Roth, with respect to refugee

flows, do you see evidence that a significant part of the Chinese

ethnic-Indonesian population has left? With respect to the potential

flows of refugees from Aceh, as well as perhaps a few other parts

of the country, what is the thinking, the attitude, and the concern

in Malaysia or Singapore today?

Mr. ROTH. Several different issues: One, there was never a large

Chinese refugee flow out of Indonesia. What there was a large

amount of capital flight out of Indonesia, and some of the wealthiest of the Chinese who either propped themselves or in many cases

their families, and you had people commuting back and forth while

the families were propped in safer schools or elsewhere in Singapore. But that was always the very tip of the community, and the

vast majority of the Chinese of course are not—Chinese-Indonesians are not multimillionaires and can’t afford to live at the Regent Hotel in Singapore, and so they never did leave. So, that is

not the issue.

We also have considerable evidence that most people came back,

including many of the businessmen. Again, that doesn’t address the

real question which is have they brought their money back, which

Undersecretary Geithner has addressed.

I should say that, interestingly, I learned on my last trip to

Japan that a major effort’s being made by some Japanese academics to try to systematically interview the Chinese-Indonesians

to see if they can get a better handle on what their investment

plans are and what they plan to do with their money so that we

might have a more direct answer to this question than simply

guessing at the magnitude of the flows. But we don’t have that

data yet.

In terms of your second question, in terms of Aceh and refugee

flows, clearly there is—there has been enormous concern, more in

Singapore than Malaysia given the tiny size of Singapore, about

the possibility of refugee flows if Indonesia were to collapse or disintegrate. This was more a concern—this was not an Aceh-specific

concern as much as it was a concern about the Indonesian economy.

You may recall that at the height of the financial crisis in 1998

that Singapore was starting to get several hundred refugees a week

from Indonesia and was very concerned about being swamped, was

worried about safety in the sea lanes if you started getting hundreds of thousands or millions of people. That concern, of course,

has largely evaporated as a result of the stabilization of the economy. I can’t say there is improvement, but there isn’t a sense that

the economy is falling off the cliff, and there have not been very

large refugee flows.

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On Aceh, I think there is no desire in either Singapore or Malaysia to see Aceh spill beyond its borders anymore than it has. There

are already large and local refugee communities, Acehnese, in both

Singapore and Malaysia. They would not like to see these increase;

they would rather see a political settlement. During the recent

ASEAN meeting in Manila, they made it very clear that they too

supported the territorial integrity of Indonesia and wanted to see

Aceh stay in the family, as it were.

Chairman BEREUTER. We will have a representative from the

U.S.-Indonesian Business Council here in the second panel, but I

was struck in the past by how relatively small American business

investment was in Indonesia. In certain energy sectors, it is significant but, given the size of the country and its importance in the

region, we have had a relatively small economic presence there.

Since Secretary Albright mentioned Indonesia as one of her four

focal points for assistance and scrutiny and also seemed to give

some support to the recommendations for perhaps $500 million in

targeted, very specific aid recommended over the next 3 years by

the study group, what can this government do to encourage American business investment in Indonesia. What signs, particularly,

Secretary Geithner, will American business community look for?

What will be the benchmarks they consider to see if the economic

reforms and the political reforms are sufficient that they’ll feel confident in returning or investing?

Mr. ROTH. Let me start with the political dimension of it, and

then let Tim get to the more hard core economic dimension of it.

I mean, the thing about the market, it is obvious you can’t force

it to go in if you have the free market, and if you don’t have an

Indonesia that is perceived as stable, if you have horrific pictures

of the Malukas on TV night after night and you see violence in

Lombok and trouble up in Tem Island and islands in Aceh that create an impression that Indonesia’s not safe, that obviously is going

to make it much more difficult to attract foreign investment regardless of what economic policies the government adopts. So, stability in and of itself is one of the key issues.

Similarly, if people think that democracy is at risk, if they think

that the government might be overthrown by a coup and they know

that the consequences of that would be dire in terms of not just

U.S. Government support but multilateral support, that is a deterrent.

So, part of the U.S. response has been to work for the cause of

stability within Indonesia itself. As you know, and I have highlighted, we were very clear in our position about civilian supremacy

and what the consequences of a coup would be, just to make sure

no one misunderstood, and we emphasized that point repeatedly,

and I think this outcome has helped right the fact that General

Wiranto has been suspended from the cabinet, the fact that there

has not been any maneuverance for a coup has I think reinforced

the notion that civilian supremacy is setting in Indonesia.

On the ethnic violence, I think the government has to still demonstrate that it has more effective policies for bringing this under

control. There has been some reduction in recent days in Ambon,

I am sorry to say not the case in Aceh, but this is an area where

20

I think more work is needed if they’re going to create the impression that Indonesia is a safe place in terms of economic policy.

Chairman BEREUTER. What will the American business community look for?

Mr. GEITHNER. I think they’ll look for political stability on a

broad scale. I think they’re going to look to see whether the economic team is competent, able to act without political interference.

I think they’re going to look to see whether the government is open

to selling the substantial assets they hold to foreigners. I think

they are going to look to see whether the system which is frozen

now starts to thaw in terms of actual movement on the financial

sector. I think they are going to see whether the types of corruption

that were so pervasive in Indonesia in the past still seep into most

economic activity. They will see if that changes, and I think a couple of examples of a core system that works would be quite reassuring and quite helpful.

But I think there is a lot of interest in Indonesia now. If you read

what the analysts in the financial community write about Indonesia, there is much more hope in it than there was before, and

so I think people are taking a fresh look. The trip that Mike

Gadbaw led I think demonstrates that level of interest and promise.

Chairman BEREUTER. The overseas Chinese community has been

an important source of investment in Indonesia of course, but

Japan has been the largest. They of course have their economic difficulties including their 7th or 8th year in economic doldrums. To

what extent will their situation slow the economic recovery in Indonesia?

Second, With respect to the IMF LOI, will that resolve the OPIC

claims that are filed against Indonesia?

Mr. GEITHNER. I think everybody believes, and I think the Japanese would acknowledge, that the best thing they could do for the

region and the best thing they could do for Indonesia is to get their

economy on a stronger footing. Growth would lend to increase imports from the region, including from Indonesia.

That would be quite powerful in trying to contribute to a stronger economic environment for the region as a whole. Japan has provided a really quite substantial scale of financial assistance to Indonesia over the last several years, and they are likely to continue

to do so on a meaningful scale.

Chairman BEREUTER. You are talking about the Japanese government.

Mr. GEITHNER. Yes. I think that the dynamics that have traditionally governed private Japanese investment in Indonesia are

probably likely to persist in the future. They are largely driven by

two forces: One is the need for resources, where Indonesia is rich

and Japan is poor, and the other is an interest in investing and

building manufacturing capacity in the markets that are important

to Japan.

I think those forces are likely to be a significant pull for Japanese interests going forward. I don’t have a really good sense of

whether Japanese financial institutions are going to be prepared to

lend on a meaningful scale going forward. I suspect they are likely

to be quite tentative and cautious going forward. But if the busiVerDate 11-MAY-2000 10:19 Jun 20, 2000 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 64418.TXT HINTREL1 PsN: HINTREL1
21

ness community sees the basis for stability and for a bit of protection from corruption, et cetera, before the law, they are likely to be

in there too.

Chairman BEREUTER. Thank you.

Mr. GEITHNER. Now, you asked about the LOI. The Indonesian

government, with a fair amount of encouragement from us and

from the State Department and our Ambassador, has taken a number of quite important steps to help facilitate a resolution of the

full range of problems they face in the power sector, including resolution of OPIC’s claim. They have replaced the head of the state

owned power company, the PLN. The government committed, and

this commitment is reflected in the LOI, to engage in a process of

negotiation with the full range of independent power producers.

They terminated a court case that had been filed as a means of

frustrating the arbitration proceeding against Cal Energy and

OPIC. I think this has left most people feeling a little more comfortable that there is at least a process underway that could lead

to a favorable resolution. They are talking to OPIC and I think

OPIC itself feels a little more comfortable. But as is true in almost

everything we have discussed, we are going to have to see how it

proceeds.

Chairman BEREUTER. That is generally favorable at this point.

OPIC took a huge hit, as you know, relative to its history.

My final question would be directed to you, Secretary Roth. You

have heard my comments about military-to-military contact and

my attitude that we have reduced it at the wrong times. The Australians have played a very important military role in recent years,

but now they have difficulties because of East Timor.

What has the State Department or what would you recommend

that the State Department advise the Defense Department with respect to resumption or enhanced military-to-military contact and

under what conditions, if any?

Mr. ROTH. First, obviously we agree with you that it is an unnatural state that we have a suspended military-to-military relationship with Indonesia. That was a result of the events you

flagged in East Timor, and the situation has changed dramatically,

and we actually have an interagency process near conclusion to

make some recommendations to my bosses about how to restore aspects of a military-to-military relationship.

It goes without saying, testifying before this Subcommittee, that

we need to obey the law and that there is congressional legislation

that places very clear conditions on certain aspects of the militaryto-military relationship. The Leahy amendment has six specific

conditions that relate to and in fact basically preclude IMET or

military sales until they are met, and at this point, I could not say

that they have been met. So, that is a statutory bar for at least this

current fiscal year.

Chairman BEREUTER. It is an appropriation measure that applies

only to this year, isn’t that correct?

Mr. ROTH. That is correct. It was hoped not to see it in future

years. It also does not refer to the totality of the military relationship since the scope of that legislation is IMET FMF and not many

of the other things that have been suspended. So, that is currently

actively under review. I chaired an interagency meeting on it yesVerDate 11-MAY-2000 10:19 Jun 20, 2000 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 64418.TXT HINTREL1 PsN: HINTREL1
22

terday, and I hope that we will have some decisions in the next

couple of weeks.

But at the same time, I think you rightly asked under what conditions, and I think the clear obvious one is twofold: One, the military’s commitment to accountability. As you know, the Indonesian

process, their own Commission of Inquiry on East Timor has

named 33 individuals being referred to the attorney general for further investigation. It is expected, and the attorney general announced yesterday, that he expected to have his first indictment

within 2 or 3 weeks. He didn’t say whom out of that 33 or whether

it was even 1 of those 33. But clearly how the military reacts to

this accountability process, not just on Timor but elsewhere in Indonesia, is going to very important.

Second, the principle of civilian supremacy. We have seen one

test of wills already with respect to General Wiranto which has

been satisfactorily resolved.

Another is the firing of the military spokesman who had repeatedly contradicted the president of Indonesia about Aceh policy in

his calls for martial law, and the president had indicated there

would not be martial law or state of emergency there. But there

will be future positions coming down the pike, and as we see how

this principle of civilian supremacy is obeyed, that will influence

our willingness to go ahead. So, it is basically the accountability

and human rights plus the principle of civilian supremacy and of

course our obligations under the law.

Chairman BEREUTER. Thank you very much. I think some advice

from the State Department at the appropriate time certainly early

in the appropriations season as to what would be appropriate or inappropriate from the Congress might be helpful to some of us who

would like to see mistakes avoided.

I would like to turn to the gentleman from American Samoa to

see if he has any last questions for either of our panelists.

Mr. FALEOMAVAEGA. I think I have completed my share of questions.

Mr. GEITHNER. I have an answer for you, though. You asked

what the scale of U.S. foreign investment was in the country. The

Commerce Department numbers say at the end of 1998 it was

about $6.9 billion. That is in book terms, meaning its real value,

market value is probably substantially higher than that.

Mr. FALEOMAVAEGA. I have another question.

Chairman BEREUTER. Go ahead.

Mr. FALEOMAVAEGA. What is the total amount of the value of the

gold that Freeport Company has taken out of West Papua New

Guinea?

Mr. GEITHNER. I have no idea nor do I know where we could find

that out, but I am sure we could ask.

Mr. FALEOMAVAEGA. Could you?

Mr. GEITHNER. Sure.

Chairman BEREUTER. Gentlemen, thank you very much for helping us with information today and clarifying the Administration’s

views and some information about the international financial institutions. This has been very helpful to the Subcommittee, and we

will try to relay this information to Full Committee.

Thank you again.

23

Mr. GEITHNER. Thank you very much.

Chairman BEREUTER. All Members’ written statements that they

may have will be made a part of the record.

I would like now to call up to the table the distinguished second

panel in today’s hearing.

Gentlemen, thank you very much for your attendance today to

help the Subcommittee with your information and answering our

questions. I have already, perhaps you have heard, given more formal introductions of you in terms of your biographical background.

I think we will call upon you in the order listed. So, first, we will

hear from Mr. Michael Gadbaw, Chairman of the U.S.-Indonesia

Business Committee of the U.S.-ASEAN Business Council and a an

officer in General Electric.

Please proceed as you wish. Your entire statements will be made

a part of the record, and you may proceed as you wish. Summarize

or read portions—whatever suits you.

STATEMENT OF MICHAEL GADBAW, CHAIRMAN, UNITED

STATES-INDONESIA BUSINESS COMMITTEE, UNITED STATESASEAN BUSINESS COUNCIL

Mr. GADBAW. Thank you, Mr. Chairman. I will do a summary of

my testimony and agree to have the full text put in the record.

Mr. Chairman and your colleagues, I am pleased to be here on

behalf of the U.S.-Indonesia Business Committee of the U.S.-

ASEAN Business Council on its behalf. Chairman Bereuter, I want

to thank you for your outstanding leadership and long-term commitment to Southeast Asia. The hearing today is an excellent opportunity to take stock of our current situation in Indonesia following what has been a breathtaking case of events. The sweep of

positive changes in Indonesia must be seen to be truly believed.

Most recently, I was able to survey developments in Indonesia as

the leader of a business delegation of 30 leading U.S. corporations

who visited Indonesia from January 18 to the 20th. Our delegation

was comprised of 48 senior U.S. corporate executives. The January

mission called on President Wahid, speaker of the MPR, Amien

Rais, speaker of the DPR, Akbar Tandjung, the attorney general,

Marzuki Darusman, six key ministers and many others, including

the new head of IBRA, Mr. Cacuk.

Our delegation concluded that the government of Indonesia,

under President Abdurrahman Wahid, is committed to implementing changes necessary for full economic recovery. It is a challenging task. As the January 14th edition of Asiaweek suggested,

President Wahid has probably the ‘‘toughest job on the planet.’’

However, we believe that President Wahid has made an important

start in naming key individuals to posts that will be critical to his

success.

Among our mission’s major findings and themes were the following: The Wahid government has prioritized resolving regional

conflicts, re-establishing rule of law, civilian accountability over the

military, judicial reform, and recapitalization of the banking and

corporate sectors. While there is a consensus among the government and business leaders that foreign investment in Indonesia is

a fundamental element of the economic recovery, it is clear that

there is a wide range of definitions of acceptable levels.

24

Regionalism will be a continuing trend, and power will devolve

from the central government to the province and district level. The

legislative branch will demand more focus by the council and its

Members, both in terms of policy work and business development

strategy.

Sale of IBRA assets is likely to proceed more aggressively than

in the past in the first part of this year, but it remains to be seen

what type of financial structure will be allowed. Most agree that

the optimum chance for 100 percent foreign owned deals will come

earlier as opposed to later in this process.

Corporate restructuring looks unlikely to move quickly, as vested

interests seem to have placed themselves strategically in key advisory roles and are likely to lobby hard for protection in legislative

branch.

Bank recapitalization will take enormous political will by the

Wahid government, and is not likely to get completed quickly, but

they have begun the process, and we expect that that will eventually succeed.

Our business mission was in Indonesia at an auspicious moment,

indeed, and extremely eventful week. The same week that our 48-

member business delegation was there, the Wahid government and

the IMF signed a new letter of intent that cleared the way for an

additional $5 billion in IMF support, as you have just heard. The

government also reached agreement on a new government budget,

which I think, as you well know is no small task, particularly in

a coalition government.

When presented to parliament on January 20th, the budget was

cast as a blueprint to reduce the size of the deficit and Indonesia’s

reliance on external financing. Significantly, the budget seeks to

defuse regional tensions by addressing the need for fiscal decentralization. Two weeks later, in response to this good news, Indonesia’s international donors, under the umbrella of the Consultative Group on Indonesia, approved an additional $4.7 billion in

new assistance to Indonesia.

In addition to our delegation, Secretary of the Treasury Summers

was in town the week of January 17th expressing support for Indonesia. This is evidence of a concerted U.S. Government effort to engage Indonesia at this critical time in its economic and political

transition. We also applaud the initiative by Senator Kit Bond in

bringing a delegation to Indonesia, and we encourage other such

congressional visits.

In another critical development that week, the government announced that it would drop its lawsuit against energy company

P.T. Paiton. In return, the power plant sponsors agreed to withdraw their international arbitration, and both sides agreed to begin

earnest negotiations under the leadership of the new PLN President Kuntoro. This is a 2-year dispute over contract terms negotiated with a previous Indonesian government. Many in the private

sector of the United States view resolution of this dispute as a barometer of the new Indonesian government’s commitment to contract sanctity. The commencement of negotiations is therefore an

encouraging turn of events for stakeholders in Indonesia’s economy.

Despite this incredible effort on the part of the new government

to address its most basic economic problems, the international

25

media that week focused almost entirely on social disturbances. In

no way would I want to minimize the human cost of the disturbances. They are, indeed, very serious. In the particular case of

Aceh, the underlying political issues pose a threat to the nation’s

unity. However, I am suggesting that focusing almost exclusively

on these conflicts has created an incomplete and indeed distorted

image of what is going on in Indonesia.

On our mission to Indonesia, we raised many core business

issues, both with the Indonesian government and with our counterparts in the private sector. We discussed with them a detailed set

of policy issues from power deregulation to telecommunications reform to agricultural reform that are critical to U.S. business interested in stimulating additional trade and investment, and they are

captured in a paper re-entitled ‘‘U.S.-Indonesia Business Committee, Dashboard, Key Goals,’’ which I would be happy to submit

to the Committee if you would like that level of detail. We also discussed the importance to American business of on-going U.S. Government programs, including Ex-Im Bank, TDA, and USAID. We

found the Indonesian government very much open to suggestion

and quite engaging on our most pressing concerns.

Prior to the crisis, Indonesia’s economy averaged 7 percent

growth per year for 25 years. It had created a middle-class conservatively estimated at 20 million—a larger population than all of

Australia. To be certain, some of this remarkable growth was unsound. But a great deal of it is attributable to Indonesia’s integration into the global economy, conscious diversification, the

strengths of the Indonesian people and Indonesia’s other natural

resources. Structural economic reform carried out to its designated

end and political stability will once again permit Indonesia to make

the most of its national assets. Speaking on behalf of the U.S.- Indonesia Business Committee of the ASEAN Business Council, I am

confident of this. I am also confident that President Wahid and his

government is up to the task.

Let me close by thanking you once again, Mr. Chairman, for the

opportunity to testify. We have been very fortunate to have been

given the opportunity to publicly report the findings of our missions to Congress following each of our visits to Indonesia, in either

your Subcommittee, or that of your colleague on the Senate side,

Senator Thomas. It provides the U.S. private sector a regular channel through which to provide fresh policy input to Congress. It is

a tradition that we hope to continue.

Thank you.

[The prepared statement of Mr. Gadbaw appears in the appendix.]

Chairman BEREUTER. Mr. Gadbaw, thank you very much for

your testimony. We are glad to receive information from you and

other business interests that have an American perspective.

I would, at this point, ask unanimous consent that a statement

from the U.S.-Indonesian AmCham also be entered into our record.

Hearing no objection, that will be the order.

Our next witness is Dr. Theodore Friend. He is Senior Fellow at

the Foreign Policy Research Institute and President Emeritus and

Trustee of the Eisenhower Fellowships.

26

Dr. Friend, we know of your expertise on Indonesia and other

foreign policy issues so we look forward to your testimony. You may

proceed as you wish.

STATEMENT OF THEODORE FRIEND, SENIOR FELLOW,

FOREIGN POLICY RESEARCH CENTER

Dr. FRIEND. Thank you very much, Mr. Chairman.

Given the expert initial statement by yourself and the witnesses

that have preceded me, I will skip over a lot of what is in my written statement, trusting that will appear in history somewhere.

Chairman BEREUTER. It will be part of the record.

Dr. FRIEND. Thank you. Focus on three things, reading from my

statement only at the very end on American policy salients.

I think everybody in this room feels an enormous hope or even

personal affinity to Abdurrahman Wahid, known as Gus Dur. I am

going to use that name for him, because I feel I am among his

10,000 most intimate friends. He invites friendship everywhere,

and he is a tremendously accessible person.

But with all that can be said for him, I think we have to face

into some of the immediate problems. It needs to be said that no

president of Indonesia until him made evident his beliefs in gender

equality, racial equality, and religious equality. He is a universalist

Muslim. That is a tremendously valuable thing for Indonesia and

I believe for our international relations.

Second, of course, no Indonesian president made evident his belief in democracy, rules of law, and transparent business transactions. So, we have got six enormously important qualities residing in this one man. Mr. Gadbaw has referred to some of the last

three. I just want to emphasize them from the point of view of an

independent historian.

Gas Dar faces, as I detail in my papers, three kinds of major

problems: six separatisms, a couple of ethno-cultural tensions, and

distorted institutions left over from the Suharto regime. The most

distorted, I am sorry to say, is the army upon which he must rely

to get the country back together.

Now, because my predecessor to my right has said the newspapers have over accentuated some of the negatives, I will try not

to do that, but leave in the record what I have tried to detail usefully to this Committee.

Indonesia, I believe, can prevail over the several things tearing

it apart. Even if all six separatisms succeeded, it would amount, if

the Far East Economic Review is correct, to only 17 percent of the

GNP. So, you can say, if you want to take a relaxed point of view,

five-sixths of Indonesia would survive in economic terms. But I

think our interests there are not numerical in that way. I think our

interests are two: They are ideal in the sense that we want to see

this democracy work; and they have to deal with the Straits of Malacca and the passage of oil to our allies in Korea and Japan. So,

it is this geo-strategic interest combined with an ideal interest—

conceptual and concrete, both.

They unite in the fact that Indonesia used to be the center of

gravity of ASEAN, and now that is pulled apart. So, we want to

see Indonesia reassemble itself, hold together. I expect that Mr.

Faleomavaega, may not totally agree on that, but we want to see

27

Indonesia hold together. We want to see it to be a counter weigh

to negative things in that region.

A stabilized democracy is the best guarantee of security throughout the region and our own international security interest. To be

questioned the sooner, let me make a couple of summarizing remarks.

As the only, perhaps, think-tank historian here, let me talk

about long-term prospects, very long-term, while respecting the excellent expert advice in the earlier panel. My view of Indonesian

recovery is in multiyear terms. Reattracting capital and regenerating first-rate business momentum in a fresh transparent environment could take—to get back to old levels and go beyond

them—could take as much as 5 years in my view, and that is the

fastest recovery. Business, I believe, and I respect it, actually

seems to modernize practices faster than other institutions. Reforming and professionalizing the army could be achieved in 5 or

10 years. Recovering lost ground in education and achieving new

plateaus of learning and skill could be done in 10 or 15 to a level

that amounts to something. Rescuing the court system from corruption, alluded to twice by Undersecretary Geithner, or maybe thrice,

and nourishing rule of law, could reach significant effectiveness in

15 years, or at best 10. All of this obviously intuition thinking.

If Indonesia with leadership, luck and patience can achieve substantial progress by sustained effort in these tasks, its fifth democratic election successively in 2019 could see it standing proud

among the world’s democracies. It stands modestly there now, and

also in jeopardy. With synergy among all the enterprises mentioned, the goal could be achieved in the fourth or maybe the third

such election. So, I hope this Committee and other leaders of our

government will stay the long course with this major fragile nation.

How can we help? Let me explicitly state six ways:

Explicitly support the values that the reform government represents. Nourish Gus Dur as the elected leader with moral support,

without over personalizing the relationship as we may have done

in some other countries in past times. We can love the man, but

we have got to deal with a country that is highly volatile, friable—

and plenty of other adjectives, too.

Two, endorse what I understand and which I heard, from Secretary Roth specify, so I will allow myself to use the numbers, to

be a proposed expansion of the USAID budget from $75 to $125

million. I think that is an excellent step.

Support IMF and World Bank projects and ADB and other

multilaterals. It is very invaluable for Indonesia recovery. My sense

of IMF and World Bank is that they have responded to criticism

since the Asian crisis on timing and discipline, and they are going

to do their best.

Fourth may be more controversial—reinstitute (I believe not controversial with the Chairman here) reinstitute IMET and JCET

Programs for advanced education of Indonesian military in the

United States. Punishing a past Administration does not help the

present one. Breaking such ties does nothing to advance the reform

movement within the military, let alone develop future relations

with a future reformed military. So, I think we have got to start

now. Others know the obstacles much more than I. I just encourVerDate 11-MAY-2000 10:19 Jun 20, 2000 Jkt 000000 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 64418.TXT HINTREL1 PsN: HINTREL1
28

age, if I may, getting over the obstacles. The current free press—

let me offer one example—in Indonesia was launched by a retired

general as minister of information, who learned his Jeffersonian

principles at Fort Benning, and he proudly attests to that fact.

Fifth, encourage public and private foundations to form consortia, as was done in Eastern Central Europe after the Berlin

Wall fell. Now that all the Suharto walls have fallen, we should do

the same. Here, I am really talking to colleagues in private and

public foundations, so I will not take more of the Committee’s time.

But every field that the Committee has mentioned has been

iterated here—educational, health, free press, and law, plus others.

Last, a strategic point: stand fast in the whole Southwest Pacific.

Pull away no military assets. I think we should remain what Lee

Kuan Yew asked us to be a long time ago, ‘‘the sheriff of the Pacific.’’ Recognize there are difficulties. Islamists in South Malaysia

are getting together with separatists in Aceh and supporting them

with arms and money.

Tactical moves and occasional statements by China suggest they

would like to be a posse leader, but I believe that they are going

to have to be preoccupied with the Taiwan Strait for a long time

before they dare into the Strait of Malacca. Still, we must recognize

the whole region may be becoming a little more like our own ‘‘Wild

West’’ than it was 20 years ago. This is a much more volatile time

in that region, so we must be prepared for restrained action.

To summarize: our two major interests are a conceptual support

of democratic values and concrete protection of free passage of oil

through the Malacca Straits. I believe support of Indonesian democracy will help stabilize the government and ensure the realization of both center of gravity in ASEAN, and a center of democracy

in the Muslim world and the world entire.

Thank you, Mr. Chairman.

[The prepared statement of Dr. Friend appears in the appendix.]

Chairman BEREUTER. Thank you very much, Dr. Friend, particularly for your concluding six areas of recommendations which you

have summarized.

Next we will call upon Mr. Eric Bjornlund. He is Director of the

Asia Programs of the National Democratic Institute (NDI), and, as

I think I said in introduction, and I hope I am right, this is probably your largest overseas activity. You in fact have been personally involved in it so we are looking forward to your testimony. You

may proceed as you wish.

STATEMENT OF ERIC C. BJORNLUND, DIRECTOR OF ASIA

PROGRAMS, NATIONAL DEMOCRATIC INSTITUTE

Mr.BJORNLUND. Thank you, Mr. Chairman, for this opportunity.

I will not speak from my statement or really even summarize it.

I just want to draw out a few points.

In fact, I have lived in Indonesia for more than the last year, and

I must say today I am encouraged by the discussion that seems to

reflect increasing recognition of the profound changes that have

happened in Indonesia. It does not always seem that way to those

of us in the international community in Jakarta. It sometimes

seems like the policy debate in the rest of the world was more

about how to deal with a semi-authoritarian country, whether and

29

to what extent to engage. I think that some of those premises have

been mistaken, and I am glad that it is clear from this discussion

that everyone testifying here and the Members of Congress have

today understand how profound the changes have been in Indonesia.

I think the intrinsic importance of the country I don’t need to remind you of, and Dr. Friend has pointed out a number of important

factors. What I think is important to remind everyone of you the

record is that this is a very important time in Indonesia’s history.

Not only is Indonesia an important country, but this is a very historic opportunity for Indonesia to consolidate a democracy. It has

changed dramatically in the last 2 years.

Indonesia is a profoundly different country, not only because of

the fact that there have been democratic elections that were essentially accepted by all political forces, not only because there is a

new democratically elected government and legislature, but also because there is been broader political liberalization. There is a free

press; there is freedom to organize political parties, and there is a

different set of expectations by the public and by the political elites

and expectations for the future.

I think all of us recognize, as well—everyone in this room recognizes—that democracy in Indonesia is still very vulnerable. We

should be talking about how the international community can help

a democratic country, a real democratic country, but one that is

still very fragile, a democracy, a transition that still faces many

challenges. The new president and his multiparty national unity

government recognize that fragility and are trying to deal with

those challenges. The important thing that I want to underline is

that they are worthy of our support, that the transition in Indonesia, the country of Indonesia is worthy of support for the process

of institutional reform.

I mentioned in my prepared statement eight specific challenges

that confront the institutionalization, the consolidation of democracy in Indonesia. I will list them, but I want to talk a little bit

about three of them in particular. To a significant extent, these are

short-term challenges. Dr. Friend talked about the long-term process, but there are many aspects of these challenges that must be

confronted in the short-term.

The list that we have come up with is, one, civil military relations, ending the military’s extensive involvement in politics—this

has been much discussed today; second, the problem of separatists

and communal violence; third, the process of constitutional restructuring; fourth, the need for election reform.

I won’t talk about that verbally today, but I would like to make

it clear that although the elections were successful last year, they

carried the seeds of many problems in the future. There are fundamental questions that need to be addressed about how elections are

organized in the future, such as whether future elections should be

organized with a very complicated system of proportional representation, how the president is elected, and who should administer the

elections, whether the authorities who run the elections are credible.

Five, is the problem of decentralization and devolution; six is the

empowerment of the legislature; seven is rule of law. This includes

30

not only strengthening the judiciary, but also attacking corruption

and addressing human rights abuses. Eight is the role of civil society.

Most of these, seven of these eight, are what we in the business

of promoting democracy will call supply side questions. They are

questions of whether institutions can deliver a democracy, whether

the supply of democracy will be there; in other words, whether existing institutions can be appropriately reformed or new institutions can be established that will make democracy real in Indonesia. The last is about the extent to which the political parties

and civil society organizations as intermediaries for the public can

maintain pressure for democracy and can maintain the demand for

democratic institutions.

If I can I would like to just take a few minutes to mention three

of these issues in a little bit more detail with some idea of what

some of the appropriate responses in the short-term might be.

The first I wanted to mention is constitutional restructuring. The

Indonesian constitution is a vague document that was written in

a very few days in 1945, and it has been used to legitimize authoritarian rule for much of the last 50 or more years. Nevertheless,

there is broad agreement in Indonesia that it shouldn’t be scrapped

and that it should be merely amended.

The MPR is the larger legislative body whose most important responsibility is to elect the president and vice president, but that

also has the power to amend the constitution. In its meeting last

October, the MDR adopted a first amendment making some amendments to the constitution. They consciously decided to follow the

U.S. style in not rewriting sections of the constitution but rather

making amendments.

One item of consensus also has been to not change the preamble

to the constitution, which means Indonesia will not have to have

a fractious debate over what kind of state it is—what the role of

Islam in the state is, for example—but rather can focus on institutions of government.

The first of the most important challenges, the most important

issues, in the constitutional debate is what the process is by which

the president is elected. I think there is an emerging consensus

that there will be a direct election of the president in the future.

As you know, President Abdurrahman Wahid was elected by this

700-member body, the MPR, that was about two-thirds directly

elected and one-third elected by regional legislatures and appointed, and there is an expectation that that will change in the

future.

A second important question is whether the country will adopt

a bicameral legislature as part of its response to the problem of

separatism and sentiment for independence around the country. It

would change this MPR body, this larger legislative body, into

something along the lines of the U.S. Senate.

The third question is whether Indonesia will become a Federal

state or how regional interests will be protected in the constitution.

The fourth is the extent of separation of powers and checks and

balances.

We believe that it is important for the international community

to provide comparative international experiences to the MPR, the

31

body that is amending the constitution, and to civil society and to

parties on what is possible in this constitutional reform process,

and we encourage civil society organizations to continue to monitor

and advocate changes and to develop a process that is inclusive,

that involves the public in the constitutional debate. Indonesian political elites seem very open to international advice, if it is provided

in an appropriate way. They are interested in the American experience, as I have alluded to, among others, and they want to try to

use this opportunity to develop a constitution that will institutionalize their democracy.

The reason that this is an important issue in the short-term, in

part, is because the MPR has decided to amend the constitution at

its meeting in August of this year, so it has 6 months to try to

make some very fundamental decisions. The opportunities for the

international community to try to help with that process are very

much in the short-term.

The second issue I wanted to mention in a little more depth is

the process of strengthening the legislature, working with the

DPR—that is, the national legislature. The new national legislature has 21 political parties represented in it. They are elected in

a system that doesn’t develop strong ties to constituencies. They

need to determine how to support the interests of their constituents. Eighty percent of the Members, roughly, are new, have not

served in the past legislatures, and much of what they do now will

set precedents for the future.

Once again, we think there are opportunities for the international community to offer advice to explain how legislatures

work in other countries; to create exchange opportunities for these

members of the legislature, many of whom, as I said, have not

served in the national legislature before; to help with their rules

and procedures, their system of ethics disclosure, their process of

developing professional staff and the like. These opportunities,

again, are very important in the short-run, because much of what

they do now will set precedents for the future, and in the absence

of other information, they look to the precedents of past legislatures that were much less real.

Finally, I wanted to mention the importance of supporting civil

society organizations and political parties. These organizations

must perform well in order to maintain the pressure for democracy

in Indonesia, in order to ensure that the public does not become

dissatisfied with the performance of the government and the parties and the legislatures. There are enormous opportunities for the

international community to provide advocacy training and organizational development advice, to share experiences from around the

world on how parties can be successful, on how advocacy organizations can influence public policy, and how they can operate within

a democracy.

As I mentioned in my statement, we believe that the United

States has performed well in its support for the election process in

Indonesia, and we believe it is important that there be continued

efforts to support the consolidation of democracy and to continue to

work with the new government, not only at the national level but

also at the provincial and district levels; with the legislatures, with

the DPR and the MPR, the two parts of the national legislature,

32

with parties and civil society organizations; with the judiciary; with

trade unions; with media. There are enormous opportunities, and

many of these opportunities are particularly important in the

short-run.

The question about the levels of foreign assistance and the extent

of diplomatic support seems to be coming clearer. Not long ago, it

seemed that foreign assistance actually might be going down, so it

is encouraging to hear what we have heard today.

In the short-term, there will be fundamental decisions made

about institutions, as I have said. There will be precedents established that will have influence far into the future, and there are

these challenges that we have talked about and that you are aware

of that threaten serious crisis to the new government and to the

new democracy. But I—in the longer-term, I share the optimism of

the others who have spoken today about the prospects for Indonesia.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Bjornlund appears in the appendix.]

Chairman BEREUTER. Thank you very much, Mr. Bjornlund, for

your excellent statement, too. It is organized in the eight major

challenges with your focus on three of them in particular, and the

appendix is attached to give us more detail on the NDI Programs.

I would just say that those favorable comments we heard from

Secretary Roth and also from Secretary Albright this morning

about funding for Indonesia in the next year and 3 years sound

good, but, with the pressure for Wye River Accords appropriations

and with the restiveness on the part of the Black Caucus and the

Latino Caucus, it could well be that we will be scrambling to find

sufficient funds in the appropriations process for the programs that

are identified for Indonesia. Those of you who are interested and

concerned about that will have to weigh in with me.

I would like to begin my questions, and then we will proceed

back and forth here with Mr. Faleomavaega. Perhaps the first

question addressed to Dr. Friend and Mr. Bjornlund in particular.

We have this widespread ethnic and religious violence in the

East Timor region which may have set something in motion in

places like Aceh, Irian Jaya, the Spice Island areas, and so on. How

much of what happened in East Timor, in your judgment, has influenced what is now happening in those parts of Indonesia? To

what extent do you think a genuine Federal system is a likely possibility, and what do you think the long-term prospects are, as we

look at Indonesia today, for maintaining Indonesia’s national

unity?

Dr. Friend, do you want to try first?

Dr. FRIEND. Yes, sir. Thank you for those penetrating and provocative questions. I think the terrible atrocities in East Timor

have chiefly affected Aceh, because there is an analogy of army behavior there going back to 1989 to 1992 when there was ruthless

suppression of the previous insurgency; also one in the seventies.

The very apparent looseness of national unity as a result of all

the things we have seen since the Asian economic crisis has helped

produce an environment in which the other four separatisms have

emerged, of which the one with the greatest historical persuasiveVerDate 11-MAY-2000 10:19 Jun 20, 2000 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 64418.TXT HINTREL1 PsN: HINTREL1
33

ness, though not as compelling to me as to Congressman

Faleomavaega, is in Papua. I would put the others in descending

order of seriousness. Riau, for instance, just had a provincial popular Congress within days, and they voted more than half against

independence and some for autonomy and some for federalism. I

think that would be true in most places. So, I think high profile

Aceh is really critical, and the others are of descending seriousness.

What are the chances for federalism, your second question. I believe it is not a lovely word to Indonesians, as you know, because

the Dutch used it in a kind of ploy in the late forties, a really strategic ploy to keep part of Indonesia. So, Gus Dur tried to say ‘‘we

can’t say it; but what other word is there? We need to be Federal.’’

I just wish he would say, ‘‘Well, let us have more regional autonomy,’’ and I think he is saying that, and they are doing that now,

and the new minister for regional autonomy is a very able woman.

So, I think whatever it is called, a decentralized and better-coordinated Indonesia is within view; it should be within view, and can

be achieved.

Your third question, the unity question, I think is probably answered, at least within my terms, by my answer to the second one,

that some careful form of decentralization is the best guarantee of

long-term unity.

Mr.BJORNLUND. I think that the problems of East Timor have

certainly complicated the situation for Indonesia and have encouraged some independence sentiment in some parts of the country.

Federalism or something like federalism is part of the response to

that, and I think we should be encouraged that there are many political elites in Indonesia, including the president of the country,

who recognize that the grievances of places like West Papua and

Aceh are grievances about past human rights abuses and about

control of resources as much as they are a security issue. They recognize that this is a political and economic problem, not a security

problem.

The concept of federalism itself is controversial, and in recent

months it has seemed that sentiment has swung away again from

calling it that, but the important question is whether there is some

kind of national deal, whether there is some kind of negotiated

process about the nature of the state and about the relationship between the center and the regions that has broad support in the regions, including in the places where there is strong separatist sentiment or strong independence sentiment, and that that deal is

somehow constitutionally protected or entrenched in some way that

it doesn’t just become a question of the good will of future governments as to whether that deal is honored.

We are optimistic about the possibilities that that process will be

reasonably successful and will have broad political support, including in the difficult parts of the country, and that there will be

much more regional autonomy, much more local democracy, much

more local control of resources. We are optimistic that greater regional autonomy will somehow will be constitutionally protected

and that the national unity of Indonesia isn’t necessarily threatened.

Chairman BEREUTER. Thank you, Mr. Bjornlund.

34

Dr. Friend, I wanted to mention that I specifically appreciated

the six areas of specific recommendation you made to us, most of

which involve our government to some extent. Some would be primarily directed to the NGO community, and I noted with interest

that your comments that the free press in Indonesia was launched

by a retired general while serving as the Minister of Information

who learned Jeffersonian principles at Fort Benning.

When I visited with the Chief of Staff and the entire general

staff about 3 years ago, every single officer in that room—about 10

to 12—had been to a U.S. military school. Several of them gave me

a high-five when they realized I had attended Fort Benning Infantry School, too a long time ago. I am not surprised that the retired

general had been through some military exposure in the U.S., but,

unfortunately, we have lost a generation or perhaps a half-generation of field grade officers who have never had that American experience.

Dr. FRIEND. Yes, sir.

Chairman BEREUTER. Mr. Gadbaw, a question for you. Some

have criticized the IBRA for moving too slowly to dispose of assets

and dealing with banking and company debt restructuring. They

say it is too weak or too bureaucratic. What is your view of IBRA’s

performance at this point, and what would you like to see it do differently for the benefit of Indonesia and, for that matter, for American business who might be increasing their activities in Indonesia?

Mr. GADBAW. I think the private sector would share the assessment that it has been a very slow process, and indeed they have

even stumbled a bit in their first efforts. I think that we had the

opportunity to meet with the new head of IBRA Mr. Cacuk, who

I think is an individual, who holds the kind of possibility to bring

together the unique set of political and economic and commercial

talents that IBRA needs in order to succeed.

When we met with President Wahid, he clearly set the political

objective, which is that IBRA move forward very quickly to begin

to dispose of those assets that it holds, and indeed it holds a good

part of the country’s assets, and begin to sell those back into the

private sector, and that is indeed the test for IBRA’s effectiveness.

We are seeing in the way that IBRA handled the Astra sale that

they have been able to make some progress on that front. Mr.

Cacuk told us that he is very open to American business participating in those sales. The test will be what kind of deals, what

kind of structures can be put together to make that possible?

There are companies, my company included, that are working

with IBRA. The reports we have gotten really even since our visit,

which was now some 3 weeks ago, are that there is a new atmosphere, a new working relationship with the private sector, with the

foreign investment community that has been brought in by the new

IBRA leadership. I think the test is clearly now before them to see

if they can produce the results that are needed to recycle these assets back into the private sector, to bring the kind of management

combination of foreign and Indonesian management talent that will

restore private investment, both domestic and international, to Indonesia.

Chairman BEREUTER. Mr. Gadbaw, Undersecretary Geithner

talked about the need for autonomy of the Central Bank, and he

35

talked about the privatization of some of the banking structure

within Indonesia. I know this is not your personal area of involvement in the business sector, but I think he said he expected that

we might more likely see a greater degree of foreign interests possible in the banking structure early versus some years from now,

which was an interesting statement and I think somewhat encouraging. It may, however, just reflect the degree of the crisis they

have in their banking structure.

To what extent do you think American and foreign banks would

be likely to be permitted to be involved in what foreigners call retail banking, in Indonesia? With a larger presence of American

banks and their ability to deal not only in investment banking but

also in what is called retail banking, how much of a factor is that

in encouraging American business enterprises in Indonesia?

Mr. GADBAW. I think that is an excellent question, and you are

right that my crystal ball doesn’t go very far. I will say that within

our delegation we had a number of American banks represented

that are looking into that very issue. I can say for my company,

GE Capital has been active in Indonesia. They have been in the

nonbank financial sector. They have credit card operations, they

have auto finance activities, and they have personal credit activities.

Interestingly enough, they reported to me that the incidence of

failure to repay debts, the measurements that they have in Indonesia, they are performing better than virtually anywhere else in

the world; that is to say they manage their portfolio very carefully,

but there is a community of middle-class individuals that are able

to carry debt and to manage that debt effectively, and I think that

does give one hope for the future.

It is clear that there are American banking and financial institutions that are in Indonesia right now working with the ministry of

finance and looking for the varied licenses that you have identified

in the retail banking area. I don’t think we will know what the real

prospects are until we see one of those deals actually get structured

and succeed. It hasn’t happened yet. Some of the examples, obviously, the Bank Bali incident has really set a negative tone in that

area, but it is something that the government has said they are

open. They are open to all the possibilities.

The reports we have are that this is very much in the forefront

of discussions, so there is a lot of optimism in the air, but the test

will really be what kind of deal is actually structured, what kind

of foreign participation will there be, and will those institutions actually begin to function effectively in the economy?

Chairman BEREUTER. Thank you very much.

Mr. Faleomavaega, you have been very patient.

Mr. FALEOMAVAEGA. No problem.

Chairman BEREUTER. Please proceed with your questions.

Mr. FALEOMAVAEGA. Thank you, Mr. Chairman.

Just a couple of questions. Am I to understand correctly, at least

from the previous witnesses, the total business investment that the

U.S. has in Indonesia is about $7 billion? Is that correct, Mr.

Gadbaw?

36

Mr. GADBAW. The figures that we have are that it is close to $8

billion. I can share with you a document that we put together that

gives at least a chart. This is the total——

Mr. FALEOMAVAEGA. I am sorry, I am little blind here. What is

it again? It is about $8 billion?

Mr. GADBAW. It should show approximately—excuse me, $7 billion. I believe what Undersecretary Geithner said was 6.9, and the

bar chart, if you can discern it, shows for 1998 cumulative direct

U.S. investment of closer to $7 billion.

Mr. FALEOMAVAEGA. Almost $7 billion.

Mr. GADBAW. That is correct.

Chairman BEREUTER. Without objection, I would like to have this

entered into the record.

[The information referred to appears in the appendix.]

Mr. FALEOMAVAEGA. Please, by all means, Mr. Chairman.

Mr. Gadbaw, do you have a breakdown in terms of the kinds of

businesses that we have from the U.S. that are making investments in Indonesia? Is this primarily from the lending institutions

or menu factoring industries? Do we have a breakdown?

Mr. GADBAW. I think we can certainly work with the Department

of Commerce to get you a more detailed breakdown than I can give

you, but I would say that from my experience, it is clear that the

oil and gas and the mining sectors are the largest areas. What we

saw, however, before the crisis was that there was a significant increase in the manufacturing and service areas, and companies like

my own that are in manufacturing——

Mr. FALEOMAVAEGA. When you say the crisis, do you mean the

East Timor crisis or——

Mr. GADBAW. I mean the financial crisis.

Mr. FALEOMAVAEGA. The financial crisis.

Mr. GADBAW. I was referring to the financial crisis. Of course

those coming simultaneously complicated the matter.

Mr. FALEOMAVAEGA. Sure.

Mr. GADBAW. But it is clear that there is a lot of interest on the

part of manufacturing companies. The auto companies were all

present on our delegation. The telecommunications companies are

all actively pursuing, looking at opportunities in the service area.

There are companies across the board that want to get involved in

the full range of services.

Mr. FALEOMAVAEGA. So, you are saying that basically out of the

$7 billion, of U.S. total investment, maybe $4 billion is in oil, gas,

and minerals and the sort?

Mr. GADBAW. I would say that is the largest piece. I am not able

to say whether it is $4 billion or not, but that clearly is the largest

piece.

Mr. FALEOMAVAEGA. You would say the majority.

Mr. GADBAW. That is true.

Mr. FALEOMAVAEGA. How does it compare to investments from

the European countries, our investment?

Mr. GADBAW. We are, with Japan, one of the largest investors,

so if you compare it to individual European countries, we would be

larger. I think the EU, as a whole, probably would start to come

close to ours.

37

Mr. FALEOMAVAEGA. There was a question earlier, Dr. Friend,

about reinstituting military training for our Indonesian friends. It

is a paradox that we find ourselves in. Nicaraugua’s dictator

Samoza was also a cadet at West Point. He was one of the friends

that we had in Central America who was later ousted because of

his dictatorship.

I wanted to ask you, over the years, as you know, the military

top brass in Indonesia has been trained by the U.S. Is this a positive thing that we, as a country, should do to train the military of

other country’s with the expectation that they become pro-democracy? Do they in fact become supportive of democracy?

Dr. FRIEND. I am sure we could get a roster of cadets who turned

out badly, Congressman Faleomavaega.

Mr. FALEOMAVAEGA. Except for those that went to Fort Benning.

My question to you, you can talk about Sukarno in the mid-sixties and you talk about Suharto, and I am positive that many of

the top officers that we now have in the military in Indonesia were

U.S.- trained. Given the problems that we have had, as I have said

earlier, historically about what happened to West Papua and East

Timor and other places, has U.S. military training been effective

and do you see where I am going?

Dr. FRIEND. I believe I do so. I am sensitive to it. I think I recognize the seriousness of the point. I think the point applies, as you

have already mentioned, to Latin America and may apply to other

places as well.

Mr. FALEOMAVAEGA. See, we always give you good intentions.

Dr. FRIEND. Congressman, it is my trust and I hope it is not just

democratic faith, that in the end if there were an ability to strike

a full balance on this, we help more than we hurt. I can’t really

make a scientific statement; I can’t even make a social-scientific

statement, but I do believe that it is better to engage these militaries in short segments of advanced training where they can read

Jefferson for the first time or read Hamilton or read Ralph Waldo

Emerson.

Mr. FALEOMAVAEGA. Do you think any of these soldiers knew

anything about Jefferson and Emerson and——

Dr. FRIEND. Very few in Indonesia. It is a real eye opener for

General Yunus Yesfia, who is the man I am talking about and referred to, a real eye opener. I mean, he just was enlightened by

being in America and at Fort Benning. When he got the opportunity, under President Habibie, he was given a wide portfolio, and

he immediately started issuing licenses for publication and has

kept on going to the point that now there is no need even for a license. Now, we have the opposite problem coming at us—or coming

at Indonesia, which is the licentious ultra-free press, and that is

why I mentioned in my paper the need for media grants to help

train people in the limits of a free press.

But to come back again to your question, which is very serious,

my answer has to be on faith, on balance. I reiterate, if you will

allow me, what Chairman Bereuter said a moment ago: We have

lost a half-generation of contact there with leading military officers,

and we need to regain that contact as we do in the all the ways

that Mr. Bjornlund was talking about, all the ways Mr. Gadbaw

was talking about. We need that kind of contact, too.

38

Chairman BEREUTER. Will the gentleman yield for a second?

Mr. FALEOMAVAEGA. I would gladly yield, sure.

Chairman BEREUTER. I think, for the record, it probably should

be pointed out that the training we provide through IMET or

EIMET is basically very senior enlisted personnel or generally officers in the major, lieutenant, colonel era. They do not receive their

basic education or training in a military sense in this country, but

they do have this exposure for 4 to 12 months, and I think exposure’s what we are talking about, not basic training for either enlisted or officers.

I thank the gentleman for yielding.

Mr. FALEOMAVAEGA. I thank the Chairman for enlightening me

on that.

We have a very interesting dialogue here. The gentleman is an

officer; I was just a grunt in Vietnam, and it came to the point I

wanted to shoot every general there was given the situation that

we ended up with in Vietnam. These were highly trained officers,

mind you, some even went to West Point and the Naval Academy.

The point here is that we have good intentions. We have done

this with other countries, not just Indonesia, with the hope and the

desire that these military officers will respect democratic government. Thank God that the history of our country reflects the military has always acquiesced to civilian authority.

So, I am glad the chairman is correct in the fact that these are

very senior officers in Indonesia that were being trained. Now, I

am talking about the grunt out there that was ordered by these

senior officers that went out there and started doing the killing. If

you can call it killing—there is a difference between killing and

murdering, you know. The mass taking of life by the military during the dictatorships of Sukarno and Suharto have not been examined by any international court of justice. The authorities committed in East Timor and West Papua and throughout Indonesia

during periods of political upheaval several hundreds of thousands

of lives, or murder for which no one has been held accountable.

Dr. FRIEND. I hope if I insert a word, Mr. Congressman, that my

history will get that on paper and available to readers.

Mr. FALEOMAVAEGA. I look forward to reading your book when

you publish it.

Dr. FRIEND. My deadline is June 15, 2001, sir, and I am marching along on schedule.

Mr. FALEOMAVAEGA. Just one more question, Mr. Chairman.

Mr. Bjornlund, in our discussions on Indonesia, I have not heard

one instance where a Muslim country has given assistance to Indonesia. Are the Arab countries giving any assistance to Indonesia,

economic assistance?

Mr.BJORNLUND. I don’t know. I don’t know about economic assistance. Maybe Mr. Gadbaw knows. In terms of supporting the democratic transition process, the United States plays a very important

role, and United States programs take chances that many other

countries are not willing to take. I think that is something to recognize about U.S. assistance in the democracy area around the world,

that there are programs that American organizations with American government funding are willing to carry out that are someVerDate 11-MAY-2000 10:19 Jun 20, 2000 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 64418.TXT HINTREL1 PsN: HINTREL1
39

times risky and are very important that many other countries in

the world are not able or willing politically to take on.

In Indonesia, the United States was clearly ahead of the Europeans, for example, in providing assistance to the democratic transition process, as I think the U.S. should have been.

Mr. FALEOMAVAEGA. Of course there is also the paradox that we

find ourselves in when promoting democracy and the rights of

women around the world, but you don’t talk about that in Saudi

Arabia. Saudi Arabia happens to be ruled by a king who some call

a dictator, but who is very pro-American. They have an entirely different set of values in terms of democracy and the rights of women.

We talk about abuses that as far as their culture is concerned are

perfectly all right, because it is in line with the Koran. I don’t question that either because of the cultural difference on how we perceive things.

Mr.BJORNLUND. There is been a sentiment among many in Indonesia for many years that the government was not concerned about

Islamic values and was not representing the point of view of religious people in the country, that the past governments were nationalists, secular in their outlook. I think that concern, to some extent, continued right through the selection process of the current

president.

But what I think Indonesians will increasingly come to realize is

that a democratic Indonesia has to be concerned about religious

people. Because it is a country that is so predominantly Muslim in

its makeup, a democratic Indonesia will obviously protect religious

values in the country.

The nature of Islam—Dr. Friend can talk about this much more

than I can—but the nature of Islam in Indonesia is very different

from the nature of Islam in the Middle East.

Mr. FALEOMAVAEGA. That is right.

Mr. Chairman, thank you very much.

Chairman BEREUTER. Thank you very much, Mr. Faleomavaega.

I have a final question, and I will direct it to you, Mr. Bjornlund,

but Dr. Friend and Mr. Gadbaw may also like to make a comment.

Your No. 7 challenge is reforming the judiciary and establishing

the rule of law, including addressing the problems of corruption

and human rights abuses. I would like to know now, during this

hearing, what you might say to us about where we ought to direct

those funds and by what channels in an aid program we might

begin for fiscal year 2001, the upcoming budget?

Also, I would like to know whether you would be willing to followup and after giving it some thought help us write some directive

language which we would try to put in the appropriations process,

if we don’t have a separate authorization bill. At this point, not

quite off the top of the head, but how do we proceed in this important area?

Mr.BJORNLUND. I think the area is enormously important. It is

important over the longer-term as much as in the shorter-term.

Many of the interventions that are possible from the international

community, many of the ways in which international assistance

can help, can only contribute to real change over time. Establishing

the rule of law is something that can’t be done by some particular

intervention or foreign assistance program in the next few months.

40

So, we believe it is an enormously important area and deserves

support from the United States and from the international community. Ar the same time, there are also needs in the political participation area, including many that are more immediate, and institutional decisions that need to be made, as I talked about earlier.

In the rule of law area, certainly one question is the judiciary

and there are opportunities perhaps to try to help increase the professionalism of the judiciary. The legal profession, in general, is demoralized and standards are low, and many in the legal profession

think there are opportunities to benefit from international engagement as to how to raise the standards of the profession, its

credentialing process, its educational system.

The question of addressing past problems helps to reestablish

confidence in the integrity of the legal process, certainly.

Chairman BEREUTER. And that was with respect to the Commission of Inquiry and the 33 people and perhaps already indicated on

indictment. If in fact the Indonesian government does not proceed

with bringing these people to justice in very general terms, then

would you encourage an international tribunal?

Mr.BJORNLUND. It is important to try to allow the Indonesian

process to work its way through the various compromises that need

to be made and the interests that need to be balanced and to try

to deal with the problem, because I think there are people in the

government and in the human rights community that want this

process to succeed, that want justice to be done, that want real investigations to happen, that want people to be held accountable,

and to the extent that they can succeed, they not only address

those past abuses, but they reinforce the institutionalization and

consolidation of democracy.

Chairman BEREUTER. I agree with you. It is very important to

give them an opportunity to do it themselves first, and maybe we

shouldn’t even think about a worst-case scenario.

Mr.BJORNLUND. I think that they are likely to succeed more or

less in that process.

Chairman BEREUTER. With regard to the Human Rights Commission, which is about 4 or 5 years old, is it an institution worthy

of our support and encouragement?

Mr.BJORNLUND. Absolutely. It is been a very important institution. It was important under Suharto, and it is only more important now.

Chairman BEREUTER. Who else would like to comment on this?

It looks like both gentlemen.

Dr. Friend?

Dr. FRIEND. Yes, sir. I agree strongly with your emphasis implied

in the question, and I address it in point 5-E of my concluding remarks. I would be happy to join with Mr. Bjornlund, who probably

has more resources and connections in this regard than I do, to

come up with some language with a little help from your staff, because I think this is a long-term project, and I don’t think American bar associations, law institutes, law schools are alert to it the

way they got onto the opportunity and the need when the Berlin

Wall fell. We have got a different kind of wall having fallen, different opportunities and needs, and our not-for-profit institutions

generally have not responded enough yet.

41

Chairman BEREUTER. I would like to take you up on your offer

and hope Mr. Bjornlund will also agree.

Mr. Gadbaw?

Mr. GADBAW. Yes. This is one of the most important issues I

think that the private sector sees when you ask the question about

return of foreign investment capital to Indonesia. I think the rule

of law and judicial reform is really very much at the top of the list.

A couple of points: When we met with President Wahid, he made

an interesting statement, echoing what he said when he was here

in the United States. He said, we value very much doing business

with countries and companies that share our value system—democracy, rule of law, and political accountability.

When we met with the attorney general, Marzuki Darusman, he

said, Indonesia is in a transition from a country whose system is

based on political stability to one that the system will be based on

the supremacy of law and respect for human rights. I think that

means that there is at the political level a commitment to make the

kind of changes.

I think there are two challenges when it comes to judicial reform:

One is creating professionalism and accountability and an integrity

in the system, and the other is creating political independence.

There is a debate going on over what the right sequence is, because

if you get independence before you are able to get professionalism

and integrity, you may compound your problems. So, I tend to feel

we have got to put as much emphasis on the latter to get that right

as on the former.

I think that what we ought to focus on is twofold: One is creating

some kind of focal point for a strategy where some group is able

to lay it all out but at the same time engage all of the different

groups that have to be engaged. As our Ambassador said, this effort will have to be a multiyear, multidonor, comprehensive strategy which actually engages both the private sector and the public

sector across a whole spectrum of problems that will only address

the issue if they can get all of these individual pieces right.

So, if you can get the focal point right and you can create ways

to make linkages, whether it is bar associations, universities, fellowships, groups like NDI, linking up with counterpart groups, you

create this network of both public and NGO-type institutions and

the private sector. We have a need for an effective court system,

professional, legal, and judicial individuals, all of which has to

work effectively.

So, I think that kind of two-part strategy following under what

I think our Ambassador there and the World Bank seems to be

working on, which is again a comprehensive, multiyear, multidonor

strategy, is the only thing that holds any chance of being successful.

Mr. FALEOMAVAEGA. Would the gentleman yield?

Chairman BEREUTER. I would be happy to yield.

Mr. FALEOMAVAEGA. I just want to make a little observation that

sometimes when we have these expectations of a country like Indonesia that has just come out of a 30-year dictatorial rule, we have

to give them some space. It has taken us almost 100 years, over

100 years, to recognize what civil rights are about, what the rights

of all citizens under the Constitution should be. It is very easy for

42

us to say that we have got to do this or they have got to do that,

but given the infrastructure and the complexity of a nation like Indonesia with all the problems attending it, I say let them do it at

their own pace and their own ability to cope with each problem.

Otherwise, I think we ask for something and get something quite

different or probably even worse. That is just my little observation.

Chairman BEREUTER. Mr. Faleomavaega, thank you very much

for that reminder.

Mr. Gadbaw, you really made a very interesting suggestion, and

I think most people would embrace it. It certainly implies, at least,

an international effort, not one that is a bilateral arrangement between Indonesia and the United States. I recall that an election assistance we gave came under a U.N. umbrella which was a very advantageous approach. But there is, in my quick examination of

this, no logical international organization to do that. I would like

to think it could be done. The IMF is only a small part of it, but

the issue deserves some attention.

I wanted to say to Mr. Faleomavaega, I appreciate all of his continued assistance and interest in the Asia-Pacific region. We will

hope you relay that to him for his involvement here today.

Gentlemen, thank you very much for your time with us today, for

your testimony, and for your written statements. I very much appreciate it, and I hope we can count on you for future assistance

to the Subcommittee in our efforts.

The Subcommittee is adjourned.

[Whereupon, at 4 p.m., the Subcommittee was adjourned.]

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