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[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]

 
        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

                              

                     U.S. GOVERNMENT PRINTING OFFICE
64-418 CC                    WASHINGTON : 2000

                  COMMITTEE ON INTERNATIONAL RELATIONS

                 BENJAMIN A. GILMAN, New York, Chairman
WILLIAM F. GOODLING, Pennsylvania    SAM GEJDENSON, Connecticut
JAMES A. LEACH, Iowa                 TOM LANTOS, California
HENRY J. HYDE, Illinois              HOWARD L. BERMAN, California
DOUG BEREUTER, Nebraska              GARY L. ACKERMAN, New York
CHRISTOPHER H. SMITH, New Jersey     ENI F.H. FALEOMAVAEGA, American 
DAN BURTON, Indiana                      Samoa
ELTON GALLEGLY, California           MATTHEW G. MARTINEZ, California
ILEANA ROS-LEHTINEN, Florida         DONALD M. PAYNE, New Jersey
CASS BALLENGER, North Carolina       ROBERT MENENDEZ, New Jersey
DANA ROHRABACHER, California         SHERROD BROWN, Ohio
DONALD A. MANZULLO, Illinois         CYNTHIA A. McKINNEY, Georgia
EDWARD R. ROYCE, California          ALCEE L. HASTINGS, Florida
PETER T. KING, New York              PAT DANNER, Missouri
STEVE CHABOT, Ohio                   EARL F. HILLIARD, Alabama
MARSHALL ``MARK'' SANFORD, South     BRAD SHERMAN, California
    Carolina                         ROBERT WEXLER, Florida
MATT SALMON, Arizona                 STEVEN R. ROTHMAN, New Jersey
AMO HOUGHTON, New York               JIM DAVIS, Florida
TOM CAMPBELL, California             EARL POMEROY, North Dakota
JOHN M. McHUGH, New York             WILLIAM D. DELAHUNT, Massachusetts
KEVIN BRADY, Texas                   GREGORY W. MEEKS, New York
RICHARD BURR, North Carolina         BARBARA LEE, California
PAUL E. GILLMOR, Ohio                JOSEPH CROWLEY, New York
GEORGE P. RADANOVICH, California     JOSEPH M. HOEFFEL, Pennsylvania
JOHN COOKSEY, Louisiana
THOMAS G. TANCREDO, Colorado
                    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                 TOM LANTOS, California
DANA ROHRABACHER, California         HOWARD L. BERMAN, California
PETER T. KING, New York              ENI F.H. FALEOMAVAEGA, American 
MARSHALL ``MARK'' SANFORD, South         Samoa
    Carolina                         MATTHEW G. MARTINEZ, California
JOHN McHUGH, New York                SHERROD BROWN, Ohio
RICHARD BURR, North Carolina         ROBERT WEXLER, Florida
PAUL GILLMOR, Ohio                   JIM DAVIS, Florida
DONALD A. MANZULLO, Illinois         EARL POMEROY, North Dakota
EDWARD R. ROYCE, California          GARY L. ACKERMAN, New York
JOHN COOKSEY, Louisiana              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

                            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

        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.
    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 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 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 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.
    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 
referendum, 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 problems 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.
    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 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 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--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 re-examining 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 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 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. 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 one-time-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.
    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 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 Chinese-Indonesian capital is returning, that they have 
some confidence in this government and in President Wahid?
    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.
    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 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 business 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 military- to-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 yesterday, 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.
    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 STATES-ASEAN 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.
    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 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.
    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 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 encourage, 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 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 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 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, 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 persuasiveness, 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.
    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 
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?
    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.
    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.
    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 sometimes 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.
    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.
    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 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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                            A P P E N D I X

                           February 16, 2000

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