Indonesia's President Looks Ahead as Vote Nears

By TOM WRIGHT

Reuters

Indonesian President Susilo Bambang Yudhoyono and his wife, center, greet supporters at a campaign rally on Saturday in the capital of Jakarta.

JAKARTA, Indonesia -- On the eve of a national election this week, Indonesia is re-emerging as one of the world's hottest developing economies, a remarkable turnaround for a country that was once widely viewed as a basket case.

Despite the global financial crisis, Indonesia's economy is on track to grow nearly 4% this year, making it one of only a handful of major economies -- including China and India -- that International Monetary Fund expects to expand in 2009.

Its stock market is up 50% for the year, and companies including Volkswagen AG and British American Tobacco PLC are making new investments there.

Much of the credit goes to Indonesia's president Susilo Bambang Yudhoyono, a former army general who is widely expected to win re-election after five years in power. Under his watch, the government has stamped out Islamic terrorism and ended its civil war in the resource-rich province of Aceh. He has brought state spending under control and launched a popular anti-corruption drive, landing a number of senior politicians and central bank officials, including one whose daughter is married to Mr. Yudhoyono's son, in jail.

But critics say Mr. Yudhoyono will have to do more to attack corruption if the nation is to reach its potential of China-style economic growth rates of over 8%. Last year, China attracted six times more foreign direct investment than Indonesia. Foreign businesses say that a corrupt legal system and bureaucracy are major deterrents to doing business in Indonesia.

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Indonesia's Election

In a rare hour-long interview on Sunday at his home -- a sprawling estate outside Jakarta that has a library of 13,000 volumes -- Mr. Yudhoyono said that if he's re-elected, he will fill his next cabinet with technocrats, rather than hand out positions to a wide range of under-qualified leaders from rival political parties, as he did to placate opponents in his first term. He acknowledged that in the past his government has included businessmen with conflicts of interest that made it harder for him to rein in corruption and push reform -- a practice that he pledged to end in a second term.

"Five years from now, I have to complete my effort in reforming Indonesia," Mr. Yudhoyono said. "Good governance, bureaucratic reform, the anti-corruption campaign all have to be intensified."

A broad-shouldered man who dresses neatly in bureaucrats' safari suits or silk batik shirts, Mr. Yudhoyono, 59, is an unlikely reformer. He is a career military officer in a country where the military is widely associated with corruption and human rights abuses.

In a poll of 3,000 people released on Sunday by Lembaga Survei Indonesia, 63% of respondents said they will vote for Mr. Yudhoyono in the presidential election set for Wednesday. Twenty percent opted for his closest rival, former president Megawati Sukarnoputri, who has been pushing an anti-free trade stance. Trailing a distant third is Jusuf Kalla, chairman of the Golkar Party.

The question is whether Mr. Yudhoyono could carry his law-and-order campaign to a new level in a second term, putting Indonesia -- the world's fourth-largest country with 240 million people -- on a more sustainable path as one of the world's top emerging-market economies. Mr. Yudhoyono has taken a number of steps in recent weeks -- including choosing a well-respected Wharton-educated economist with few political ties as his new running mate -- that suggest he'll press for bigger changes during a second term.

In the interview, Mr. Yudhoyono said he would protect only a few crucial industries such as the local rice market, to make sure food security is maintained, but said he is otherwise committed to free trade and investment as a way to raise incomes in a country filled with natural resources.

For more than a decade, this ethnically-diverse archipelago nation of more than 17,000 islands -- covering a distance greater than Los Angeles to New York -- was known for corruption and chronic instability, with one of the world's longest-running civil wars. Islamic terrorists struck Western targets in Indonesia with impunity, and foreign investors mostly steered clear. Indonesia seemed so unstable at times that some Western analysts feared it would turn into another Pakistan.

Recently, its fortunes are changing. Last month, a Morgan Stanley analyst report suggested Indonesia should be added to the famous "BRIC" grouping of fast-growing emerging markets that now includes Brazil, Russia, India and China.

Mr. Yudhoyono's reputation as a reformer in the Muslim world's largest democracy is far from assured. Indonesia's cosy business elite has barely changed since the fall of former authoritarian president Suharto in 1998. The judiciary and civil service remain graft-ridden, according to advocacy group Transparency International, despite Mr. Yudhoyono's personal reputation for probity. Without more serious changes, investors fear the recent surge in interest in the country will fizzle.

Despite his anti-corruption drive, Mr. Yudhoyono remains part of the nation's elite, making him cautious in going after the most powerful politicians, judges and other government officials involved in graft, critics say. Last month, New York-based Human Rights Watch issued a report detailing continued abuses by military special forces, including rape and torture, in Indonesia's easternmost province of Papua.

"He's very much part of the system," says Michael Buehler, a fellow at Columbia University's Weatherhead East Asian Institute. "If you look at civil service reform, nothing has happened in the past five years."

Mr. Yudhoyono hit back at critics who charge he has been slow at bringing reform. He says they underestimate the enormity of Indonesia's problems of graft, which could take 10 years more to clean up, and the need to weigh decisions carefully to bolster respect for the nation's laws and Constitution, which in the past were often disregarded. "That's the way we have to run the country, it's not a small company where you can make decisions right away," he said.

And while acknowledging that army reform isn't yet complete, Mr. Yudhoyono insisted there have been no major violations of human rights or other systematic repressions under his watch.

Like Mr. Suharto, who was also an army general, Mr. Yudhoyono can seem aloof and stiff in public, preferring to read from prepared scripts than answer questions off-the-cuff from the media. He often deliberates so long over decisions that cabinet meetings have been known to run all day without reaching a decision.

But he is also considered to be an intellectual who has shown a commitment to democracy and rule of law that's somewhat unusual for Indonesia. After declaring independence from the Netherlands in 1945, Indonesia became one of the world's most impoverished economies under its first president, an independence hero named Sukarno. Mr. Suharto took over in 1965 and presided over growth fueled by Western capital and foreign aid, but also ruled the country as his own fiefdom. In 2007, a report by the U.N. and World Bank alleged Mr. Suharto stole more state funds than any other modern world leader -- as much as $35 billion. Rights groups documented a range of abuses, including military-led massacres in East Timor, which voted in 1999 to split from Indonesia in a U.N.-backed referendum after a 24-year civil war.

Mr. Suharto, who died in 2008, justified his practices by arguing that Indonesia would disintegrate without an authoritarian figure at the helm. This seemed all the more true after Mr. Suharto's government collapsed in the wake of the 1998 Asian financial crisis. A series of ineffective civilian leaders left the country adrift and foreign investors fled.

Mr. Yudhoyono appears to have broken that mold. Born into a poor family whose father was a low-ranking military official, he excelled in studies from an early age and won a place at Indonesia's prestigious military academy, where he graduated top of his class.

From early on, his approach to soldiering often put him at odds with army colleagues. Upon taking command of Battalion 744, a feared infantry unit with a reputation for brutality in East Timor in the 1980s, he moved to end the common practice of summarily executing prisoners.

On one occasion, he intervened to stop troops from killing a resistance fighter who was badly injured in a skirmish, ordering that he instead receive hospital treatment, according to an account of the incident in Mr. Yudhoyono's official biography. Former senior generals confirm the account and say Mr. Yudhoyono was criticized by some for these unusual tactics.

He studied several times in the U.S. on joint-training programs and served as a top United Nations commander in Bosnia. In 1990, he spent a year at the U.S. Army's staff college in Fort Leavenworth in Kansas, where officials conducted classes on the role of the army in the U.S. and its separation from politics.

"He saw how the United States could be a superpower and democratic," says T.B. Silalahi, a former general who was Mr. Yudhoyono's senior in rank at staff training college in the 1990s and is now a presidential national security adviser for Mr. Yudhoyono.

By the mid-1990s, a pattern in Mr. Yudhoyono's leadership was emerging in which he stayed loyal to the country's establishment but pressed for more flexibility and reform from within. He became head of the army's political wing, an army staff position that oversaw the secondment of generals to the civilian government's cabinet and played a role in policymaking.

When tensions between pro-democracy student activists and Mr. Suharto's government reached a boiling point in 1998, with three days of rioting in which hundreds of people were killed, Mr. Yudhoyono backed the government. But unlike most other generals, he tried to help mediate by organizing televised forums with pro-democracy groups to reduce tensions. There was an ethos that "rebellions must be crushed militarily. I didn't agree," Mr. Yudhoyono said.

After Mr. Suharto stepped down, Mr. Yudhoyono took a lead role in the new government headed by Mr. Suharto's last vice president, B.J. Habibie, and drew up a blueprint for army reforms that were quickly enacted. They included measures aimed at withdrawing the military from domestic politics -- including forcing generals to resign before taking up cabinet positions -- and removing the country's national police from army control.

Mr. Yudhoyono, who left the army for a full-time career in politics in 1999, also grew frustrated by the country's low reputation abroad. The following year, as the nation's top political and security minister under then-President Abdurrahman Wahid, he was summoned by the U.N. Security Council in New York after an episode in which an Indonesian military-backed militia attacked a U.N. office near East Timor, killing three U.N. personnel.

Mr. Yudhoyono defended his country, amid angry responses by President Bill Clinton and other world leaders, telling U.N. officials that sending a U.N. peacekeeping force would be meddling in Indonesia's affairs. But he also promised to create a timetable for reining in the militias and privately told advisers he was deeply embarrassed by the affair.

"The world had a problem with Indonesia because of East Timor," Mr. Yudhoyono said in the interview. World leaders saw the nation as a "repressive country in which internal security problems were resolved militarily."

Indonesia was in chaos on other fronts, too. Hard-line Islamist groups that had been forced into exile by Mr. Suharto but were able to return after the end of military-backed rule plotted terrorist attacks on Western targets, culminating in the 2002 nightclub bombings in Bali that killed 202 people.

Meanwhile, decentralization laws designed to unravel some of Mr. Suharto's power network instead led to near anarchy in the provinces, where newly-empowered local politicians became extremely wealthy handing out permits to cut down trees and mine inside national parks.

Mr. Yudhoyono coordinated the setting up of a U.S.-funded anti-terrorism police unit called Detachment 88 that made scores of arrests over the next few years, including those of the Bali bombers, all but destroying a local Islamic terrorist network linked to al Qaeda.

In 2004, backed by a group of disgruntled liberal former generals, Mr. Yudhoyono resigned from the government of Ms. Megawati, a daughter of Mr. Sukarno, to stand in Indonesia's first direct presidential elections. Mr. Yudhoyono, who wasn't implicated in a number of corruption scandals that plagued Ms. Megawati's tenure, promised voters he wouldn't shy away from taking tough decisions to end Indonesia's security and economic woes. The voters responded, electing him in 2004 in a landslide victory.

His strategy, he now says, was to identify a few key areas where Indonesia needed to act -- including lack of respect for the law, reining in corruption and restoring overall economic and political stability -- while recognizing that some other areas couldn't be fixed right away.

Within a year, he signed a deal to end 30 years of fighting in the province of Aceh by agreeing to give it special autonomy within Indonesia and more power to run its own affairs, despite opposition from hard-line generals who feared compromise would cause Indonesia's other minorities to demand independence -- something that hasn't happened.

"I did convince military officers we had to change," Mr. Yudhoyono said. "It's not that we necessarily had to conduct military operations all the time."

On the economic front, high global oil prices were wreaking havoc on the state budget, with generous consumer fuel subsidies adding up to $7 billion in 2004. Foreign investors were fleeing the stock market and local currency on fears the nation was on the verge of bankruptcy.

The government raised fuel prices twice in 2005, sparking street protests. Opposition politicians and NGOs slammed the moves as anti-poor and inflationary. But Mr. Yudhoyono appeared regularly in public and mustered academic experts to point out fuel prices disproportionately benefited the middle classes who drive cars, while leaving less for education and health care.

To balance the fuel-price increase, Mr. Yudhoyono instituted a cash-transfer program that reached a third of households. The government has spent more than $2 billion in cash handouts, subsidized primary education and other benefits, paid for in part from fuel subsidy savings.

The president appointed well-respected technocrats who have run a tight economic ship. Finance Minister Sri Mulyani Indrawati, a former International Monetary Fund executive director, has presided over a reduction in public debt to 30% of gross domestic product from 60% when Mr. Yudhoyono came to power. The economy, helped by a commodity boom and healthy consumer spending, grew by over 5% annually between 2004 and last year.

"The fact he's going after corruption is a very good sign," said Mark Mobius, a Hong Kong-based executive chairman of Templeton Asset Management LLC, who has covered emerging markets for over 40 years. "The $64 million question is whether he will continue to carry that out. They're up against a lot of competition in the race for investment from around the world. They've really got to move forward."

Mr. Yudhoyono's ability to drive change is now greater, his supporters argue. In part because of his success over the past several years, Mr. Yudhoyono's Democrat Party is today the largest in Parliament, which means he can more easily press through reform legislation, if he chooses.

"I've tried to transform Indonesia," he said. His goal, he says, is "to be as any other normal democratic countries."

-- Yayu Yuniar contributed to this article.

Write to Tom Wright at tom.wright@wsj.com