Don Greenlees, Jakarta – Indonesia is angry and the East Timorese are cynical. As Don Greenlees reports, the Howard Government's policy switch on Timor always ran the risk of pleasing no one

Two days before Christmas, Australia's ambassador in Indonesia, John McCarthy, arrived at the colonial-era office of President B. J. Habibie bearing the Howard Government's answer to a problem that for 23 years has been almost as troublesome for politicians in Canberra as in Jakarta.

It was contained in two humbly phrased pages from John Howard. After months of painstaking debate and consultations by diplomats and ministers, in early December Cabinet's National Security Committee had finally arrived at a policy on East Timor it hoped would be credible at home and abroad.

The Prime Minister's letter to Habibie signalled a significant, and risky, change in the Government's thinking on East Timor. For the first time, it was pushing Indonesia to permit an act of self-determination by the East Timorese people.

Referring to the growing support for the East Timorese to be given the right to choose whether they remain part of Indonesia, Howard wrote: "It might be worth considering, therefore, a means of addressing the East Timorese desire for an act of self-determination in a manner which avoids an early and final decision on the future status of the province".

Only a few months earlier Foreign Minister Alexander Downer had been in lockstep with the Indonesian Foreign Ministry by warning such a course would invite a return to the bloody civil war that had been the excuse for Indonesia's 1975 invasion. Hardly surprisingly, the sudden reversal by Canberra was not well received in the ornate meeting room of the presidential palace on December 23.

McCarthy, one of Australia's most experienced diplomats, listened as Habibie ran through his objections. He took particular exception to a paragraph in Howard's letter suggesting Indonesia should consider the example of French decolonisation in New Caledonia under the so-called Matignon Accords.

"The Matignon Accords," Howard had written, "have enabled a compromise political solution to be implemented while deferring a referendum on the final status of New Caledonia for many years."

Habibie was offended by the notion that East Timor – "socially and geographically integrated into Indonesia" – could be equated with a French colony. Indonesians, with their bitter history of Dutch colonisation, did not see themselves as neo-colonialists. "It was just a historical fluke it [East Timor] was separated," says one government adviser. "You can't liken it to a French colony ... it does not help to sell the argument."

It was not an auspicious start to the promotion of what Howard had modestly described as some "outside perspectives" on the problem. Howard had gone out of his way to flatter Habibie, referring to his "bold and clear-sighted" decision to open negotiations over autonomy for East Timor and reassuring him that Australia's support for Indonesian sovereignty was "unchanged".

The emerging split with Jakarta remained out of sight until last Tuesday when the story of the Government's rethink was revealed in The Australian. Indonesian Foreign Minister Ali Alatas, then en route from New York to Singapore, was taken by surprise but responded quickly. He spoke to the head of political affairs in his department, Nugroho Wisnomurti, who prepared a terse statement expressing concern and "deep regret".

Privately, Australia's new stance was seen as "ambivalent" and "contradictory" – recognising Indonesian sovereignty on the one hand but supporting East Timorese demands for self-determination on the other. This apparent inconsistency was instructive of the difficulties the Government faced developing a sustainable policy. It risked leaving no one happy.

From the moment the Coalition won office in 1996, it was clear Howard and Downer would pursue human rights issues with Indonesia, and other Asian neighbours, as discreetly as possible. Downer ridiculed the "megaphone diplomacy" of Labor.

Through development aid to East Timor and quiet pressure on Jakarta over issues such as reducing troop numbers, the Government felt it could achieve more enduring improvements in the life of the East Timorese than through bellicose rhetoric. Furthermore, it suited Australia's strong desire to see East Timor remain within Indonesia.

After the fall of president Suharto last May and Habibie's decision to offer "special status" to East Timor, it quickly became evident that such an approach might leave Australia looking badly out of touch and out of date.

Only days after Habibie opened the way for East Timor to become a self-governing territory within Indonesia, McCarthy left Jakarta for his first visit to the East Timorese capital, Dili. The city he encountered on June 12 was in the midst of boisterous student demonstrations demanding independence. The elites, too, sensed an increasing prospect of the East Timorese finally wresting the right to decide their future.

With this began months of regular contacts with East Timorese leaders. The Australian side privately considered whether it might host talks between the various East Timorese factions. Although Downer was attracted to the idea of a direct role for Australia, there were few opportunities. The main game was being played out elsewhere. Under the guidance of the UN in New York, Indonesia and Portugal, the former colonial power, were haggling over the details of the autonomy proposal. The East Timorese themselves provided input via the back channel of UN officials.

But the apparent reluctance of the Indonesians to engage popular East Timorese leaders face-to-face, in particular the jailed resistance leader Xanana Gusmao, struck Australian officials as the main weakness in the negotiations.

This view was reinforced in the regular contacts between Australian diplomats and prominent East Timorese. In early July, McCarthy had gone to Jakarta's maximum security Cipinang jail for the first of two meetings with Gusmao, the Fretilin leader imprisoned for 20 years who has become something of an East Timorese Nelson Mandala.

A sign of the impact these unpublicised meetings were having on Canberra's thinking came on August 19, when Downer for the first time advocated Gusmao be released from prison so he could play a greater part in the peace process. It was first public hint of the changes taking place in the Government's attitude.

Although the Indonesian Government remains firm that it will not offer the further concession of a referendum on independence, it is starting to recognise the need to more directly engage the East Timorese. The Government continues to fear that granting a referendum will trigger a domino effect in which first Irian Jaya and then other provinces would seek the same. Yet opinion among the elite is increasingly divided.

"I am less worried about that because I know that East Timor is a special case," says Jusuf Wanandi, head of the Centre for International and Strategic Studies in Jakarta. "They have never been part of Indonesia before and emotionally we have never had that connection, that relationship, those emotional ties that we have with the other parts." The new Australian policy, says Wanandi, is "very realistic".

The East Timorese have been far less animated over the diplomatic nuances. Years of Australian appeasement of Jakarta have generated a great deal of cynicism. With Canberra still backing Indonesian sovereignty, many East Timorese are wondering what's new.

Says MP and Dili newspaper editor Salvador Ximenes Soares: "If Australia withdrew recognition of Indonesian sovereignty, that would be a big change. Australia is just catching up with what is already happening."