Indonesia a front line against terrorism

Indonesia a front line against terrorism

J. Andrew Spindler, Executive Director, Financial Services,
Volunteer Corps (FSVC). John L. Walker, President, FSVC Board,
New York

Indonesia has become a crucial front line in the war against
terrorism. This development, so far, has escaped the attention of
most Americans. While the United States and its allies have been
preoccupied with other aspects of the new war, a smoldering fire
is burning in the world's largest Muslim nation.

Three and one-half years after the downfall of Soeharto,
Indonesia could yet become a model democratic market economy for
the rest of the Islamic world. But the likelihood of an
alternative scenario, over the near term and perhaps beyond, is
growing: Indonesia could become a hotbed of anti-Western
sentiment, fanned by economic failure on a scale that few other
countries could rival.

The West has a huge stake in the direction that Indonesia
heads, and its direction will greatly affect the war against
terrorism.

Indonesia is languishing in the fifth year of an economic
crisis of gigantic proportions. At present, most of the country's
economic indicators are deeply troubling.

Most ominous of all, the growth rate, which is declining,
currently is not sufficient to create enough new jobs to employ
the fast growing population. At 228 million, that population is
already the fourth largest in the world. Despite such
inauspicious circumstances, President Megawati Soekarnoputri has
a better chance to promote a democratic market economy than any
of her predecessors.

Buttressed by support from the West, Indonesia could continue
to head in fits and starts toward democracy, a market economy and
globalization. Its progress could be interrupted indefinitely,
however, if a lethal mix of radicalism and economic crisis
created sufficiently volatile conditions to lead to the
restoration of authoritarian rule.

Still another possibility is that the country will
disintegrate, and the refugee exodus could easily number in the
millions.

The biggest impediment to successful reform remains
corruption, and a lack of appreciation for just how harmful such
corruption is to reform.

The path that Indonesia takes could influence the direction of
economic development throughout the Islamic and emerging market
worlds. The West can no longer afford to underestimate the
strategic importance of this huge and fragile country.
Indonesia's experiment with market economic principles, long
flawed by rampant corruption, weak respect for the rule of law,
and a teetering banking system, must succeed, and the global
stakes in the outcome are now greater than ever.

What should be done? First, the Indonesian Bank Restructuring
Agency (IBRA) urgently needs to return control over a meaningful
share of the $50 billion in assets that it manages to the private
sector. This should happen as fast as good buyers can be found,
and without political interference in the process.

Second, the government promptly needs to signal its commitment
to honor past agreements with foreign investors. All too often,
Jakarta has reneged on foreign investment transactions that have
threatened the privileged positions of powerful local businesses.

President Megawati must also move swiftly to express publicly
her serious commitment to fighting corruption. Western
governments should use their considerable influence to persuade
her to take this action, which would have an immediate positive
impact on Indonesia's economic prospects and international image.

If an economic disaster is to be averted in Indonesia over the
longer term, the United States and its allies must work now to
help Indonesia build the infrastructure needed to sustain a
market economy, including strengthening adherence to the rule of
law and creating a functional banking system.

Critical priorities in the legal sphere should be judicial
reform and the development of anti-corruption and bankruptcy
laws. Assistance must also focus on helping Bank Indonesia to
strengthen its market surveillance and bank supervision
capabilities.

Banks urgently need to channel savings to creditworthy
borrowers -- something that is not happening today. Additionally,
major technical support must help strengthen corporate governance
practices within the financial and business sectors.

The battle to create a strong market economy in Indonesia will
not be an easy one, and the infrastructure required to sustain it
could take years to build. But this battle needs to be won. The
ramifications of success or failure will reverberate throughout
the Islamic world, throughout Asia, and well beyond.

An economically sound and vibrant Indonesia could play a large
role in winning the war against terrorism.