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.