Survey of recent developments

Almost four years after the fall of Soeharto and five after the financial crisis began, Indonesia is still struggling to deal with economic restructuring and recovery political transition, decentralisation and redefining national identity. The nation has regained political and economic stability, but is in fragile condition and is losing reform momentum. Without substantial progress soon, avoiding renewed crises becomes unlikely. Taking advantage of present stability is therefore crucial. The economy is far from having been restructured, far from achieving rapid and sustainable growth, and far from regaining the per capita output level of 1997. The democratic transition has become bogged down with three changes of president, elite infighting and a more assertive parliament. The new presidency has brought political stability, as Megawati is likely to survive at least until the next elections. However, fundamental constitutional issues surrounding the direct election of executive figures, district representation, the independence of the judiciary and the role of the People's Consultative Assembly (MPR) require resolution. Decentralisation has successfully reached its first birthday. While many of the predicted pitfalls have been avoided, the government must still wrestle with allocation formulae, trade and business restrictions and taxes, minimum wage hikes, treatment of foreign investment and state enterprises, delivery of services, and accountability. Separatism and ethnic and religious chauvinism are testing Indonesia's sense of identity. Separatist movements in Aceh and Papua have gained momentum, despite offers of autonomy, and despite military actions. Ethnic and religious conflicts still flare in Sulawesi, Maluku and Kalimantan. Debate is sharpening on the proper role of Islam in the state, including that of paramilitary and vigilante groups formed to defend Islam and enforce moral values. Indonesia's economic growth of 3.3% in 2001 exceeded that of most of its neighbours, but represented a slowing from the 4.8% growth recorded in 2000 and included a marked slowdown in the last quarter. The government has restored relations with the International Monetary Fund (IMF), as witnessed by the recent approval of another Letter of Intent (1,01) and extension of the current program until 2003. However, reforms are lagging, especially in debt restructuring, banking, financial supervision, revenue generation and privatisation. The gloomy international scene has impacted strongly on Indonesia's exports and casts doubts on 2002 growth prospects. Given the slowdown in the economy in the fourth quarter of 2001, lacklustre reform efforts and current poor global prospects, expectations are for somewhat less growth than last year-certainly lower in the first half, but stronger in the second as the world economy picks up.