Rousing the Giant; Can a new leader revive Asia's biggest laggard?(Indonesia )

Byline: George Wehrfritz and Joe Cochrane

When Bandung's desperate textile bosses met Indonesian presidential candidate Susilo Bambang Yudhoyono in September, they lamented the sorry state of the economy. Mill owner Eddy Soekwanto suggested that the general turned politician remember late Chinese leader Deng Xiaoping's famous line about cats: it doesn't matter whether they're black or white, so long as they catch mice. His point: Indonesia needs pragmatists if it hopes to catch China. Afterward, says Soekwanto, the candidate "shook my hand and said: 'Don't worry, we are going to be reborn'."

That promise is why Yudhoyono, who takes office this week, emerged the landslide winner in Indonesia's first direct presidential contest. As the major victim of the 1997-98 Asian financial crisis, Indonesia has had the slowest recovery: Public debt remains dangerously high. Per capita income has yet to return to pre-crisis levels. Indonesia's last two presidents have been content with growth of 4 percent--half that of China and, lately, India as well. Like Indian leaders who once spoke of a moderate "Hindu rate of growth," Yudhoyono's predecessors seemed to believe that a vast multiethnic democracy could not mobilize to grow as fast as China's command economy. Yudhoyono has inspired high hopes because "nobody since Suharto has talked about the need for 7, 8, 9 percent growth for a generation to eradicate poverty," says Douglas Ramage, Jakarta representative of the Asia Foundation. "During the campaign Yudhoyono started to."

Not so long ago, Indonesia was on China's heels and ahead of India. When the financial crisis helped topple Suharto in 1998, it brought down a corrupt family dictatorship, but one that had spurred the economy to decades of 7 percent growth. As democracy took root, power leaked from Jakarta to the provinces. But while decentralization in India and China had spawned local corruption, it also gave birth to regional dynamos like Shenzhen and Bangalore, which are leading nationwide booms. In Indonesia, devolution has spawned mainly official corruption, a booming underground economy and what one high-profile Jakarta lawyer calls "black-market justice" for foreign investors. That's why Yudhoyono campaigned on a promise of clean government, but warned in his acceptance speech last week: "I am not Superman."

The joke today is that under Suharto, bribes went to a select few who got results. Now there are so many local hands to grease, it's impossible to get things done. While China and India have held steady in global surveys of corruption, Indonesia's reputation has decayed since Suharto's fall--dropping in the Transparency International rankings, for example, from 80th place to 122nd, or third to last in Asia, ahead only of Burma and Bangladesh. Corruption is choking off foreign investment, which Indonesia needs even more than China because of a lower savings rate. China is laying new roads and railroads, while transport in Indonesia is slowing measurably as the black market siphons off taxes that could pay for new infrastructure.

The result is capital flight. Sony pulled out last year, and IKEA recently decided against investing in Indonesia, says a top government official. It doesn't help that five executives of U.S.-based Newmont Mining are in jail in Jakarta on charges of degrading the environment--charges the United Nations and the U.S. government consider baseless. And capital flight explains why Indonesia's share of global exports has fallen more than any other Asian country's since 1995. Outgoing National Development Minister Kwik Kian Gie warns that deindustrialization is taking Indonesia "back to the colonial era's economic system, based on agriculture and mining."

Yudhoyono did inherit one plus: relative stability. Jakarta has slowed inflation, lowered interest rates and repaid a multibillion-dollar IMF rescue package put together after the 1997-98 crisis. That's why Indonesia's stock market ...