Indonesia's recovery was alreadyslowing several months before the events of September 11.Political instability had raised social tensions and slowedreforms--fueling capital flight, alarming investors, anddelaying official external finance for development. Progresson bank restructuring had slowed and the debt of financiallystrapped corporations remained largely unresolved.Corruption flourished, unchecked by a justice system thatitself was corroded. Regional tensions increased even as thecountry embarked upon an ambitious decentralization program.And, if real wages are any indication, progress on povertyreduction--encouraging in 1999 and 2000-ground to a halt.Although markets initially welcomed President MegawatiSoekarnoputri into office, the new administration has madelittle progress on structural and governnance reforms in herfirst one hundred days in office, thus renewing nervousnessin markets and worrying external donors and creditors. Theevents of September 11 have emphatically underscored theurgency of Indonesia's reform priorities. but donorsneed to be realistic about what is feasible, given strongvested interests, severe institutional weaknesses, theuncertainties arising from decentralization, and a turbulenttransition to democracy. Progress is most needed in the keyareas of structural reforms, good governance, and empoweringand investing in the poor.
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