Commentary: Can Indonesia Exorcise Its Demons?

If security doesn't improve, the rebounding economy could be stopped in its tracks

By Michael Shari

Agronomist A. John DeBoer had little reason to fear for his safety when he stepped out of the lobby of Jakarta's JW Marriott Hotel on the morning of Aug. 5. After several tumultuous years, a recovering economy and a reform-minded government had helped restore calm in the Indonesian capital. DeBoer, a visiting adviser to Indonesia's Agriculture Ministry, noted the tight security: At the Marriott, guards routinely searched vehicles entering its horseshoe-shaped driveway for explosives, even sliding mirrors under each chassis before opening a trunk.

By the time DeBoer returned after lunch, the Marriott's facade was in ruins. He found a scorched cavity where the lobby had been. Glass shards rained from shattered windows 17 floors up. A suicide bomber had driven a minivan laden with explosives onto the hotel's driveway, just before the checkpoint. The explosion killed more than a dozen people, including the Dutch former general manager of Rabobank's Indonesian unit, and injured more than 100. "It's symptomatic of the problems they're having," says DeBoer, a program manager at Winrock International, an Arlington (Va.) charity. "Tourism was just coming back, and now this."

The carnage is a grim reminder of just how fragile Indonesia remains. The prime suspect is Jemaah Islamiyah, the extremist group behind the Bali disco bombing in October that killed 200 and a foiled plot in July to assassinate President Megawati Sukarnoputri. But the harder police crack down, the more determined the terrorists become to attack establishments frequented by Westerners. The violence makes clear that Megawati will have to provide more than economic reform to bring back investors who fled the country amid the financial and political chaos of 1998 that led to the ouster of President Suharto.

The irony is that Indonesia was already on the right track. It has been working with U.S., British, and Australian antiterrorism units. It invested millions in advanced police surveillance technology. On trial are 29 members of Jemaah Islamiyah for alleged roles in the Bali attack. Now, the government is looking to buy helicopters to carry SWAT teams and boats to patrol the 5,000 kilometer-long archipelago. "Jemaah Islamiyah will do whatever it takes to retaliate," says Dorojatun Kuntjoro-Jakti, Coordinating Finance and Economy Minister. "We're going to fight."

The government also must battle to limit the economic fallout. Jakarta's stock market slid 3%, and the rupiah fell 2% after the bombing, though markets stabilized the next day. Panic among foreign investors might have been worse. It's "blind luck" that diplomats and more staff of foreign companies, who frequent the Marriott, weren't killed, says a Western diplomat. "This is a massive attack right in the heart of Jakarta."

Still, there's reason to hope the attack won't seriously damage Indonesia's recovery. Megawati's economic team has curbed inflation, lowered interest rates, and pushed ahead on key banking reforms. Foreign investment could drop, after surging 40% in the first half. But rising domestic consumption, which is fueling 3.5% economic growth, could cushion the impact. And exports should jump, thanks to 13 natural-gas contracts signed with multinationals in July. Kuntjoro-Jakti says Indonesia is financially strong enough to proceed with its plan to end its six-year aid program with the International Monetary Fund. "We believe the recent act of terrorism is another dark cloud," says an Aug. 6 Citigroup Global Markets Inc. report. "But not one that would seriously derail the country's progress."

Now Megawati's top challenge is to show as much progress in restoring order as in economic reform. That's a big challenge. "In the past, people used to talk about the need for law and order," says an Indonesian banker. "But now there's a sense of helplessness." Until investors feel safe again, the funds required to lift living standards for millions of Indonesians could remain elusive.

Singapore Bureau Chief Shari covers Southeast Asian affairs.

    Before it's here, it's on the Bloomberg Terminal.