Removing Soeharto was the easy part. Now Indonesia must grapple with his legacy of three decades of corruption and cronyism. Louise Williams reports.

Every day for the past two weeks Adi has stood in front of the charred shell of his electronics store in Jakarta's normally frenetic Chinatown district, the nauseating smell of burnt plastic lingering in the air.

"I have not even one single unit of my stock left, and I hadn't even paid for it," he says, gesturing at the destruction.

"So, all I have is debt. I am scared, but I can't run away because I have no money. We can't get any more stock because now suppliers demand cash. I can't reopen, so I have to sell my family possessions just to eat."

Adi's shop lies in the ruins of Glodok Plaza, formerly the teeming hub of Jakarta's electronics trade, in a commercial district that had turned over the equivalent of $17million a day. He and his friends shake their heads in disbelief, gathering more out of habit than with any sense of purpose.

"The rupiah is now meaningless. What can we buy with it?" asks another shopkeeper of the ailing Indonesian currency, his own shop optimistically offering a couple of salvaged rolls of electrical wire for sale.

Much of Chinatown remains boarded up, its shopkeepers unwilling or unable to reopen, after their shops were burnt and plundered by the mobs that raged through the capital for two nights and two days earlier this month. And as the smoke clears it is apparent the damage goes way beyond the estimated $400million lost when thousands of shopping malls, shops, supermarkets, homes, cars and motorcycles were torched.

The Indonesian economy, too, lies in ruins and the very real prospect of hunger and poverty poses a serious risk to stability as the post-Soeharto political power struggle is played out.

Overlaying the political machinations is the inevitable economic shake-out. The two groups that dominated the economy before the fall of Soeharto – his political cronies and the ethnic Chinese business class – are in retreat.

The managers of companies owned by the Soeharto children have fled, the stock market is dumping crony shares, crony contracts are being torn up and a run on banks this week saw long queues at automatic teller machines late into the night.

For the cronies there is the fear of reprisals as the public clamours for the punishment of those guilty of economic crimes. For ordinary Chinese traders the fear is different. The ethnic Chinese were the main targets of this month's riots because their dominant position in commerce and their relative wealth have made them the historical scapegoats during political upheavals. As the economy continues to decline they fear they may be hit again.

But, for the economy, the impact will be the same. The two groups that had the entrepreneurial skills and capital essential for economic growth are under threat. International investors, too, are nervous. Many threw in their lot with the Soeharto clan, enjoying the smooth progress through the bureaucracy that a single signature could ensure. "What we have, in effect, is ground zero," says Bruce Rolph, head of equities at Bahana Securities. "The economy as we knew it has been largely wiped out. We have a banking system that is almost non-existent; we have a property sector that is near worthless. Shares in companies don't have any value, because there is no equity left, so they are more like warrants on future recovery prospects.

"We have to accept that there has been no experience like this in any major country since World War II. This is not just a cyclical slowdown; this a structural break with the past."

So devastating are the new post-Soeharto economic forecasts that growth has been revised down to as low as minus 20per cent, a contraction that could push more than a quarter of Indonesia's 200million people below the poverty line and strip three-quarters off the spending power of those still in work. As a shortage of raw materials bites and working capital dries up, factories are locking their gates. The oversupplied banking sector, now relying on the Government to print more and more money to cope with the rush by depositors to withdraw their funds, must be rationalised.

Jakarta still looks like a modern high-rise city, but with private foreign debt at more than $125billion most of the new developments have not even been paid for. As the Jakarta City Council announced that idle city real estate projects might be turned into market gardens, and soldiers marched in to help till the land, foreign banks faced the reality that much of the outstanding debt will never be repaid. New unemployment projections range from 18million to 30million, out of a workforce of 90million, in a country with no social security safety net.

The destruction and looting of shops and warehouses and the disruption to transport systems have already pushed prices of basic goods up by 20 to 70per cent. One supermarket chain estimated it had only three to five weeks' worth of food stocks left in an economy that has run out of money to pay for imports. This week, the director of the Retail Traders' Association, Steven Sondakh, said he had asked the Government to consider making military trucks and troops available to guarantee food distribution.

"The situation is frightening and very sad; you can only imagine this happening in Africa, not in Indonesia where the country is so fertile and rich," he said.

A businessman warned: "We are now talking about people being able to afford only four basic foods: rice, oil, soya bean and sugar" - a daunting reality evoking memories of the hardships of the mid-1960s. It is true that the rapid decline of the Indonesian economy that began in August last year precipitated the spectacular political confrontation on the streets that forced the resignation of President Soeharto last week. Riots began in January over access to food as prices soared, and demonstrations were fuelled by calls for price decreases as much as for political reform.

The dramatic loss of confidence in an economy that had enjoyed more than 25 years of 7per cent annual growth and was once the darling of the international lending institutions has been largely blamed on the corruption, collusion and nepotism that Soeharto's unchallenged power bred.

But, as pressure mounts for the dismantling of Soeharto's political system, a parallel dismantling of his economic system is also under way.

During Soeharto's rule economic and political power were virtually inseparable. Those closest to the President enjoyed access to fabulously lucrative contracts without having to engage in competitive tender bids.

When Soeharto came to power in 1966 the nation's minority ethnic Chinese dominated commerce, just as they had done during the Dutch colonial period when native Indonesians were barred from doing business. Some of the Chinese entrepreneurs, such as the nation's richest man, Liem Sioe Liong, formed crony partnerships with Soeharto's indigenous political elite and the officers of the powerful armed forces, offering business acumen in exchange for business opportunities.

For many years economists have warned that the 180 or so giant conglomerates that controlled the economy under Soeharto were creating a dangerous gap between the super rich and the poor and were distorting the economy because small and medium-sized entrepreneurs could not compete against the preferential market access the cronies enjoyed.

On Thursday night, the central bank announced it was taking over the supervision of Bank Central Asia (BCA), the nation's largest private bank, owned by Liem Sioe Liong. It was a move unimaginable only a week ago.

For an entire week thousands upon thousands of depositors had queued for hours to withdraw their cash. Last week, 17per cent of all the money in the Indonesian banking system had been withdrawn. The BCA run may have pushed that figure up to 40per cent, according to Rolph. "The Government can only print more money. This is no longer people putting money under their mattresses; they are stuffing them with it," he said.

"The more money the Government prints, the higher the danger of tipping over into hyperinflation."

The Government has guaranteed all deposits in domestic banks in an effort to restore confidence, and has raised interest rates to more than 60per cent to attract deposits. The central bank refused to say how much it pumped into BCA this week, but money supply has risen from about 23trillion rupiah at the beginning of the year to 45trillion rupiah. The Government guarantee also raises the issue of why the bank's owners are not being forced to sell their assets to pay back small depositors.

The fate of the BCA is closely linked to Indonesia's largest food producer, Indofoods, which is part of Liem Sioe Liong's Salim Group. Rumours on financial markets yesterday suggested that the group, which has heavy foreign debts, was trying to borrow money from the BCA bank but was blocked by the central bank.

But big problems for Indofoods would immediately affect food availability. The group controls 96per cent of the instant noodle market, as well as a large share of the market in cooking oil and basic condiments such as soya sauce and tomato sauce.

"Everyone is scared of being accused of corruption, collusion and nepotism," said Mari Pangestu, an economist. "There is a big public demand for the trial of economic criminals. But if you move too suddenly in the interests of justice and then you don't have an alternative source of noodles, then you will have a disruption in the supply of basic foodstuffs." A business consultant, Laksamana Sukardi, said: "The cronies who ran the economy might have come back [after the riots] to survey their losses, but they are not even thinking of continuing their businesses. They are already prepared with money and houses overseas. They don't care about their houses and furniture here, they can just leave with no bags.

"We need replacement entrepreneurs, and it is very difficult to find them. My concern is that production is virtually at a standstill. There is a shortage of raw materials for the factories, managers have left, the retail traders have been burnt down and no-one is willing to put up working capital."

The International Monetary Fund flew back into Jakarta this week to reassess its $US43billion bail-out package. Sharp rises in fuel and petrol prices under the IMF package first triggered rioting in the Sumatran port town of Medan, which spread to Jakarta. Hubert Neiss, the fund's Asia-Pacific director, warned Indonesia's problems were so extensive there would be no quick recovery.

Many analysts continue to argue that the country's long-term economic prospects are good, particularly if a new legal and political system is established to regulate business and provide protection for investors. Indonesia has the abundant natural resources and large workforce for economic success.

But, over the next one or two years, says Rolph, "the Indonesian economy is going to go back to being a much more basic Third World economy than it was even a week ago, let alone six months ago".

In the end, it could be Soeharto's legacy that carries Indonesia through this treacherous transition. Under Soeharto, agriculture was transformed during the so-called "green revolution", when farmers were given access to new rice strains, irrigation, fertiliser and pesticides that greatly increased rice harvests and allowed the country to achieve rice self-sufficiency. At the same time, a highly successful family planning program kept population growth low. The education system and network of health clinics set up under Soeharto will come under pressure in the recession, but these gains cannot be wiped out overnight like the value of shares in Soeharto family companies.

For decades millions of Indonesians have been pouring into the cities in search of the opportunities the booming industrial economy was offering, and sending money home to the rural villages. Now those villages will be asked to absorb many of the urban unemployed.

Who will steer Indonesia through this terrible recession is not yet clear. Few are expressing faith in President B.J. Habibie, because of his close links with the cronyism of the Soeharto era.

But, says Laksamana, economic conditions are going to get much worse. "So we need a leader who has credibility and is respected by the people, so he or she can call on the people to be prepared for more suffering.

"If the leader does not have credibility then they will say, "Look, you enjoy your life, but if you ask me to suffer more, you can go to hell'."