Marcus W. Brauchli, Jakarta – For a generation, the World Bank considered this sprawling archipelago's rise from poverty its great triumph. Now Indonesia's unraveling is raising questions about the World Bank's long forbearance of the regime of former President Suharto.

A shattering economic reversal, sped by Asia's downturn and the political crisis that ended President Suharto's 32 years in power, is returning as many as half of Indonesia's 200 million people to destitution. In some villages, they are unable to afford food and could face malnutrition. Banks are on the ropes, and the national airline is canceling aircraft orders.

It is a historic setback, in the words of the World Bank's top official here. And no less for the bank than for Indonesia. Not only did the development agency lend money and credibility to Gen. Suharto, but critics say it tolerated and in some ways may have inadvertently stoked the corruption and economically corrosive practices that increasingly characterized the Suharto regime in recent years.

Accounts of current and former Indonesian officials and World Bank employees show that:

The bank, at the government's insistence, softened reports on Indonesia's economy, reports that helped the government win better ratings and draw in capital. When the economy got dicey last year, this capital fled, undermining Indonesia's currency.

The World Bank lent $307 million to replenish the capital of state-run banks, which then channeled much of that money to companies run by Mr. Suharto's cronies. It was the failure of those same companies to repay earlier loans that had necessitated the state-bank recapitalization.

World Bank officials knew corruption in bank-funded projects was common, but never commissioned any broad reports tracking how much money was lost to it – in part, some bank officials say, because they feared having to confront the government.

The bank went along with government estimates that showed epic improvements in living standards, despite indications the numbers were inflated. A majority of Indonesians long were clustered only a shade above the international $1-a-day poverty standard. Now a majority are well below it.

"Morally, we now see the World Bank has done the wrong thing, as have many Indonesians," contends Mubyarto, an adviser and former vice minister of the National Development Planning Board. Like many Indonesians, he uses only one name.

Officials of the World Bank – which supports poorer countries by lending for development projects – concede they should have pushed harder to shore up weaknesses in a country that was a top client. The bank lent Indonesia more than $25 billion over three decades. "We were caught up in the enthusiasm of Indonesia," the Washington-based bank's president, James Wolfensohn, told critics in Jakarta earlier this year. But, he added, "I am not alone in thinking that 12 months ago, Indonesia was on a very good path."

Now, the bank's soul-searching has begun. "In every country that we operate in there is a tradeoff between, shall we say, being pure and helping people," says Dennis de Tray, a University of Chicago-trained economist who has run the nearly 150-person World Bank mission in Jakarta for four years. "We deal in the real world. ...We have to decide every morning when we wake up, are we doing more good than harm?"

The balance, for a long time, seemed positive. Indeed, there is no question that the World Bank's development efforts, particularly in early years, helped wrench Indonesia toward modernity. From 1975 to 1990 its installed electrical capacity soared 18-fold, the number of telephone lines rose sevenfold and miles of paved roads grew sixfold, according to Adam Schwarz, author of "Indonesia: a Nation in Waiting." Health care and literacy continued to lag, but, thanks to aid from the World Bank and other groups, they were improving.

Now, the bank estimates the Indonesian economy may shrink as much as 15 percent this year. Some private economists say it could shrivel to its size in the 1970s in dollar terms.

Mr. de Tray says it isn't clear what the bank could have done differently, short of the "nuclear-bomb option" of cutting off all support. The bank, owned in part by its clients, is traditionally reluctant to cut a country off. Moreover, bank officials say, Indonesia's economic and political weight makes it hard to muscle. "We can kick Kenya around, or Costa Rica," says one senior bank official in Jakarta. "You can't kick Indonesia around."

Asked if he could recall the bank's ever blocking projects because of corruption by Suharto interests, Mr. de Tray says on two occasions he was able to protest against corruption in World Bank-backed projects and get them righted.

The fact was, in the 1990s, few major projects escaped Mr. Suharto's family or friends. When the World Bank objected in 1992 that only one bid, from a Suharto relative, had come in to develop a power project, the government reopened bidding. Another bid came in, from another Suharto relative, and contracts for two power plants were drawn up.

Inside the bank, though, economists argued that corruption could be viewed as a kind of tax on an otherwise sound economy. "I think they really believed it," says Scott Guggenheim, a project manager at the bank's Jakarta office. After all, "the economists' argument is almost unbeatable; how do you argue with 8 percent growth?"

It wasn't until 1997 that the World Bank, in public documents, "used the C-word" – corruption – according to Mari Pangestu, an economist at the Center for Strategic and International Studies in Jakarta and a past consultant to the bank. She says her earlier work for the bank was "sanitized" before publication, particularly to remove critical references to the government or its officials. "I've written reports where, when I've gotten it back, I hardly recognized it," she says.