[In the wake of the October 12 bombing on the Sari Club at Kuta Beach, tourist arrivals to the island of Bali have fallen by 75 percent. Now, for each hotel bed that is occupied, six more lie empty. The impact is being felt throughout Indonesia – and if holiday makers don't come back, then more than two and a half million people could be permanently out of a job. Even before the Bali blasts, Indonesia's economy was struggling. Foreign investment had all but dried up, growth was sluggish and corruption rampant. In a nation of 200 million people, the implications for political stability are profound.]

Presenter/Interviewer: Tricia Fitzgerald

Speakers: Doctor Ross McCleod from the Australian National University; David Nellor, head of the Jakarta mission of the International Monetary Fund; University of Indonesia economist Faisal Basri; Amin Rais, chair of Indonesia's supreme parliament; Minister of National Development and Planning Mr Kwik Kian Gie; World Bank representative Mark Baird; Farid Faqih from the Government Corruption Watch group; Pak Sukino, trishaw peddler; Pak Sirigar is an economic advisor to President Megawati Sukarnoputri

Fitzgerald: Popular Indonesian musician Iwan Fals, telling the story of Budhi, a young boy selling newspapers in the rain on a crowded Indonesian street.

He's counting his money to see if he has enough to realise his dream of going to school, rather than working for his next meal.

The story is lived out a million times a day in Indonesia where a massive 35 million people live below the poverty level.

On a busy street in Central Java a little girl sings and plays her home-made tambourine in the hope that drivers caught in traffic jams will toss her a bit of spare change.

The Bali bombings, have created further hardships for the Indonesian people. The World Bank predicts that a twenty per cent fall in tourist arrivals to Bali will throw 360 thousand people out of work.

The effects will be felt well beyond the island itself, since the tourism market is supplied with labour and goods from right across Indonesia.

David Nellor who heads the Jakarta mission of the International Monetary Fund.

Nellor: The tourism sector is an important part of the economy. Based on what has happened in some other countries in the world after such events, there's been a sharp decline for some considerable time. So we would expect that there would be some slow down in economic growth as a result and that will of course make the reform effort somewhat more difficult.

Fitzgerald: The Bali bombings hit an economy which was already struggling to recover from the 1997 economic crash that sent its economic growth rate plunging down to minus 13 percent. The crisis left the country labouring under a massive 133 billion US dollar national debt.

The International Monetary Fund, the IMF, has been leading the effort to bank-roll the country's recovery and David Nellor says the reforms had been starting to take hold prior to this latest set-back.

Growth rates, were still below the pre-Asian crash level, but had largely recovered and the rupeah, had strengthened in value.

Nellor: A sound platform or foundation had been built on which further growth could be developed and we were at a phase where it was important to continue reforms in the banking sector and the like, which were a hangover from the crisis but also to look forward in terms of strengthening the investment climate in a number of areas. The Bali tragedy is clearly a set-back in that respect.

Fitzgerald: Indonesia faced major economic challenges before the Bali bombings though. Decades of rule by former President Suharto, created a financial system based on cronyism and corruption and totally lacking in basic laws and regulations.

University of Indonesia economist Faisal Basri.

Basri: Suharto didn't build didn't follow the most important things in creating a modern economy. What I mean is lack of institutional development. Nothing happened in developing institutions under Suharto. So when every thing had been growing very fastly we thought strong foundation and then crisis come, and is gone everything and we have to start from zero.

Fitzgerald: Not just from zero. Former President Suharto, had handed the country's wealth to his own family and a network of loyal businessmen and when the crisis hit they'd rushed to move their cash into safe havens.

In the biggest financial scandal in Indonesian history private banks operated by Suharto cronies, at the peak of the Asian crisis, fraudulently over valued their assets so they could get credit from the central bank.

Doctor Ross McCleod from the Australian National University.

McCleod: What happened when the crisis first struck Indonesia was that the banks started to look like they were going to fail which meant you had the prospect of depositers lining up to withdraw their funds and there being no funds for them to withdraw. And so the Central bank stepped in and started lending very heavily to the banks precisely so that they could cater to cash withdrawals. In fact however it wasn't really a case of ordinary depositors making withdrawals or wanting to do so. The banks were busily engaged in making loans to themselves or to affiliated companies and then they were taking those funds which they had just loaned to themselves and using then to repay their foreign debts or to speculate against the rupeah. Unfortuneately the loans that were given by the central bank were not properly secured which means shortly after the crisis started when the central bank would have liked to have got its money back, it simply has been unable to do so.

Fitzgerald: During the crisis the government took on 70 billion US dollars worth of domestic debt, to bail out the private banks, at a time when the banks themselves were stashing their money outside Indonesia.

Faisal Basri says the government bail out has left the Indonesian people labouring under the biggest national debt in the South East Asian region.

Basri: If you look at the data at to how much the government baliled out the private sector includingthe banking sector, the value is 70 billion US dollar, equivalent to 700 trillion rupeah. And people have to pay the interest now. This year the government allocated 60 trillion rupeah, six billion US dollars, for interest of the government bonds issued to back up banking sector bail out program.

Fitzgerald: The business elites have not only left ordinary Indonesians with a massive debt to pay off. The banking scam has exposed a gaping hole in Indonesia's justice system.

Only a handful of the embezzlers have been prosecuted....the majority of them were allowed to flee the country and now live lives of luxury abroad, in places like Singapore and Australia.

To add insult to injury, 39 bank owners who were bailed out, signed their bank assets over to the Indonesian Bank Restructuring Agency IBRA, in order to avoid prosecution.

Faisal Basri, says many of those businessmen are now buying back their seized assets at rock-bottom prices.

Basri: IBRA now sell the assets given by the original owners, and what is happening is the that original owners buy the assets back with very very low prices. That's part of corruption...co-operation between agency chairman and deputy chairman, with elites of political parties for next election.

Fitzgerald: Amin Rais, chair of Indonesia's supreme parliament, says the government's failure to retreive the embezzled funds or to prosecute all those responsible, undermines the Indonesia's efforts to become a more democratic and just society.

He puts much of the blame on corrupt officials within the Attorney General's Department, who he says are taking bribes in exchange for not proceeding with prosecutions.

Rais: People who have plundered the richness of this country. People who have stolen a lot of people's money cannot be brought to justice simply because the Attorney General's office is colluding with them. There is about a dozen conglomerates who have plundered the money from the Central Bank, which is amounted to 75 to 80 billion US dollars, and then thsoe big monies have been deposited in Singaporean banks and other foreign banks. Then you can imagine if they get half a percent interest or a quarter of a percent per month of the big money, they can use the interest to bribe the Attorney General and his office.

Fitzgerald: Amin Rais, who's a political rival to President Megawati Sukarnoputri, claims rather than tackling corruption and ordering prosecutions to recover debts, the Megawati Government has simply joined in on the free for all.

He says although Suharto has gone, corruption is flourishing, and he claims its Megawati's inner circle who are benifitting.

Rais: Megawati's performance in eradicating corruption, collusion and nepotisim is not that successful. Even some observers say that the corruption is even more prevailing in the era of Mrs Megawati Sukarnoputri. Up to now what we are seeing is only an effort to eliminate small corruption at the low level but those gigantic and mega corruption at the top level are still completely free an dcannot be touched by law.

Fitzgerald: Even members of Megwati's own Government and party, like her Minister of National Development and Planning Mr Kwik Kian Gie, admit corruption is rampant despite Suharto's fall.

Kwik Kian Gie: Because during the day of Suharto it was corrupt but the corruption was done by Suharto and his circle. If it is outside, if the people who dare to corrupt, are outside Suharto's circle, Suharto could take harsh mesaures, but now you can't, because they will scream, "why me, and why not you?"

Fitzgerald: While the Minister admits the extent of corruption in Indonesia, he does not see it as a major problem.

Kwik Kian Gie: I am still [feeling] that that is nor a hampering factor at all. That is what you here in the press but the practice, especially if you listen to those foreign companies who have been operating here for more than 100 years, they don't mind at all. They say, " I know the corruption, I know that if I loose I ahve to pay. You just put that on your calculation of your cost price."

Fitzgerald: The Minister's view is hotly contested. Even before the Bali bombings foreign investment was still at a five year low and World Bank representative Mark Baird, believes corruption at the core of Indonesia's judicial system is what is holding back foreign investors.

Baird: Let's remember Indonesia has not had a judicial system for many many years. Under the previous regime you didn't get certainty from the courts you got certainty from your association with the elite. So the eleite in Indonesia has benifitted from the weak judicial system. It is now that indonesia has a much more democratic government, a much open society that the pressure for legal reform has to come and I think will come because the current situation is not acceptable to the majority of people in Indonesia.

Investors have just told us in the past few days in a series of meetings they want to see progress in a number of areas.

Paramount is judicial reform. You have to have a court system that rpotects investor rights. Second they would like to see the reform in key areas like taxation and customs so that there is sceratainty and transperancy in the way those programs are implemented.

Third they would like to see more balanced competitive labour market policies, And fourth they like to see a better regulatory environment for investment particularily in infratructure and mining.

This is a big agenda! Its not going to come overnight but by making progress I think the government can convince investors that this is the place to be.

Fitzgerald: There has been some progress in Indonesia's Commercial Court. For the first time the verdicts of dissenting judges are being published making it easier to spot corruption. But the World Bank's Mark Baird, says the progress has been negligable.

Baird: Particularily in protecting creditor rights but also in protecting the people of Indonesia particularily the poor of Indonesia. There has just been too many cases where justice has not been done. An dthis is not really going to be acceptable to the investors or to the Indonesian people. Progress on reform has been painfully slow. Certainly the government has been quite right to say it is not under their control, it is a matter for an independent judiciary. But how do you get an independent judiciary to reform itself?

This is the challenge and I think the pressure for this reform has to come from the Indonesians.

Fitzgerald: In a rundown office in central Jakarta a small group of concerned Indonesians is keeping a close watch on government corruption.

Farid Faqih from the Government Corruption Watch group, agrees Megawati's pledges to stamp out corruption, have yeided very few results.

Faqih: Since three years ago Indonesia made a new law about anti-corruption and anti-corruption body. But until now the parliament did not approve the anti-corruption body addendum of the new law. So I think Megawati's statements are only political gaming to say that the government is doing something for anti-corruption but its nothing!

Fitzgerald: Farid Faqih estimates 150 million US dollars a year are being syphoned off the national budget ... out of the public purse ... through corruption.

Faqih: The government budget is four hundred trillion a month, rupeah and the deficit is 55 triilion rupeah a month. But the losses are 30 to 50 percent. It means we can save around 100 or 150 billion. So that means if we reduce the corruption there is no deficit in the government budget, so we can use the money to help the poor people, to extend the programs fopr the poor people. That means that corruption is very bad for poor people.

Fitzgerald: Pak Sukino, is typical of the millions of Indonesian feeling the impact of the national debt, corruption and the Bali bomb attacks on a daily basis.

He scrapes together an income to feed his family by peddling a trishaw or bechak in the city of Yogyakarta in central Java.

He says protests by islamic extremists were already frightening away tourists in Yogya well before the Bali bombings.

Pak Sukino: I have had less money since Suharto's downfall because extremists in Yogya have been demonstrating against foreigners, so the tourists are frightened so they aren't coming to travel in my bechak. I earn 600 thousand rupeas a month, but I work for twenty hours a day for that ... but it is becoming harder to find money because I feel tourist are no longer safe in Indonesia ... the demonstrations by extremists mean that tourists are staying away. There is not enough money to support the family, its only if my wife and two children work as well that we have enough to live. The others around my village are having the same crisis and hardship.

Fitzgerald: It will be Indonesians like Pak Sukino who will decide the fate of Megawati's Government at elections in 2004.

The president is walking a tight rope ... she's promised to deliver a better standard of living to the masses, but is also attempting to satisfy foreign donors like the International Monetary Fund which is pouring nine billion dollars into the national budget over three years.

The president has already jumped one major hurdle set by the foreign donors, removing long-running government petrol subsidies. But there is local opposition to Indonesia's increasing reliance on intenational donors bodies.

Minister Kwik Kian Gie, sees IMF and World Bank programs as an affront to national pride. The Minister is angry that Indonesia is getting into more debt, a burden he feels the population cannot and should not support.

Kwik Kian Gie: The main reason for that is because the IMF really is of the opinion that the Indonesian Government, meaning the Indonesian people, Indonesian taxpayers really have to pay thousands and trillions of rupeah (in interest) . The range is between one thousand trillion and 1400 trillion rupeah and it is between 100 billion USD to 1.4 trillion USD.

Fitzgerald: There are also other pressures mounting on President Megawati. Economists are warning that her government must start to embark on major capital works projects before the country grinds to a halt.

Pak Sirigar is an economic advisor to President Megawati.

Sirigar: Without these projectsthere is an acute possibilty that in 2004 or 2005 Indonesia will face black outs or even brown outs and we are not talking about provinces in remore areas we are talking about Java and Bali.So there are real possibilities about that ... we have to solve this.

Fitzgerald: Pak Sirigar is one of those pushing the government to restart an ambitious public works program first conceived under Suharto ... multi-billion dollar tollroads, petrochemical projects, seaports, and power plants, which were commissioned but then put on hold after the asian financial crash.

Pak Sirigar had to convince MP's that the projects should be urgently restarted.

Pak Sirigar: It's not a matter of overnight in building electricty power plants, it takes three or four years at least. They [the MP's] became more excited than us saying we have to finish all renegotiations of the 27 projects by the end of this year.

Fitzgerald: Because the major projects were commissioned under Suharto the contracts were handed to his cronies and family members. They had dramatically inflated the estimated cost of projects, so that excess government funds could be pocketed.

That's meant the government has had to rewrite and re-commission all those major contracts in a transparent and uncorrupted way. Mr Sirigar believes Megawati's Government is up to the challenge.

Pak Sirigar: If these projects are still considered as strategic as we used to think they have to be renegotiated. It could be with the same players or investors or it could involve some new investors or parties. For us what is more important is that these renegotiations would mean a much more efficient and much more realistic cost and the process has to be as transparent as possible.

Fitzgerald: Kick starting the country's public works programs will be even more vital to Indonesia's economic survival, in the wake of the Bali bombings. The projects could replace jobs lost with the downturn in the tourism industry and upgrading infrestructure could entice back wary investors.

But economist Faisal Basri says there are will be no quick fixes for Indonesia's economy. He says unless the parliament puts in place basic financial regulation laws and makes sure they are followed the law of the jungle will rule and Indonesia's poor will continue to miss out.

Faisal Basri: There is no big truth or short cut that we can follow to deal with the crisis. What has to be done is to create fair competition, less government intervention in business in the market and to set up a type of social security or social safety net for marginalised groups in the society. So thats the role of the government...institutional developement and then create conditions for sustainable growth.

That the job of megawati if she would like to be remembered by the people as the mother of modern Indonesia. Her father is the founding father if Indonesia ... unless Megawati uses the opportunity to be rembered by all Indonesian people as the founder of modern Indonesia ... what she needs to do is create as much [as possible] institutional development and then strengthen the foundation for the sustainable growth of Indonesia.

Fitzgerald: Even prior to the Bali bombings President Megawati was running out of time to get the foundations for a fairer Indonesia in place.

She is due to face the masses in the first direct presidential election in under two years ... where her popularity will rest on her economic performance and her score card on tackling corruption.

And in the current climate a strong economy will be President Megawati's only defence against growing support for islamic and military extremists. If she fails to deliver on her promises of making the economy work for the masses not for the elites, supportors of her moderate and secular PDI-P party may look to other less moderate leaders.