The inadequate 10-year sentence handed down to self-confessed Bali bomber Idris, after the charges relating to Bali were dropped, is a slap in the face to victims and their families and a setback in the war against terror.

Until now, the orderly trial and conviction of the 33 fanatics convicted in the attacks that blew apart Paddy's bar and the Sari Club on October 12, 2002, was a testament to the courage and independence of the Indonesian judicial system in the face of constant threat and intimidation. In addition, Bali concentrated the mind of the political class and made Indonesia an excellent neighbour to Australia in the fight against terror in the region.

When Indonesia's Constitutional Court ruled last month that anti-terror laws could not be applied retrospectively, it sent a shudder through the Bali survivors, victims' families and all Australians who can never forget the horror they woke to on that Sunday nearly two years ago. However, when we were assured the Constitutional Court's ruling itself was not retrospective, we breathed a sigh of relief: the full weight of the law would still apply to the monsters who murdered 202 innocent people, including 88 Australians, in the name of religious fascism. While we are prepared to be reassured this remains the case, the dropping of all Bali-related charges against Idris suggests everything could unravel. Both John Howard and Mark Latham are right to express dismay at the verdict, and to declare Australia will do whatever it can, diplomatically, to see that a man who has confessed to killing hundreds of people receives the life sentence that is his due.

While no imputation can be made against the judges in Idris's case, the question does arise of whether intimidation is finally having its desired effect, or – what would be almost as bad – whether we are seeing a subtle undermining of judicial will by Indonesian public opinion which, while it does not support or condone terror, consistently underrates the scale of the problem. If the legal wrangling results in the early release of radical cleric and alleged Jemaah Islamiah mastermind Abu Bakar Bashir – in whose fundamentalist college many of the bombers, including Idris, trained – the worst will be confirmed. With around 1000 trained JI activists operating in Indonesia, it will look like nothing less than a green light.

But the greatest cost will be to Indonesia itself. In parliamentary elections in April, voters turned their backs on the fundamentalists; and in the first round of the direct presidential elections last month, former general Susilo Bambang Yudhoyono, seen as the toughest of the candidates on terror, emerged clearly in front. Those are the signals Indonesia needs to be sending out to the world, not confessed terrorists being let off.

While Indonesia's democratic adventure must be judged an overall success, a failure of will in the face of corruption and shoddy governance has stymied the economic gains that usually accompany political freedom. What Indonesia needs if it is to join the Asian tiger economies, but conspicuously lacks, is foreign investment: foreigners are simply not prepared to pay the bribery tax that accompanies every stage of a business or financial transaction.

Indeed, the office of Indonesia's Attorney-General estimates corruption costs the economy nearly $1.5 billion annually. It is possible that victory by Mr Yudhoyono in the run-off election next month will usher in the economic and legal reforms Indonesia urgently needs to become a successful open society – which would be a huge setback for terror. For that to happen, judicial integrity and independence must be maintained.