Indonesia's incoming President, Susilo Bambang Yudhoyono, takes office tomorrow with a promise of "a beautiful era", including better relations with the West.

In a public, and unprecedented, gesture of goodwill, the Prime Minister, John Howard, will attend the inauguration ceremony in Jakarta.

Prospects for diplomatic harmony have rarely been better. Dr Yudhoyono comes to the job with a polished rhetoric of political and economic reform, language the West understands. For Australia, a Yudhoyono government will mean smoother communication in general, and enhanced security co-operation over the terrorist threat to Australians and their interests in particular. But just how "beautiful" the broader bilateral relationship will prove depends largely on whether Dr Yudhoyono succeeds in reshaping his nation.

The catch is this. Dr Yudhoyono inherits a faltering economy and grinding unemployment. On paper, Indonesia's 4.8 per cent growth rate looks like a respectable recovery from the Asian economic crisis of the late-1990s.

But Indonesia's domestic market is so large that this merely reflects consumer spending. What Indonesia must achieve, just to absorb the millions of school leavers who enter the job market each year, is growth of 6 per cent to 7 per cent. Eight would be better. Anything less and poverty and deprivation will continue to fuel resentment and instability, to foster corruption, and, arguably, to feed Islamic extremism. But these are some of the very problems which discourage the new foreign investment upon which growth depends.

Foreign investors are clear on what it will take to lure their money back. For a start, security – and a very hard line against terrorists. Legal certainty, clean government, less restrictive labour laws and keen attention to policy detail – rather than the distraction of political infighting - would greatly assist. This is a truly sweeping reform agenda. Each area in itself represents a minefield of vested interests, with political cliques attached. And despite the popularity of the "reform" mantra there are some very sensitive issues on the table. Costly oil subsidies, for example,are unsustainable but any rise in the artificially low price of fuel will send shock waves through a fragile economy.

While the Indonesia-based Jemaah Islamiah terrorist group is at the top of Canberra's agenda, Jakarta is facing a myriad of security threats elsewhere, especially, but not only, in the contested provinces of Aceh and Papua.

The new president must revive peace talks. The lesson of decades of bloodshed is simple; separatism driven by legitimate economic and human rights grievances cannot be crushed by force. Dr Yudhoyono must also confront Islamic extremism, but not veer so close to the West as to alienate Indonesia's majority moderate Muslims.

What Dr Yudhoyono has running firmly in his favour is the sorry record of the outgoing President, Megawati Soekarnoputri. The Indonesian public understands the cost of policy stagnation and wants change. This is democracy taking hold. Dr Yudhoyono can count, too, on the support of the international community, including Australia. Indonesia is a large, important Muslim nation. Its stability and prosperity matter, far beyond its borders.