The World Bank announced plans to boost lending to Indonesia to help lift millions out of poverty but said much of the extra aid depends on greater efforts to fight rampant corruption and improve governance.
The World Bank, in its country assistance strategy for 2004-7, proposes lending of 450-850 million dollars a year should Indonesia make "continued but incremental" progress towards better governance and an improved investment climate.
This is far below the average annual 1.3 billion dollars during the last years of dictator Suharto but higher than the 400 million earlier this decade. Sharply accelerated reform would qualify Indonesia for up to 1.4 billion dollars in annual loans.
The World Bank, in an unusually frank report, took itself to task for its record during Suharto's final years. The autocratic ruler stepped down in 1998 after 32 years in power.
It said its own image had been tarnished "as it was perceived to have failed to take a stand against corruption while lending large sums of money in support of the Suharto regime." The bank said "our entire success will be judged by the contribution that our programs are seen to make towards greater transparency and accountability, and by the standards of integrity with which we implement these programs." It said Indonesian democracy has gained much ground in recent years, macro-economic stability has been restored and poverty has almost been reduced to the levels before the 1997-98 economic crisis.
At the same time, more than half the population still lives on less than two dollars a day and health and education services are inferior to most Southeast Asian neighbours. As a result, the achievements "continue to be clouded by widespread concerns about governance and corruption across Indonesian society.
"The high hopes that the Reformasi [reform] movement would break the hold of the vested interests and the corruption, collusion and nepotism that characterised the later years of the Suharto era have not been realised."
The World Bank said only a few people have been held to account for the theft of public resources and there are signs that "money politics" is still at work, allowing old elites to re-acquire their previous assets and new elites to consolidate their positions. "The perception that corruption is still entrenched in the political system has damaged Indonesia's investment climate and generated popular resentment and resignation," it said.
The problem of weak government institutions has wider implications than that of graft and is the single most important factor in reducing poverty.
The World Bank said Indonesia has undertaken reforms to make politicians more accountable to voters. Elections next summer, including the first direct presidential poll, "will be an important first test" of whether money politics rules the day.
A huge programme to devolve power from Jakarta to more than 400 local regions had also made government potentially more resposive to public demand but bold reforms had been undermined by weak implementation and "the gap between the promise and the reality of reform in Indonesia has been large." It also warned of risks to political and social stability including separatist tensions in Aceh and terrorism threats from extremist Islamic movements.
These twin threats dampened investor responses to the country's strong macro-economic achievements and "underlie a continued powerful political role for the military."