The task of building a new and viable political system of government is deeply intertwined with the task of stabilizing and rehabilitating the country's economy. Although a condition necessary for recovery - the departure of Suharto - has been achieved, the challenge remains staggering. If anything, the economy has actually deteriorated since Habibie took power (though this in part reflects the negative impact of the malaise in Japan). The most urgent economic tasks ahead are reasonably clear. At the most basic level, the government must maintain affordable supplies of rice and other household essentials if there is not to be a resurgence of mass rioting and serious starvation problems. At present rice supplies are being maintained, but only on the basis of IMF subsidies, with the price of rice in Indonesia at the time of writing being about half the price on world markets. Without a major currency appreciation, this situation is unlikely to be sustainable for more than a few months.

Second, the banking system must be recapitalized. At present there is systemic insolvency in the Indonesian banking sector. This will require major institutional reform. Until decrepit banks are closed or merged and otherwise viable banks helped to restructure, commercial lending cannot resume.

Third is the closely related issue of resolving private foreign debt. An estimated $60 billion is owed to foreign lenders by firms other than banks. The fact that so much of the debt is held by a wide array of large and medium-sized Indonesian companies has greatly complicated the task of restructuring the debt. A broad framework for negotiations between lenders and borrowers has been reached (the so-called Frankfurt agreement), though for practical purposes it remains largely irrelevant because the exchange rate is still so far from a level at which firms could begin to think of making repayments. Further, on both sides there is a waiting game still in play: Indonesian borrowers are sitting tight in the hope that their debts may be largely or even completely written off, and foreign banks are unwilling to begin heavy discounting of loans until they are sure there is no prospect of a better outcome. And so the issue remains frozen. But there is a very destructive dynamic here: the longer the debt issue remains unresolved the longer the economy will remain in limbo, as firms will not be able to attract the new foreign lending necessary to help revive the economy.

Fourth and most conspicuously, the government needs to find a way to get the exchange rate back up to a level at which international transactions again become viable. This seems likely to require clear progress on all of the preceding issues, plus striking a judicious balance between satisfying the IMF's monetary and fiscal targets on the one hand, and not stifling commercial activity on the other. Finally, in addition to these macroeconomic imperatives, it will also be necessary for the government to take effective measures to address the sheer political anxiety of Chinese Indonesians, who make up the bulk of the country's entrepreneurial community. The anti-Chinese looting and violence of May, the rise of political Islam, and the fear that more democratic politics will be bad for Chinese Indonesians - all these factors combine to encourage them to leave their liquid financial assets offshore. Chinese Indonesians will want to bring their assets back - Indonesia is after all their homeland - but the government will have to work to rebuild their trust and confidence.

All policy options available to the Indonesian government are heavily constrained. To give but one illustration: the budget deficit (made up in large measure of essential food subsidies) is now projected to reach about 9 percent of GDP, which roughly translates to about $12 billion. This will have to be financed almost entirely with international assistance. In recent years the consortium of donors that has supported Indonesia has provided around $5-6 billion. The likelihood of this figure being doubled seems very low. Given that there is no functioning domestic bond market, the only alternative would be for the government to print money - thereby placing itself in breach of the IMF's requirements.

How will Indonesia's economic crisis be stabilized? The most likely scenario (though not the only one) is that the economy will continue to slide until it hits rock bottom - something which cannot now be far off. At that point, when there is no longer any advantage to waiting, foreign lenders and large Indonesian corporations (which still have a reputation worth preserving) or firms in a particularly profitable area of trade will come to some heavily discounted repayment arrangement, while lesser firms will simply disappear and have their debts written off. As this happens lending will be able to begin again, though the economic and social cost of reaching this new economic equilibrium will be very high.

U.S. Interests and Options

Indonesia will come back from this economic crisis. But if it is left to drift without assistance the hardship and dislocation will be very much greater and the process will be an extended one. There are two key areas in which the United States could, in principle, be of major assistance. First, in the short term it could provide generous emergency aid to help with basic human needs such as food, household fuels, and medicines. There has been some assistance of this sort already, but with the exchange rate falling still lower such emergency relief will continue to be needed for some time yet. Second, Washington could use its global leadership to facilitate a speedy resolution on the corporate debt issue. This problem must be overcome before the economy can improve. The United States played a pivotal role in negotiations on Korean bank debt, but has been little involved in the very much more messy Indonesian debt problem. Things have now reached a point at which the U.S. Treasury might be able to persuade foreign banks to cut their losses and make a deal sooner rather than later. Clearly this would involve major losses for those banks - but this now seems unavoidable anyway, making it largely an issue of timing. Further, given that most of the corporate debt in Indonesia is held by Japanese and European banks, the burden falling on U.S. banks would be relatively small. Beyond these concrete economic measures, what Indonesia will need most over the next few years is sympathetic understanding and support, as it grapples with what are essentially internal problems.

Why should the United States pay serious attention to Indonesia's plight and consider taking serious steps to help it? After all, Indonesia does not pose any obvious or dire threat to America. It does not have nuclear weapons pointed this way, it is not a large holder of U.S. Treasury bonds, it does not pose a frightening immigration threat on America's doorstep, and it does not have an electorally active domestic lobby in the United States ready to mobilize on its behalf.

Despite the absence of some of these classic ingredients for winning U.S. attention and support, there are strong reasons why Washington should look very seriously at coming to Indonesia's aid in a more vigorous fashion than it has to date. One is strategic. Over the past several decades, Indonesia has basically been a "good news" story as far as U.S. foreign policy calculations are concerned, and accordingly it has received little attention. This will change, however, if Indonesia is in serious distress for a sustained period. Arguing the strategic significance of any particular place is hard in the abstract, but if the concern and efforts of countries as diverse as Japan, Singapore, and Australia are anything to go by, Indonesia's woes are not to be taken lightly. The longer economic recovery takes, the greater the likelihood of serious political instability and a return to military-based government. There are powerful demographic considerations at work here. Prior to the economic crash, it was estimated that Indonesia needed an economic growth rate of 5-6 percent annually just to generate enough jobs for the hundreds of thousands of new entrants to the labor force. Such a growth rate is now but a distant dream, but the problem remains. Although it is not being openly discussed today, no one should discount the possibility that in one to two years Indonesia's political situation could become very ugly indeed if the economic scenarios at the bleak end of the spectrum come to pass.

The implications of Indonesia's internal problems go well beyond its boundaries. If Indonesia is in serious distress, the Association of Southeast Asian Nations (ASEAN) is likely to become a lame institution, since Indonesia is pivotal to the region. This would entail real costs for U.S. foreign policy. While members of ASEAN still only account for a modest share of the world's GDP and military power, acting collectively they have managed to punch well above their weight in world affairs in recent decades. Not only did ASEAN help to bring stability to a region that had previously been one of the most volatile and violent in the world, but it was within its framework that the region prospered in a way that no other developing region had ever before - or since. By the 1990s all the major powers of the world found it an organization worth courting assiduously. Despite its limitations and self-important rhetoric, ASEAN has been central to the evolving multilateral framework for economic and security cooperation via institutions such as APEC and the ASEAN Regional Forum. More broadly, ASEAN has the potential of providing a useful counterpoint to China in the region.

Essay Types: Essay