Indonesia As the New India

One regional pioneer, Gamawan Fauzi, took power in West Sumatra's Solok region in 2001 and quickly created a one-stop shop for government services, replacing an opaque and complex web of offices and brokers. Fauzi's concept was to bring all government services under a single roof, post set fees, promote autopayment and guarantee prompt service as a means of rooting out corruption. And it has worked: the model has since been emulated across Indonesia, and Transparency International reports that corruption, while still high, has been reduced substantially.

Other local leaders have earned fame by initiating innovative new programs. Gede Putrayasa, who heads the poorest of nine regencies on the tourist island Bali, won office in 2001 on a pledge to provide universal medical insurance and free education. The latter proved relatively easy (he simply waived the 5,000 rupiah monthly fees), but improving health care without breaking the local budget was tougher. Under the old system, funds went to hospitals and local administrators, who did things like stockpile pharmaceuticals procured from companies that paid kickbacks. Putrayasa's innovation: provide every local household free health insurance that compensates clinics for services actually provided. "There's not a big savings," says Putrayasa, "but everyone is covered and the efficiency is much better because there is no longer any corruption."

Such reforms have stimulated economic growth. Putrayasa's health-care and education initiatives (as well as a jobs program that sends underemployed rice farmers to Japan) have reduced the local poverty rate fourfold to just 5.5 percent today. Better local governance has also made Indonesia a major beneficiary of the global soft commodity boom. Together, the value of its four largest crops—rubber, coconut, palm oil and cocoa—rose from $2.3 billion in 2000 to an estimated $19 billion in 2008, CLSA calculates. That's thanks to local leaders like Fadel Muhammad, governor of the hardscrabble province of Gorontalo on the island Sulawesi, who turned his constituents into the country's best corn farmers by deploying teams of agricultural consultants; providing subsidized seeds, fertilizers and rental machinery to farmers; and giving cash rewards to village leaders who boost yields. Since 2002, Gorontalo's poverty rate has shrunk from 49 to 29 percent.

Of course, decentralization has its problems. Analysts and watchdog groups say that while the number of effective leaders in the 500 local administrations has spiked from a handful to 50 or more under SBY, they are sometimes particularly effective at blocking necessary national reforms and projects. The result, says Ramage, is that progress will be "evolutionary, not revolutionary." For example, the Trans Java highway, which would link Jakarta with Indonesia's second-largest city, Surabaya, was launched in 2004 with a target completion date of 2009, but is still only 10 percent done because of local opposition.

Nonetheless, Indonesia has already become a beacon of stability in Southeast Asia and the Islamic world. Its antiterrorism campaign—Indonesia has shut radical madrassas, established an effective counterterrorism force and cracked down hard on suspected cells, while also avoiding human-rights abuses—is seen as a model for the region. And as the world's most populous Muslim country, Indonesia's democratization has implications from Morocco to Mindanao in that it exemplifies an alternative to zealotry, intolerance and extremism. "Indonesia is not immune to radicalism we see worldwide, but this is exactly why we must maintain our identity as a moderate, tolerant nation," says Yudhoyono. "It enables us to prevent a clash of civilizations."

SBY is likely to win re-election next year, but even if he loses, analysts don't expect any sharp change in policy, because all the major political camps in Jakarta agree on the current reform blueprint. Even India does not enjoy that kind of stable consensus on how to catch China.

With Greg Hunt in Hong Kong

© 2008