Indonesia

* The Indonesian business environment is the least transparent of the HPAEs, and property rights receive the weakest protection. * Indonesia’s business environment constantly ranks below the fiftieth percentile among a group of fourteen newly industrial countries. * Indonesia’s reliance on informal social networks, instead of on predictable rules and procedures has resulted in private investment tends lagging behind those of East Asian neighbors. * Informal social networks emerged because of leadership’s need to nurture political support from the military, which was the only institution capable of governing the country. * The Armed Forces and the Rise of the New Order - Old government could not collect taxes, so it could not pay its officials and provide an adequate legal system, laws were out of date and the judicial system was dysfunctional. * With backing of military, President Sukarno declared martial law and restored the 1945 Constitution. Threatened that the military might threaten his position, he supported the rise of the PKI, Indonesia’s Communist Party, as counterweight to the military. This led to a power struggle between the army and, other elements of the armed forces, and the PKI, which eventually spun out of control. General Soeharto became head of state and the government became the glue that held together ethnically diverse groups. * The Technocrats and Regime Credibility – Under Soeharto, inflation was at an all-time high of 1,000 percent, and foreign exchange reserves were at an all time low; foreign debt service had become unmanageable, the agriculture/rural sector was failing, food shortages threatened; infrastructure had deteriorated; the economy was contracting. * Policies were designed that enhance responsible economic management-including stringent controls on the budget, depreciation, and