JAKARTA, Indonesia -- Ten years ago this summer, Asia's financial crisis hit Indonesia. Within a year, Southeast Asia's largest "tiger" economy had collapsed: Gross domestic product fell 14 percent, the currency dropped from 2,250 to 17,500 to the dollar, and the Jakarta Stock Exchange plunged 91 percent in dollar terms. Millions lost jobs as most large banks and many domestic firms went bankrupt. Protests brought down President Suharto's 30-year-old authoritarian regime. The country seemed close to chaos.
Today, Indonesia is back: a working, if imperfect, democracy and a recovering economic tiger. The emergence of a solid democratic regime has quelled regional separatism and Islamic militancy. Moreover, Indonesians are bullish on foreign investment and U.S. brands, though they are skittish about economic liberalization. A stable, growing Indonesia is again attracting foreign investors, despite their disappointment with the pace of economic and legal reform
The successful shift to democracy has confounded skeptics who in 1997 feared this sprawling, diverse country of 235 million would disintegrate without a strongman holding it together. Its effective security response to bombings by Islamic extremists and its marginalization of pro-terror radicals has also surprised those who thought the world's largest Muslim nation might become a "failed state" and a hotbed of terrorist activity. Instead, Indonesia has achieved something unique in the region and the developing Muslim world: stability and growth on democratic foundations.
Since Suharto fell, Indonesia has held two free elections, in 1999 and 2004, both with turnout over 90 percent. Neither election was marred by serious fraud or violence; the political system has become open and vibrant. Almost all important segments of society -- even the military -- accept the legitimacy of the political system.
Polling we conducted beginning last September shows that Indonesians are optimistic about their country's future. Their reasons include restored order; economic recovery; and President Susilo Bambang Yudhoyono's successes in attacking corruption, raising school enrollment and ending separatist conflict in Aceh. Regional threats to Indonesia's integrity have been resolved through the 2005 Aceh peace accord, the financial autonomy given all provinces in 2001 and the independence East Timor gained in 2000.
The reform-minded Yudhoyono, Indonesia's first directly elected president, retains great popularity. In trial heats for the 2009 election, he trounces rivals, including his 2004 opponent, former president Megawati Sukarnoputri.
Some worries remain, including high unemployment, corruption and problems with disaster relief after the 2004 tsunami and other natural calamities. Yet these concerns contrast sharply with Indonesians' preoccupations after Suharto's fall: riots, violence and a leadership vacuum. Today, questions about the survival of the state have given way to ordinary government problems -- jobs and good governance.
Indonesia's democratic advance seems to have blocked Muslim extremists from making any headway. The Islamic fundamentalist party still polls at just 7 percent, its 2004 level, while the moderate Nahdlatul Ulama -- the world's largest Muslim organization -- is viewed favorably by 80 percent of the people. The state's security measures -- including the arrest in June of two leaders of Jemaah Islamiyah, al-Qaeda's local affiliate, for alleged involvement in terrorism -- have popular support. Backing for the U.S.-led war against terrorism has climbed sharply since 2002, after the terrorist bombings in Bali and Jakarta, and Indonesians now support the effort by 5 to 3. With banks and companies restored to health, the economy grew 5.5 percent in 2006. Growth should top 6 percent this year. More than $12 billion in public and private bonds have been sold since 2005, and foreign direct investment ($6 billion in 2006), though below pre-crisis inflows, is catching up.
Investors should be interested: Indonesians favor foreign investment 2 to 1. Iconic U.S. brands -- Coca-Cola and Microsoft -- are popular despite widespread antipathy toward America's Middle East policy. (There is a catch: Indonesians demand more corporate social responsibility -- and say multinationals do less for society than state or private local firms.)
Moreover, while Indonesians want to compete in the world economy, its risks frighten them. They split over tariff cuts, fear liberalizing labor markets and are reluctant to privatize state-owned firms. This restrains government from making those needed reforms, a problem which -- along with weak legal institutions -- inhibits foreign investment.
Yet Indonesia has come far since 1997, when students marched in the streets behind a coffin, protesting the "death of democracy." Indonesian democracy is managing potentially explosive disputes -- political, regional and religious -- that its autocratic neighbors ignore or suppress. If it can speed up economic progress, broad-based democracy, as in India, may become a better long-term bet for stability and growth than the rigid systems prospering in China, in Vietnam and in other Muslim countries.
James Castle foundedCastleAsia, a Jakarta consultancy. Craig Charney is president ofCharney Research, a New York polling firm. They co-authored "Indonesia Outlook Survey 2007."