Regions and Countries

	Table of Contents
p. 13 of 15 BACK | NEXT Map Executive Summary I. Recent Economic Developments II. Short and Medium-Term Economic Prospects and Policy Issues A. Growth, Investment, and Saving B. Fiscal and Monetary Developments C. Balance of Payments D. Risks and Uncertainties III. Corruption as a Challenge to Development Appendix

Country Economic Review - Indonesia : II. Short and Medium-Term Economic Prospects and Policy Issues

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D. Risks and Uncertainties

52. Indonesia is undergoing tremendous institutional change amid an external environment that may increasingly be less forgiving of non-market- oriented economic policy. There are tThree major areas of concerns are the followinglooking forward:

1. Weak external market recovery in 2002 could limit growth and investment.
2. An uncertain political or security situation would depress economic output, especially investment; set back financial sector strengthening; and hamper effective monetary policy.
3. Uneven implementation of decentralization might result in deterioration in service delivery, especially social services critical to the poor.

53. The first of these was noted in para. 40. As the recovery from the financial Ccrisis was sparked by exports, this year's growth forecast depends crucially on continued recovery of OECD markets. Failure of export growth will depress investment and public revenues. Dependence upon international markets increases the need to allay address investment concerns.

54. The biggest risk to achieving significantly higher, sustainable growth is the failure to encourage investment, especially by Indonesians in their own country. In the rRecent past political uncertainty had an immediate impact on currency and asset markets and undermined Indonesia's recovery from the Crisis. The contrast between capital flows in Indonesia and its neighborsing crisis-affected countries with respect to capital flows suggests large potential gains from a policy environment that encourages investment by restoring confidence. However, considerable political challenges need to be faced if public perception of regarding governance problems and potential security risks are is to be changed.

55. At the vortex of many of the political problems lies the need to ensure that decentralization is implemented properly,. which This will requires addressing the present tendency for local governments to stop contradicting move at variance to national policy, sometimes in ways that discourage economic activity. Long-term needs to iImprovement of social service provision, particularly for health and education, will demands a wide range of actions improving the dynamics of revenue flows, coordinating service standards for services, and encouraging wider participation in public decision- making.

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