INDONESIA AND MCC COMPACT ELIGIBILITY

UNCLAS SECTION 01 OF 03 JAKARTA 003130

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR E - U/S JEFFERY
DEPT FOR EAP DAS MARCIEL AND EB/IFD DAS DIBBLE
MCC FOR AMBASSADOR DANILOVICH AND MORFORD
AID FOR DEPUTY ADMINISTRATOR KUNDER AND ANE WARD
TREASURY FOR A/S LOWERY
DEPT PASS USTR FOR SCHWAB

E.O. 12958: N/A
TAGS: EINV ECON KMCA KCOR ID
SUBJECT: INDONESIA AND MCC COMPACT ELIGIBILITY



1. (SBU) Summary: Indonesia's strong performance on its FY08 MCC
indicator scorecard is a testimony to the country's stunning
progress of transforming into a modern, free-market, secular and
democratic nation that plays a positive and active role in the
international community. Recognizing these accomplishments is the
right thing to do. We should support and strengthen this
transformation through the conveyance of Compact eligibility for
technical reasons based on Indonesia's MCC indicator scores and
Threshold Program performance as well as our own vital interests
promoting democracy and development in the world's largest,
Muslim-majority nation. The MCC is the signature development
program of the Bush Administration. Helping Indonesia's
transformation succeed would be a crowning achievement for this
important program. End Summary.

Most Free in Southeast Asia
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2. (U) Indonesia was recently named the "freest country in Southeast
Asia" by the Freedom House index, one of the many indicators of
Indonesia's progress in the several years. Indonesia ranked as the
second best reformer in Asia on the World Bank's "Doing Business
2008" indicators, second only to China. Indeed, Indonesia appears
to be an ideal MCC candidate country given its progression from the
status of a non-recipient of MCC assistance, to award in November
2006 of the largest MCC Threshold Program ($55 million),to its
current status as a serious contender for MCC Compact eligibility.
Based on its FY08 MCC Scorecard, Indonesia passes all three broad
MCC categories of Ruling Justly, Investing in People and Economic
Freedom. Indonesia's dramatic indicator improvements from last year
testify to the GoI's continued robust implementation of serious
reforms.

Great Year-on-Year Progress
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3. (U) In FY07, Indonesia passed 9 out of 16 (56%) of the MCC
indicators and came up short in seven (44%). Capturing the
Government of Indonesia's (GoI) significant achievements, in FY08,
Indonesia passed 12 out of 17 (71%) indicators, behind in only five
(29%). Significant improvements were made across all three broad
categories in a number of indicators, including "Control of
Corruption," "Government Effectiveness," "Rule of Law," "Primary
Education Expenditures," "Regulatory Quality," and "Fiscal Policy."
While Post recognizes that Indonesia scores at exactly but not above
the median on its Control of Corruption indicator, Post highlights
(and the GoI is keenly aware) that exceeding the median is not
mandatory for Compact eligibility and, more importantly, there is
clear, strong momentum and positive results in Indonesia's
anti-corruption efforts.

Significant Positive Trends
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4. (SBU) There is also a clear trend in indicator improvement,
reflecting Indonesia's positive transformation over the years.
Since its FY04 Scorecard (the first MCC published Scorecards),
Indonesia has made marked improvements, including:

-- Control of Corruption: Moving from the 11th percentile to
achieving the median at the 50th percentile;

-- Government Effectiveness: Moving from the 69th to the 82th
percentile;

-- Rule of Law: Moving from the 46th to the 54th percentile;

-- Primary Education Expenditures: Moving from the 10th to the 59th
percentile; and

-- Regulatory Quality: Moving from the 52th to the 86th
percentile.

Indonesia Corruption Reform Achieving Results
--------------


5. (SBU) Indonesia is successfully breaking the endemic culture of
corruption. The Corruption Eradication Commission (KPK) has
successfully pursued the prosecution and conviction of a number of
key figures this year, including a governor, a minister, and two
mayors. In 2007, the KPK has successfully prosecuted 21 cases as of
August 31, six of which involved high-level government officials.
The KPK also won cases involving bribery scandals at the Supreme

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Court. The KPK is currently prosecuting a case against a senior
Judicial Commission official. These "big fish" cases are
symbolically and substantively important: they put Indonesia's
dynamic anti-corruption efforts in the public spotlight and put
potential corruptors, large and small, on notice that times are
changing. Additionally, many of President Yudhoyono's appointments,
including the Finance Minister and the Chief of Police are actively
and effectively delivering on anti-corruption reforms.

Threshold Program Success
--------------


6. (SBU) Through robust cooperation on its two-year, $55 million MCC
Threshold Program, the GoI is demonstrating its strong commitment to
the Threshold Program reforms which include ambitious results under
the $35 million anti-corruption component and $20 million
immunization coverage activity. The GoI works closely with USAID
Indonesia via the Project Steering Committee to jointly monitor and
evaluate project status and ensure activities are contributing to
the Threshold Plan goals. The close USG-GoI cooperation on the
Threshold Program, including daily interaction with Threshold
Program counterparts at the Corruption Eradication Commission; the
Financial Transaction Reports and Analysis Center; the Supreme
Court; the National Development Planning Agency; and the Ministry of
Health, demonstrates to the GoI's commitment and advances its
dynamic reform agenda. A separate cable on the Threshold Program is
forthcoming.

GoI Activism in International
Anti-Corruption Efforts
--------------


7. (SBU) On the international stage, Indonesia is taking a
high-profile position in its anti-corruption efforts. The KPK has
hosted a number of international conferences in 2007, including the
ASEAN-Senior Officials Meeting (SOM) Transnational Crime Expert
Meeting; the Conflict of Interest International Seminar; the Asset
Recovery International Seminar; the Procurement and Bribery
International Seminar; and the upcoming International Association of
Anti-Corruption Authorities Conference in November and the Second
United Nations Convention on Anti-Corruption (UNCAC) Conference of
State Parties in January 2008. Recently, at the September UN
General Assembly, President Yudhoyono met with World Bank President
Zoellick and embraced the joint World Bank and United Nation's
Office of Drugs and Crime newly launched StAR (Stolen Asset
Recovery) Initiative, a bold move given the remaining political
sensitivities regarding former President Suharto.

Funding a Compact and Impacting Development
--------------


8. (SBU) Post appreciates financial considerations related to MCC
budget funding, and recognizes that any Compact for Indonesia will
be significant given the desired transformative effect on the
world's fourth most populous nation. While recognizing that one
Compact for Indonesia may financially equal several Compacts for
smaller countries, it is imperative to remind ourselves of MCC's
mission, namely to reduce global poverty through the promotion of
sustainable economic growth.


9. (SBU) The head of the Asia Foundation in Indonesia recently
wrote, "That beguiling combination of political democracy and rapid
economic growth appears to be within Indonesia's grasp yet the most
important problem of all is poverty." Although in 2007 there was a
slight reduction in the national poverty rate over previous years,
the numbers are daunting: 16.6% (just over 37 million people) live
at or below the official poverty line...if those "near" absolute
poverty is set at about US$2 a day then 45%, or over 100 million
Indonesians, are poor."


10. (SBU) The combination of the total populations of the top five
MCC Compact countries in terms of Compact amounts is only 123
million -- not all of those 123 million live in poverty. The
combined Compact amount of those top five is over $3 billion, less
than any anticipated Compact for Indonesia. If MCC wishes to impact
the greatest number of poor, reduce global poverty and promote
sustainable growth in a bell-weather country -- while still abiding
by the technical eligibility criteria -- then Indonesia must be
seriously considered for Compact eligibility.

The Time for Compact is Now, under President SBY
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11. (SBU) With the indicators justifying Compact, the MCC Board
should be aware of the political importance of Compact-eligibility
and its potential impact on supporting President SBY and his reform
campaign. With elections in Indonesia scheduled for 2009, Compact
eligibility - even if funds are not yet disbursed - could support
President Susilo Bambang Yudhoyono (SBY),his reform-oriented
platform and reform-minded appointments. Post has strong relations
with the current GoI administration and is in a position to
positively engage in supporting and shaping Compact development.
Several key transformative reforms are underway in a relatively
early stage, including comprehensive civil service reform, customs
and tax reform, and infrastructure development. These would be
prime areas in which to engage the GoI via Compact support. If
improvements do not come soon, will Indonesians start questioning
their enthusiastic embrace of democracy? We request the MCC Board
seriously consider Indonesia for Compact eligibility.

HUME