INDONESIA AND MCC COMPACT ELIGIBILITY SUMMARY CABLE

UNCLAS SECTION 01 OF 03 JAKARTA 001727 SENSITIVE SIPDIS MCC FOR AMBASSADOR DANILOVICH AND MORFORD MCC FOR MARIA LONGI MCC FOR DEPUTY CEO RODNEY BENT DEPT FOR E - U/S JEFFERY DEPT FOR EAP DAS MARCIEL AND EB/IFD DAS DAVID NELSON USAID FOR ADMINISTRATOR FORE USAID FOR DEPUTY ADMINISTRATOR KUNDER AND ANE WARD USAID/ODP FOR KAREN TURNER AND PETER DELP USAID/ANE FOR STEPHAN SOLAT TREASURY FOR A/S LOWERY TREASURY/IA FOR RACHEL BAYLY DEPT PASS USTR FOR SCHWAB DEPT PASS USTR FOR ELENA BRYAN DEPT PASS USTR FOR FRAN HEUGEL DEPT PASS USTR FOR AUSTR BARBARA WEISEL OMB FOR JACQUELINE STRASSER E.O. 12958: N/A TAGS: ID ECON SUBJECT: INDONESIA AND MCC COMPACT ELIGIBILITY SUMMARY CABLE ¶1. (SBU) SUMMARY: Indonesia continues its transformation into a modern, free-market and democratic nation. It is the largest democracy in the world to have emerged in an essentially peaceful manner from decades of authoritarian rule. And it plays a positive role in the international community. Over the past year, the Indonesian government has taken steps to improve its performance in the areas of ruling justly, investing in people, and increasing economic freedom. If Indonesia passes its policy indicators this year, it should be given an MCC Compact with funding commensurate with its importance to U.S. policy interests. END SUMMARY. ADVANCING REFORMS IN THE FACE OF A GLOBAL FOOD AND ENERGY CRISIS - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ¶2. (U) Sharply higher global food and energy prices adversely affected inflation, the fiscal balance and income distribution in Indonesia over the past year. Rising prices for basic commodities especially hurt the approximately 110 million Indonesians living on less than $2 per day and the 15 million living on less than $1 per day. Large fuel subsidy payments threatened to explode Indonesia's budget deficit. But despite the approaching 2009 elections, President Yudhoyono took the unpopular step of reducing fuel subsidies by an average of 29% last May. This was the third cut in fuel subsidies during President Yudhoyono's administration, bolstering his reputation as a fiscally responsible leader. ¶3. (U) The government also simultaneously announced pro-poor programs to help the most vulnerable citizens weather the twin shocks of higher food and fuel. The government implemented a direct cash transfer initiative to provide 19.1 million households (an estimated 76.2 million people) approximately $11/month (Rp. 100,000) through December 2008 to compensate for increased fuel prices. It also expanded an existing subsidized rice program and directed additional incentives to the agricultural sector. The government's actions mitigated the adverse impacts of higher food and fuel prices and prevented widespread public unrest. 2009 PROPOSED BUDGET: DRAMATIC INCREASE IN EDUCATION SPENDING - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ¶4. (U) In his August 15 State of the Nation address, President Yudhoyono presented his 2009 budget proposal, which increases investment in people and focuses on poverty alleviation. Embracing a "Growth with Equity" strategy, the government committed to increasing central government education spending to 20% of the total budget, meeting a Constitutional mandate. Legislative leaders have expressed support for this commitment, which promises to provide additional resources to build on Indonesia's nearly universal primary education (93.5%). The Yudhoyono administration has taken this step despite tight fiscal constraints. Larger education spending will allow expansion of existing educational programs, including block grants for School Operational Assistance program and a conditional cash transfer program which provides direct cash assistance to poor families who keep their children in school. It will also fund increased teachers' salaries and support needed school construction and repair. ECONOMIC POLICIES REDUCE POVERTY TO LOWEST LEVEL IN TEN YEARS - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ¶5. (U) Sound macroeconomic policies and continued strong economic growth have helped the Indonesian government to reduce unemployment to 8.5% and the national poverty rate to 15.4%, the lowest levels in ten years. GDP growth of 6.3% in 2007 and nearly 6.4% through the first half of 2008 reflect both strong commodity prices and Indonesia's economic strength under President Yudhoyono and his technocratic economic reform team. Expansion of the National Community Empowerment Program, which provides block grants at the sub-district and village levels, has supported poverty reduction and spurred development of economically productive infrastructure while promoting community participation and oversight. INDONESIA PROGRESS RECOGNIZED, REFORM AGENDA CONTINUES - - - - - - - - - - - - - - - - - - - - - - - - - - - ¶6. (SBU) Indonesia's political transformation has been dramatic. It remains the only country rated "Free" in Southeast Asia, and one of the few Muslim-majority countries that has achieved a "Free" rating according to Freedom House. Recent World Bank reports have highlighted Indonesia's substantial improvements over the past decade in "Voice and Accountability," particularly in freedom of expression, freedom of association, and a free media. The MCC Board has taken special note of country performance on the "Ruling Justly" indicators, including Voice and Accountability, in selecting countries as eligible for MCC programs. ¶7. (U) The government of Indonesia has moved forward with an ambitious tax reform package, which reduces corporate and personal income taxes and enhances comprehensive tax administration reforms, which are generating additional revenue and improving the investment climate. Reform of customs continues, including continued roll-out of a national single window for importers and exporters related to the ASEAN Single Window initiative. Institutions such as the Ministry of Finance and Supreme Court have moved forward on ambitious civil service reform (including implementation of job descriptions, performance standards, and more stringent and regularized requirements for advancement in exchange for higher remuneration). A SUCCESSFUL THRESHOLD PROGRAM -------------- ¶8. (U) As reported septel, Indonesia continues to make good progress on its MCC Threshold Program in both its areas of focus: Control of Corruption and Immunization Rates. The Indonesian government has supported extensive judicial sector reform at the Supreme Court, leveraged MCC assistance at the Corruption Eradication Commission (KPK) to expand prosecutions, enhanced anti-money laundering capacity at the Financial Intelligence Unit and initiated on-line procurement processes under the e-Government Procurement component. Concurrently, the Ministry of Health has partnered with the MCC Threshold Program, World Health Organization (WHO) and UNICEF to capture accurate immunization coverage data that reflect a higher-than-expected coverage rate while continuing technical training for health care professionals in key MCC target provinces. FIGHT AGAINST CORRUPTION CENTRAL TO GOVERNMENT'S AGENDA - - - - - - - - - - - - - - - - - - - - - - - - - - - - ¶9. (SBU) The fight against corruption remains central to the Yudhoyono administration's agenda. Prosecutions of high-profile government officials and legislators have reached a record pace. Nearly each day, almost every major newspaper has a front page article covering the government's investigation and prosecution of real, ongoing corruption cases. Many observers feared the KPK's strong track record would not survive the replacement of its first dedicated group of commissioners. If anything, the KPK has not only maintained, but picked up, the pace of government investigation and prosecution of corruption charges under the new leadership. A FINDING OF COMPACT ELIGIBLITY WILL SUPPORT US INTERESTS - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ¶10. (SBU) Ruling justly, investing in people, and promoting economic freedom became more difficult in a deteriorating global economic environment in 2008. With hotly contested parliamentary and presidential elections looming in 2009, pressures for politically expedient but flawed policies are magnified. Despite these pressures, reformers in the government led by President Yudhoyono have continued to push forward reforms that heighten government accountability and institutionalize transparent systems and processes. The reforms now underway have begun to change societal attitudes and break a culture of corruption. Indonesia's efforts merit notice. ¶11. (SBU) If Indonesia passes the MCC indicators, it should be awarded a Compact funded at a level commensurate with Indonesia's importance to U.S. interests. As the world's fourth largest country, third largest democracy, and largest Muslim-majority democracy, it is in the U.S. interest to recognize, reward, and support Indonesia's ongoing transition to a free-market democracy. Indonesia's embrace of democratization, decentralization, and liberalization over the past ten years has provided a firm foundation, but the transformation is not yet complete. MCC Compact status would recognize the enormous steps Indonesia has made while providing targeted assistance to help Indonesia tackle remaining problems.