VZCZCXRO0501
PP RUEHLMC
DE RUEHJA #1727/01 2550834
ZNR UUUUU ZZH
P 110834Z SEP 08
FM AMEMBASSY JAKARTA
TO RUEHLMC/MILLENNIUM CHALLENGE CORP PRIORITY 0072
RUEHC/SECSTATE WASHDC PRIORITY 0056
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHEHOMB/WHITE HOUSE OMB WASHINGTON DC

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 
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¶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 
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¶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 
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¶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 
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¶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 
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¶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 
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¶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.