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Cablegate: Indonesia Should Be Awarded Mcc Compact Status

VZCZCXRO9666
RR RUEHLMC
DE RUEHJA #2009/01 3050456
ZNR UUUUU ZZH
R 310456Z OCT 08
FM AMEMBASSY JAKARTA
TO RUEHC/SECSTATE WASHDC 0485
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHNSC/NSC WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP 0093
RHEHOMB/WHITE HOUSE OMB WASHINGTON DC

UNCLAS SECTION 01 OF 02 JAKARTA 002009

SENSITIVE
SIPDIS

MCC FOR AMBASSADOR DANILOVICH
DEPT FOR E - U/S JEFFREY
USAID FOR ADMINISTAROT FORE
TREASURY FOR A/S LOWERY AND IA BAYLY
DEPT PASS USTR SCHWAB
OMB FOR JACQUELINE STRASSER
MCC ALSO BENT, MORFORD, LONGI
STATE ALSO EAP MARCIEL AND EB NELSON
USAID ALSO FOR DEPUTY ADMINISTRATOR KUNDER, ANE WARD/SOLAT, ODP
TUNER/DELP
USTR ALSO FOR AUSTR WEISEL, EHLERS, BRYAN, HEUGEL

E.O. 12598: N/A
TAGS: EINV ECON KMCA EAID PRESL ID
SUBJECT: INDONESIA SHOULD BE AWARDED MCC COMPACT STATUS

1. (SBU) Summary. The Millennium Challenge Corporation Board should
declare Indonesia Compact eligible at its December meeting. Over
the past decade, Indonesia has transformed itself from an
authoritarian state to the world's third-largest democracy committed
to policies that promote political and economic freedom, investments
in education and health, control of corruption, and respect for
civil liberties and the rule of law. Indonesia now meets the
criteria for Compact eligibility. We should recognize this
progress. We should also recognize Indonesia as an increasingly
important bilateral partner with growing influence in the
international community. Naming Indonesia as Compact eligible will
give Indonesian reformers additional confidence to continue their
efforts to build a modern, free-market and democratic nation. As
funding decisions are made, it is essential to factor in Indonesia's
size, complexity and strategic importance. End summary.

2. (SBU) Ten years ago, Indonesia was a mess. Its authoritarian
ruler had been overthrown after three decades in power. In 1998 the
economy shrank by nearly 14 percent in the wake of the Asian
financial crisis. Social violence erupted in parts of the country.
Compare that picture of the world's fourth-largest country and
largest Muslim-majority nation with today's Indonesia. Indonesia is
now firmly democratic; while the upcoming 2009 parliamentary and
presidential elections are newsworthy, the fact that they are
happening is not news. In fact, last year Freedom House named
Indonesia the freest country in Southeast Asia. And this year,
Indonesia passed the "Control of Corruption" indicator for the first
time after several years of consistent, continuous improvement.
This is no accident. President Yudhoyono came to power in 2004 with
a pledge to fight corruption. Indonesia has made remarkable
progress in battling corruption; on its first MCC scorecard five
years ago it ranked at the 11th percentile. It is now at the 56th
percentile. Our MCC threshold program provided key support to this
effort.

3. (SBU) Similar advances have been made on the economic front.
While it has not been able to escape the impacts of the current
financial crisis, Indonesia is operating from a sound macroeconomic
base that it has purposefully put into place over the past several
years. Economic growth is slowing, but is still projected to exceed
five percent this year and next. And the current government has
demonstrated an ability to act sensibly in the face of crisis.
Earlier this year it took the politically unpopular decision to
reduce fuel subsidies in order to minimize its budget deficit.
Challenges clearly remain. Despite increased expenditures (the
government has committed to devote 20 percent of the budget to
education), much work needs to be done to build effective health and
education systems in this vast island nation. And with more than
100 million people living on under $2 per day, Indonesia has almost
twice as many poor as the combined total populations of the other
three countries being considered for Compact eligibility. This
demography, in conjunction with the Indonesian government's
anti-poverty programs, offers the United States a huge opportunity
to demonstrate the impact of an MCC compact on poverty alleviation.


4. (SBU) Declaring Indonesia to be Compact eligible would
acknowledge the progress of the past decade and give the government
additional confidence to carry out further reforms. While President
Yudhoyono and team have made steady progress in transforming this
country, nationalist and protectionist sentiment remains strong.
This nationalism will be given voice in the 2009 Parliamentary and
Presidential elections campaign. MCC Compact status would give the
reformers added credibility as the elections approach.

5. (SBU) MCC Compact eligibility would also allow us to work more
closely with Indonesia as a partner on issues of joint interest. By
recognizing and rewarding Indonesia for its progress and providing
assistance to help it continue on it reform path, we will also
deepen and broaden the structure of our relationship. We are
already finding more and more areas where we can work together with
Indonesia. We are cooperating on a host of environmental issues
that could reduce deforestation and combat climate change. We have
invited Indonesia to participate in the upcoming financial summit.
And economically, Indonesia will continue to grow in importance; it
is the only G-20 country eligible for MCC Compact status and Goldman
Sachs estimates that in four decades Indonesia's economy will be

JAKARTA 00002009 002 OF 002


bigger than Japan's. We should be working together with Indonesia
now as it becomes more and more important regionally and globally.

6. (SBU) We understand that the MCC budget will be tight and
competition intense. But Indonesia - through its own hard work -
has met the criteria for MCC Compact eligibility. An MCC Compact
here could potentially have a greater impact on poverty reduction
than in any other country in the world. It would generate further
reforms. And it would help build our relationship with an important
Muslim-majority country that has demonstrated that Muslim-majority
countries can also be democratic and secular.

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