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Cablegate: Indonesia and Mcc Compact Eligibility Summary Cable

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
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

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
- - - - - - - - - - - - - - - - - - - - - - - - - - -

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.

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