A little over a decade ago, the country experienced a catastrophic economic crisis, which in turn triggered the collapse of the Soeharto regime and ushered in a period of deep uncertainty. East Timor voted to secede, there were secessionist challenges elsewhere, and serious ethnic/religious conflict in several regions. At a crucial period in this crisis, the international donor community was largely unhelpful. Then there was a series of terrorist attacks earlier this decade, prompting some to ask whether Indonesia was in danger of becoming a failed state.

Three factors underpin the return of optimism. First, the national elections have proceeded smoothly, as they did in 2004. Second, the economy has been doing quite well this decade. The government has also adroitly managed the global crisis. The economy is likely to grow at about 3.5 per cent this year, slower than China and India, but faster than its immediate neighbours and the OECD block. Third, the peace settlement in Aceh looks secure, thus ending decades of rebellion, and the nasty violence elsewhere has for the most part been contained.

Looking forward, what can we expect from another five years of SBY? The answer, reflecting both the man himself and the country’s institutions, is essentially more of the same. SBY is a highly cautious leader, sometimes agonizingly so for the ambitious reformers around him. Moreover, although his Democrat Party emerged as the front-runner from the April parliamentary elections – quite an achievement for a six-year old party – he will continue to lead a minority party in the lower house of parliament. This means he will have to assemble another ‘rainbow coalition’ in cabinet, this time with a more overtly Islamic flavour owing to his choice of coalition partners. As at present, we can therefore expect a cabinet comprising a handful of competent, non-political technocrats, like Dr Boediono, running key economics ministries (and possibly also Defence and Foreign Affairs), alongside a group of political appointees of various persuasions and calibre.

Indonesia is not an easy country to govern. It is institutionally unlikely that the country can ever match the spectacular growth rates of China and earlier the East Asian ‘miracle’ economies, where ruthless and powerful leaders implemented a ‘growth first’ strategy. This is so for at least three reasons.

First, the power of the central government has been deliberately weakened since the sweeping 2001 decentralization, which handed over much administrative and financial authority to more than 500 sub-national governments. Each now has directly elected leaders and parliaments, and hence local legitimacy. From Soeharto’s highly centralized regime, centre-region relations are now work in progress. Every significant investment decision – highways, factories, mines, reforestation programs – involves three tiers of sometimes inexperienced governments, thus often entailing protracted negotiations.

Second, community opinion is skeptical of the virtues of globalization. One of the most hotly debated issues during the presidential election campaign was the accusation that Boediono was a ‘neo-lib’, with the pejorative connotation that he is too close to the international financial institutions (particularly the IMF) and foreign investors. Ironically, the populist, nationalist campaign run by one of the vice presidential candidates, Prabowo resonated (ironical because his father was the widely respected founder of the Indonesian economics profession). Consequently, Indonesian reformers have a constant struggle on their hands: to align domestic petrol prices with the world price, to sell the case for foreign investment, to rebut notions of food self-sufficiency, to repeal the country’s restrictive labour laws, and much else.

Third, Indonesia is engaged in the long-term, complex process of building institutions. At any one time, there is a host of scandals in the press, from minor provincial officials to national government ministers. These cases periodically paralyze the operations of government. Civil servants, for example, are genuinely fearful of signing off on major projects, including for badly needed infrastructure. Judicial cases, both civil and commercial, can be drawn out and the results uncertain.

More than any other developed economy, Australia has a vital stake in these developments. A confident and prosperous Indonesia is the best defence policy for Australia and our neighbourhood. The Indonesian economy will probably not grow as fast as China. There will be periodic hiccups in the bilateral relationship. The government will from time to time do things that puzzle us. But we need to take a long-term view, one that transcends narrow strategic and commercial interests, and to realize how fortunate we are with the current course of developments in our giant neighbour.

This article was first published in the Australian Financial Review on the 6th of July 2009. Hal Hill is the HW Arndt Professor of Southeast Asian Economies at the Australian National University.