What's Holding Indonesia Back?

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Yet economists contend that Indonesia's performance could match that of India and China if Yudhoyono presses reforms further. The most damaging, and most politically sensitive, issue dampening investment is the nation's oppressive labor law. Passed in 2003, it requires companies to get government approval to lay off staff and mandates heavy severance payments. The stipulations were a misguided attempt to protect local workers that instead has made Indonesia uncompetitive in the kinds of labor-intensive industries — like textiles and footwear manufacturing — that could help reduce the country's lofty unemployment rate, currently at about 8.5%. Political analysts complain that Yudhoyono doesn't exhibit the necessary decisiveness on economic matters — and with a presidential election looming in 2009, they fear he has little hope of achieving much more ahead of the vote. "He's become more focused on not making mistakes than doing anything positive on potentially controversial issues," says John Arnold, president director of consulting firm APCO Indonesia in Jakarta.

Channeling Chávez
There are limits to what any elected President can accomplish in the diverse and far-flung island nation. To many Indonesians, the wrangling over economic policy is a sign of a healthy democracy. Sarundajang, the North Sulawesi governor, points out that the original contract allowing Archipelago to dig for gold in his province was signed in 1986, during the Suharto years, when citizens' wishes were disregarded. The struggle against the mine, he contends, is a struggle to correct the sins of the past. By opposing the mine, he says he wants to "give a salute to [Hugo] Chávez," Venezuela's radical socialist President. Says Bert Supit, founder of Manado-based NGO Majelis Adat Minahasa and one of the gold mine's chief opponents: "We want to remain Indonesian, but we don't want to be dictated to by the élites in Jakarta. We need to find a system that allows the local people to have a voice in their affairs."

Indonesians these days are definitely making themselves heard, even in the thatch-hut hamlets surrounding the Archipelago mine. Some in the community, like village headman Marten Katiandagho, believe that preserving the environment is all well and good, but that the area also badly needs the jobs and the tax dollars the mine will bring. "People need to eat," he says. But other villagers have battled Archipelago ferociously, even forming their own NGO, called the Alliance of People Against Mining Waste, to stage protests and lobby in Jakarta. Says Tajudin Hema, one of the leaders of the antimine group: "We don't want to have waste in the sea, on the land or in the air." Tajudin last year was sentenced to 18 months in jail for inciting a violent 2006 protest during which a mob of 1,000 villagers attacked and burned down a guard post at the mine's jetty. (Tajudin says his conviction was overturned on appeal.)

With passions running so high, resolving Indonesia's economic ills won't be easy — although economists and officials say the cure is straightforward enough: the government has to demarcate federal, provincial and local powers, and reconcile conflicting laws. "We have to make regional governments aware that their regulations must comply with the higher regulations," says Purnomo, the mineral-resources minister. Indonesia also has to further liberalize its economy to encourage greater investment from both foreign and local enterprises, by, for example, loosening up the labor market and lifting remaining restrictions on foreign investment in certain sectors, such as transport and telecom.

Indonesia is heading in the right direction, says the OECD's de Mello. "But what they need to understand is that the world is moving faster." Real progress can come only if there is a national consensus to make economic development a priority. And in the country's fractious political environment, not everyone is willing to take the politically uncomfortable steps to achieve high growth, such as scaling back labor rights and encouraging foreign investment.

Still, there are those who see too much opportunity to quit the country. At the Sulawesi gold-mine site, Dave Morrison has begun hiring contractors to complete facilities construction. Archipelago hopes to start digging next year. "Everyone is telling the truth from their own aspect," Morrison says of the controversy surrounding the mine. "I'm confident that things will move forward." If Indonesia's leaders did more to reinforce that confidence, perhaps the country's promise, like its gold, won't always seem out of reach.