Indonesia has undergone an extraordinary transition during the last two years from a society long ruled by a military-backed authoritarian leader to one in which an elected government was installed through an open and largely democratic process. This has occurred notwithstanding massive economic collapse in the wake of the 1997 Asian financial crisis, which aggravated social tensions, including ethnic conflict, in many parts of the country: the anti-Chinese rioting was particularly damaging because it led to the withdrawal of much commercial capital and expertise.

While impressive political progress has been made, Indonesia's crisis is far from over. The key challenges discussed in this report are:

• Achieving constitutional reform which steers a course between the overwhelmingly dominant government of the authoritarian New Order and the weak and unstable democratic governments of the 1950s;
   
• Consolidating civilian supremacy over the military, and reforming the military's organisational structure to prevent it being used as a political instrument by future governments;
   
• Implementing regional autonomy in a way that holds the country together and reduces the incentives for separatism;
   
• Restoring harmony between members of different ethnic and religious communities in regions which have been torn apart by communal conflict during the last two years;
   
• Reforming a legal system that is riddled with corruption and enforcing accountability in cases of gross corruption and human rights abuse; and
   
• Overcoming the enormous obstacles in the path of economic growth including the restoration of a failed banking system, the restructuring of huge private debts, the reform of commercial law, and measures to remove the many non-economic disincentives to investment.

Indonesia's crisis at present is chronic rather than acute. The nation faces serious political, regional, communal, legal and economic problems and challenges but it is not on the point of breaking up and descending into chaos. On the other hand, the government has not yet been able to show the way forward to a permanent resolution of these challenges.

The purpose of this report, the first in a proposed new series systematically addressing these problems and challenges, is to sketch the overall state of the nation, and to identify in outline appropriate policy responses by the international community. Later reports will address the key issues in more detail; the recommendations which follow do no more than offer broad guidelines.

Jakarta/Brussels, 31 May 2000