Evidence of rekindled enthusiasm for Indonesia’s economy is abundant. In 2003 the Jakarta Stock Exchange index rose by 63 percent, the second-best performance among East Asian markets. Earlier this year, a $1 billion sovereign-bond offering—Indonesia’s first foray into international capital markets since the 1997–98 financial crisis—attracted strong demand at a lower-than-expected yield. The government also sold 10 percent of Bank Mandiri, the country’s largest bank in terms of assets, for $333 million—more than it made a year earlier from the sale of a stake twice as big.

Indonesia’s leaders and investors would be wise not to be dazzled by such successes, however. Instead they should stay focused on resolving the persistent problems threatening the economy. Indonesia remains well behind its Asian neighbors by several measures: Annual GDP growth has hovered between 3.5 and 4 percent for the past three years, compared with more robust performances by China, Malaysia, South Korea, and Thailand. The chronically unreliable legal system and the lack of meaningful corporate restructuring still hamper the flow of foreign direct investment.¹ In addition, commercial credit growth is only now recovering; with outstanding corporate loans equal to about 20 percent of GDP, Indonesia’s lending levels remain far below those...