The markets have since recovered a bit. But fears are growing that the blast in Bali could touch off an economic crisis in Indonesia, political upheaval in Jakarta, and even a regional investment slump. Although Southeast Asia has experienced a recovery this year, policymakers have been worried that foreign investors had fixed on China--with its cheap, talented labor and huge markets--as the only place to be. The blast could chase more investment dollars to the mainland. "The whole of Southeast Asia will feel some negative impact," predicts P.K. Basu, chief economist for Southeast Asia for Credit Suisse First Boston in Singapore.
Nowhere is the connection between politics and economics more important than in Indonesia. Since the fall of Suharto, in 1998, the country has seen net outflows of capital averaging $8 billion a year. More terror could send more money packing. The economy, which is expanding by about 3% a year, needs to grow almost twice as fast to provide jobs for young people entering the workforce. Now, the probable collapse in the $6 billion tourism industry is likely to hurt growth.
So the pressure is growing on Megawati, who had ignored warnings from the U.S. that terrorist cells were gathering strength in Indonesia. She promises to assist foreign intelligence agencies in bringing the perpetrators to justice. But how far can she really go? Singapore, Malaysia, and the Philippines want her to arrest Abu Bakar Bashir, a cleric believed to be the spiritual leader of Jemaah Islamiyah, an Islamic organization that Indonesia's neighbors suspect is behind thwarted terrorist attacks in the region. But on Oct. 16, an Indonesian official declared that there was not enough evidence to charge Bashir.
The U.S. wants more cooperation with Indonesia on intelligence-gathering and law enforcement. Yet even a moderate tilt to the U.S. could cause complications for Megawati. The rivalry between military factions in Indonesia is intense. Some favor cooperation with the U.S.; others vehemently oppose it. Vice-President Hamzah Haz is also likely to resist any new tough line. Haz, 62, leader of the United Development Party, a conglomeration of Muslim groups, once visited the jail cell of a prominent Islamic militant arrested for inciting violence after calling for Megawati's assassination. Haz is seen as Megawati's most likely rival in presidential elections in 2004.
In many ways, the attack on Bali was also "an attack against Megawati herself," notes Catharin E. Dalpino, a specialist on Southeast Asia for the Brookings Institution. Bali is considered the political heartland for Megawati, who is part Balinese. It also was one of the few places in Indonesia that had largely escaped communal violence. By stirring instability in Bali, says Dalpino, the perpetrators are sending the message that "it can happen anywhere in Indonesia." That's just what the world is afraid of. By Michael Shari in Jakarta, with Frederik Balfour in Hong Kong and Stan Crock in Washington EDITED BY Edited by Rose Brady