(FORTUNE Magazine) – When Indonesians forced President Suharto from office two years ago after more than three decades in power, the dream was that a new leader would help dig the country out of the economic swamp in which it was mired. It is a dream denied. Abdurrahman Wahid, 60, a moderate Muslim intellectual and longtime opposition politician, took office last fall with promises to reform one of the world's most corrupt nations. He is falling seriously short of his goal.

Unlike other countries hit hard by Asia's financial crisis, Indonesia is not bouncing back. The archipelago continues to reel from regional revolts, a dysfunctional banking system, and heavy debt. Creditors have little to show for the $47 billion they have spent to rescue the chaotic Southeast Asian nation from its own bad habits. But Wahid is in no hurry, dismissing the idea of a swift and thorough cleanup. "That's impossible," he says. "We have to do that [reform] in our own way."

Wahid's efforts, the World Bank says, are "painfully slow." Since coming to power in October, his government has not successfully prosecuted a single case of corruption, even though corruption is ubiquitous: In a 1999 global survey, only Nigeria and Cameroon ranked worse. Wahid's answer? "You cannot alienate too many people at one time," he told FORTUNE. In an outburst of frustration, Kwik Kian Gie, the minister in charge of coordinating economic policy, said of the government's stumbling and drift, "If I were a foreign investor, I wouldn't come to Indonesia. The lack of law enforcement, the way the government is managed--the whole thing is so confusing."

No one knows the difficulties of reforming Indonesia better than Laksamana Sukardi, 43. As Minister of Investment and State Enterprises, an agency long considered a snake pit of graft and patronage, Laks, as he is known, earned a reputation for integrity. A U.S. Embassy report last year described him as "the champion of Indonesia's efforts to craft reforms needed to restore investor confidence." He lasted just six months. His rise and fall is a case study in why Indonesia has found it so difficult to get back on track.

Quiet and low-key in manner, Laks seems like just another bright technocrat--until his sense of outrage boils over. "The leaders of this government have already become infected with the virus of corruption," he charges. "They are not serious about economic reforms. If this continues, Indonesia is not going anywhere." Laks sees ample evidence of apparent crimes, such as an audit of the central bank showing that $7 billion has simply vanished. Much of the $37 billion spent by the government to shore up banks in the wake of the crisis has evaporated.

The son of a journalist who worked for Antara, the national news agency, Laks passed the tough exam to get into the Bandung Institute of Technology and graduated as a civil engineer. Opportunities in that profession were thin, however, so he joined the executive training program at Citibank. He jumped off the fast track there to join Lippo Bank in 1987. Working as Lippo's managing director for five years opened Laks' eyes to the ugly flaws of his country. "Bank supervision was lax," he recalls, "and people could just bribe their way around rules." In 1991, when the central bank reduced liquidity to prevent inflation, he saw with disgust how banks still lavished loans on a son of Suharto to finance a monopoly on cloves used in Indonesian cigarettes. Such abuse propelled Laks into politics--"the only way I saw of ending this unfairness."

In 1992, he joined the Democratic Party of Indonesia. and the following year he was elected to one of the few open seats in Parliament. (Eighty percent of representatives back then were appointed by the government.) During his first year he was among a handful of opposition politicians who refused to rubber-stamp Suharto's reelection. Uneasy with his criticism of the regime, Lippo Bank pushed Laks out. He started Reform Consulting, a firm that does financial risk analysis for international clients. (Indonesian companies tend to avoid him because of his politics.) He also invested in a joint venture to make tennis balls with Dunlop Slazenger. Both those businesses continue to provide him income.

Once the Suharto regime collapsed, in May 1998, Democratic Party leader Megawati Sukarnoputri, daughter of the country's first President and a figurehead popular with the masses, was widely viewed as most likely to end up in the presidential palace. Laks became her right-hand man, instructing her on economics and international relations. At the World Bank and IMF meetings in Washington last fall, recalls an American economist who was there, officials treated him "like a Finance Minister in waiting." Megawati's party won the most votes, 34%, but Wahid, whose party won only 13%, adroitly put together a coalition and won the backing of the assembly of electors that chose the President. He took office in October and appointed Laks to the cabinet that month.

From the beginning, Laks was a stranger in a strange land. He recalls an evening when Wahid was going over the contracts for a multimillion-dollar expansion of the Surabaya airport with several cabinet officers. The President suggested that the winner should be encouraged to make a donation to his personal foundation. When Laks questioned the propriety of this, he says that Wahid replied, "If the winner has been decided, it's okay. We're not influencing the decision."

"Really strange things happened" in that cabinet, Laks says. Strangest of all, perhaps, is that "there's no sense of crisis, no plan," even though up to 50 million Indonesians have been thrust back into poverty in the past three years. The unwieldy crowd of 33 cabinet ministers, from five different parties and the military, are divided between would-be reformers and determined resisters. The President, who is sickly and almost blind, often falls asleep at meetings. When he is awake, he can be clueless. In June, for example, Wahid appeared to endorse currency controls to prop up the sagging Indonesian rupiah; a few days later, he pledged not to impose them. Says Sri Mulyani Indrawati, an economic advisor to Wahid: "The President has no basic trust in his cabinet ministers. He knows little about economics and gets confused."

Burdened by neither ill health nor a sense of uncertainty, Laks took a broom to his own ministry. He set the tone early by halting the old practice of selling high positions in state corporations. Instead, he set up a screening process that rated candidates by their qualifications rather than by their connections. He used the system to recruit chief executives for Indosat and Telekom, two state telecom firms--but then Wahid overruled both choices.

Still, Laks kept plugging. Early in the administration, he mopped up a mess over government contracts to buy electricity from private power producers. Power plants had become something of a Suharto family hobby, and the country had overbuilt. The state-owned utility company claimed that corrupt practices had made deals with many such power projects invalid. The biggest deal involved Paiton Energy--a joint venture of Edison Mission Energy, General Electric, Mitsui, and a Suharto relative. Not wanting to break a contract, which would have been bad for Indonesia's battered reputation, Laks arranged a compromise: a revision of the commercial terms and a separate probe of possible corruption.

To attract investors, he eliminated irksome regulations that served as an invitation to bribery as well as inefficiency, and promised equal access for both local and international companies. He drafted legislation that required investors only to protect the environment, promote harmonious relations with employees, and operate transparently--that is, without payoffs. (The law has yet to pass.) And he tried to stop bureaucrats from shaking down investors.

Laks also took aim at the shoddy management of state-owned enterprises, which he wanted to privatize. He blocked the ingrained practice of tapping state corporations for political funds. And he took on the thankless task of persuading Indonesian corporations to settle at least some of the $60 billion in debt they owed to international banks--an effort that has stalled since he left office.

Above all, Laks wanted to administer "shock treatment" to cure Indonesia's corruption. How? "Locking up one or two big fish would show that this government is clean, credible, and serious." He began angling for a suitable target--and thought he found one in Texmaco, a textile and machinery conglomerate that had borrowed more than $1 billion from the state-owned Bank Negara Indonesia between November 1997 and February 1998. Texmaco has yet to repay the loans.

Late last year Laks went public with charges that Texmaco had engaged in "high-level collusion and conspiracy" to obtain loans that violated banking regulations. He presented to Parliament a slew of documents, including a December 1997 letter from Texmaco chairman Marimutu Sinivasan, 62, to his friend Suharto pleading for emergency loans. The paper trail shows that Suharto's office ordered the central bank to make available via BNI more than $1 billion from a special export-financing program. But Texmaco used the money largely for its long-term investments. Sinivasan, for instance, moved $40 million from one of his companies to a personal account in Frankfurt to acquire a stake in a Hoechst venture. Laks, it seemed, had hooked a big fish. Michael S. Horn, an attorney with Coudert Brothers in Jakarta, says, "This case was thought to be an important opening salvo in the new government's anticorruption drive. Many expected that it would be pursued diligently to establish the primacy of the rule of law in Indonesia."

Instead, Laks' bombshell exploded in his face. Sinivasan mounted a vigorous lobbying campaign against the charges, including a contribution of $250,000 to Nahdlatul Ulama, an Islamic organization that Wahid once led. Sinivasan found allies among other prominent businessmen who opposed making an example of Texmaco: Such a precedent might force them to acknowledge--or even pay back--their own debts. Legislators accused Laks of acting on behalf of his former employer Lippo--a charge he angrily challenged them to substantiate. (They didn't.)

In short, Laks stepped on too many toes. Rather than defend his maverick minister, Wahid fired him in March. The decision stirred sharp criticism. Says Attorney General Marzuki Darusman, another reformer: "Removing him was a setback to restoring confidence in our government--the last thing we needed." Confidence was not restored when Wahid replaced Laks with Rozy Munir, a bureaucrat whose main qualification seems to be slavish loyalty to the President.

Texmaco landed on its feet. Wahid insists the company is an important national asset, and it is getting another bailout. Sinivasan's legal battles are over. The government dropped criminal charges against the company in May on the grounds that the state sustained no financial loss--even though BNI had to be recapitalized at public expense.

That's the right judgment, according to Sinivasan, because he never did anything illegal. Yes, he was a friend of Suharto's, but "we had no business relationship." Yes, he enlisted Wahid's support to save his company, but, hey, Washington once bailed out Chrysler. And, yes, maybe BNI technically exceeded prudent lending limits in loaning him more than $1 billion, but "every bank in Indonesia has violated rules for years." What about the money? Texmaco still intends to pay its debts, Sinivasan says, perhaps by converting some of its loans into government-owned equity. The details are murky.

Wahid has never publicly explained why he booted Laks. The Indonesian press reported that he insinuated to legislators that Laks himself was corrupt. But there have since been reports that Wahid is trying to recruit Laks to become governor of the central bank, hardly a position for a dishonest man. Laks is wary: "I don't trust the government. It's very difficult to work with such unpredictable behavior."

Ironically, since getting rid of Laks, Wahid has been battered by his own ethical troubles. His brother Hashim, 46, who has no business experience, was quietly given a nebulous job as a debt collector at the Indonesian Bank Restructuring Agency (IBRA), which in the wake of the economy's precipitous collapse in 1997 assumed control of most of the country's corporate and financial assets. After the press reported the appointment, Hashim was forced to resign in June. In another bizarre scandal, a friend of Wahid's (his masseur) persuaded Bulog, a government food-distribution agency, to hand him $4.2 million from its pension fund for the President to use for humanitarian projects. Wahid denies wrongdoing, but a senior aide has resigned over what the Indonesian press calls "Buloggate."

As for Laks, he prefers for now to be a politician without portfolio. Right after his ouster from the cabinet, the World Bank pointedly invited him to speak at a regional development conference in Singapore. The subject? Good governance, which he told the meeting means "ridding the country of corruption and nepotism in both government and business." A United Nations agency has sounded out Laks about a senior position. The Democratic Party of Indonesia has asked Laks to be its leader in Parliament. He spends much of his time traveling around the country to push his brand of reform. In June he told university students in Bali, "Corrupters are freely walking around the state palace. This is creating a credibility gap for Indonesia."

The concerns of Laks have real consequences, as Wahid discovered on a visit to the U.S. in June to promote investment. He got nowhere. Instead, executives in a private meeting that included blue chips like Chase and ExxonMobil told him to clean up the courts and devise a coherent economic policy. Otherwise, concluded one blunt banker, "it's too soon for Indonesia to be seeking new investors." Before the crisis in 1997, foreigners were investing more than $30 billion a year, and domestic companies some $4 billion; this year, investment commitments have shriveled to next to nothing. The Jakarta stock market, the world's worst performer, is down 43% since January, while the Indonesian rupiah has declined about 17%.

So far the government's main anticorruption effort has gone into preparing a case against Suharto, 79, who professes to be in poor health and unable to recall his past actions. Wahid has already promised to pardon the former ruler--if he is convicted and returns $25 billion of ill-gotten gains. In another effort to combat corruption, Wahid is also raising government pay to curb the temptation to accept graft, but Laks notes that bribes still can easily dwarf the increased compensation for cabinet ministers (about $30,000 a year).

His own solution, vague and idealistic as it may seem, is to recruit leaders willing to make personal sacrifices. He would start by overhauling Indonesia's shoddy legal system, which is so rotten that even Attorney General Darusman concedes that most judges are incompetent, corrupt, or both, as are some prosecutors in his own office.

Indonesia is maddening, but the mineral-rich nation can't be ignored. As a new democracy of 210 million people, it is also the world's fourth most populous--and largest Islamic--nation. It is too big to fail. A political breakdown in Indonesia could plague Southeast Asia with refugees, piracy, drugs, arms trading, and warlords. Much is riding on Wahid's government. "Bribes and kickbacks are part of the culture of corruption that plunged us into economic crisis," Laks notes. "The key is setting the right standard at the very top of government." He is right. Too bad Wahid doesn't get the message.

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