Ask an average Australian last year what 'Indonesia' conjured up and they might tell you Bali beaches. The more romantic might say batik, harmony. The more entrepreneurial, market opportunity. In 1998 those peaceful images were engulfed in flames. Journalists abandoned friendly cliches in favour of geological ones: fault-lines, and of course the treacherous volcano. Talkback radio revived 'yellow peril' fears we thought we'd left behind with White Australia.

So suddenly did the images invert that it will intrigue university researchers for years. But the pictures still get it wrong. The flames did not erupt like some unpredictable phenomenon out of a society we suddenly find is riven by bigotry. They were lit by leadership decisions taken years ago.

1998 was annus horribilis for Indonesia's elite. In mid-January the currency, drooping for 6 months, collapsed into a black hole. Overnight, their rupiah debts quadrupled in size. The IMF mercilessly demanded an end to their usual ways of doing business. Politically, the elite were out of ideas. In March they unanimously reelected Suharto, their godfather of 32 years, to another term. Within two months, that dearth of ideas came home to roost amidst an orgy of rioting in the capital.

Into Suharto's place slipped Habibie. At last a civilian president. Yet not one with new ideas. He did promise an election, free up the press and allow all and sundry to announce new parties. What else could he do in the face of such public anger? But he refuses to talk with any of the popular societal leaders, scoffs at their lack of experience. He won't prosecute Suharto because he knows the revelations would spread to himself. His armed forces commander Gen Wiranto keeps warning protesters not to undermine 'the system'.

Not love for Suharto stymies this post-Suharto elite, but inability to imagine a democratic Indonesia. They were nurtured in the elitist vision of developmentalism. The colonial Dutch invented it. For the Suharto elite it glowed with the rightness of natural law. Now its failure threatens to destroy the very nation-state on which it depended.

The basic idea of developmentalism was simple. Eliminate politics, grow the economy. The economic part went well. Indonesia has oil, cheap labour, a big domestic market. With expert management and a little luck, billions of footloose dollars and yen were persuaded to settle. A miracle, applauded the World Bank. Countless western editorials agreed.

The political part was harder. Everything depended on that economic miracle. What if the poor should decide they were getting a raw deal? Inevitably, like the colonial Dutch, the Suharto elite developed phobias familiar to any student of the French Revolution. The sans-culottes were for this elite too the source of unfathomable chaos, ever ready to explode. Whenever anger did break out, they never traced the cause to genuine feeling within society, but only to a conspiracy hatched against them by some rival elite faction. Rather than appease unrest with social legislation, they sought for scapegoats and gaoled them.

The us-and-them mentality explains Suharto's notorious habit of dumping anyone from his circle who looked like becoming popular. Popularity was the great betrayal of elite solidarity. Such fortress fears are difficult to reconcile with fair elections. Indeed, one of the most curious questions among researchers is why the elite felt compelled to stage the electoral ritual at all.

Theirs was an emergency regime. If elections were an optional extra, the dual function of the armed forces was not. A military presence at every level down to the village symbolised elite distrust of the unwashed. The people are too poor and ignorant, they are too fanatical to be democratic, they said. Every church set aflame, every Chinese shop smashed by unemployed street thugs, proved it again.

The elite needed the demons in society to make the emergency permanent. Meanwhile they enjoyed the spoils of decades of strong growth. Untroubled by public scrutiny, they treated the nation-state as their private golfing green. Until 1998 hit them, annus horribilis.

The elite's determination to 'depoliticise' the population had created a leadership vacuum. Their mantra was: 'the military will hold the archipelago together'. But new forms of identity quietly began to fill the vacuum, largely unseen by the self-censored mainstream press, out of reach of the nation-state.

As in the former Yugoslavia, in Algeria, Turkey, or Russia, disillusionment with the modern nation-state is growing. Alternative leaders are reinventing old bonding myths to create new, often local solidarities based on ethnicity and religion. The economic collapse immeasurably strengthens their appeal.

The globalised market declares the unemployable millions a failure. The nation-state disowns them. Now, the marginalised are discovering the exhilaration of belonging elsewhere - they are Muslim, they are Dayak. The militancy of these new identities is a direct consequence of inequalities thrust upon the population by an elitist developmentalism.

The potential for communal bloodshed has risen alarmingly. The word 'disintegration' leapt into the national discourse in July and August this year, as Jakartans learned of massive demonstrations in East Timor, Irian Jaya and Aceh.

Jakarta's confused, anxious elites now face a fork in the road. Each choice is strewn with obstacles. On the low road lies more of the same. It means first reuniting the elite and finding another Suharto. Then persuading people that the military, despite the hate they have stirred up in the regions, can still hold the archipelago together. That the emergency is, after three decades, deeper than ever, and there is no need to apologise. That honest elections are a mistake, and so are prosecutions for corruption or human rights abuse. That Megawati, for whom young people have already died, is best left in the cold. That developmentalism can work again. And, we are tempted to add, that pigs can fly.

On the high road lies a return to normal, real politics. No bland option, it will require oodles of what the sociologist Pareto quaintly called 'elite circulation'. Out would go Habibie and Wiranto, in would come Megawati or Amien Rais, inexperienced yes, but blessed with moral authority. Their immensely difficult challenge: to restore hope that the modern nation-state can mean something for the people as well as for the elite. Only they can do it.

To convince the electorate they're for real, the new, more democratic elite would distance themselves from Suharto: high profile prosecutions, get tough with Freeport, a tax on the rich, more help for the poor. Doing this could open a Pandora's box of other pent-up grievances from the developmentalist era - over land grabs for example, or unjust prison sentences and massacres. Nor would it necessarily please foreign investors, sorely needed to restore the economy.

If that were not enough to test the new politicians' skills, they would also have to open that other Pandora's box: those ethnic and religious identities. Face them bravely, hold open the possibility even of peaceful secession if that is what the people want. The alternative is to resort once more to the military mantra and the low road of an emergency.

Gaping beside the fork in the road is the abyss of a 'disintegration' beyond the control of any elite. The stakes are that high. If the elite fails once more to make the responsible choice now, they would make the geological imagery more apt than ever.

Gerry van Klinken, editor, 'Inside Indonesia' magazine. A version of this will soon appear in The Age (Melbourne)