Indonesia: the Troubled Giant

Topics: Indonesia, Economics, Economy of Indonesia Pages: 8 (2642 words) Published: November 13, 2008
Indonesia: The Troubled Giant

Question 1: What political factors explain Indonesia's poor economic performance? What economic factors? Are these two related?

The impeachment of the Indonesian dictator Suharto is widely considered one of the most exciting political happenings of recent years. Indonesia is the world's fourth biggest country, with a population of 202 million people; Suharto had ruled the country with an iron fist for about 32 years. The fact that his absolute rule fell apart in just a few days shows the democracy holds when a country's people simply just get fed up. When they rose against Suharto, all of the institutions he had depended upon for all those years were not enough to keep him in power, and in the end the people of his country prevailed.

After dealing with inflation and a bad economic depression during the final years of the then President Sukarno in the early 1960s, Indonesia experienced rapid and lasting economic growth for three decades under the New Order government of President Suharto. The economic growth was followed by a severe decline in poverty, as it went from 40% of the population in 1976 to 11% in 1996. However, looking at only the New Order's economic accomplishments while ignoring its downfalls gives us an unfair view of that time era. The general view in Indonesia is that after the Asian economic crisis, the New Order brought economic ruin to the country.

The Indonesian economy crashed at the end of 1997. The rupiah, Indonesia's currency, lost 70% of its value. Indonesian banks were going out of business, overcome with debt, as they could not pay off their creditors in Japan, the U.S. and many other countries. Also, they could no longer afford to loan out money to the country's businesses, factories, or merchants. The factories had no choice but to begin firing off their employees, and to make matters worse, while the workers were losing their jobs, they were also facing higher prices for basic consumer goods, creating a double-edged sword and a downward spiral for the economy.

Suharto finally gave in and decided to appeal for help to the International Monetary Fund. The IMF is an international organization that oversees the world's financial system by following the economic policies of the countries it includes. It also offers financial assistance to its members, such as Indonesia at the time, making it a financial lender when all other options are gone. Its headquarters are located in Washington, D.C. The IMF agreed to loan up to $43 billion to Indonesia, but only if they agreed to certain conditions. These conditions stated that Suharto had to break up all the monopolies that were controlled by his family members and close friends within his country that he supported and backed; he had to allow more international business of Indonesia's commercial and banking sectors. At the same time the IMF demanded high interest rates to maintain the loaned currency, but this would have the effect of hurting business activity further and leading to more job cuts. To prevent inflation, the IMF requested a strict government budget, with a designated ending point of price subsidies on basic consumer goods. Some of the IMF demands, such as the assault on monopolies controlled by Suharto associates, were popular in Indonesia with its citizens, however all in all the program was designed to put an end to the imperialist dealings and not to help the working masses.

Of course Suharto himself didn't like any of the imposed conditions. He knew he was sitting on a time bomb, and if he actually imposed the harsh IMF requirements on his workers, they would probably revolt. The president wasn't prone to do away with his associates' special privileges either. On the other hand, he needed the loans and cash that the IMF was offering to keep the economy buoyant, even if just temporarily. So he made the decision see what he could...
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