Indonesia: From Crisis to Cataclysm?

1998

Dr Ross H. McLeod

The second IMF package announced in mid January proved no more successful than the first in bringing Indonesia's crisis to an end, because it failed to address the fundamental problems: namely, the inability of Indonesia's corporate sector to repay its foreign borrowing’s given the rupiah's huge devaluation, and the inability of the banking system to supply the liquidity needed to enable business to keep functioning. The economy is now a shambles. Exports should be booming, but are stymied by the lack of credit from a banking system that has largely broken down. Unemployment and inflation are rising rapidly, resulting in the spread of violent protests directed mainly at the largely defenceless ethnic Chinese minority. The President has lost confidence in his technocrat advisers and the multilateral institutions led by the IMF, and economic policy-making is in disarray. Widespread antipathy towards ethnic Chinese on the part of indigenous Indonesians may pose a formidable obstacle to recovery. Street mobs loot and burn Chinese grocery stores today, forgetting that they will not be able to buy rice there next week. Workers trash their Chinese employers' factories, forgetting that with no job there is no income. Strong political leadership in such circumstances is essential, but instead we find the armed forces fanning the flames by harassing respected leaders of the ethnic Chinese community, whose energy and initiative has largely driven Indonesia's extraordinary economic progress. The initial rush last year to buy dollars reflected merely a widespread concern that the rupiah might quickly lose its value. Capital flight now is increasingly driven by people fearful for their own safety, and haunted by the threat of destruction of the physical assets they have built up over the years, and on which the functioning of the economy depends. What started as a financial crisis is now clearly a political one, inflamed by the coming parliamentary session in March at which members can be expected to re-elect a President the Indonesian people would now dearly like to be rid of. Huge increases in prices of essential commodities and services are inevitable in the absence of a rebound of the rupiah, and will cause social unrest on a scale not seen since the 1960s. The ability of the President to withstand calls to step down is now truly in doubt, despite the lack of an obviously capable successor.

WATCHPOINT: Indonesia's problems are as much political as economic. But will a leadership change, however it is achieved, resolve them?

 

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