1997-98 ASIAN FINANCIAL CRISIS IN INDONESIA

1997-98 ASIAN FINANCIAL CRISIS IN INDONESIA

The Indonesian economy collapsed in the second phase of the Asian Financial crisis along with South Korea’s. The crisis in Indonesia was brought about by a sudden lack of confidence by foreign investors who suddenly began pulling their money out of Indonesia as they had elsewhere in Asia. The attack on the Indonesian currency seemed somewhat unfounded. For years, Indonesia had low inflation, high steady growth, balanced budgets and a healthy trade balance of payments. Only weeks before the crash the World Bank reported that Indonesia was performing well and the high growth rates in had posted in the past should continue.

The capital flight caused the currency to drop dramatically, causing businesses with foreign loans to have to pay pack more money. This caused further lack of confidence in the Indonesian economy, sending it spiraling downward. The rupiah lost 80 percent of its value. Between July 1997 and January it dropped from 2,400 rupiah to the dollar to 10,000 rupiah per dollar. During the first week of January the rupiah lost 10 percent its value every day and reached levels of 14,000 rupiah to the dollar before Suharto's resignation in May 1998. Later it climbed to 16,000 per dollar before stabilizing around 10,000 per dollar.

The Asian Financial Crisis coincided with severe droughts caused by El Niño When the rupiah fell, banks were straddled with huge foreign currency debts they could not pay, which made the currency fall even more. Depreciation of the rupiah caused per capita income to drop from $1,200 to $300 in a few months. At end of December 1997, the stock market had declined by 49 percent. In 1998, unemployment rose to 13.2 and the economy shrunk by 15 percent.

Suharto and the Asian Financial Crisis in Indonesia

During the 1997-1998 Asian financial crisis, investors took a closer look at the Indonesian economy and found it burdened with wasteful investment in thing things like automobiles and jet industries resulting from crony capitalism. Confidence was shattered some more when Suharto, rather than bolding addressing the problems, appointed his golfing buddy Mohammed "Bob" Hasan and his daughter Siti "Tutut" Hardijanti Rukmana to his cabinet.

Suharto blamed the economic problems on "plots" by unnamed enemies and told friends he thought the economic crisis was part of a Zionist ploy intended to keep Indonesia from leading the Islamic world to prosperity. He refused to enact economic reforms that the threatened the interests of his cronies and family members. In the midst of the crisis he allowed a bank owned by one son to reopen under a new name and approved an expensive, unnecessary power-generating project for his daughter Tutut.

In his speeches, Suharto seemed misinformed, out of touch and unwilling the face the reality of Indonesia's economic problems and incapable of rising to the occasion and making necessary reforms. Instead he lived in a kind a fantasy land. In a policy speech given in the midst of the rupiah's collapse and soaring inflation he unrealistically promised that inflation would remain under 10 percent for the year and the rupiah would stabilize at around 4,000 to the dollar (at the time when it was already around 10,000 to the dollar). In the meantime he encouraged Indonesians to covert their dollars to rupiah out of patriotic duty.

Consequences of the Asian Financial Crisis in Indonesia

During the 1997-1998 Asian financial crisis in Indonesia, people lost their savings and stores were emptied as people hoarded and looted goods. Companies went bankrupt, the property market and banks teetered on the edge of collapse and prices of basic food skyrocketed. Banks ran out of money as people panicked and withdrew all their saving, poor people shouting "We Are Hungry!" rioted in the streets.

Fistfights broke out in supermarkets as customers pushed and shoved to snatch up and hoard cooking oil, noodles, flour. sugar and other staples. The demand for cooking oil was so intense in some places it was distributed at police stations. "If they didn't sell cooking oil at police stations," one man told Newsweek "people would kill each other."

During the crisis many mothers could no longer afford milk, which tripled in price. They feed their babies tea instead. People couldn't afford to go the hospital and died because the couldn't afford foreign drugs. People who needed medical treatments like kidney dialysis went without it because they couldn't afford it. Hospitals could no longer afford plastic bags to hold blood for transfusions and so hospital employees were asked to collect milk bottles to store blood.

During the 1997-1998 Asian financial crisis businesses in Indonesia could not pay the $90 billion they borrowed from foreign banks. Suharto's family members and cronies had taken out huge loans from banks that in turn had borrowed heavily from foreign banks and could not pay pack their debts. Many Indonesian Chinese tycoons moved their capital offshore.

Businesses shut down. Banks closed as depositors formed long lines to get at their savings. Businesses that relied on things like imported wheat or fabric had to shut down because the prices of these items tripled or quadrupled. For a while there was a sense of panic and many foreigners left. Companies made contingency plans to evacuate their employees and one international school stockpiled food in the event of serious social unrest.

Poor Indonesians and the Asian Financial Crisis in Indonesia

During the Asian Financial Crisis in 1997-98, the number of people under the poverty line in Indonesia by some estimates expanded from 20 million to 100 million, or around half of the population (other said it increased to 40 million or 20 percent of the population). Explaining what the crisis meant to him one unemployed factory worker said, "It's a matter of the stomach. Stomachs are very sensitive." An estimated 7 million Indonesians suffered from severe food shortages and hunger brought about by disruptions in the food distribution system and the collapse of the rupiah.

In most cases there were adequate food supplies but people didn't have the money to buy anything. People waited for hours in lines to buy rice and cooking oil sold at cheap price by the government and by Chinese merchant aiming to win good wil from the Muslim public. Cooking oil and baby-milk powder was especially expensive and scarce. Instead of eating steamed rice, families stretched their supplies by making watery rice gruel. When meat or more substantial food was found it was fed to men because they needed the energy to work.

Some poor people who could not afford the basic goods were forced to eat tree bark and planted crops on golf courses. They stole shrimp from shrimp ponds and looted stores. Pregnant women were forced to eat bark and roots they foraged in the woods. In West Timor, people ate putak, a porridge made from the boiled splinters of the wood of a palm tree (reportedly pigs usually won't even eat it but it provided enough nutrients to keep people from starving). People also ate grasshoppers, wild potatoes, wild pumpkins, leaves a root called wee-ah (which has to be repeatedly boiled and soaked or else it produces a skin rash). [Source: New York Times, June 8, 1998]

Violence and Workers During the Asian Financial Crisis in Indonesia

Laid off factor workers and mechanics who earned about $1 or $2 a day were forced to collect bottles and cans for recycling, from which they earned about 10 cents a day. Other workers became homeless. They had no money for rent and were too ashamed to return to their home towns. Even those who kept their jobs could not make ends meet. A university lecturer told Time, "Every time I go shopping I feel sad and angry. Almost my whole wage goes for milk for the children."

Workers that attempted to get more money often lost their jobs. Time described an auto mechanic who earned 80 cents a day and participated in a strike for a wage increase of $1.50 a day. His bosses responded by shutting down the business and firing all 40 workers. To survive he collected scrap metal for recycling and earned about 10 cents a day.

Indonesian economic immigrants in Malaysia suddenly were told to pack up and go home. One group of Indonesians picked and put in a detention center rioted, leaving one dead.

Children were forced to drop out of school because their parents couldn't afford the $2 for a school uniform and books. Most of those forced to drop out were girls. Even middle class families were forced to forage for meat and fish and skip meals to save money. Things could have been worse were it not for subsidies on some foods, government services and gasoline and oil.

Riots broke out all over Indonesia, with the main targets being Chinese-owned businesses and enterprises associated with the Suharto regime. In East Java mobs attacked Chinese-owned shops. On Flores protesters shouting "Hungry! Hungry!" marched out the Central bank, owned by a Suharto crony. There were similar outbursts in Central Java, South and Central Sulawesi, Sumatra and the island of Sumbawa. In some places there were clashes between baton-wielding police and rock-throwing protestors. Tear gas was fired and some people were injured. One Indonesian official told AP, "The people become easily insulated, emotional and provoked by rumors, leading them to attack one another and to acts of arson.”

Violence Against the Chinese After the Asian Economic Crisis

During the Asian economic crisis in 1997-1998 and through the period before and after Suharto’s resignation in May 1998 and the selection of a new president in June 1999, ethnic Chinese were the targets of violence all across Indonesia. Ethnic Chinese women and girls as young as 10 were raped during looting of Chinese neighborhoods by organized gangs. Some of the victims were gang raped in front of their parents and then set on fire and killed."Some of the attacker said, 'You must be red because you are Chinese and a non-Muslim," one woman told the New York Times and added that many women committed suicide afterwards rather than lose face.

Many of the riots were sparked by resentment towards the Chinese for their wealth. Because ethnic Chinese control so much of the Indonesian economy, many Indonesians blamed them for the crisis and took out their anger by looting Chinese-owned shops, shouting anti-Chinese slogans and attacking Chinese. The violence was often triggered by rumors and small things. One spate of violence began after a Chinese man complained about the noise made by drummers during a Muslim feast day.

In January 1998, people in eastern Java broke into Chinese-owned stores with crow bars and looted rice, cooking oil and other staples. The looters accused the Chinese of price gauging, although prices they charged were the same as those charged by Muslim merchants. One sympathizer told the Independent. "The Chinese are uptight and greedy. I support what happened, and it will happen again if the prices keep going up.”

Much of the violence was not a spontaneous venting of revenge but a planned campaign of terror. Witnesses often reported that violence began when thugs, brought in by truck, began shouting anti-Chinese and pro-Muslim slogans like "Destroy the Chinese," "I love Muslims," and "Money hung Chinese fools," outside Chinese-owned businesses and encouraging local people to join them. One man told Time, "Everyone wanted to get in a kick or a cut; it was a badge of pride to have taken part.”

Descriptions of Attacks Against the Chinese

Describing an attack on Chinese in February 1998 in western Java, Ron Maroau wrote in Newsweek, "The first warning came in a phone call from school. Don't send your daughter today...Rumors were swirling...angry Muslims would attack Chinese-owned stores after noon prayers at a local mosque."

"Just before noon, a crowd of at least 20 angry young men began heaving rocks into the shop. Wielding knives, scythes and iron bars, they stormed inside, knocking over displays of rice, sugar, soybeans and cooking oil. They robbed the cash drawer, stole two tons of rice, started a fire...shouting "Kill the Chinese." The owner was chased down the street by an angry mob and found safety in a shop owned by a non-Chinese Indonesian friend.”

Describing violence against the Chinese in Sumatra in September 1998, David Liehold wrote in Time, "The trouble began with a rumor...word had got around that a Malay man had been killed by an ethnic Chinese following a minor traffic accident. Within hours mobs of armed men were rampaging through the streets, setting fire to mostly Chinese-owned houses and shops, By sunrise...more than 400 buildings had been damaged or destroyed, and the Chinese fled to neighboring towns.

IMF Bailout in Indonesia

The International Monetary Fund gave Indonesia a $14.1 billion aid package (much smaller than what it gave South Korea) in return for promises that it would carry out austerity measures and economic reforms, be more transparent (provide accurate information so a companies health can be accurately ascertained) and end monopolies and expensive industrial projects supported by the states and in many cases headed by Suharto's family members or cronies. In a famous photograph the IMF head Micheal Camdessus is shown standing like as disapproving school principal while Suharto sits and signs the agreement like a disciplined school child.

The Hong Kong investor Philip Tose told Newsweek, "When the IMF package came in, it was widely felt that Indonesia was probably was going to be one of the first to pull through. However as things began to unravel, Indonesia did all the wrong things. The main problem with Indonesia was it was just unable to implement measures that gave any degree of confidence to the marketplace. It appeared as if there was a power vacuum and nothing was going on....Moody's downgraded Indonesia from investment garde o junk. And S&P did the same."

In January 1998, Suharto was expected to announce IMF-proposed economic reforms but instead he proposed pumping up the value of the rupiah by pegging it against the dollar to increase the value of the rupiah in part to save companies owned by cronies and family members from going bankrupt. After Suharto announced the plan the rupiah plummeted 40 percent in three days and the IMF threatened to scuttle the aid program and the idea was dropped. Suharto also renewed contracts for expensive, unnecessary power plants associated with his daughters and one crony and allowed a troubled bank owned by son to reopen under a different name.

Thailand and South Korea followed IMF advise and rebounded much quicker after the Asian financial crisis than countries like Indonesia that did not follow the advice. Indonesia backtracked on reforms and failed to go through with programs that were politically unpopular. The World Bank and IMF employed a multilayered monitoring and supervision system to make sure that they money wasn’t wasted or embezzled. Even so it was.

Some of the IMF reforms were ill advised such as removing food and fuel subsidies which led to hunger and social unrest and made a bad situation worse. Demands by the IMF that Indonesia overhaul its judiciary diverted attention away from bailing out the troubled banking system, a more pressing need.

After the Asian Financial Crisis in Indonesia

After the Asian Financial Crisis, Indonesia's problems continued. Economic growth plummeted, the currency stayed low. There was high inflation, soaring poverty, mass unemployment and social unrest. To keep pace with rising inflation, employers had to raise wages. This forced some companies to lay off workers and foreign companies to flee to where labor costs were lower.

Money and wealth began flowing out of Java. In 1999, 23 of the 31 largest companies in Indonesia were based off of Java. At the end of the Suharto era, before the crisis, only nine were. Monopolies, cartels and debt-ridden banks and factories owned by Suharto cronies and family members were allowed to close and a new economy driven by small entrepreneurs rose up to take its place.

Some of the first sectors to recover were based on exports that were boosted by the loss in value of he rupiah. These included paper, palm oil, rubber, cacao, sugar and minerals. Economist Albert Fishlow told the New York Times, "Indonesia needs to go back to the roots of its success, using cheap, abundant labor to power a fresh export boom."

The number of people living under the poverty line doubled during the Asian Financial Crisis but returned to pre-cris levels as the government stabilized the economy. But still life was hard. Many poor families used 60 percent of their income to buy rice. The removal of subsidies on things like kerosene, gasoline and food stuffs made many basic things unaffordable. Inflation after the Asian economic crisis was particularly hard on the poor. The price of kerosene, which they rely on for cooking, rose 2½ times between 1998 and 2003 and diesel, used to transport food stuffs and other goods rose five times.

Many farmers ultimately lost their farms and were forced to move to the cities. They lived reasonably comfortable lives before the crisis. Afterwards life was hard and the recovery for them was slow and painful. One family described by the Washington Post lost their tobacco farm and ended up living under a highway in a Jakarta slum and lived off about $8 a day earned by selling meatball stew served from a pushcart.

Image Sources:

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, Lonely Planet Guides, Library of Congress, Compton’s Encyclopedia, The Guardian, National Geographic, Smithsonian magazine, The New Yorker, Time, Newsweek, Reuters, AP, AFP, Wall Street Journal, The Atlantic Monthly, The Economist, Global Viewpoint (Christian Science Monitor), Foreign Policy, Wikipedia, BBC, CNN, NBC News, Fox News and various books and other publications.

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© 2008 Jeffrey Hays

Last updated June 2015

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