An inquiry into the nature, causes and consequences of the Indonesian crisis

Abstract

The Indonesian currency crisis has escalated into a full‐blown national crisis one year after its eruption. The economy is afflicted with serious damage through severe inflation, a large budget deficit, an estimated contraction of 15 per cent in output for 1998, and a steep increase in unemployment. Heavy currency devaluation has inflated the rupiah value of private sector debt. With plunging sales, the extent of non‐performing loans has risen sharply, pushing many banks to insolvency. Causes of the crisis are manifold. In retrospect one discovers that Indonesia's economic fundamentals were weak on the eve of the crisis. The nation was exposed to speculative frenzy in the years after 1993 when a sense of prosperity was spread by the privileged few who benefited from flagrantly violating non‐discrimination during the course of financial deregulation. Poor governance in politics and business are the root causes of the crisis that is now very likely to drag on pending solutions to the external debt, the banking crisis and the budget deficit. To prepare for reconstructing the economy, the concept and practice of governance must be reinvented, centered on notions of transparency, non‐discrimination, clean government and openness toward the rest of the world.

Keywords:

• Indonesia
• crisis
• devaluation
• banking
• deregulation
• governance