POLICY RESPONSE TO ECONOMIC CRISES: 1998 AND 2008

byGinandjar Kartasasmita

National Graduate Institute for Policy StudiesTokyo, Japan

2012

OldOrderOld

Order

1965/

1966Chaos

NewOrderNew

Order

EconomicMiss-

management

PoliticalInstability

Communist VsNon

CommunistConfrontation

Development

• PoliticalStability

• EconomicGrowth

• Equity

• Globalizationof Ideas

• PoliticalOpposition

• FragileEconomicStructure

1998Crisis Reform Democratization

Communist VsNon

CommunistConfrontation

InternationalConflicts

2008Crisis

Global FinancialMeltdown

Political Economic

Impact

Response

Impact

Response

2Day1_GRIPS 2012 www.ginandjar.com

Success Story

• Political Stability

• High EconomicGrowth

• AcceleratedPoverty Reduction

OldOrderOld

Order1965/1966

ChaosNew

OrderNew

Order

“Law & Order”

Tight PoliticalControl

Market Economy

Open CapitalAccount

TradeDeregulation

FinancialDeregulation

Support of WesternCountries

• Political Stability

• High EconomicGrowth

• AcceleratedPoverty Reduction

OldOrderOld

Order1965/1966

ChaosNew

OrderNew

OrderRice Self

Sufficiency

6 yearCompulsoryEducation

Health;• Family

Planning• Public Health• Social Service

FinancialDeregulation

InfrastructureDevelopment


SettingFor

Change

1998Crisis

Internal Dynamics

• Fall of InformationBarrier

• Rise of Middle Class• Social Awareness• Enlightened Public• Political Islam

• Overheated Economy• Lack of BankingOversight

• AggressiveForeign (Short Term)Lending

Collapse of theEconomy

Breakdown ofSocial Compact

ReformMovement

SettingFor

Change

• Fall of GlobalCommunism

• Democratization• Human Rights

1998Crisis

Disparity :• Income• Sectoral• Regional• Ethnic• Opportunity

Closed System• Cronyism• Corruption• Nepotism

DysfunctionalBureaucracy

• Overheated Economy• Lack of BankingOversight

• AggressiveForeign (Short Term)Lending

Abandonment ofInternational

Support

Role of Student

Political Elite

Mlitary

ReformMovement

External Forces :


Reform

Multi Party

Freedom ofSpeech

HumanRights

Rule of Law

GoodGovernance

1999Election

2004Election

DemocraticGovernment

InternationalAcknowledgement

• StrongParliament

• ConstitutionalCourt

• Robust CivilSociety

• Free Press

Early Stage ofEconomicRecovery

ConstitutionalAmendments

Fall ofNew

Order

Decentralization

Return ofEconomic Stability

ReversedEconomicDownturn

Political

Habibie Gus Dur

Megawati SBY

Release ofPolitical

Prisoners

RegionalAutonomy

Peace in•Aceh

•Papua

Return of PovertyReduction

Fight AgainstCorruption

Return of Growth

Return ofEconomic Stability

Early Stage ofEconomicRecovery

Foundation forSustainableEconomic

Growth

Independenceof Monetary

Authority

DismantlingMonopolies

Free and FairCompetition

GoodCorporate

Governance

Economic


ExternallyInduced

2009Election

2008Crisis

Active FormalOpposition

DynamicEconomic

&Political

Condition

SBYReelected

SBY vs MEGAWATIEconomicResponse

2009Election

2008Crisis

DissatisfiedPublic

Nostalgia forOriginal 1945Constitution

Call for 5th

Amendment

DynamicEconomic

&Political

Condition

SBYReelected

PoliticalResponse

6Day1_GRIPS 2012 www.ginandjar.com 6

CONTENTS

PRELUDE: EAST ASIAN MIRACLE– NEW ORDER DEVELOPMENT STRATEGY– EAST ASIAN MIRACLE– CHARACTERISTICS– INDONESIA’S ECONOMIC LIBERALIZATION– THE OUTCOMES– RISING PER CAPITA INCOME– DECREASING RATE OF INFLATION– INCREASING FOOD SUPPLIES AND THE ATTAINMENT OF RICE SELF-SUFFICIENCY– A RISING SHARE OF MANUFACTURING OUTPUT IN GDP– SHARPLY DECLINING LEVELS OF POVERTY– THE UNEXPECTED THUNDERSTORM

PRELUDE: EAST ASIAN MIRACLE– NEW ORDER DEVELOPMENT STRATEGY– EAST ASIAN MIRACLE– CHARACTERISTICS– INDONESIA’S ECONOMIC LIBERALIZATION– THE OUTCOMES– RISING PER CAPITA INCOME– DECREASING RATE OF INFLATION– INCREASING FOOD SUPPLIES AND THE ATTAINMENT OF RICE SELF-SUFFICIENCY– A RISING SHARE OF MANUFACTURING OUTPUT IN GDP– SHARPLY DECLINING LEVELS OF POVERTY– THE UNEXPECTED THUNDERSTORM


1998 CRISIS– THE INITIAL RESPONSES– CRITICISM AGAINST THE IMF– THE ECONOMIC ABBYSS– INDONESIA: PRE AND DURING CRISIS– THE CONFUSION– REALIZING THE SEVERITY OF THE CRISES– SUHARTO’S RE-ELECTION– EFFORTS AT ECONOMIC RECOVERY– THE FLASH POINT– HABIBIE GOVERNMENT– THE ECONOMIC QUAGMIRE– LAYING THE GROUNDWORK FOR ECONOMIC RECOVERY– RESTRUCTURING OF THE BANKING SECTOR– RESTRUCTURING OF THE CORPORATE SECTOR– HELPING THE POOR

CONTENTS

1998 CRISIS– THE INITIAL RESPONSES– CRITICISM AGAINST THE IMF– THE ECONOMIC ABBYSS– INDONESIA: PRE AND DURING CRISIS– THE CONFUSION– REALIZING THE SEVERITY OF THE CRISES– SUHARTO’S RE-ELECTION– EFFORTS AT ECONOMIC RECOVERY– THE FLASH POINT– HABIBIE GOVERNMENT– THE ECONOMIC QUAGMIRE– LAYING THE GROUNDWORK FOR ECONOMIC RECOVERY– RESTRUCTURING OF THE BANKING SECTOR– RESTRUCTURING OF THE CORPORATE SECTOR– HELPING THE POOR


– ON THE CUSP OF RECOVERY– MONTHLY RATE OF INFLATION (IN PERCENT)– INFLATION HAS BEEN SMOTHERED . . . (12 month percentage change in consumer &

food price index)– …AND THE RUPIAH HAS BEEN RELATIVELY STABLE IN RECENT MONTHS DESPITE

POLITICAL UPS AND DOWNS (Rupiah per US$, Spot Rate Daily)– INTEREST RATES HAVE DECLINED . . .(One Month Bank Indonesia Certificates And

Rupiah Deposit Of Domestic Bank Rate)– GDP HAS STABILIZED AND IS STARTING TO RECOVER...(Index of GDP; 1995 Q1 – 100)– …HELPED, IN PART, BY INDUSTRIAL OUTPUT (Production Index In Selected Real

Sectors)– POVERTY RATE TRENDS (February 1996-February 2001)

2008 CRISISCRISIS IN THE MAKING

– THE UNFOLDING CRISIS

CONTENTS

9

– ON THE CUSP OF RECOVERY– MONTHLY RATE OF INFLATION (IN PERCENT)– INFLATION HAS BEEN SMOTHERED . . . (12 month percentage change in consumer &

food price index)– …AND THE RUPIAH HAS BEEN RELATIVELY STABLE IN RECENT MONTHS DESPITE

POLITICAL UPS AND DOWNS (Rupiah per US$, Spot Rate Daily)– INTEREST RATES HAVE DECLINED . . .(One Month Bank Indonesia Certificates And

Rupiah Deposit Of Domestic Bank Rate)– GDP HAS STABILIZED AND IS STARTING TO RECOVER...(Index of GDP; 1995 Q1 – 100)– …HELPED, IN PART, BY INDUSTRIAL OUTPUT (Production Index In Selected Real

Sectors)– POVERTY RATE TRENDS (February 1996-February 2001)

2008 CRISISCRISIS IN THE MAKING

– THE UNFOLDING CRISIS


IMPACT ON GLOBAL ECONOMY– SLOWING DOWN ECONOMIC GROWTH– REGIONAL ECONOMIC PERFORMANCE– THE US– JAPAN– CHINA– INDIA– EU– GREECE– REGIONAL ECONOMIC PERFORMANCE– EU AREA DEBT– DEBT AND COUPON DUE IN 2012 (US$ BILLION)– GLOBAL ECONOMIC GROWTH PAST AND PROJECTED

CONTENTS

IMPACT ON GLOBAL ECONOMY– SLOWING DOWN ECONOMIC GROWTH– REGIONAL ECONOMIC PERFORMANCE– THE US– JAPAN– CHINA– INDIA– EU– GREECE– REGIONAL ECONOMIC PERFORMANCE– EU AREA DEBT– DEBT AND COUPON DUE IN 2012 (US$ BILLION)– GLOBAL ECONOMIC GROWTH PAST AND PROJECTED


IMPACT ON INDONESIA’S ECONOMY– GDP GROWTH– WHY INDONESIA IS MORE RESILIENT?– EXPORT TO GDP RATIO– EXPORT TO GDP RATIO (COMPARED TO OTHER REGIONAL COUNTRIES)– INDONESIA’S EXPORT DESTINATION– TRADE OPENNESS– DESTINATION OF EXPORT– COMPOSITION OF EXPORT– PORTFOLIO INVESTMENT TO EAST ASIA BY ORIGIN

CONTENTS

IMPACT ON INDONESIA’S ECONOMY– GDP GROWTH– WHY INDONESIA IS MORE RESILIENT?– EXPORT TO GDP RATIO– EXPORT TO GDP RATIO (COMPARED TO OTHER REGIONAL COUNTRIES)– INDONESIA’S EXPORT DESTINATION– TRADE OPENNESS– DESTINATION OF EXPORT– COMPOSITION OF EXPORT– PORTFOLIO INVESTMENT TO EAST ASIA BY ORIGIN


POST CRISIS ECONOMIC PERFORMANCE– EXPORT– GDP GROWTH 1988-2011– RUPIAH MOVEMENT– COMPARED TO SOME ASIAN COUNTRIES– FISCAL DEFICIT (%)– DEBT PROFILE– DEBT TO GDP RATIO IN SELECTED COUNTRIES (2009)– NATIONAL CURRENCY RESERVE– INFLATION– POVERTY– UNEMPLOYMENT

LESSONS TO BE LEARNED

CONTENTS

POST CRISIS ECONOMIC PERFORMANCE– EXPORT– GDP GROWTH 1988-2011– RUPIAH MOVEMENT– COMPARED TO SOME ASIAN COUNTRIES– FISCAL DEFICIT (%)– DEBT PROFILE– DEBT TO GDP RATIO IN SELECTED COUNTRIES (2009)– NATIONAL CURRENCY RESERVE– INFLATION– POVERTY– UNEMPLOYMENT

LESSONS TO BE LEARNED12Day1_GRIPS 2012 www.ginandjar.com

PRELUDEPRELUDEEAST ASIAN MIRACLE

NEW ORDER DEVELOPMENT STRATEGYNEW ORDER DEVELOPMENT STRATEGY

WITH UNIFORMITY OF PURPOSE AND METHOD THE NEWORDER EARNESTLY EMBARKED ON ECONOMICDEVELOPMENT, WHICH WAS WIDELY CONSIDERED ASSUCCESSFUL USING VARIOUS STANDARD OFMEASUREMENTS

DEVELOPMENT TRILOGY:STABILITYGROWTHEQUITY

WITH UNIFORMITY OF PURPOSE AND METHOD THE NEWORDER EARNESTLY EMBARKED ON ECONOMICDEVELOPMENT, WHICH WAS WIDELY CONSIDERED ASSUCCESSFUL USING VARIOUS STANDARD OFMEASUREMENTS

DEVELOPMENT TRILOGY:STABILITYGROWTHEQUITY


EAST ASIAN MIRACLEEAST ASIAN MIRACLE THE ECONOMIC PERFORMANCE OF PRE-CRISIS

INDONESIA COULD BE SEEN AS PART OF A GENERALPATTERN OF SUCCESSFUL ECONOMIC DEVELOPMENT INASIA.

HPAES ARE:• JAPAN (THE LEADER)• HONG KONG, THE REP. OF KOREA, SINGAPORE AND TAIWAN (THE

FOUR TIGERS ).• INDONESIA, MALAYSIA AND THAILAND (NEWLY INDUSTRIALIZING

ECONOMIES OF SOUTHEAST ASIA / NIE).SINCE 1960 THE HPAES HAVE GROWN MORE THAN:

• TWICE AS FAST AS THE REST OF EAST ASIA.• THREE TIMES AS FAST AS LATIN AMERICA AND SOUTH ASIA.

THE ECONOMIC PERFORMANCE OF PRE-CRISISINDONESIA COULD BE SEEN AS PART OF A GENERALPATTERN OF SUCCESSFUL ECONOMIC DEVELOPMENT INASIA.

HPAES ARE:• JAPAN (THE LEADER)• HONG KONG, THE REP. OF KOREA, SINGAPORE AND TAIWAN (THE

FOUR TIGERS ).• INDONESIA, MALAYSIA AND THAILAND (NEWLY INDUSTRIALIZING

ECONOMIES OF SOUTHEAST ASIA / NIE).SINCE 1960 THE HPAES HAVE GROWN MORE THAN:

• TWICE AS FAST AS THE REST OF EAST ASIA.• THREE TIMES AS FAST AS LATIN AMERICA AND SOUTH ASIA.


CHARACTERISTICSCHARACTERISTICS

HIGH AVERAGE RATE OF ECONOMIC GROWTH DECLINING INCOME INEQUALITY. RAPID PRODUCTIVITY GROWTH. HIGH RATES OF GROWTH OF MANUFACTURED EXPORTS. DECLINES IN FERTILITY. HIGH GROWTH RATES OF PHYSICAL CAPITAL, SUPPORTED

BY HIGH RATES OF DOMESTIC SAVINGS ANDINVESTMENT.

HIGH INITIAL LEVELS AND GROWTH RATES OF HUMANCAPITAL.

HIGH AVERAGE RATE OF ECONOMIC GROWTH DECLINING INCOME INEQUALITY. RAPID PRODUCTIVITY GROWTH. HIGH RATES OF GROWTH OF MANUFACTURED EXPORTS. DECLINES IN FERTILITY. HIGH GROWTH RATES OF PHYSICAL CAPITAL, SUPPORTED

BY HIGH RATES OF DOMESTIC SAVINGS ANDINVESTMENT.

HIGH INITIAL LEVELS AND GROWTH RATES OF HUMANCAPITAL.


INDONESIA’S ECONOMIC LIBERALIZATIONINDONESIA’S ECONOMIC LIBERALIZATION IN THE EARLY STAGE OF DEVELOPMENT, INDONESIA

DEPENDED ON OIL INCOME AND FOREIGN ASSISTANCE. 1980: INDONESIA EMBARKED ON VARIOUS ECONOMIC

REFORMS TO EMBRACE GLOBALIZATION. ELEMENTS OF ECONOMIC LIBERALIZATION PRE-1980.

• ADOPTION OF AN OPEN CAPITAL ACCOUNT.• THE BALANCED BUDGET POLICY.• COMPETITIVE REAL EXCHANGE RATE WITH PERIODIC ADJUSTMENTS.

ELEMENTS OF ECONOMIC LIBERALIZATION POST-1980:• DEREGULATION OF FOREIGN TRADE.• REDUCTION AND REMOVAL OF RESTRICTIONS ON FOREIGN DIRECT

INVESTMENT.• LIBERALIZATION OF FINANCIAL SECTOR.• ADOPTION OF A MODERN, SIMPLIFIED TAX SYSTEM.

IN THE EARLY STAGE OF DEVELOPMENT, INDONESIADEPENDED ON OIL INCOME AND FOREIGN ASSISTANCE.

1980: INDONESIA EMBARKED ON VARIOUS ECONOMICREFORMS TO EMBRACE GLOBALIZATION.

ELEMENTS OF ECONOMIC LIBERALIZATION PRE-1980.• ADOPTION OF AN OPEN CAPITAL ACCOUNT.• THE BALANCED BUDGET POLICY.• COMPETITIVE REAL EXCHANGE RATE WITH PERIODIC ADJUSTMENTS.

ELEMENTS OF ECONOMIC LIBERALIZATION POST-1980:• DEREGULATION OF FOREIGN TRADE.• REDUCTION AND REMOVAL OF RESTRICTIONS ON FOREIGN DIRECT

INVESTMENT.• LIBERALIZATION OF FINANCIAL SECTOR.• ADOPTION OF A MODERN, SIMPLIFIED TAX SYSTEM.


THE OUTCOMESTHE OUTCOMES

RISING PER CAPITA INCOME. DECREASING RATE OF INFLATION. INCREASING FOOD SUPPLIES AND THE

ATTAINMENT OF RICE SELF-SUFFICIENCY. A RISING SHARE OF MANUFACTURING OUTPUT

IN GDP. SHARPLY DECLINING LEVELS OF POVERTY.

RISING PER CAPITA INCOME. DECREASING RATE OF INFLATION. INCREASING FOOD SUPPLIES AND THE

ATTAINMENT OF RICE SELF-SUFFICIENCY. A RISING SHARE OF MANUFACTURING OUTPUT

IN GDP. SHARPLY DECLINING LEVELS OF POVERTY.


RISING PER CAPITA INCOMERISING PER CAPITA INCOME

OVER THE PERIOD 1965-95 REAL GDP PER CAPITAGREW AT AN ANNUAL AVERAGE RATE OF 6.6%.

IN THE MID L960S INDONESIA WAS POORERTHAN INDIA.

BY MID 1995, INDONESIA’S GDP PER CAPITAEXCEEDED $ 1,000, OVER 3 TIMES INDIA’S

OVER THE PERIOD 1965-95 REAL GDP PER CAPITAGREW AT AN ANNUAL AVERAGE RATE OF 6.6%.

IN THE MID L960S INDONESIA WAS POORERTHAN INDIA.

BY MID 1995, INDONESIA’S GDP PER CAPITAEXCEEDED $ 1,000, OVER 3 TIMES INDIA’S


COMPARATIVE RATES OF GROWTHFOR SELECTED ASIAN ECONOMIES: 1985 - 1997

COMPARATIVE RATES OF GROWTHFOR SELECTED ASIAN ECONOMIES: 1985 - 1997

Note: Derived from semi-log regressions of GNP/capita on time.Source: Data from World Bank, World Development Indicators.


DECREASING RATE OF INFLATIONDECREASING RATE OF INFLATION

THE VERY HIGH LEVELS OF INFLATION SEEN INTHE MID- TO LATE-1960S WERE BROUGHT UNDERCONTROL.

IN THE YEARS IMMEDIATELY PRECEDING THECRISIS, INDONESIA HAD MANAGED TO KEEPINFLATION IN THE SINGLE DIGIT RANGE

THE VERY HIGH LEVELS OF INFLATION SEEN INTHE MID- TO LATE-1960S WERE BROUGHT UNDERCONTROL.

IN THE YEARS IMMEDIATELY PRECEDING THECRISIS, INDONESIA HAD MANAGED TO KEEPINFLATION IN THE SINGLE DIGIT RANGE


INCREASING FOOD SUPPLIES AND THEINCREASING FOOD SUPPLIES AND THEATTAINMENT OF RICE SELFATTAINMENT OF RICE SELF--SUFFICIENCYSUFFICIENCY

MARKET INTERVENTIONS THAT HELPED REDUCEPRICE INSTABILITY AND INFLATION, COMBINEDWITH STRATEGIC INVESTMENTS THAT INCREASEDAGRICULTURAL PRODUCTIVITY, RESULTED INRISING RURAL INCOMES AND WELFARE, ANDREASONABLY STABLE RICE PRICES.

MARKET INTERVENTIONS THAT HELPED REDUCEPRICE INSTABILITY AND INFLATION, COMBINEDWITH STRATEGIC INVESTMENTS THAT INCREASEDAGRICULTURAL PRODUCTIVITY, RESULTED INRISING RURAL INCOMES AND WELFARE, ANDREASONABLY STABLE RICE PRICES.


A RISING SHARE OF MANUFACTURINGA RISING SHARE OF MANUFACTURINGOUTPUT IN GDPOUTPUT IN GDP

THE SHARE OF THE MANUFACTURING SECTOR IN GDPROSE FROM 7.6% IN 1973 TO NEARLY 25% IN 1995.

THIS WAS DRIVEN BY THE RAPID GROWTH OFMANUFACTURED EXPORTS

NON-OIL EXPORTS, WHICH WERE PREDOMINANTLYMANUFACTURED PRODUCTS, GREW BY ROUGHLY 22%PER ANNUM OVER THE DECADE FROM 1985, WHENTRADE LIBERALIZATION WAS FIRST IMPLEMENTED, TO1995; A RATE FOUR TIMES FASTER THAN THE GROWTHOF WORLD TRADE

THE SHARE OF THE MANUFACTURING SECTOR IN GDPROSE FROM 7.6% IN 1973 TO NEARLY 25% IN 1995.

THIS WAS DRIVEN BY THE RAPID GROWTH OFMANUFACTURED EXPORTS

NON-OIL EXPORTS, WHICH WERE PREDOMINANTLYMANUFACTURED PRODUCTS, GREW BY ROUGHLY 22%PER ANNUM OVER THE DECADE FROM 1985, WHENTRADE LIBERALIZATION WAS FIRST IMPLEMENTED, TO1995; A RATE FOUR TIMES FASTER THAN THE GROWTHOF WORLD TRADE


SHARPLY DECLINING LEVELS OF POVERTYSHARPLY DECLINING LEVELS OF POVERTY

THE PROPORTION OF THE POPULATION LIVING BELOW THE NATIONALPOVERTY LINE FELL FROM AROUND 60% IN 1970 TO 40% IN 1976 TO

15% IN 1990 AND TO 11.5% IN 1996


INDONESIA’S BROAD BASED, LABOR-ORIENTEDGROWTH STRATEGY, BACKED BY A STRONGRECORD IN HUMAN RESOURCEDEVELOPMENT, BROUGHT ABOUT ONE OF THESHARPEST REDUCTIONS IN POVERTY IN THEDEVELOPING WORLD.

INDONESIA’S BROAD BASED, LABOR-ORIENTEDGROWTH STRATEGY, BACKED BY A STRONGRECORD IN HUMAN RESOURCEDEVELOPMENT, BROUGHT ABOUT ONE OF THESHARPEST REDUCTIONS IN POVERTY IN THEDEVELOPING WORLD.


AT THE SAME TIME, THIS STRATEGY RESULTED IN REALWAGES RISING ABOUT AS FAST AS PER-CAPITA GDPAND, AMONG OTHERS, BENEFITED WOMEN BYPROVIDING THEM WITH RAPIDLY GROWING PAIDEMPLOYMENT IN THE FORMAL SECTOR, THAT ALLOWEDTHEM TO SWITCH OUT OF UNPAID WORK IN THE RURALSECTOR.

SOCIAL INDICATORS, SUCH AS INFANTMORTALITY, FERTILITY AND SCHOOLENROLLMENTS, ALSO SHOWED SIGNIFICANTIMPROVEMENT.

World Bank document (l997)World Bank document (l997)

AT THE SAME TIME, THIS STRATEGY RESULTED IN REALWAGES RISING ABOUT AS FAST AS PER-CAPITA GDPAND, AMONG OTHERS, BENEFITED WOMEN BYPROVIDING THEM WITH RAPIDLY GROWING PAIDEMPLOYMENT IN THE FORMAL SECTOR, THAT ALLOWEDTHEM TO SWITCH OUT OF UNPAID WORK IN THE RURALSECTOR.

SOCIAL INDICATORS, SUCH AS INFANTMORTALITY, FERTILITY AND SCHOOLENROLLMENTS, ALSO SHOWED SIGNIFICANTIMPROVEMENT.

World Bank document (l997)World Bank document (l997)26Day1_GRIPS 2012 www.ginandjar.com

THE UNEXPECTED THUNDERSTORMTHE UNEXPECTED THUNDERSTORM

THE DEPTH AND DURATION OF THE ECONOMIC CRISIS ININDONESIA WERE ARGUABLY UNIQUE

FROM 1989 TO 1996, ANNUAL REAL GDP GROWTHAVERAGED 8 PERCENT, SPURRED BY STRONGINVESTMENT BEHAVIOR

THE OVERALL FISCAL BALANCE WAS IN SURPLUS AFTER1992

PUBLIC DEBT FELL AS A SHARE OF GDP, THEGOVERNMENT USED PRIVATIZATION PROCEEDS TOREPAY LARGE AMOUNTS OF FOREIGN DEBT.

INFLATION WAS BELOW 10%

27

THE DEPTH AND DURATION OF THE ECONOMIC CRISIS ININDONESIA WERE ARGUABLY UNIQUE

FROM 1989 TO 1996, ANNUAL REAL GDP GROWTHAVERAGED 8 PERCENT, SPURRED BY STRONGINVESTMENT BEHAVIOR

THE OVERALL FISCAL BALANCE WAS IN SURPLUS AFTER1992

PUBLIC DEBT FELL AS A SHARE OF GDP, THEGOVERNMENT USED PRIVATIZATION PROCEEDS TOREPAY LARGE AMOUNTS OF FOREIGN DEBT.

INFLATION WAS BELOW 10%

Day1_GRIPS 2012 www.ginandjar.com

1998 CRISIS

28

1998 CRISIS


ON 2 JULY 1997, THE CENTRAL BANK OF THAILAND WASFORCED TO ABANDON ITS FIXED EXCHANGE RATEREGIME AND THE BAHT IMMEDIATELY DEPRECIATED BYALMOST 20%.

AS QUESTIONS BEGAN TO BE RAISED ABOUT THESTRUCTURAL SOUNDNESS OF THE EAST ASIANECONOMIES THERE WAS A SUDDEN AND DRAMATICREVERSAL OF CAPITAL FLOWS AS INFLOWS TURNED INTOMASSIVE CAPITAL OUTFLOWS AND BANKS THAT WEREONCE EAGER TO LEND TO NEARLY ANY ASIAN INVESTORSUDDENLY REFUSED TO RENEW SHORT-TERM CREDITLINES.

29

ON 2 JULY 1997, THE CENTRAL BANK OF THAILAND WASFORCED TO ABANDON ITS FIXED EXCHANGE RATEREGIME AND THE BAHT IMMEDIATELY DEPRECIATED BYALMOST 20%.

AS QUESTIONS BEGAN TO BE RAISED ABOUT THESTRUCTURAL SOUNDNESS OF THE EAST ASIANECONOMIES THERE WAS A SUDDEN AND DRAMATICREVERSAL OF CAPITAL FLOWS AS INFLOWS TURNED INTOMASSIVE CAPITAL OUTFLOWS AND BANKS THAT WEREONCE EAGER TO LEND TO NEARLY ANY ASIAN INVESTORSUDDENLY REFUSED TO RENEW SHORT-TERM CREDITLINES.


DURING THE THREE MONTHS BETWEEN JULY ANDSEPTEMBER 1997, THE ASIAN FINANCIAL CRISISGATHERED FULL FORCE AND BEGAN TO AFFECTINDONESIA DESPITE CONTINUED EXPRESSIONSOF CONFIDENCE THAT THE SOUNDNESS OF ITSECONOMIC FUNDAMENTALS AND MANAGEMENTWOULD SEE IT THROUGH WITH LITTLE DAMAGE.

30

DURING THE THREE MONTHS BETWEEN JULY ANDSEPTEMBER 1997, THE ASIAN FINANCIAL CRISISGATHERED FULL FORCE AND BEGAN TO AFFECTINDONESIA DESPITE CONTINUED EXPRESSIONSOF CONFIDENCE THAT THE SOUNDNESS OF ITSECONOMIC FUNDAMENTALS AND MANAGEMENTWOULD SEE IT THROUGH WITH LITTLE DAMAGE.


THE INITIAL RESPONSESTHE INITIAL RESPONSES MID JULY 1997 WIDENING THE INTERVENTION MARGINS OF

THE CRAWLING PEG REGIME. AUGUST 1997 FREE FLOATING THE RUPIAH. RAISED INTEREST RATES AND TIGHTENED LIQUIDITY BY

TRANSFERRING A LARGE AMOUNT OF PUBLIC SECTORDEPOSITS OUT OF COMMERCIAL BANKS

SEPTEMBER 1997, “TEN POLICY-MEASURES” COVERING THEFINANCIAL, MONETARY AND BANKING SECTORS, AS WELL ASTHE REAL SECTOR.

IN THE BANKING SECTOR TWO IMPORTANT DECISIONS WEREMADE: 1) TO BAIL OUT HEALTHY BANKS FACING TEMPORARYLIQUIDITY DIFFICULTIES AND 2) UNHEALTHY BANKS SHOULDBE MERGED WITH OTHER BANKS OR BE LIQUIDATED.

31

MID JULY 1997 WIDENING THE INTERVENTION MARGINS OFTHE CRAWLING PEG REGIME.

AUGUST 1997 FREE FLOATING THE RUPIAH. RAISED INTEREST RATES AND TIGHTENED LIQUIDITY BY

TRANSFERRING A LARGE AMOUNT OF PUBLIC SECTORDEPOSITS OUT OF COMMERCIAL BANKS

SEPTEMBER 1997, “TEN POLICY-MEASURES” COVERING THEFINANCIAL, MONETARY AND BANKING SECTORS, AS WELL ASTHE REAL SECTOR.

IN THE BANKING SECTOR TWO IMPORTANT DECISIONS WEREMADE: 1) TO BAIL OUT HEALTHY BANKS FACING TEMPORARYLIQUIDITY DIFFICULTIES AND 2) UNHEALTHY BANKS SHOULDBE MERGED WITH OTHER BANKS OR BE LIQUIDATED.


THE DECISION ALSO INCLUDED THE POSTPONEMENT OFTHE IMPLEMENTATION OF LARGE PROJECTS (PROJECTSWITH A TOTAL COST OF $13 BILLION) THAT NEEDEDOVERSEAS LOANS.

THE GOVERNMENT ANNOUNCED FURTHER ECONOMICREFORMS AND DEREGULATION MEASURES IN EARLYSEPTEMBER, INCLUDING A COMMITMENT TO RENEWEDEFFORTS TOWARD STRENGTHENING AND ENFORCINGBANK PRUDENTIAL REGULATIONS.

THE INITIAL ANNOUNCEMENT WERE NOT FOLLOWED BYIMPLEMENTATION MEASURES, PROVIDING FURTHEREVIDENCE THAT THE GOVERNMENT WAS NO LONGERUNIFIED ON MEASURES NEEDED TO STEM THE IMPACTOF THE CRISIS.

32

THE DECISION ALSO INCLUDED THE POSTPONEMENT OFTHE IMPLEMENTATION OF LARGE PROJECTS (PROJECTSWITH A TOTAL COST OF $13 BILLION) THAT NEEDEDOVERSEAS LOANS.

THE GOVERNMENT ANNOUNCED FURTHER ECONOMICREFORMS AND DEREGULATION MEASURES IN EARLYSEPTEMBER, INCLUDING A COMMITMENT TO RENEWEDEFFORTS TOWARD STRENGTHENING AND ENFORCINGBANK PRUDENTIAL REGULATIONS.

THE INITIAL ANNOUNCEMENT WERE NOT FOLLOWED BYIMPLEMENTATION MEASURES, PROVIDING FURTHEREVIDENCE THAT THE GOVERNMENT WAS NO LONGERUNIFIED ON MEASURES NEEDED TO STEM THE IMPACTOF THE CRISIS.


THE CURRENCY CONTINUED TO DEPRECIATE, AND BYEARLY SEPTEMBER HAD MOVED BEYOND 3000 PERDOLLAR

OCTOBER L997 THE INDONESIAN GOVERNMENT TURNEDTO THE IMF FOR ASSISTANCE.

THE INITIAL IMF PROGRAM WAS BASED ON THEASSUMPTION THAT THE CRISIS WAS ESSENTIALLY AMODERATE CASE OF CONTAGION—AN OVERSHOOT OFTHE EXCHANGE RATE (IMF, 2003: 78)—AND DESIGNED APROGRAM THAT WAS STANDARD AND CONVENTIONALFOR SUCH A “MILD” CRISIS.

33

THE CURRENCY CONTINUED TO DEPRECIATE, AND BYEARLY SEPTEMBER HAD MOVED BEYOND 3000 PERDOLLAR

OCTOBER L997 THE INDONESIAN GOVERNMENT TURNEDTO THE IMF FOR ASSISTANCE.

THE INITIAL IMF PROGRAM WAS BASED ON THEASSUMPTION THAT THE CRISIS WAS ESSENTIALLY AMODERATE CASE OF CONTAGION—AN OVERSHOOT OFTHE EXCHANGE RATE (IMF, 2003: 78)—AND DESIGNED APROGRAM THAT WAS STANDARD AND CONVENTIONALFOR SUCH A “MILD” CRISIS.


THE PROGRAM FOCUSED ON (1) TIGHTENINGMONEY SUPPLIES IN ORDER TO RAISE INTERESTRATES AND PREVENT CAPITAL FROM FLEEINGAND ATTRACTING THE ALREADY FLEEING CAPITALBACK INTO THE COUNTRY AND; (2) STRUCTURALREFORM.

MISJUDGMENT BY BOTH THE GOVERNMENT ANDTHE IMF OF THE DEPTH AND NATURE OF THECRISIS.

34

THE PROGRAM FOCUSED ON (1) TIGHTENINGMONEY SUPPLIES IN ORDER TO RAISE INTERESTRATES AND PREVENT CAPITAL FROM FLEEINGAND ATTRACTING THE ALREADY FLEEING CAPITALBACK INTO THE COUNTRY AND; (2) STRUCTURALREFORM.

MISJUDGMENT BY BOTH THE GOVERNMENT ANDTHE IMF OF THE DEPTH AND NATURE OF THECRISIS.


CRITICISM AGAINST THE IMFCRITICISM AGAINST THE IMF

PAUL VOLKER CRITICIZED THE IMF IMPOSEDSTRUCTURAL CONDITIONALITY AS IRRELEVANT TOFINANCIAL STABILIZATION, CYNICALLY CALLING THECONDITIONS ON MARKET REGULATIONS INCLOVES, ORANGES AND OTHER FOODSTUFFS AS A“RECIPE”.

THERE IS SOME SPECULATION THAT THE NEGATIVEASSESSMENT ON THE IMF PACKAGE COMING FROM APERSON WITH SUCH DISTINGUISHED BACKGROUND MAYHAVE INFLUENCED THE MARKET NEGATIVELY.

35

PAUL VOLKER CRITICIZED THE IMF IMPOSEDSTRUCTURAL CONDITIONALITY AS IRRELEVANT TOFINANCIAL STABILIZATION, CYNICALLY CALLING THECONDITIONS ON MARKET REGULATIONS INCLOVES, ORANGES AND OTHER FOODSTUFFS AS A“RECIPE”.

THERE IS SOME SPECULATION THAT THE NEGATIVEASSESSMENT ON THE IMF PACKAGE COMING FROM APERSON WITH SUCH DISTINGUISHED BACKGROUND MAYHAVE INFLUENCED THE MARKET NEGATIVELY.


JOSEPH STIGLITZ CRITICIZED THE IMF FOR APPLYING THELATIN AMERICAN CASE TO THE ASIAN CRISIS RESULTINGIN WRONG DIAGNOSIS WHICH LED TO THE WRONG ---AND IN INDONESIA’S CASE FATAL--- PRESCRIPTION IN THEHANDLING OF THE CRISIS.

HE MAINTAINED THAT IN THE HIGHLY INFLATIONARYENVIRONMENT OF LATIN AMERICA, WHAT WAS NEEDEDWAS A DECREASE IN DEMAND; WHILE IN THE CASE OFEAST ASIA, THE PROBLEM WAS NOT EXCESS DEMANDBUT INSUFFICIENT DEMAND.

36

JOSEPH STIGLITZ CRITICIZED THE IMF FOR APPLYING THELATIN AMERICAN CASE TO THE ASIAN CRISIS RESULTINGIN WRONG DIAGNOSIS WHICH LED TO THE WRONG ---AND IN INDONESIA’S CASE FATAL--- PRESCRIPTION IN THEHANDLING OF THE CRISIS.

HE MAINTAINED THAT IN THE HIGHLY INFLATIONARYENVIRONMENT OF LATIN AMERICA, WHAT WAS NEEDEDWAS A DECREASE IN DEMAND; WHILE IN THE CASE OFEAST ASIA, THE PROBLEM WAS NOT EXCESS DEMANDBUT INSUFFICIENT DEMAND.


THE ECONOMICTHE ECONOMIC ABBYSSABBYSS THE EXCHANGE RATE DROPS FROM 2,400 RP/$ (JULY

1997) TO 16,000 RP/$ (JUNE 1998). 1998:

• GDP GROWTH: -13.6%• INFLATION: 77.6%.

COLLAPSE OF THE BANKING SYSTEM: COST OFRESTRUCTURING THE BANKING SYSTEM: RP. 650TRILLION (US$65 BILLION)

TOTAL EXTERNAL DEBT (1999):• $148 BILLION, OR 104% GDP• HALF OF IT PRIVATE SECTOR’S• + $ 30 BILLION SHORT TERM

37

THE EXCHANGE RATE DROPS FROM 2,400 RP/$ (JULY1997) TO 16,000 RP/$ (JUNE 1998).

1998:• GDP GROWTH: -13.6%• INFLATION: 77.6%.

COLLAPSE OF THE BANKING SYSTEM: COST OFRESTRUCTURING THE BANKING SYSTEM: RP. 650TRILLION (US$65 BILLION)

TOTAL EXTERNAL DEBT (1999):• $148 BILLION, OR 104% GDP• HALF OF IT PRIVATE SECTOR’S• + $ 30 BILLION SHORT TERM


NON-OIL EXPORTS GROWTH:• 1998: + 9,9%• 1999: - 7,2%

MILLIONS OF INDIVIDUALS LOST THEIR JOBS CHILDREN LEFT SCHOOL POVERTY INCREASED IN MAY 1998, RIOTS ERUPTED AGAINST THE

CHINESE COMMUNITY. THIS LED TO MASSIVECAPITAL FLIGHT AND THE BREAKDOWN OF THEDISTRIBUTION SYSTEM.

38

NON-OIL EXPORTS GROWTH:• 1998: + 9,9%• 1999: - 7,2%

MILLIONS OF INDIVIDUALS LOST THEIR JOBS CHILDREN LEFT SCHOOL POVERTY INCREASED IN MAY 1998, RIOTS ERUPTED AGAINST THE

CHINESE COMMUNITY. THIS LED TO MASSIVECAPITAL FLIGHT AND THE BREAKDOWN OF THEDISTRIBUTION SYSTEM.


INDONESIA: PRE AND DURING CRISISINDONESIA: PRE AND DURING CRISIS

IndicatorIndicator Pre CrisisPre Crisis CrisisCrisisIncome (US$ Billion) 218 (1996) 120 (2000)Income/Capita (US$) 1,110 (1996) 570 (2000)GDP Growth (%) 6.6 (1965-1995) -13.6 (1998)

39

GDP Growth (%) 6.6 (1965-1995) -13.6 (1998)GDP (% Manu-facturing Share)

25 (1995) -14.2 (1998)

Inflation (%) Single digit 78 (1998)


Indonesia: PreIndonesia: Pre aandnd During CrisisDuring Crisis

IndicatorIndicator Pre CrisisPre Crisis CrisisCrisisExchange Rate Rp. 2,400 16,000 (1998); 10,200

(2002)Non Oil Export (%) 9.9 (1998) -7.2% (1999)Total Ext. Debt 113 billion (1996) 150 billion

(104% GDP, 1999)

40

Total Ext. Debt 113 billion (1996) 150 billion(104% GDP, 1999)

Poverty Line 11.9% (1996) 18.2% (1999)


THE CONFUSIONTHE CONFUSION

NOVEMBER 1997, THE GOVERNMENT CLOSED 16 BANKSFACING SERIOUS LIQUIDITY PROBLEMS, ONE OWNED BYSUHARTO’S SON ALLOWED TO RESURFACE UNDER ADIFFERENT NAME.

SUHARTO ENDORSE EXCEPTIONAL TREATMENT OF HISFAMILY ASSETS.

JANUARY 1998, AN UNREALISTIC OVERALL BUDGETSURPLUS OF 1.3% OF GDP WAS TARGETED FOR FISCALYEAR 1998/99.

41

NOVEMBER 1997, THE GOVERNMENT CLOSED 16 BANKSFACING SERIOUS LIQUIDITY PROBLEMS, ONE OWNED BYSUHARTO’S SON ALLOWED TO RESURFACE UNDER ADIFFERENT NAME.

SUHARTO ENDORSE EXCEPTIONAL TREATMENT OF HISFAMILY ASSETS.

JANUARY 1998, AN UNREALISTIC OVERALL BUDGETSURPLUS OF 1.3% OF GDP WAS TARGETED FOR FISCALYEAR 1998/99.


THE CONFUSION OF PROJECTIONS ONGROWTH:

• THE NOVEMBER IMF PROGRAM PROJECTED GROWTH OF5% FOR 1997/98 AND 3% FOR 1998/99.

• IN THE JANUARY PROGRAM THE 1998/99- GROWTHPROJECTION WAS REVISED AND REDUCED TO ZERO, WHILEIN REALITY THE 1998/1999 GDP ACTUALLY DECLINED BY13%

THE RUPIAH CONTINUED TO DEPRECIATEDESPITE ALL THE EFFORTS AND SUPPORT FROMTHE IMF AND DONOR COUNTRIES.

42

THE CONFUSION OF PROJECTIONS ONGROWTH:

• THE NOVEMBER IMF PROGRAM PROJECTED GROWTH OF5% FOR 1997/98 AND 3% FOR 1998/99.

• IN THE JANUARY PROGRAM THE 1998/99- GROWTHPROJECTION WAS REVISED AND REDUCED TO ZERO, WHILEIN REALITY THE 1998/1999 GDP ACTUALLY DECLINED BY13%

THE RUPIAH CONTINUED TO DEPRECIATEDESPITE ALL THE EFFORTS AND SUPPORT FROMTHE IMF AND DONOR COUNTRIES.


REALIZING THE SEVERITY OF THE CRISESREALIZING THE SEVERITY OF THE CRISES

IN LATE JANUARY 1998, PRESIDENT SUHARTOESTABLISHED:• COUNCIL FOR THE STABILIZATION OF ECONOMIC AND

FINANCIAL RESILIENCE (DPKEKKU)• INDONESIAN BANK RESTRUCTURING AGENCY

(IBRA/BPPN) TO TAKE OVER BANKS FACING LIQUIDITYPROBLEMS

43

IN LATE JANUARY 1998, PRESIDENT SUHARTOESTABLISHED:• COUNCIL FOR THE STABILIZATION OF ECONOMIC AND

FINANCIAL RESILIENCE (DPKEKKU)• INDONESIAN BANK RESTRUCTURING AGENCY

(IBRA/BPPN) TO TAKE OVER BANKS FACING LIQUIDITYPROBLEMS


THE JANUARY 1998 LOI CONTAINED THE 50-POINTPLAN INCLUDED:• GREATER CENTRAL BANK INDEPENDENCE,• WITHDRAWAL OF TAX PRIVILEGES FOR THE NATIONAL CAR

PROJECT,• THE ELIMINATION OF CEMENT, PAPER, AND PLYWOOD

CARTELS,• THE WITHDRAWAL OF SUPPORT FOR THE AIRCRAFT

INDUSTRY, AND• OTHER GOVERNANCE AND STRUCTURAL REFORMS.

SUHARTO’S “CONFLICT” WITH THE IMF DOMINATEDTHE HEADLINES .

44

THE JANUARY 1998 LOI CONTAINED THE 50-POINTPLAN INCLUDED:• GREATER CENTRAL BANK INDEPENDENCE,• WITHDRAWAL OF TAX PRIVILEGES FOR THE NATIONAL CAR

PROJECT,• THE ELIMINATION OF CEMENT, PAPER, AND PLYWOOD

CARTELS,• THE WITHDRAWAL OF SUPPORT FOR THE AIRCRAFT

INDUSTRY, AND• OTHER GOVERNANCE AND STRUCTURAL REFORMS.

SUHARTO’S “CONFLICT” WITH THE IMF DOMINATEDTHE HEADLINES .


THERE WAS A STRONG INDICATION THAT THE PRESIDENTHAD NO INTENTIONS TO FOLLOW THROUGH THEREFORM PROGRAM AGREED ON WITH THE IMF

THE GOVERNMENT SERIOUSLY CONSIDERED ADOPTINGA CURRENCY BOARD SYSTEM (CBS)

THE PRESIDENT AND THE IMF RELATIONSHIP HAD COMETO A NEW LOW, HE DREW AN ANALOGY OF HIS DEALINGWITH IMF WITH A “GUERRILLA WAR”

MARCH 6TH1998, FRUSTRATED BY THE LACK OFPROGRESS ON THE JANUARY PROGRAM, THE IMFANNOUNCED THAT IT WAS DELAYING A $3BILLIONINFUSION SCHEDULED TO BE DISBURSED ON MARCH15TH

45

THERE WAS A STRONG INDICATION THAT THE PRESIDENTHAD NO INTENTIONS TO FOLLOW THROUGH THEREFORM PROGRAM AGREED ON WITH THE IMF

THE GOVERNMENT SERIOUSLY CONSIDERED ADOPTINGA CURRENCY BOARD SYSTEM (CBS)

THE PRESIDENT AND THE IMF RELATIONSHIP HAD COMETO A NEW LOW, HE DREW AN ANALOGY OF HIS DEALINGWITH IMF WITH A “GUERRILLA WAR”

MARCH 6TH1998, FRUSTRATED BY THE LACK OFPROGRESS ON THE JANUARY PROGRAM, THE IMFANNOUNCED THAT IT WAS DELAYING A $3BILLIONINFUSION SCHEDULED TO BE DISBURSED ON MARCH15TH


SUHARTO’S RESUHARTO’S RE--ELECTIONELECTION

REFLECTED IN THE GENERAL ELECTION OF 1997,SUHARTO STILL HELD A STRONG GRIP ON THEPOLITICAL SYSTEM.

MARCH 11TH, 1998 SUHARTO WAS INDEED RE-ELECTED FOR ANOTHER FIVE-YEAR TERM BY THE MPR.

A NEW CABINET ESTABLISHED MARKING THE DEMISEOF THE ECONOMIC TECHNOCRATS.

46

REFLECTED IN THE GENERAL ELECTION OF 1997,SUHARTO STILL HELD A STRONG GRIP ON THEPOLITICAL SYSTEM.

MARCH 11TH, 1998 SUHARTO WAS INDEED RE-ELECTED FOR ANOTHER FIVE-YEAR TERM BY THE MPR.

A NEW CABINET ESTABLISHED MARKING THE DEMISEOF THE ECONOMIC TECHNOCRATS.


EFFORTS AT ECONOMIC RECOVERYEFFORTS AT ECONOMIC RECOVERY

DISREGARDING THE POLITICAL CONTROVERSIES THENEW ECONOMIC TEAM SET OUT TO GET THE ECONOMYMOVING AGAIN.

MAJOR POLICY INITIATIVES:• REPAIRING THE RELATIONS WITH THE INTERNATIONAL

COMMUNITY, AND;• RESTORING MARKET CONFIDENCE.

ALL THE MAJOR CREDITOR COUNTRIES WERE READY TOGIVE SUPPORT TO INDONESIA’S EFFORTS ATRECOVERY, THROUGH OR IN COOPERATION WITH THEIMF.

47

DISREGARDING THE POLITICAL CONTROVERSIES THENEW ECONOMIC TEAM SET OUT TO GET THE ECONOMYMOVING AGAIN.

MAJOR POLICY INITIATIVES:• REPAIRING THE RELATIONS WITH THE INTERNATIONAL

COMMUNITY, AND;• RESTORING MARKET CONFIDENCE.

ALL THE MAJOR CREDITOR COUNTRIES WERE READY TOGIVE SUPPORT TO INDONESIA’S EFFORTS ATRECOVERY, THROUGH OR IN COOPERATION WITH THEIMF.


THE FIRST PRIORITIES WERE DIRECTED AT BOTH THERESTRUCTURING OF THE FINANCIAL AND BANKINGSYSTEM AND RESOLVING THE CORPORATE DEBTPROBLEM

THE GOVERNMENT ECONOMIC TEAM IMMEDIATELY RE-ESTABLISHED DIALOGUE WITH THE IMF TO WORK ON ARENEWED PROGRAM

STRUCTURAL REFORMS WERE EMBRACED BY THEECONOMIC TEAM AS THEIR OWN

THE NEED TO PROTECT THE POOR FROM THE WORST OFTHE CRISIS

CLOSING INSOLVENT BANKS TO STOP THE BLEEDING OFTHE FINANCIAL SYSTEM

48

THE FIRST PRIORITIES WERE DIRECTED AT BOTH THERESTRUCTURING OF THE FINANCIAL AND BANKINGSYSTEM AND RESOLVING THE CORPORATE DEBTPROBLEM

THE GOVERNMENT ECONOMIC TEAM IMMEDIATELY RE-ESTABLISHED DIALOGUE WITH THE IMF TO WORK ON ARENEWED PROGRAM

STRUCTURAL REFORMS WERE EMBRACED BY THEECONOMIC TEAM AS THEIR OWN

THE NEED TO PROTECT THE POOR FROM THE WORST OFTHE CRISIS

CLOSING INSOLVENT BANKS TO STOP THE BLEEDING OFTHE FINANCIAL SYSTEM


STRENGTHENED THE EFFORTS TO DEAL WITHCORPORATE DEBT PROBLEM WHICH HAD ACTUALLYBEGAN IN 1997

RESULT: ALTHOUGH INFLATION WAS STILL HIGH, THERUPIAH EXCHANGE RATE WAS STRENGTHENED FROM10,000 AT THE START OF THE NEW CABINET TO 7,500BY MID APRIL AND REMAINED BELOW 8,000 UNTILTHE MAY TROUBLES OCCURRED

49

STRENGTHENED THE EFFORTS TO DEAL WITHCORPORATE DEBT PROBLEM WHICH HAD ACTUALLYBEGAN IN 1997

RESULT: ALTHOUGH INFLATION WAS STILL HIGH, THERUPIAH EXCHANGE RATE WAS STRENGTHENED FROM10,000 AT THE START OF THE NEW CABINET TO 7,500BY MID APRIL AND REMAINED BELOW 8,000 UNTILTHE MAY TROUBLES OCCURRED


THE FLASH POINTTHE FLASH POINT

WHILE THE ECONOMY SHOWED SAME IMPROVEMENT,IN THE POLITICAL FRONT, THE SITUATION DETERIORATED

SUHARTO HAD NO INTENTION TO UNDERTAKE REFORMSAS THE POLITICAL AND ECONOMIC SITUATIONDEMANDED

HOWEVER, THE ELITES AND LEADERS OF THE VARIOUSREFORM MOVEMENTS WERE STILL WARY OF SUHARTO’SPOWER

THE HIKE IN FUEL PRICES CHANGED EVERYTHING

50

WHILE THE ECONOMY SHOWED SAME IMPROVEMENT,IN THE POLITICAL FRONT, THE SITUATION DETERIORATED

SUHARTO HAD NO INTENTION TO UNDERTAKE REFORMSAS THE POLITICAL AND ECONOMIC SITUATIONDEMANDED

HOWEVER, THE ELITES AND LEADERS OF THE VARIOUSREFORM MOVEMENTS WERE STILL WARY OF SUHARTO’SPOWER

THE HIKE IN FUEL PRICES CHANGED EVERYTHING


IT SET THE STAGE FOR THE ENDGAME OF THEPOLITICAL DRAMA

THE CULMINATION OF POLITICAL CONFRONTATIONWAS REACHED WHEN IN EARLY MAY 1998 THEGOVERNMENT ANNOUNCED A RISE IN FUELPRICES, WITH THE ACCOMPANYING CONSEQUENCESOF A RISE IN PUBLIC TRANSPORTATION FARES

SUHARTO RESIGNED 21 MAY 1998.

51

IT SET THE STAGE FOR THE ENDGAME OF THEPOLITICAL DRAMA

THE CULMINATION OF POLITICAL CONFRONTATIONWAS REACHED WHEN IN EARLY MAY 1998 THEGOVERNMENT ANNOUNCED A RISE IN FUELPRICES, WITH THE ACCOMPANYING CONSEQUENCESOF A RISE IN PUBLIC TRANSPORTATION FARES

SUHARTO RESIGNED 21 MAY 1998.


HABIBIE GOVERNMENTHABIBIE GOVERNMENT

A NEW GOVERNMENT ESTABLISHED. THE ECONOMIC SITUATION AT THE TIME

HABIBIE CAME TO POWER HAD GROWNMUCH WORSE LESS THAN A YEAR AFTER THEFINANCIAL CRISIS HIT THE ECONOMY.

52

A NEW GOVERNMENT ESTABLISHED. THE ECONOMIC SITUATION AT THE TIME

HABIBIE CAME TO POWER HAD GROWNMUCH WORSE LESS THAN A YEAR AFTER THEFINANCIAL CRISIS HIT THE ECONOMY.


DUE TO THE UPHEAVALS IN MAY, THE DISTRIBUTIONNETWORKS HAD BEEN SERIOUSLY DAMAGED.

BASIC SUPPLIES WERE DISRUPTED. RICE, COOKINGOIL, SUGAR AND OTHER ESSENTIAL ITEMS BECAMESCARCE AND PRICES WERE RISING.

RICE IMPORTS HAD TO BE INCREASED BECAUSE OF THEPROLONGED DROUGHT.

DUE TO THE SUDDEN SURGE OF IMPORTS—AMOUNTINGTO 4.1 MILLION TONS FOR FISCAL YEAR 1998/99—PRICES IN THE INTERNATIONAL MARKETS SOARED.

THE ECONOMIC QUAGMIRETHE ECONOMIC QUAGMIRE

53

DUE TO THE UPHEAVALS IN MAY, THE DISTRIBUTIONNETWORKS HAD BEEN SERIOUSLY DAMAGED.

BASIC SUPPLIES WERE DISRUPTED. RICE, COOKINGOIL, SUGAR AND OTHER ESSENTIAL ITEMS BECAMESCARCE AND PRICES WERE RISING.

RICE IMPORTS HAD TO BE INCREASED BECAUSE OF THEPROLONGED DROUGHT.

DUE TO THE SUDDEN SURGE OF IMPORTS—AMOUNTINGTO 4.1 MILLION TONS FOR FISCAL YEAR 1998/99—PRICES IN THE INTERNATIONAL MARKETS SOARED.


THE INCREASED COST FOR IMPORT MEANT MOREPRESSURE ON THE COUNTRY’S DEPLETED FOREIGNEXCHANGE RESERVE.

TO MAKE MATTERS WORSE, OVERSEAS BANKS CONTINUEDTO REFUSE TO HONOR INDONESIA’S LETTERS OFCREDIT, MEANING THAT ALL IMPORTS HAD TO BE PAID FORBY CASH.

PUBLIC TRANSPORTATION WAS ALSO DISRUPTED BECAUSEOF THE LACK OF SPARE PARTS, A SUBSTANTIAL NUMBER OFWHICH HAD TO BE IMPORTED.

AS A RESULT, EXPORTATION OF MANUFACTURED GOODSWAS DISRUPTED AT THE TIME WHEN INDONESIA’SEXPORTS SHOULD HAVE ACTUALLY ENJOYED ANADVANTAGE BECAUSE OF THE HUGE DEPRECIATION OF THECURRENCY.

54

THE INCREASED COST FOR IMPORT MEANT MOREPRESSURE ON THE COUNTRY’S DEPLETED FOREIGNEXCHANGE RESERVE.

TO MAKE MATTERS WORSE, OVERSEAS BANKS CONTINUEDTO REFUSE TO HONOR INDONESIA’S LETTERS OFCREDIT, MEANING THAT ALL IMPORTS HAD TO BE PAID FORBY CASH.

PUBLIC TRANSPORTATION WAS ALSO DISRUPTED BECAUSEOF THE LACK OF SPARE PARTS, A SUBSTANTIAL NUMBER OFWHICH HAD TO BE IMPORTED.

AS A RESULT, EXPORTATION OF MANUFACTURED GOODSWAS DISRUPTED AT THE TIME WHEN INDONESIA’SEXPORTS SHOULD HAVE ACTUALLY ENJOYED ANADVANTAGE BECAUSE OF THE HUGE DEPRECIATION OF THECURRENCY.


THE HEAT GENERATED FROM POLITICAL TENSION DIDNOT HELP THE ECONOMY.

FOREIGN INVESTORS STAYED AWAY, AND INSTEAD OFINCOMING CAPITAL, RAMPANT CAPITAL FLIGHT TOOKPLACE.

BY THE TIME HABIBIE’S GOVERNMENT TOOK OFFICE THEECONOMY WAS OUT OF FOREIGN CURRENCY.

55

THE HEAT GENERATED FROM POLITICAL TENSION DIDNOT HELP THE ECONOMY.

FOREIGN INVESTORS STAYED AWAY, AND INSTEAD OFINCOMING CAPITAL, RAMPANT CAPITAL FLIGHT TOOKPLACE.

BY THE TIME HABIBIE’S GOVERNMENT TOOK OFFICE THEECONOMY WAS OUT OF FOREIGN CURRENCY.


DOMESTIC COMPANIES WERE STRUGGLING FOR SURVIVAL.MANY HAD SIMPLY STOPPED PAYING THEIRDEBT, DOMESTIC AS WELL FOREIGN.

THE DEFAULT MADE THE CONDITION OF THE ALREADYBATTERED BANKING SECTOR EVEN WORSE AS THE VOLUMEOF THEIR NON-PERFORMING LOANS SUDDENLY JUMPED.

THE INDONESIAN BANKING AND CORPORATE SECTORSWERE BOTH IN A DOWNWARD TAILSPIN, EACH PULLINGTHE OTHER FURTHER DOWN.

THE AMOUNT OF FOREIGN DEBT OWED BY INDONESIANCOMPANIES WAS STAGGERING.

BY MARCH 1998 THE TOTAL AMOUNT OF PRIVATE FOREIGNDEBT HAD REACHED $84 BILLION, AROUND $30 BILLIONDUE IN 1998.

56

DOMESTIC COMPANIES WERE STRUGGLING FOR SURVIVAL.MANY HAD SIMPLY STOPPED PAYING THEIRDEBT, DOMESTIC AS WELL FOREIGN.

THE DEFAULT MADE THE CONDITION OF THE ALREADYBATTERED BANKING SECTOR EVEN WORSE AS THE VOLUMEOF THEIR NON-PERFORMING LOANS SUDDENLY JUMPED.

THE INDONESIAN BANKING AND CORPORATE SECTORSWERE BOTH IN A DOWNWARD TAILSPIN, EACH PULLINGTHE OTHER FURTHER DOWN.

THE AMOUNT OF FOREIGN DEBT OWED BY INDONESIANCOMPANIES WAS STAGGERING.

BY MARCH 1998 THE TOTAL AMOUNT OF PRIVATE FOREIGNDEBT HAD REACHED $84 BILLION, AROUND $30 BILLIONDUE IN 1998.


WITHOUT A WAY OUT OF THE DEBT BURDEN INDONESIANDOMESTIC COMPANIES WOULD REMAIN PARALYSED.

WITH THE STEEP DEPRECIATION OF THE RUPIAH, THE RISEIN FOOD, FUEL AND OTHER COMMODITIES, INFLATIONSURGED. BETWEEN JANUARY AND MAY 1998 INFLATIONHAD REACHED 40%.

DURING THE SAME PERIOD THE YEAR BEFORE IT HAD BEENLESS THAN 3%.

BY THE END OF AUGUST INFLATION HAD REACHED 70%. BECAUSE OF THE COLLAPSE OF MANY INDUSTRIES AND

BUSINESSES, UNEMPLOYMENT INCREASED, AND WITH THEHIGH LEVEL OF INFLATION, THE NUMBER OF POORFAMILIES ALSO INCREASED SUBSTANTIALLY.

57

WITHOUT A WAY OUT OF THE DEBT BURDEN INDONESIANDOMESTIC COMPANIES WOULD REMAIN PARALYSED.

WITH THE STEEP DEPRECIATION OF THE RUPIAH, THE RISEIN FOOD, FUEL AND OTHER COMMODITIES, INFLATIONSURGED. BETWEEN JANUARY AND MAY 1998 INFLATIONHAD REACHED 40%.

DURING THE SAME PERIOD THE YEAR BEFORE IT HAD BEENLESS THAN 3%.

BY THE END OF AUGUST INFLATION HAD REACHED 70%. BECAUSE OF THE COLLAPSE OF MANY INDUSTRIES AND

BUSINESSES, UNEMPLOYMENT INCREASED, AND WITH THEHIGH LEVEL OF INFLATION, THE NUMBER OF POORFAMILIES ALSO INCREASED SUBSTANTIALLY.


THE PROGRESSIVE REDUCTION OF POVERTY, ONE OF THEMOST SIGNIFICANT ACHIEVEMENTS OF THE NEWORDER, HAD BEEN SET BACK.

POVERTY LEVELS WENT FROM 11% IN 1996 POVERTY TO24.2% OF THE POPULATION OR 49.5 MILLION BY THE ENDOF 1998

IN YEAR 1997-1998 THE NUMBER OF WAGE EARNERSDECLINE BY 5.1%, WHILE AT THE SAME TIME REAL WAGESDECLINED SHARPLY BY 35%.

ILLUSTRATING THE RESULTING RE-MIGRATION FROM THECITY BACK TO THE RURAL AREAS IS THE DROP IN THEEMPLOYMENT OF THE MANUFACTURING SECTOR BY9.8%, WHILE IN THE AGRICULTURALSECTOR, EMPLOYMENT ACTUALLY INCREASED BY 13.3%.

58

THE PROGRESSIVE REDUCTION OF POVERTY, ONE OF THEMOST SIGNIFICANT ACHIEVEMENTS OF THE NEWORDER, HAD BEEN SET BACK.

POVERTY LEVELS WENT FROM 11% IN 1996 POVERTY TO24.2% OF THE POPULATION OR 49.5 MILLION BY THE ENDOF 1998

IN YEAR 1997-1998 THE NUMBER OF WAGE EARNERSDECLINE BY 5.1%, WHILE AT THE SAME TIME REAL WAGESDECLINED SHARPLY BY 35%.

ILLUSTRATING THE RESULTING RE-MIGRATION FROM THECITY BACK TO THE RURAL AREAS IS THE DROP IN THEEMPLOYMENT OF THE MANUFACTURING SECTOR BY9.8%, WHILE IN THE AGRICULTURALSECTOR, EMPLOYMENT ACTUALLY INCREASED BY 13.3%.


INDICATING THE PRESSURE EXERTED ON THE MEAGERECONOMY IN THE RURAL AREAS AS URBAN EMPLOYMENTWAS SHRINKING

THE IMPACT ON SOCIAL AND HEALTH SECTORS WASDEVASTATING.

THERE WERE MEDICINES SHORTAGES BECAUSE OF THEDIFFICULTY OF IMPORTING THE RAW MATERIALS. THOSEMEDICATIONS THAT WERE AVAILABLE HAD GONE UP INPRICE.

INFANT MORTALITY WAS RISING. ACCORDING TO A REPORTOF THE MINISTER OF HEALTH, IN MARCH 1999, TWOMILLION CHILDREN UNDER FIVE YEARS OLD SUFFEREDFROM SEVERE MALNUTRITION.

THERE WERE REPORTS FROM VARIOUS REGIONS THATCHILDREN WERE DYING FROM MALNUTRITION.

59

INDICATING THE PRESSURE EXERTED ON THE MEAGERECONOMY IN THE RURAL AREAS AS URBAN EMPLOYMENTWAS SHRINKING

THE IMPACT ON SOCIAL AND HEALTH SECTORS WASDEVASTATING.

THERE WERE MEDICINES SHORTAGES BECAUSE OF THEDIFFICULTY OF IMPORTING THE RAW MATERIALS. THOSEMEDICATIONS THAT WERE AVAILABLE HAD GONE UP INPRICE.

INFANT MORTALITY WAS RISING. ACCORDING TO A REPORTOF THE MINISTER OF HEALTH, IN MARCH 1999, TWOMILLION CHILDREN UNDER FIVE YEARS OLD SUFFEREDFROM SEVERE MALNUTRITION.

THERE WERE REPORTS FROM VARIOUS REGIONS THATCHILDREN WERE DYING FROM MALNUTRITION.


THERE WERE TALKS ABOUT A LOST GENERATION AS ARESULT OF MILLIONS OF CHILDREN GROWING UPUNDERNOURISHED, THUS RETARDING THEIR MENTAL ANDPHYSICAL DEVELOPMENT FOR YEARS TO COME.

MANY SCHOOL CHILDREN HAD TO LEAVE SCHOOL BECAUSETHEIR FAMILIES COULD NOT AFFORD THE COST.

MANY WERE FORCED TO FIND WORK OR OTHER WAYS TOHELP THEIR FAMILIES, INCLUDING FLEEING TO THE CITIESTO BECOME STREET URCHINS.

THE INCREASING UNEMPLOYMENT AND POVERTY CAUSEDA STEEP RISE IN CRIME.

60

THERE WERE TALKS ABOUT A LOST GENERATION AS ARESULT OF MILLIONS OF CHILDREN GROWING UPUNDERNOURISHED, THUS RETARDING THEIR MENTAL ANDPHYSICAL DEVELOPMENT FOR YEARS TO COME.

MANY SCHOOL CHILDREN HAD TO LEAVE SCHOOL BECAUSETHEIR FAMILIES COULD NOT AFFORD THE COST.

MANY WERE FORCED TO FIND WORK OR OTHER WAYS TOHELP THEIR FAMILIES, INCLUDING FLEEING TO THE CITIESTO BECOME STREET URCHINS.

THE INCREASING UNEMPLOYMENT AND POVERTY CAUSEDA STEEP RISE IN CRIME.


ESPECIALLY DISTURBING—NOT LEAST FROM THEENVIRONMENTAL PROTECTION POINT OF VIEW—WASILLEGAL LOGGING, INCLUDING IN PROTECTED FORESTS.

THE CRISIS HAD BY NOW BECOME COUNTYWIDE. THIS CREATED AN ENVIRONMENTAL AND HEALTH

HAZARD THAT ADDED ANOTHER DIMENSION TO THEPROBLEMS ALREADY FACED BY THE COUNTRY.

61

ESPECIALLY DISTURBING—NOT LEAST FROM THEENVIRONMENTAL PROTECTION POINT OF VIEW—WASILLEGAL LOGGING, INCLUDING IN PROTECTED FORESTS.

THE CRISIS HAD BY NOW BECOME COUNTYWIDE. THIS CREATED AN ENVIRONMENTAL AND HEALTH

HAZARD THAT ADDED ANOTHER DIMENSION TO THEPROBLEMS ALREADY FACED BY THE COUNTRY.


UNDAUNTED BY THE SURROUNDING POLITICALCONTROVERSY, THE NEW GOVERNMENT’SECONOMIC TEAM IMMEDIATELY EMBARKED ONA SERIES OF MEASURES TO HALT THEDETERIORATION AND RESTART THE RECOVERYOF THE ECONOMY.

LAYING THE GROUNDWORK FORLAYING THE GROUNDWORK FORECONOMIC RECOVERYECONOMIC RECOVERY

62

UNDAUNTED BY THE SURROUNDING POLITICALCONTROVERSY, THE NEW GOVERNMENT’SECONOMIC TEAM IMMEDIATELY EMBARKED ONA SERIES OF MEASURES TO HALT THEDETERIORATION AND RESTART THE RECOVERYOF THE ECONOMY.


THE ECONOMIC RECOVERY AGENDA CONSISTEDOF FIVE MAIN PROGRAMS:1) RESTORING MACROECONOMIC STABILITY;2) RESTRUCTURING OF THE BANKING SYSTEM;3) RESOLUTION OF CORPORATE DEBT;4) CONTINUING WITH STRUCTURAL REFORM;5) STIMULATING DEMAND AND REDUCING THE IMPACT

OF THE CRISIS ON THE POOR THROUGH THE SOCIALSAFETY NET

63

THE ECONOMIC RECOVERY AGENDA CONSISTEDOF FIVE MAIN PROGRAMS:1) RESTORING MACROECONOMIC STABILITY;2) RESTRUCTURING OF THE BANKING SYSTEM;3) RESOLUTION OF CORPORATE DEBT;4) CONTINUING WITH STRUCTURAL REFORM;5) STIMULATING DEMAND AND REDUCING THE IMPACT

OF THE CRISIS ON THE POOR THROUGH THE SOCIALSAFETY NET


INTERNATIONAL COOPERATION SUPPORTING INDONESIA’SEFFORTS AT RECOVERY WAS CHANNELED THROUGHMULTILATERAL VENUES: IMF, CGI, AND THE PARIS CLUB

THE IMF PROGRAM STARTED WITH THE FIRST AGREEMENTIN NOVEMBER 1997 AND WOULD TERMINATE AT THE ENDOF 2000.

THE FINANCIAL SUPPORT ORIGINALLY PROVIDEDINDONESIA WITH ACCESS TO FUNDS UNDER A STAND-BYARRANGEMENT (SBA) AMOUNTING TO SDR 8.3 BILLION ORTHE EQUIVALENT OF US $11.4 BILLION.

IN AUGUST 1998 THE SBA WAS REPLACED BY A MORECONCESSIONARY EXTENDED FUND FACILITY (EEF) TO THEAMOUNT OF SDR 5.4 BILLION, EQUIVALENT TO US $7.2BILLION.

64

INTERNATIONAL COOPERATION SUPPORTING INDONESIA’SEFFORTS AT RECOVERY WAS CHANNELED THROUGHMULTILATERAL VENUES: IMF, CGI, AND THE PARIS CLUB

THE IMF PROGRAM STARTED WITH THE FIRST AGREEMENTIN NOVEMBER 1997 AND WOULD TERMINATE AT THE ENDOF 2000.

THE FINANCIAL SUPPORT ORIGINALLY PROVIDEDINDONESIA WITH ACCESS TO FUNDS UNDER A STAND-BYARRANGEMENT (SBA) AMOUNTING TO SDR 8.3 BILLION ORTHE EQUIVALENT OF US $11.4 BILLION.

IN AUGUST 1998 THE SBA WAS REPLACED BY A MORECONCESSIONARY EXTENDED FUND FACILITY (EEF) TO THEAMOUNT OF SDR 5.4 BILLION, EQUIVALENT TO US $7.2BILLION.


THE FIRST IMF LOI UNDER THE HABIBIE’S GOVERNMENTWAS AGREED ON JUNE 24, 1998.

DUE TO THE SEVERITY OF THE CRISIS, THE AGREEMENTWAS REVIEWED ALMOST EVERY MONTH DURING1998, RESULTING IN RENEWED LOI.

65

THE FIRST IMF LOI UNDER THE HABIBIE’S GOVERNMENTWAS AGREED ON JUNE 24, 1998.

DUE TO THE SEVERITY OF THE CRISIS, THE AGREEMENTWAS REVIEWED ALMOST EVERY MONTH DURING1998, RESULTING IN RENEWED LOI.


THE CGI MEETING WAS CO-HOSTED BY THE INDONESIANGOVERNMENT AND THE WORLD BANK.

DURING HABIBIE'S PRESIDENCY THE CONSORTIUM METTWICE IN PARIS, ON 29-30 JULY 1998 AND 27-28JULY1999.

MEMBERS OF THE CGI WERE INDONESIA’S DONORCOUNTRIES AND INTERNATIONAL ORGANIZATIONS SUCHAS THE WORLD BANK, THE ASIAN DEVELOPMENTBANK, THE ISLAMIC DEVELOPMENT AND THE EUROPEANUNION.

66

THE CGI MEETING WAS CO-HOSTED BY THE INDONESIANGOVERNMENT AND THE WORLD BANK.

DURING HABIBIE'S PRESIDENCY THE CONSORTIUM METTWICE IN PARIS, ON 29-30 JULY 1998 AND 27-28JULY1999.

MEMBERS OF THE CGI WERE INDONESIA’S DONORCOUNTRIES AND INTERNATIONAL ORGANIZATIONS SUCHAS THE WORLD BANK, THE ASIAN DEVELOPMENTBANK, THE ISLAMIC DEVELOPMENT AND THE EUROPEANUNION.


TWO OF THE BIGGEST DONORS WERE JAPAN AND THEWORLD BANK.

JAPAN USUALLY PROVIDED ONE THIRD OF THE PLEDGECOMING OUT OF THE CGI MEETING.

IN THE 1998 CGI MEETING THE DONORS PLEDGED $ 7.9BILLION—THE HIGHEST EVER FIGURE—TO BE DISBURSEDIN FISCAL YEAR 1998-99, AND IN JULY 1999 MEETINGTHE PLEDGE WAS $5.9 BILLON FOR FISCAL YEAR 1999-2000.

67

TWO OF THE BIGGEST DONORS WERE JAPAN AND THEWORLD BANK.

JAPAN USUALLY PROVIDED ONE THIRD OF THE PLEDGECOMING OUT OF THE CGI MEETING.

IN THE 1998 CGI MEETING THE DONORS PLEDGED $ 7.9BILLION—THE HIGHEST EVER FIGURE—TO BE DISBURSEDIN FISCAL YEAR 1998-99, AND IN JULY 1999 MEETINGTHE PLEDGE WAS $5.9 BILLON FOR FISCAL YEAR 1999-2000.


ANOTHER MEETING ALSO HELD IN PARIS WAS TORESCHEDULE INDONESIA’S SOVEREIGN DEBT UNDER THEAEGIS OF THE “PARIS CLUB.”

THE RESCHEDULING OF DEBTS WAS ESSENTIAL IN VIEW OFTHE FISCAL BURDEN THAT INDONESIA WAS FACING.

THERE IS BUT ONE CAVEAT FOR A PARIS CLUB DEBTRESCHEDULING: THE COUNTRY CONCERNED NEEDS TO BEUNDER AN IMF PROGRAM.

ON SEPTEMBER 23, INDONESIA SUCCESSFULLYNEGOTIATED THE RESCHEDULING OF ITS DEBT DUE TO FALLIN THE 1998-99 AND 1999-2000 TO THE AMOUNT OF $4.2BILLION.

IT WAS A MUCH-NEEDED RELIEF TO THE SEVERE FISCALSITUATION.

68

ANOTHER MEETING ALSO HELD IN PARIS WAS TORESCHEDULE INDONESIA’S SOVEREIGN DEBT UNDER THEAEGIS OF THE “PARIS CLUB.”

THE RESCHEDULING OF DEBTS WAS ESSENTIAL IN VIEW OFTHE FISCAL BURDEN THAT INDONESIA WAS FACING.

THERE IS BUT ONE CAVEAT FOR A PARIS CLUB DEBTRESCHEDULING: THE COUNTRY CONCERNED NEEDS TO BEUNDER AN IMF PROGRAM.

ON SEPTEMBER 23, INDONESIA SUCCESSFULLYNEGOTIATED THE RESCHEDULING OF ITS DEBT DUE TO FALLIN THE 1998-99 AND 1999-2000 TO THE AMOUNT OF $4.2BILLION.

IT WAS A MUCH-NEEDED RELIEF TO THE SEVERE FISCALSITUATION.


RESTRUCTURING OFRESTRUCTURING OFTHE BANKING SECTORTHE BANKING SECTOR

THE ECONOMIC TEAM RECOGNIZED THATIMPLEMENTING A COMPREHENSIVE SOLUTION FOR THEBANKING SYSTEM SHOULD BE GIVEN A HIGH PRIORITY.

IT WAS AN ESSENTIAL CONDITION FOR THE RECOVERYOF THE CORPORATE SECTOR AND TO GET THE ECONOMYMOVING AGAIN.

THE OBJECTIVE WAS TO RESOLVE THE FINANCIALDIFFICULTIES OF THE WEAKENED BANKS AND ESTABLISHA SOUND FUNCTIONING BANKING SYSTEM AS QUICKLYAS POSSIBLE.

69

THE ECONOMIC TEAM RECOGNIZED THATIMPLEMENTING A COMPREHENSIVE SOLUTION FOR THEBANKING SYSTEM SHOULD BE GIVEN A HIGH PRIORITY.

IT WAS AN ESSENTIAL CONDITION FOR THE RECOVERYOF THE CORPORATE SECTOR AND TO GET THE ECONOMYMOVING AGAIN.

THE OBJECTIVE WAS TO RESOLVE THE FINANCIALDIFFICULTIES OF THE WEAKENED BANKS AND ESTABLISHA SOUND FUNCTIONING BANKING SYSTEM AS QUICKLYAS POSSIBLE.


KEY ELEMENTS IN THE STRATEGY INVOLVED:A.MEASURES TO STRENGTHEN RELATIVELY SOUND

BANKS,B.WITH REGARD TO WEAK BANKS TO SWIFTLY

RECAPITALIZE, MERGE OR EFFECTIVELY CLOSETHEM, WHILE AT THE SAME TIME

C. MAINTAINING THE COMMITMENT TO SAFEGUARDTHE INTEREST OF DEPOSITORS AND CREDITORS.

70

KEY ELEMENTS IN THE STRATEGY INVOLVED:A.MEASURES TO STRENGTHEN RELATIVELY SOUND

BANKS,B.WITH REGARD TO WEAK BANKS TO SWIFTLY

RECAPITALIZE, MERGE OR EFFECTIVELY CLOSETHEM, WHILE AT THE SAME TIME

C. MAINTAINING THE COMMITMENT TO SAFEGUARDTHE INTEREST OF DEPOSITORS AND CREDITORS.


THE ECONOMIC TEAM ESTABLISHED THAT DECISIONSREGARDING INDIVIDUAL BANKS HAD TO BE BASED ONUNIFORM, TRANSPARENT AND PUBLICLY KNOWNCRITERIA, DRAWING FROM THE RESULTS OF PORTFOLIOREVIEWS DONE BY INTERNATIONAL ACCOUNTING FIRMS.

THE REMAINING 211 BANKS WERE SUBJECTED TOAUDIT, OF WHICH ALL THE 67 BANKS THAT WERELICENSED TO CONDUCT FOREIGN EXCHANGE TRADINGWERE AUDITED BY THE “BIG SIX” INTERNATIONALAUDITING FIRMS, AND THE REST WERE AUDITED BYBANK INDONESIA.

71

THE ECONOMIC TEAM ESTABLISHED THAT DECISIONSREGARDING INDIVIDUAL BANKS HAD TO BE BASED ONUNIFORM, TRANSPARENT AND PUBLICLY KNOWNCRITERIA, DRAWING FROM THE RESULTS OF PORTFOLIOREVIEWS DONE BY INTERNATIONAL ACCOUNTING FIRMS.

THE REMAINING 211 BANKS WERE SUBJECTED TOAUDIT, OF WHICH ALL THE 67 BANKS THAT WERELICENSED TO CONDUCT FOREIGN EXCHANGE TRADINGWERE AUDITED BY THE “BIG SIX” INTERNATIONALAUDITING FIRMS, AND THE REST WERE AUDITED BYBANK INDONESIA.


OWNERS AND MANAGEMENT OF THE BANK ALSO HADTO GO THROUGH A CERTAIN FIT AND PROPER TEST.

IN MARCH 1999 THE GOVERNMENT ANNOUNCED THATSEVENTY-THREE BANKS, COMPRISING 5 PERCENT OFBANKING SECTOR ASSETS, WERE STRONG ENOUGH TOCONTINUE WITHOUT GOVERNMENT SUPPORT.

NINE BANKS COMPRISING 10 PERCENT OF BANKINGSECTOR ASSETS WERE ELIGIBLE FOR JOINTRECAPITALIZATION SCHEME WITH THE GOVERNMENT.

72

OWNERS AND MANAGEMENT OF THE BANK ALSO HADTO GO THROUGH A CERTAIN FIT AND PROPER TEST.

IN MARCH 1999 THE GOVERNMENT ANNOUNCED THATSEVENTY-THREE BANKS, COMPRISING 5 PERCENT OFBANKING SECTOR ASSETS, WERE STRONG ENOUGH TOCONTINUE WITHOUT GOVERNMENT SUPPORT.

NINE BANKS COMPRISING 10 PERCENT OF BANKINGSECTOR ASSETS WERE ELIGIBLE FOR JOINTRECAPITALIZATION SCHEME WITH THE GOVERNMENT.


SEVEN BANKS COMPRISING 3 PERCENT OF BANKINGSECTOR ASSETS HAD FAILED THE CRITERIA FOR JOINTRECAPITALIZATION, BUT DUE TO THEIR SIZE —HAVINGMORE THAN 80.000 DEPOSITORS —THEY WERE TAKENOVER BY IBRA; AND

THIRTY EIGHT BANKS COMPRISING 5 PERCENT OF THEBANKING SECTOR WITH BELOW THE MINIMUM CAPITALADEQUACY RATION (CAR), WERE CLOSED.

THE EFFORTS TO ESTABLISH A HEALTHY BANKINGSYSTEM WAS NOT ONLY LIMITED TO BANKRESTRUCTURING. A STRONG FOUNDATION WAS NEEDEDTO PREVENT SIMILAR CRISIS IN THE FUTURE AND TOPROVIDE FOR SOUND GOVERNANCE IN THE BANKINGSECTOR.

73

SEVEN BANKS COMPRISING 3 PERCENT OF BANKINGSECTOR ASSETS HAD FAILED THE CRITERIA FOR JOINTRECAPITALIZATION, BUT DUE TO THEIR SIZE —HAVINGMORE THAN 80.000 DEPOSITORS —THEY WERE TAKENOVER BY IBRA; AND

THIRTY EIGHT BANKS COMPRISING 5 PERCENT OF THEBANKING SECTOR WITH BELOW THE MINIMUM CAPITALADEQUACY RATION (CAR), WERE CLOSED.

THE EFFORTS TO ESTABLISH A HEALTHY BANKINGSYSTEM WAS NOT ONLY LIMITED TO BANKRESTRUCTURING. A STRONG FOUNDATION WAS NEEDEDTO PREVENT SIMILAR CRISIS IN THE FUTURE AND TOPROVIDE FOR SOUND GOVERNANCE IN THE BANKINGSECTOR.


STRENGTHENING REGULATORY AND PRUDENTIALFRAMEWORK FOR A SOUND BANKING SYSTEMCONSTITUTED ANOTHER IMPORTANT ELEMENT OF THESTRATEGY TO REFORM THE BANKING SECTOR.

IN OCTOBER 1998, THE PARLIAMENT PASSED THEAMENDMENT TO THE BANKING LAW (LAWNO10/1998), ALLOWING FOR MAJOR IMPROVEMENTS INAREAS OF BANK LICENSING AND OWNERSHIP, OPENNESSTO FOREIGN DIRECT INVESTMENT, BANK SECRECY ANDEMPOWERMENT OF IBRA.

THE MOST FAR REACHING WAS THE NEW LAW ONCENTRAL BANK PROVIDING FOR INDEPENDENCE OF BANKINDONESIA PASSED IN MAY 1999 (LAW NO 23/1999).

74

STRENGTHENING REGULATORY AND PRUDENTIALFRAMEWORK FOR A SOUND BANKING SYSTEMCONSTITUTED ANOTHER IMPORTANT ELEMENT OF THESTRATEGY TO REFORM THE BANKING SECTOR.

IN OCTOBER 1998, THE PARLIAMENT PASSED THEAMENDMENT TO THE BANKING LAW (LAWNO10/1998), ALLOWING FOR MAJOR IMPROVEMENTS INAREAS OF BANK LICENSING AND OWNERSHIP, OPENNESSTO FOREIGN DIRECT INVESTMENT, BANK SECRECY ANDEMPOWERMENT OF IBRA.

THE MOST FAR REACHING WAS THE NEW LAW ONCENTRAL BANK PROVIDING FOR INDEPENDENCE OF BANKINDONESIA PASSED IN MAY 1999 (LAW NO 23/1999).


THE NEW LAW ON THE CENTRAL BANK WAS INTENDEDTO REDUCE THE DANGER OF MORAL HAZARD ANDPROHIBIT GOVERNMENT INTERFERENCE IN THEBANKING AND MONETARY POLICIES.

ACCOMPANYING THE LAW ON THE INDEPENDENCE OFTHE CENTRAL BANK ANOTHER LAW WAS PASSED TOAUGMENT THE AUTHORITY OF THE CENTRAL BANK TOMONITOR THE TRAFFIC OF FOREIGN CURRENCY ANDCORPORATE EXTERNAL DEBT (LAW NO 24/1999).

75

THE NEW LAW ON THE CENTRAL BANK WAS INTENDEDTO REDUCE THE DANGER OF MORAL HAZARD ANDPROHIBIT GOVERNMENT INTERFERENCE IN THEBANKING AND MONETARY POLICIES.

ACCOMPANYING THE LAW ON THE INDEPENDENCE OFTHE CENTRAL BANK ANOTHER LAW WAS PASSED TOAUGMENT THE AUTHORITY OF THE CENTRAL BANK TOMONITOR THE TRAFFIC OF FOREIGN CURRENCY ANDCORPORATE EXTERNAL DEBT (LAW NO 24/1999).


RESTRUCTURING OFRESTRUCTURING OFTHE CORPORATE SECTORTHE CORPORATE SECTOR

THE FINANCIAL RESTRUCTURING OF THE PRIVATESECTOR WAS CRUCIAL TO THE ECONOMY, AND ANESSENTIAL COUNTERPART TO THE BANKING SYSTEMRESTRUCTURING, AS A SOUND CORPORATE SECTOR ISNECESSARY FOR A SOUND BANKING SYSTEM AND VICEVERSA.

THE ECONOMIC TEAM PRESSED AHEAD WITH ACOMPREHENSIVE PROGRAM OF MEASURES TO ADDRESSTHE PERVASIVE DEBT PROBLEMS OF THE PRIVATESECTOR.

76

THE FINANCIAL RESTRUCTURING OF THE PRIVATESECTOR WAS CRUCIAL TO THE ECONOMY, AND ANESSENTIAL COUNTERPART TO THE BANKING SYSTEMRESTRUCTURING, AS A SOUND CORPORATE SECTOR ISNECESSARY FOR A SOUND BANKING SYSTEM AND VICEVERSA.

THE ECONOMIC TEAM PRESSED AHEAD WITH ACOMPREHENSIVE PROGRAM OF MEASURES TO ADDRESSTHE PERVASIVE DEBT PROBLEMS OF THE PRIVATESECTOR.


THE PRIVATE EXTERNAL DEBT TEAM, SUPPORTED BYTHE GOVERNMENT HAD COLLECTED DATA FROMCORPORATIONS ON THEIR EXTERNALOBLIGATIONS, AND HAD TAKEN THE INITIATIVES TOHOLD TALKS WITH REPRESENTATIVES OF THECREDITORS.

AN AGREEMENT BETWEEN REPRESENTATIVE OFINTERNATIONAL LENDERS AND INDONESIANCOMPANIES ON A FRAMEWORK FOR CORPORATE DEBTRESCHEDULING WAS REACHED IN FRANKFURT ON JUNE4, 1998.

77

THE PRIVATE EXTERNAL DEBT TEAM, SUPPORTED BYTHE GOVERNMENT HAD COLLECTED DATA FROMCORPORATIONS ON THEIR EXTERNALOBLIGATIONS, AND HAD TAKEN THE INITIATIVES TOHOLD TALKS WITH REPRESENTATIVES OF THECREDITORS.

AN AGREEMENT BETWEEN REPRESENTATIVE OFINTERNATIONAL LENDERS AND INDONESIANCOMPANIES ON A FRAMEWORK FOR CORPORATE DEBTRESCHEDULING WAS REACHED IN FRANKFURT ON JUNE4, 1998.


KNOWN AS THE “FRANKFURT AGREEMENT” THE SCHEMETHROUGH THE INDONESIAN DEBT RESTRUCTURINGAGENCY (INDRA)—UNDER BANK INDONESIA—PROVIDEDFOR THE VOLUNTARY RESTRUCTURING OF THE DEBT OFCORPORATIONS TO FOREIGN BANKS ON TERMS THATWERE CONSISTENT WITH INDONESIAN’S OVERALLEXTERNAL PAYMENT CAPACITY, AND THUS GAVE CASHFLOW RELIEF TO DOMESTIC CORPORATIONS.

THE SCHEME WAS SIMILAR TO THAT USED IN MEXICODURING ITS FINANCIAL CRISIS, CALLED THE FICORCASCHEME.

ONE IMPORTANT ASPECT OF THE SCHEME WAS TORESOLVE THE PROBLEM IN THE PROVISION OF TRADEFINANCING WHICH HAD BEEN SEVERELY DISRUPTED.

78

KNOWN AS THE “FRANKFURT AGREEMENT” THE SCHEMETHROUGH THE INDONESIAN DEBT RESTRUCTURINGAGENCY (INDRA)—UNDER BANK INDONESIA—PROVIDEDFOR THE VOLUNTARY RESTRUCTURING OF THE DEBT OFCORPORATIONS TO FOREIGN BANKS ON TERMS THATWERE CONSISTENT WITH INDONESIAN’S OVERALLEXTERNAL PAYMENT CAPACITY, AND THUS GAVE CASHFLOW RELIEF TO DOMESTIC CORPORATIONS.

THE SCHEME WAS SIMILAR TO THAT USED IN MEXICODURING ITS FINANCIAL CRISIS, CALLED THE FICORCASCHEME.

ONE IMPORTANT ASPECT OF THE SCHEME WAS TORESOLVE THE PROBLEM IN THE PROVISION OF TRADEFINANCING WHICH HAD BEEN SEVERELY DISRUPTED.


TO COMPLEMENT THE NEWLY AMENDED LAW ANDINDRA SCHEME A NEW INITIATIVE WAS LAUNCHED INSEPTEMBER 1998, CALLED THE “JAKARTA INITIATIVE”.

THE OBJECTIVE WAS TO PROMOTE VOLUNTARYRESTRUCTURING OF CORPORATE DEBT BETWEEN THECREDITOR AND THE DEBTOR, ESTABLISHING GUIDELINESFOR OUT-OF-COURT CORPORATE RESTRUCTURING.

UNDER THE “JAKARTA INITIATIVE” VARIOUS MEASURESWERE ALSO UNDERTAKEN TO IMPROVE CORPORATEGOVERNANCE.

79

TO COMPLEMENT THE NEWLY AMENDED LAW ANDINDRA SCHEME A NEW INITIATIVE WAS LAUNCHED INSEPTEMBER 1998, CALLED THE “JAKARTA INITIATIVE”.

THE OBJECTIVE WAS TO PROMOTE VOLUNTARYRESTRUCTURING OF CORPORATE DEBT BETWEEN THECREDITOR AND THE DEBTOR, ESTABLISHING GUIDELINESFOR OUT-OF-COURT CORPORATE RESTRUCTURING.

UNDER THE “JAKARTA INITIATIVE” VARIOUS MEASURESWERE ALSO UNDERTAKEN TO IMPROVE CORPORATEGOVERNANCE.


ANOTHER ESSENTIAL PART OF THE CORPORATE DEBTRESTRUCTURING STRATEGY WAS TO THEESTABLISHMENT OF AN EFFECTIVE BANKRUPTCYSYSTEM.

THE EXISTING LAW ON BANKRUPTCY WAS CENTURY OLDHAVING BEEN INHERITED FROM THE COLONIALERA, AND COULD NO LONGER COPE WITH THECOMPLEXITY OF MODERN COMMERCE.

IN JULY THE PARLIAMENT RATIFIED THE REVISEDBANKRUPTCY LAW (LAW NO 4/1998).

80

ANOTHER ESSENTIAL PART OF THE CORPORATE DEBTRESTRUCTURING STRATEGY WAS TO THEESTABLISHMENT OF AN EFFECTIVE BANKRUPTCYSYSTEM.

THE EXISTING LAW ON BANKRUPTCY WAS CENTURY OLDHAVING BEEN INHERITED FROM THE COLONIALERA, AND COULD NO LONGER COPE WITH THECOMPLEXITY OF MODERN COMMERCE.

IN JULY THE PARLIAMENT RATIFIED THE REVISEDBANKRUPTCY LAW (LAW NO 4/1998).


IN FURTHER EFFORTS TO IMPROVE GOVERNANCE, INEARLY 1999 THE PARLIAMENT PASSED THE LAW ON THEPROHIBITION OF MONOPOLY PRACTICES AND UNFAIRCOMPETITION (LAW NO 5/1999).

THE LAW PROVIDES LEGAL GUIDELINES FOR THEPREVENTION OF CORRUPT PRACTICES THROUGH THEGRANTING OF LICENSES, SPECIAL TREATMENT ANDMONOPOLIES TO CERTAIN GROUP OF PEOPLE.

A LAW ON CONSUMER PROTECTION WAS ALSOPROMULGATED (LAW NO 8/1999). THE ROLE OF CIVILSOCIETY IN CONSUMER PROTECTION WAS CONSTITUTEDIN THE LAW.

81

IN FURTHER EFFORTS TO IMPROVE GOVERNANCE, INEARLY 1999 THE PARLIAMENT PASSED THE LAW ON THEPROHIBITION OF MONOPOLY PRACTICES AND UNFAIRCOMPETITION (LAW NO 5/1999).

THE LAW PROVIDES LEGAL GUIDELINES FOR THEPREVENTION OF CORRUPT PRACTICES THROUGH THEGRANTING OF LICENSES, SPECIAL TREATMENT ANDMONOPOLIES TO CERTAIN GROUP OF PEOPLE.

A LAW ON CONSUMER PROTECTION WAS ALSOPROMULGATED (LAW NO 8/1999). THE ROLE OF CIVILSOCIETY IN CONSUMER PROTECTION WAS CONSTITUTEDIN THE LAW.


THE PARLIAMENT ALSO PASSED A NEW LAW ONENVIRONMENT PROTECTION PROVIDING FOR ASTRONGER ROLE OF THE COMMUNITY AND CIVILSOCIETY ON MATTERS RELATED TO ENVIRONMENT (LAWNUMBER 23/1999).

THE 1967 LAW ON FORESTRY WAS REVISEDESTABLISHING THE PRINCIPLES OF ENVIRONMENTALPROTECTION, EQUITY, JUSTICE AND TRANSPARENCY INTHE FORESTRY MANAGEMENT AND EXPLOITATION (LAWNO 41/1999).

82

THE PARLIAMENT ALSO PASSED A NEW LAW ONENVIRONMENT PROTECTION PROVIDING FOR ASTRONGER ROLE OF THE COMMUNITY AND CIVILSOCIETY ON MATTERS RELATED TO ENVIRONMENT (LAWNUMBER 23/1999).

THE 1967 LAW ON FORESTRY WAS REVISEDESTABLISHING THE PRINCIPLES OF ENVIRONMENTALPROTECTION, EQUITY, JUSTICE AND TRANSPARENCY INTHE FORESTRY MANAGEMENT AND EXPLOITATION (LAWNO 41/1999).


THE ECONOMIC TEAM GAVE PARTICULAR ATTENTION TOPUBLIC ENTERPRISES THAT STILL PLAYED AN IMPORTANTROLE IN THE ECONOMY.

TO IMPROVE THEIR EFFICIENCY AND GOVERNANCEINTERNATIONAL AUDITORS SUBJECTED KEY PUBLICCOMPANIES TO SPECIAL AUDIT.

INTERNATIONAL AUDITING COMPANIES WERE ASSIGNEDTO AUDIT THE FINANCIAL ACCOUNT OF PERTAMINA(STATE OIL COMPANY), PLN (THE STATE ELECTRICITYCOMPANY), BULOG (THE LOGISTICS AGENCY) AND THEREFORESTATION FUND.

83

THE ECONOMIC TEAM GAVE PARTICULAR ATTENTION TOPUBLIC ENTERPRISES THAT STILL PLAYED AN IMPORTANTROLE IN THE ECONOMY.

TO IMPROVE THEIR EFFICIENCY AND GOVERNANCEINTERNATIONAL AUDITORS SUBJECTED KEY PUBLICCOMPANIES TO SPECIAL AUDIT.

INTERNATIONAL AUDITING COMPANIES WERE ASSIGNEDTO AUDIT THE FINANCIAL ACCOUNT OF PERTAMINA(STATE OIL COMPANY), PLN (THE STATE ELECTRICITYCOMPANY), BULOG (THE LOGISTICS AGENCY) AND THEREFORESTATION FUND.


THE SECOND ROUND OF SPECIAL AUDIT INCLUDED THEPRINCIPAL NATIONAL AIRLINE, THE PORTCORPORATIONS, THE DOMESTIC TELECOMMUNICATIONCOMPANY, AND THE TOLL ROAD OPERATORS.

A MASTER PLAN ON THE REFORM OF STATE ENTERPRISESHAD BEEN DEVISED INCLUDING THE RESTRUCTURINGAND PRIVATIZATION OF STATE ENTERPRISES TO IMPROVEEFFICIENCY, PROFITABILITY, AND SERVICE-DELIVERY ANDTHEREFORE LAY THE FOUNDATION FOR FUTUREGROWTH.

84

THE SECOND ROUND OF SPECIAL AUDIT INCLUDED THEPRINCIPAL NATIONAL AIRLINE, THE PORTCORPORATIONS, THE DOMESTIC TELECOMMUNICATIONCOMPANY, AND THE TOLL ROAD OPERATORS.

A MASTER PLAN ON THE REFORM OF STATE ENTERPRISESHAD BEEN DEVISED INCLUDING THE RESTRUCTURINGAND PRIVATIZATION OF STATE ENTERPRISES TO IMPROVEEFFICIENCY, PROFITABILITY, AND SERVICE-DELIVERY ANDTHEREFORE LAY THE FOUNDATION FOR FUTUREGROWTH.


TO PROVIDE FOR A STRONGER LEGAL BASIS TO DEFINEAND CRIMINALIZE CORRUPT PRACTICES, IN MAY1999, THE PARLIAMENT PASSED THE LAW ON CLEANGOVERNMENT (LAW NO 28/999).

THIS LAW INCLUDES PROVISIONS REQUIRING FAIR ANDEQUAL TREATMENT FROM GOVERNMENT OFFICIALS FORALL PEOPLE, AS WELL AS THE RIGHT OF THE PUBLIC TOSEEK INFORMATION ABOUT POLICY-RELATED MATTERSAND TO EXPRESS VIEWS ON THOSE ISSUES IN ARESPONSIBLE MANNER.

85

TO PROVIDE FOR A STRONGER LEGAL BASIS TO DEFINEAND CRIMINALIZE CORRUPT PRACTICES, IN MAY1999, THE PARLIAMENT PASSED THE LAW ON CLEANGOVERNMENT (LAW NO 28/999).

THIS LAW INCLUDES PROVISIONS REQUIRING FAIR ANDEQUAL TREATMENT FROM GOVERNMENT OFFICIALS FORALL PEOPLE, AS WELL AS THE RIGHT OF THE PUBLIC TOSEEK INFORMATION ABOUT POLICY-RELATED MATTERSAND TO EXPRESS VIEWS ON THOSE ISSUES IN ARESPONSIBLE MANNER.


ANOTHER PROVISION OF THIS LAW REQUIRES THATPUBLIC OFFICIALS —ELECTED AS WELL APPOINTED—SHOULD REPORT THEIR WEALTH BEFORE AND AFTERTAKING OFFICE, SUBJECT TO INVESTIGATION BY ASPECIAL COMMISSION TO ENSURE THAT GOVERNMENTOFFICIALS DO NOT ENRICH THEMSELVES IMPROPERLY.

IT WAS FOLLOWED BY ANOTHER LAW ON THEERADICATION OF CORRUPT PRACTICES (LAW NO31/1999). THIS LAW PROVIDES STRONGER GUIDELINESON INVESTIGATION AND PROSECUTION OF CORRUPTPRACTICES.

THE NEW LAW ALSO PROVIDES FOR THE ESTABLISHMENTOF AN INDEPENDENT COMMITTEE TO ERADICATECORRUPTION.

86

ANOTHER PROVISION OF THIS LAW REQUIRES THATPUBLIC OFFICIALS —ELECTED AS WELL APPOINTED—SHOULD REPORT THEIR WEALTH BEFORE AND AFTERTAKING OFFICE, SUBJECT TO INVESTIGATION BY ASPECIAL COMMISSION TO ENSURE THAT GOVERNMENTOFFICIALS DO NOT ENRICH THEMSELVES IMPROPERLY.

IT WAS FOLLOWED BY ANOTHER LAW ON THEERADICATION OF CORRUPT PRACTICES (LAW NO31/1999). THIS LAW PROVIDES STRONGER GUIDELINESON INVESTIGATION AND PROSECUTION OF CORRUPTPRACTICES.

THE NEW LAW ALSO PROVIDES FOR THE ESTABLISHMENTOF AN INDEPENDENT COMMITTEE TO ERADICATECORRUPTION.


HELPING THE POORHELPING THE POOR

HIGH PRIORITY WAS GIVEN ON MEASURES TO PROTECTTHE POOR FROM THE WORST IMPACT OF THE CRISIS.

THE STRATEGY CONSISTED OF TWO ELEMENTS: A)GENERAL ECONOMIC POLICIES THAT WOULD HAVEIMPACT ON THE POOR, AND B) TARGETED POLICIES FORTHE BENEFIT OF THE POOR.

FOREMOST IN THE FIRST PRONG OF THE STRATEGY WASRESTORING MACROECONOMIC STABILITY.

87

HIGH PRIORITY WAS GIVEN ON MEASURES TO PROTECTTHE POOR FROM THE WORST IMPACT OF THE CRISIS.

THE STRATEGY CONSISTED OF TWO ELEMENTS: A)GENERAL ECONOMIC POLICIES THAT WOULD HAVEIMPACT ON THE POOR, AND B) TARGETED POLICIES FORTHE BENEFIT OF THE POOR.

FOREMOST IN THE FIRST PRONG OF THE STRATEGY WASRESTORING MACROECONOMIC STABILITY.


IMPROVEMENT OF THE VALUE OF THE CURRENCY ANDARRESTING INFLATION WOULD SUBSTANTIALLY IMPROVETHE ECONOMIC CONDITION OF THE POOR, DIRECTLYAND INDIRECTLY AS THE ECONOMY BEGAN TO RECOVER.

ADEQUATE SUPPLY OF FOOD AND OTHER BASICNECESSITIES WOULD REDUCE THE COST OF THOSEITEMS.

AS AN EMERGENCY MEASURE, THE GOVERNMENT HADIMPOSED A TEMPORARY BAN ON EXPORTS OFRICE, WHEAT AND WHEATFLOUR, SOYBEANS, SUGAR, KEROSENE, AND FISHMEAL.

88

IMPROVEMENT OF THE VALUE OF THE CURRENCY ANDARRESTING INFLATION WOULD SUBSTANTIALLY IMPROVETHE ECONOMIC CONDITION OF THE POOR, DIRECTLYAND INDIRECTLY AS THE ECONOMY BEGAN TO RECOVER.

ADEQUATE SUPPLY OF FOOD AND OTHER BASICNECESSITIES WOULD REDUCE THE COST OF THOSEITEMS.

AS AN EMERGENCY MEASURE, THE GOVERNMENT HADIMPOSED A TEMPORARY BAN ON EXPORTS OFRICE, WHEAT AND WHEATFLOUR, SOYBEANS, SUGAR, KEROSENE, AND FISHMEAL.


TO THE SEVERITY AND COMPLEX ITY OF THE CRISIS THEGENERAL ECONOMIC POLICIES ALONE WERE NOTENOUGH TO PROTECT THE POOR FROM THE WORSTIMPACT OF THE CRISIS WITHOUT A SPECIFICALLYTARGETED POLICY FOR THE POOR.

THE TARGETED POLICIES FOR THE POOR, OR THE SOCIALSAFETY NET ENCOMPASSED THREE BROAD AREAS OFACTION: I) MAINTAINING THE AVAILABILITY ANDAFFORDABILITY OF KEY COMMODITIES IMPORTANT TOTHE POOR; II) GENERATING EMPLOYMENT ANDMAINTAINING INCOMES; III) PRESERVING KEY SOCIALSERVICES.

89

TO THE SEVERITY AND COMPLEX ITY OF THE CRISIS THEGENERAL ECONOMIC POLICIES ALONE WERE NOTENOUGH TO PROTECT THE POOR FROM THE WORSTIMPACT OF THE CRISIS WITHOUT A SPECIFICALLYTARGETED POLICY FOR THE POOR.

THE TARGETED POLICIES FOR THE POOR, OR THE SOCIALSAFETY NET ENCOMPASSED THREE BROAD AREAS OFACTION: I) MAINTAINING THE AVAILABILITY ANDAFFORDABILITY OF KEY COMMODITIES IMPORTANT TOTHE POOR; II) GENERATING EMPLOYMENT ANDMAINTAINING INCOMES; III) PRESERVING KEY SOCIALSERVICES.


THE MOST IMPORTANT BASIC COMMODITY WAS RICE. APROGRAM WAS INITIATED IN JULY 1998 TO PROVIDE 10KG OF RICE AT ABOUT ONE-HALF OF THE MARKET PRICETO LOW-INCOME FAMILIES FIRST IN THE JAKARTA AREAAND IN SEPTEMBER EXTENDED TO COVER 7½ MILLIONVERY POOR FAMILIES THROUGHOUT THE COUNTRY.

IN DECEMBER THE MONTHLY ALLOCATIONS UNDER THESCHEME WAS INCREASED FROM 10 KILOGRAMS TO 20KILOGRAMS PER FAMILY COVERING 17 MILLION POORFAMILIES

90

THE MOST IMPORTANT BASIC COMMODITY WAS RICE. APROGRAM WAS INITIATED IN JULY 1998 TO PROVIDE 10KG OF RICE AT ABOUT ONE-HALF OF THE MARKET PRICETO LOW-INCOME FAMILIES FIRST IN THE JAKARTA AREAAND IN SEPTEMBER EXTENDED TO COVER 7½ MILLIONVERY POOR FAMILIES THROUGHOUT THE COUNTRY.

IN DECEMBER THE MONTHLY ALLOCATIONS UNDER THESCHEME WAS INCREASED FROM 10 KILOGRAMS TO 20KILOGRAMS PER FAMILY COVERING 17 MILLION POORFAMILIES


TO IMPROVE PURCHASING POWER IN RURAL ANDURBAN AREAS, THE GOVERNMENT HAD SET UP PUBLICWORKS PROJECTS THROUGHOUT THE COUNTRY TOBOOST INCOMES OF THE POOR, THE UNEMPLOYED ANDTHE UNDEREMPLOYED.

TO SUPPLEMENT THESE EFFORTS, CASH-FOR-WORKPROGRAMS ARE BEING IMPLEMENTED IN DROUGHT-STRICKEN AREAS OF THE COUNTRY.

91

TO IMPROVE PURCHASING POWER IN RURAL ANDURBAN AREAS, THE GOVERNMENT HAD SET UP PUBLICWORKS PROJECTS THROUGHOUT THE COUNTRY TOBOOST INCOMES OF THE POOR, THE UNEMPLOYED ANDTHE UNDEREMPLOYED.

TO SUPPLEMENT THESE EFFORTS, CASH-FOR-WORKPROGRAMS ARE BEING IMPLEMENTED IN DROUGHT-STRICKEN AREAS OF THE COUNTRY.


PRESERVING ACCESS TO CRITICAL SOCIAL SERVICES FORTHE POOR CONSTITUTED AN IMPORTANT ASPECT OF THESOCIAL SAFETY NET.

IN WHAT WAS CONSIDERED BY THE WORLD BANK AS THEMOST SUCCESSFUL INTERVENTION, AMONG THE SOCIALSAFETY NETS HAD BEEN THE SCHOLARSHIP AND GRANTPROGRAM DESIGNED TO MAINTAIN ENROLMENTS ANDQUALITY OF SCHOOLING AT PRE-CRISIS LEVEL.

92

PRESERVING ACCESS TO CRITICAL SOCIAL SERVICES FORTHE POOR CONSTITUTED AN IMPORTANT ASPECT OF THESOCIAL SAFETY NET.

IN WHAT WAS CONSIDERED BY THE WORLD BANK AS THEMOST SUCCESSFUL INTERVENTION, AMONG THE SOCIALSAFETY NETS HAD BEEN THE SCHOLARSHIP AND GRANTPROGRAM DESIGNED TO MAINTAIN ENROLMENTS ANDQUALITY OF SCHOOLING AT PRE-CRISIS LEVEL.


THE PROGRAM EXTENDED TO THE POOREST 6 PERCENTOF STUDENTS ENROLLED IN PRIMARY SCHOOLS, 17PERCENT IN JUNIOR SECONDARY AND 10 PERCENT INSENIOR SECONDARY SCHOOLS.

IT ALSO PROVIDED GRANTS TO THE 60 PERCENT OF THEPOOREST IN EACH CATEGORY (SEE WORLD BANK, 1999).

THE PROGRAM HAD REACHED 4 MILLION STUDENTS.

93

THE PROGRAM EXTENDED TO THE POOREST 6 PERCENTOF STUDENTS ENROLLED IN PRIMARY SCHOOLS, 17PERCENT IN JUNIOR SECONDARY AND 10 PERCENT INSENIOR SECONDARY SCHOOLS.

IT ALSO PROVIDED GRANTS TO THE 60 PERCENT OF THEPOOREST IN EACH CATEGORY (SEE WORLD BANK, 1999).

THE PROGRAM HAD REACHED 4 MILLION STUDENTS.


IN HEALTH SERVICES, THE PRIORITY WAS GIVEN TO THEPOOR TO HAVE ACCESS TO BASIC HEALTH SERVICES ANDESSENTIAL MEDICINES, AND PREVENTED MALNUTRITIONAND MICRONUTRIENT DEFICIENCIES.

THE GOVERNMENT MADE AVAILABLE SUPPLEMENTARYFOOD FOR YOUNG CHILDREN THROUGH THE SCHOOLSYSTEM AND PREGNANT AND LACTATING WOMEN INPOOR VILLAGES.

THIS PROGRAM HAD REACHED 8.1 MILLION PUPILS IN52.5 THOUSAND SCHOOLS NATIONWIDE.

94

IN HEALTH SERVICES, THE PRIORITY WAS GIVEN TO THEPOOR TO HAVE ACCESS TO BASIC HEALTH SERVICES ANDESSENTIAL MEDICINES, AND PREVENTED MALNUTRITIONAND MICRONUTRIENT DEFICIENCIES.

THE GOVERNMENT MADE AVAILABLE SUPPLEMENTARYFOOD FOR YOUNG CHILDREN THROUGH THE SCHOOLSYSTEM AND PREGNANT AND LACTATING WOMEN INPOOR VILLAGES.

THIS PROGRAM HAD REACHED 8.1 MILLION PUPILS IN52.5 THOUSAND SCHOOLS NATIONWIDE.


ON THE CUSP OF RECOVERYON THE CUSP OF RECOVERY

BY THE END OF HABIBIE’S PRESIDENCY, INDONESIA WASEMERGING FROM THE CRISIS

THE EXCHANGE RATE, INFLATION AND INTEREST RATEHAD RESPONDED WELL TO THE GOVERNMENTSECONOMIC RECOVERY POLICIES

THE GRADUAL RETURN OF MARKET AND INVESTORCONFIDENCE, REVITALIZING THE STOCK MARKET ANDRESTARTED EXPORTS

95

BY THE END OF HABIBIE’S PRESIDENCY, INDONESIA WASEMERGING FROM THE CRISIS

THE EXCHANGE RATE, INFLATION AND INTEREST RATEHAD RESPONDED WELL TO THE GOVERNMENTSECONOMIC RECOVERY POLICIES

THE GRADUAL RETURN OF MARKET AND INVESTORCONFIDENCE, REVITALIZING THE STOCK MARKET ANDRESTARTED EXPORTS


SPECIAL ATTENTION WAS GIVEN TO EMPOWER THESMALL BUSINESS

THE NUMBERS IN POVERTY HAD ALSO STOPPED RISING THE PROGRESS TOWARD RECOVERY HAD REACHED THE

STAGE WHERE IN FISCAL POLICY THE GOVERNMENT HADSHIFTED ITS FOCUS FROM FISCAL STIMULUS TO FISCALSUSTAINABILITY

96

SPECIAL ATTENTION WAS GIVEN TO EMPOWER THESMALL BUSINESS

THE NUMBERS IN POVERTY HAD ALSO STOPPED RISING THE PROGRESS TOWARD RECOVERY HAD REACHED THE

STAGE WHERE IN FISCAL POLICY THE GOVERNMENT HADSHIFTED ITS FOCUS FROM FISCAL STIMULUS TO FISCALSUSTAINABILITY


MONTHLY RATE OF INFLATIONMONTHLY RATE OF INFLATION(IN PERCENT)(IN PERCENT)

Year Month1 2 3 4 5 6 7 8 9 10 11 12

1998 7.2 12.7 5.3 4.7 5.2 4.6 8.6 6.3 3.8 -0.3 0.1 1.4

1999 3 1.3 -0.2 -0.7 -0.3 -0.3 -1.1 -0.9 -0.7

97

1999 3 1.3 -0.2 -0.7 -0.3 -0.3 -1.1 -0.9 -0.7Source: President’s Accountability Speech to the People’s Consultative Assembly of the

Republic of Indonesia in October 1999.


INFLATION HAS BEEN SMOTHERED . . .INFLATION HAS BEEN SMOTHERED . . .(12 month percentage change in consumer & food price index)(12 month percentage change in consumer & food price index)


……AND THE RUPIAH HAS BEEN RELATIVELY STABLE INAND THE RUPIAH HAS BEEN RELATIVELY STABLE INRECENT MONTHS DESPITE POLITICAL UPS AND DOWNSRECENT MONTHS DESPITE POLITICAL UPS AND DOWNS

(RUPIAH PER US$, SPOT RATE DAILY)(RUPIAH PER US$, SPOT RATE DAILY)


INTEREST RATES HAVE DECLINED . . .INTEREST RATES HAVE DECLINED . . .(ONE MONTH BANK INDONESIA CERTIFICATES AND RUPIAH DEPOSIT OF DOMESTIC BANK RATE)(ONE MONTH BANK INDONESIA CERTIFICATES AND RUPIAH DEPOSIT OF DOMESTIC BANK RATE)


GDP HAS STABILIZED AND IS STARTING TO RECOVER...GDP HAS STABILIZED AND IS STARTING TO RECOVER...(Index of GDP; 1995 Q1(Index of GDP; 1995 Q1 –– 100)100)


……HELPED, IN PART, BY INDUSTRIAL OUTPUTHELPED, IN PART, BY INDUSTRIAL OUTPUT(PRODUCTION INDEX IN SELECTED REAL SECTORS)(PRODUCTION INDEX IN SELECTED REAL SECTORS)


POVERTY RATE TRENDSPOVERTY RATE TRENDS(FEBRUARY 1996(FEBRUARY 1996--FEBRUARY 2001)FEBRUARY 2001)


PUTTING FIREWALLS AROUND THE FINANCIAL SYSTEMTHROUGH VARIOUS MECHANISMS, TO PREVENTECONOMIC COLLAPSE CAUSED BY FITURE EXTERNALSHOCKS.

A DECADE AFTER THE 1998 CRISIS INDONESIA’SECONOMY NOT ONLY HAD RECOVERED BUT WAS WELLON ITS WAY TO BECOME ONE OF THE MOST DYNAMICEMERGING ECONOMIES.

INDONESIA NOW BELONGS TO THE G-20, THE 20LARGEST ECONOMIES IN THE WORLD.

104

PUTTING FIREWALLS AROUND THE FINANCIAL SYSTEMTHROUGH VARIOUS MECHANISMS, TO PREVENTECONOMIC COLLAPSE CAUSED BY FITURE EXTERNALSHOCKS.

A DECADE AFTER THE 1998 CRISIS INDONESIA’SECONOMY NOT ONLY HAD RECOVERED BUT WAS WELLON ITS WAY TO BECOME ONE OF THE MOST DYNAMICEMERGING ECONOMIES.

INDONESIA NOW BELONGS TO THE G-20, THE 20LARGEST ECONOMIES IN THE WORLD.


2008 CRISIS

105

2008 CRISIS


CRISIS IN THE MAKINGCRISIS IN THE MAKING

AFTER THE FINANCIAL CRISES OF 1997 AND 1998, THEGOVERNMENTS OF THE AFFECTED COUNTRIES TRIED TOPROTECT THEMSELVES AGAINST A REPEATPERFORMANCE.

THEY AVOIDED THE SHORT TERM FOREIGN BORROWINGTHAT HAD MADE THEM VULNERABLE TO A CUTOFF OFOVERSEAS FUNDING. THE IDEA WAS TO "DECOUPLED"FROM THE UNITED STATES.

107

AFTER THE FINANCIAL CRISES OF 1997 AND 1998, THEGOVERNMENTS OF THE AFFECTED COUNTRIES TRIED TOPROTECT THEMSELVES AGAINST A REPEATPERFORMANCE.

THEY AVOIDED THE SHORT TERM FOREIGN BORROWINGTHAT HAD MADE THEM VULNERABLE TO A CUTOFF OFOVERSEAS FUNDING. THE IDEA WAS TO "DECOUPLED"FROM THE UNITED STATES.


HOWEVER THERE WAS ANOTHER TRANSFORMATION INTHE CHARACTER OF THE FINANCIAL SYSTEM OVER THEPAST FIFTEEN YEARS, WITH MUCH OF IT TAKING PLACEAFTER THE ASIAN CRISIS-NAMELY, THE RISE OFFINANCIAL GLOBALIZATION, WITH INVESTORS IN EACHCOUNTRY HOLDING LARGE STAKES IN OTHERCOUNTRIES.

108

HOWEVER THERE WAS ANOTHER TRANSFORMATION INTHE CHARACTER OF THE FINANCIAL SYSTEM OVER THEPAST FIFTEEN YEARS, WITH MUCH OF IT TAKING PLACEAFTER THE ASIAN CRISIS-NAMELY, THE RISE OFFINANCIAL GLOBALIZATION, WITH INVESTORS IN EACHCOUNTRY HOLDING LARGE STAKES IN OTHERCOUNTRIES.


IN 1996, ON THE EVE OF THE ASIAN CRISIS, THE UNITEDSTATES HAD ASSETS OVERSEAS EQUAL TO 52 PERCENT OFGDP, AND LIABILITIES EQUAL TO 57 PERCENT OF GDP.

BY 2007, THESE NUMBERS WERE UP TO128 PERCENT AND 145 PERCENT, RESPECTIVELY.

THE UNITED STATES HAD MOVED DEEPER INTO NETDEBTOR STATUS; BUT THE NET IS LESS IMPRESSIVE THANTHE VAST INCREASE IN CROSS-HOLDINGS.

109

IN 1996, ON THE EVE OF THE ASIAN CRISIS, THE UNITEDSTATES HAD ASSETS OVERSEAS EQUAL TO 52 PERCENT OFGDP, AND LIABILITIES EQUAL TO 57 PERCENT OF GDP.

BY 2007, THESE NUMBERS WERE UP TO128 PERCENT AND 145 PERCENT, RESPECTIVELY.

THE UNITED STATES HAD MOVED DEEPER INTO NETDEBTOR STATUS; BUT THE NET IS LESS IMPRESSIVE THANTHE VAST INCREASE IN CROSS-HOLDINGS.


LIKE MUCH OF WHAT HAPPENED TO THE FINANCIALSYSTEM OVER THE PAST DECADE OR TWO, THIS CHANGEWAS SUPPOSED TO REDUCE RISK: BECAUSE U.S.INVESTORS HELD MUCH OF THEIR WEALTH ABROAD,THEY WERE LESS EXPOSED TO A SLUMP IN AMERICA,AND BECAUSE FOREIGN INVESTORS HELD MUCH OFTHEIR WEALTH IN THE UNITED STATES, THEY WERE LESSEXPOSED TO A SLUMP OVERSEAS.

110

LIKE MUCH OF WHAT HAPPENED TO THE FINANCIALSYSTEM OVER THE PAST DECADE OR TWO, THIS CHANGEWAS SUPPOSED TO REDUCE RISK: BECAUSE U.S.INVESTORS HELD MUCH OF THEIR WEALTH ABROAD,THEY WERE LESS EXPOSED TO A SLUMP IN AMERICA,AND BECAUSE FOREIGN INVESTORS HELD MUCH OFTHEIR WEALTH IN THE UNITED STATES, THEY WERE LESSEXPOSED TO A SLUMP OVERSEAS.


BUT A LARGE PART OF THE INCREASE IN FINANCIALGLOBALIZATION ACTUALLY CAME FROM THEINVESTMENTS OF HIGHLY LEVERAGED FINANCIALINSTITUTIONS, WHICH WERE MAKING VARIOUS SORTSOF RISKY CROSS-BORDER BETS.

AND WHEN THINGS WENT WRONG IN THE UNITEDSTATES, THESE CROSS-BORDER INVESTMENTS ACTED ASWHAT ECONOMISTS CALL A "TRANSMISSIONMECHANISM," ALLOWING A CRISIS THAT STARTED WITHTHE U.S. HOUSING MARKET TO DRIVE FRESH ROUNDS OFCRISES OVERSEAS.

111

BUT A LARGE PART OF THE INCREASE IN FINANCIALGLOBALIZATION ACTUALLY CAME FROM THEINVESTMENTS OF HIGHLY LEVERAGED FINANCIALINSTITUTIONS, WHICH WERE MAKING VARIOUS SORTSOF RISKY CROSS-BORDER BETS.

AND WHEN THINGS WENT WRONG IN THE UNITEDSTATES, THESE CROSS-BORDER INVESTMENTS ACTED ASWHAT ECONOMISTS CALL A "TRANSMISSIONMECHANISM," ALLOWING A CRISIS THAT STARTED WITHTHE U.S. HOUSING MARKET TO DRIVE FRESH ROUNDS OFCRISES OVERSEAS.


THE FAILURE OF HEDGE FUNDS ASSOCIATED WITH AFRENCH BANK IS GENERALLY CONSIDERED TO HAVEMARKED THE BEGINNING OF THE CRISIS; BY THE FALLOF 2008, THE TROUBLES OF HOUSING LOANS IN PLACESLIKE FLORIDA HAD DESTROYED THE BANKING SYSTEMOF ICELAND.

112

THE FAILURE OF HEDGE FUNDS ASSOCIATED WITH AFRENCH BANK IS GENERALLY CONSIDERED TO HAVEMARKED THE BEGINNING OF THE CRISIS; BY THE FALLOF 2008, THE TROUBLES OF HOUSING LOANS IN PLACESLIKE FLORIDA HAD DESTROYED THE BANKING SYSTEMOF ICELAND.


IN THE CASE OF THE EMERGING MARKETS, THERE WAS ASPECIAL POINT OF VULNERABILITY, THE SO-CALLEDCARRY TRADE. THIS TRADE INVOLVES BORROWING INCOUNTRIES WITH LOW INTEREST RATES, ESPECIALLY BUTNOT ONLY JAPAN, AND LENDING IN PLACES WITH HIGHINTEREST RATES. IT WAS A HIGHLY PROFITABLE TRADE ASLONG AS NOTHING WENT WRONG; BUT EVENTUALLYSOMETHING DID.

113

IN THE CASE OF THE EMERGING MARKETS, THERE WAS ASPECIAL POINT OF VULNERABILITY, THE SO-CALLEDCARRY TRADE. THIS TRADE INVOLVES BORROWING INCOUNTRIES WITH LOW INTEREST RATES, ESPECIALLY BUTNOT ONLY JAPAN, AND LENDING IN PLACES WITH HIGHINTEREST RATES. IT WAS A HIGHLY PROFITABLE TRADE ASLONG AS NOTHING WENT WRONG; BUT EVENTUALLYSOMETHING DID.


THE ONLY SURPRISE ABOUT THE ECONOMIC CRISIS OF2008 WAS THAT IT CAME AS A SURPRISE TO SO MANY. ADEREGULATED MARKET AWASH IN LIQUIDITY AND LOWINTEREST RATES, A GLOBAL REAL ESTATE BUBBLE, ANDSKYROCKETING SUBPRIME LENDING WERE A TOXICCOMBINATION.

ADD IN THE U.S. FISCAL AND TRADE DEFICIT AND THECORRESPONDING ACCUMULATION IN CHINA OF HUGERESERVES OF DOLLARS-AN UNBALANCED GLOBALECONOMY-AND IT WAS CLEAR THAT THINGS WEREHORRIBLY AWRY.

THE UNFOLDING CRISISTHE UNFOLDING CRISIS

THE ONLY SURPRISE ABOUT THE ECONOMIC CRISIS OF2008 WAS THAT IT CAME AS A SURPRISE TO SO MANY. ADEREGULATED MARKET AWASH IN LIQUIDITY AND LOWINTEREST RATES, A GLOBAL REAL ESTATE BUBBLE, ANDSKYROCKETING SUBPRIME LENDING WERE A TOXICCOMBINATION.

ADD IN THE U.S. FISCAL AND TRADE DEFICIT AND THECORRESPONDING ACCUMULATION IN CHINA OF HUGERESERVES OF DOLLARS-AN UNBALANCED GLOBALECONOMY-AND IT WAS CLEAR THAT THINGS WEREHORRIBLY AWRY.


TO OBSERVERS IN THE UNITED STATES AND EUROPE, THEEAST ASIAN BAILOUTS IN 1997 WERE A SUCCESSBECAUSE THE UNITED STATES AND EUROPE HAD NOTBEEN HARMED.

WHAT WAS DIFFERENT ABOUT THE 2008 CRISIS FROMTHE MULTITUDE THAT HAD PRECEEDED IT DURING THEPAST QUARTER CENTURY WAS THAT THIS CRISIS BORE A"MADE IN THE USA" LABEL. AND WHILE PREVIOUSCRISES HAD BEEN CONTAINED, THIS "MADE IN THE USA"CRISIS SPREAD QUICKLY AROUND THE WORLD.

TO OBSERVERS IN THE UNITED STATES AND EUROPE, THEEAST ASIAN BAILOUTS IN 1997 WERE A SUCCESSBECAUSE THE UNITED STATES AND EUROPE HAD NOTBEEN HARMED.

WHAT WAS DIFFERENT ABOUT THE 2008 CRISIS FROMTHE MULTITUDE THAT HAD PRECEEDED IT DURING THEPAST QUARTER CENTURY WAS THAT THIS CRISIS BORE A"MADE IN THE USA" LABEL. AND WHILE PREVIOUSCRISES HAD BEEN CONTAINED, THIS "MADE IN THE USA"CRISIS SPREAD QUICKLY AROUND THE WORLD.


THE UNITED STATES HAD A HOUSING BUBBLE. WHENTHAT BUBBLE BROKE AND HOUSING PRICES FELL FROMTHEIR STRATOSPHERIC LEVELS, MORE AND MOREHOMEOWNERS FOUND THEMSELVES "UNDERWATER.”

THEY OWED MORE ON THEIR MORTGAGES THAN WHATTHEIR HOMES WERE VALUED. AS THEY LOST THEIRHOMES, MANY ALSO LOST THEIR LIFE SAVINGS ANDTHEIR DREAMS FOR A FUTURE-A COLLEGE EDUCATIONFOR THEIR CHILDREN, A RETIREMENT IN COMFORT.

THE UNITED STATES HAD A HOUSING BUBBLE. WHENTHAT BUBBLE BROKE AND HOUSING PRICES FELL FROMTHEIR STRATOSPHERIC LEVELS, MORE AND MOREHOMEOWNERS FOUND THEMSELVES "UNDERWATER.”

THEY OWED MORE ON THEIR MORTGAGES THAN WHATTHEIR HOMES WERE VALUED. AS THEY LOST THEIRHOMES, MANY ALSO LOST THEIR LIFE SAVINGS ANDTHEIR DREAMS FOR A FUTURE-A COLLEGE EDUCATIONFOR THEIR CHILDREN, A RETIREMENT IN COMFORT.


THE COLLAPSE OF THE BUBBLE AND THE TIGHTENING OFCREDIT HAD INEVITABLE CONSEQUENCES. THEECONOMY SLOWED. AS THE ECONOMY SLOWED, THENUMBER OF FORECLOSURES MOUNTED.

THE PROBLEMS IN REAL ESTATE FIRST SURFACED IN THESUBPRIME MARKET BUT SOON BECAME MANIFEST INOTHER AREAS.

THE COLLAPSE OF THE BUBBLE AND THE TIGHTENING OFCREDIT HAD INEVITABLE CONSEQUENCES. THEECONOMY SLOWED. AS THE ECONOMY SLOWED, THENUMBER OF FORECLOSURES MOUNTED.

THE PROBLEMS IN REAL ESTATE FIRST SURFACED IN THESUBPRIME MARKET BUT SOON BECAME MANIFEST INOTHER AREAS.


IF PEOPLE COULDN'T MAKE THEIR HOUSE PAYMENTS,THEY WOULD ALSO HAVE TROUBLE MAKING THEIROTHER—INCLUDING CARD—CREDIT PAYMENTS.

WITH REAL ESTATE PRICES PLUNGING, IT WAS ONLY AMATTER OF TIME BEFORE PROBLEMS IN PRIMERESIDENTIAL AND COMMERCIAL REAL ESTATEAPPEARED.

AS CONSUMER SPENDING DRIED UP, IT WAS INEVITABLETHAT MANY BUSINESSES WOULD GO BANKRUPT-ANDTHAT MEANT THE DEFAULT RATE ON COMMERCIALLOANS WOULD ALSO RISE.

IF PEOPLE COULDN'T MAKE THEIR HOUSE PAYMENTS,THEY WOULD ALSO HAVE TROUBLE MAKING THEIROTHER—INCLUDING CARD—CREDIT PAYMENTS.

WITH REAL ESTATE PRICES PLUNGING, IT WAS ONLY AMATTER OF TIME BEFORE PROBLEMS IN PRIMERESIDENTIAL AND COMMERCIAL REAL ESTATEAPPEARED.

AS CONSUMER SPENDING DRIED UP, IT WAS INEVITABLETHAT MANY BUSINESSES WOULD GO BANKRUPT-ANDTHAT MEANT THE DEFAULT RATE ON COMMERCIALLOANS WOULD ALSO RISE.


TWO-THIRDS TO THREE-QUARTERS OF THE ECONOMY(OF GDP) WAS HOUSING RELATED: CONSTRUCTING NEWHOUSES OR BUYING CONTENTS TO FILL THEM, ORBORROWING AGAINST OLD HOUSES TO FINANCECONSUMPTION.

IT WAS UNSUSTAINABLE-AND IT WASN'T SUSTAINED.

TWO-THIRDS TO THREE-QUARTERS OF THE ECONOMY(OF GDP) WAS HOUSING RELATED: CONSTRUCTING NEWHOUSES OR BUYING CONTENTS TO FILL THEM, ORBORROWING AGAINST OLD HOUSES TO FINANCECONSUMPTION.

IT WAS UNSUSTAINABLE-AND IT WASN'T SUSTAINED.


FALLING HOME PRICES HAVE A DIRECT NEGATIVE EFFECTON EMPLOYMENT THROUGH THE DECLINE INCONSTRUCTION.

THEY TEND TO LEAD TO REDUCED CONSUMER SPENDINGBECAUSE CONSUMERS FEEL POORER AND LOSE ACCESSTO HOME EQUITY LOANS; THESE NEGATIVES HAVE AMULTIPLIER EFFECT AS FALLING EMPLOYMENT LEADS TOFURTHER DECLINES IN SPENDING.

FALLING HOME PRICES HAVE A DIRECT NEGATIVE EFFECTON EMPLOYMENT THROUGH THE DECLINE INCONSTRUCTION.

THEY TEND TO LEAD TO REDUCED CONSUMER SPENDINGBECAUSE CONSUMERS FEEL POORER AND LOSE ACCESSTO HOME EQUITY LOANS; THESE NEGATIVES HAVE AMULTIPLIER EFFECT AS FALLING EMPLOYMENT LEADS TOFURTHER DECLINES IN SPENDING.


WHEN THE BUBBLE POPPED, THE EFFECTS WEREAMPLIFIED BECAUSE BANKS HAD CREATED COMPLEXPRODUCTS RESTING ON TOP OF THE MORTGAGES.WORSE STILL, THEY HAD ENGAGED IN MULTIBILLION-DOLLAR BETS WITH EACH OTHER AND WITH OTHERSAROUND THE WORLD.

THIS COMPLEXITY, COMBINED WITH THE RAPIDITY WITHWHICH THE SITUATION WAS DETERIORATING AND THEBANKS' HIGH LEVERAGE, MEANT THAT THE BANKSDIDN'T KNOW WHETHER WHAT THEY OWEDTO THEIR DEPOSITORS AND BONDHOLDERS EXCEEDEDTHE VALUE OF THEIR ASSETS.

WHEN THE BUBBLE POPPED, THE EFFECTS WEREAMPLIFIED BECAUSE BANKS HAD CREATED COMPLEXPRODUCTS RESTING ON TOP OF THE MORTGAGES.WORSE STILL, THEY HAD ENGAGED IN MULTIBILLION-DOLLAR BETS WITH EACH OTHER AND WITH OTHERSAROUND THE WORLD.

THIS COMPLEXITY, COMBINED WITH THE RAPIDITY WITHWHICH THE SITUATION WAS DETERIORATING AND THEBANKS' HIGH LEVERAGE, MEANT THAT THE BANKSDIDN'T KNOW WHETHER WHAT THEY OWEDTO THEIR DEPOSITORS AND BONDHOLDERS EXCEEDEDTHE VALUE OF THEIR ASSETS.


AND THEY REALIZED ACCORDINGLY THAT THEYCOULDN'T KNOW THE POSITION OF ANY OTHER BANK.THE TRUST AND CONFIDENCE THAT UNDERLIE THEBANKING SYSTEM EVAPORATED.

BANKS REFUSED TO LEND TO EACH OTHER-ORDEMANDED HIGH INTEREST RATES TO COMPENSATE FORBEARING THE RISK. GLOBAL CREDIT MARKETS BEGAN TOMELT DOWN.

THIS CRISIS QUICKLY BECAME GLOBAL-AND NOTSURPRISINGLY, AS NEARLY A QUARTER OF U.S.MORTGAGES HAD GONE ABROAD.

AND THEY REALIZED ACCORDINGLY THAT THEYCOULDN'T KNOW THE POSITION OF ANY OTHER BANK.THE TRUST AND CONFIDENCE THAT UNDERLIE THEBANKING SYSTEM EVAPORATED.

BANKS REFUSED TO LEND TO EACH OTHER-ORDEMANDED HIGH INTEREST RATES TO COMPENSATE FORBEARING THE RISK. GLOBAL CREDIT MARKETS BEGAN TOMELT DOWN.

THIS CRISIS QUICKLY BECAME GLOBAL-AND NOTSURPRISINGLY, AS NEARLY A QUARTER OF U.S.MORTGAGES HAD GONE ABROAD.


THE INTENSIFICATION OF THE CREDIT CRISIS AFTER THEFALL OF LEHMAN BROTHERS, THE SUDDEN CRISIS INEMERGING MARKETS, A COLLAPSE IN CONSUMERCONFIDENCE, ALL POINT TO THE WORST RECESSION INTHE UNITED STATES, AND IN THE WORLD AS AWHOLE, SINCE THE EARLY 1980s.

AFTER ALL THE U.S. ECONOMY IS STILL THELARGEST, AND IT IS HARD FOR A DOWNTURN OF THISMAGNITUDE NOT TO HAVE A GLOBAL IMPACT.

MOREOVER, GLOBAL FINANCIAL MARKETS HAVEBECOME CLOSELY INTERLINKED.

THE INTENSIFICATION OF THE CREDIT CRISIS AFTER THEFALL OF LEHMAN BROTHERS, THE SUDDEN CRISIS INEMERGING MARKETS, A COLLAPSE IN CONSUMERCONFIDENCE, ALL POINT TO THE WORST RECESSION INTHE UNITED STATES, AND IN THE WORLD AS AWHOLE, SINCE THE EARLY 1980s.

AFTER ALL THE U.S. ECONOMY IS STILL THELARGEST, AND IT IS HARD FOR A DOWNTURN OF THISMAGNITUDE NOT TO HAVE A GLOBAL IMPACT.

MOREOVER, GLOBAL FINANCIAL MARKETS HAVEBECOME CLOSELY INTERLINKED.


IN THE BEGINNING, MANY IN EUROPE TALKED OFDECOUPLING, THAT THEY WOULD BE ABLE TO MAINTAINGROWTH IN THEIR ECONOMIES EVEN AS AMERICA WENTINTO A DOWNTURN.

THE GROWTH IN ASIA WOULD SAVE THEM FROM ARECESSION.

BUT ASIA'S ECONOMIES ARE STILL TOO SMALL (THE ENTIRECONSUMPTION OF ASIA IS JUST 40 PERCENT OF THAT OFTHE UNITED STATES).

THEIR GROWTH RELIES HEAVILY ON EXPORTS TO THEUNITED STATES.

EVEN AFTER A MASSIVE STIMULUS, CHINA'S GROWTH IN2009 WAS SOME 3 TO 4 PERCENT BELOW WHAT IT HADBEEN BEFORE THE CRISIS.

IN THE BEGINNING, MANY IN EUROPE TALKED OFDECOUPLING, THAT THEY WOULD BE ABLE TO MAINTAINGROWTH IN THEIR ECONOMIES EVEN AS AMERICA WENTINTO A DOWNTURN.

THE GROWTH IN ASIA WOULD SAVE THEM FROM ARECESSION.

BUT ASIA'S ECONOMIES ARE STILL TOO SMALL (THE ENTIRECONSUMPTION OF ASIA IS JUST 40 PERCENT OF THAT OFTHE UNITED STATES).

THEIR GROWTH RELIES HEAVILY ON EXPORTS TO THEUNITED STATES.

EVEN AFTER A MASSIVE STIMULUS, CHINA'S GROWTH IN2009 WAS SOME 3 TO 4 PERCENT BELOW WHAT IT HADBEEN BEFORE THE CRISIS.


WHILE EUROPE'S FINANCIAL INSTITUTIONS SUFFEREDFROM BUYING TOXIC MORTGAGES AND THE RISKYGAMBLES THEY HAD MADE WITH AMERICAN BANKS,A NUMBER OF EUROPEAN COUNTRIES GRAPPLED WITHPROBLEMS OF THEIR OWN DESIGN.

THE WELFARE STATE SYSTEM AND THE MONETARYUNIFICATION OF EUROPE (EURO) HAD AMPLIFIED THEFINANCIAL CRISES AFFECTING MANY EUROPEANCOUNTRIES, NOT ONLY ECONOMICALLY BUT ALSOPOLITICALLY.

WHILE EUROPE'S FINANCIAL INSTITUTIONS SUFFEREDFROM BUYING TOXIC MORTGAGES AND THE RISKYGAMBLES THEY HAD MADE WITH AMERICAN BANKS,A NUMBER OF EUROPEAN COUNTRIES GRAPPLED WITHPROBLEMS OF THEIR OWN DESIGN.

THE WELFARE STATE SYSTEM AND THE MONETARYUNIFICATION OF EUROPE (EURO) HAD AMPLIFIED THEFINANCIAL CRISES AFFECTING MANY EUROPEANCOUNTRIES, NOT ONLY ECONOMICALLY BUT ALSOPOLITICALLY.


IMPACT ONGLOBAL ECONOMY

IMPACT ONGLOBAL ECONOMY

SLOWING DOWN ECONOMIC GROWTHSLOWING DOWN ECONOMIC GROWTH

2,9

5,0 4,3 4,54,5 3,0

12,4

8,2 6,74,09,014,0% yoy

127

2,9-0,5

4,3 4,53,0 4,1 4,2 3,12,7

-10,9-11,0-6,0-1,04,02008 2009 2010 2011* 2012*GDPInflationTrade Volume*Projection

Source: WEO, IMF Juni 2011


REGIONAL ECONOMIC PERFORMANCEREGIONAL ECONOMIC PERFORMANCE

MAJOR REGIONS (yoy,%) ASEAN (yoy,%)

2,9 1,8 4,02,5 2,02,7 1,7 2,90,02,04,0% yoy

10121416%, yoy

2009 20102011* 2012*

-2,6 -4,1 -6,3-0,7

-8,0-6,0-4,0-2,0

US Europe Japan2009 2010 2011* 2012**ProjectionSource: WEO, IMF Juni 2011

-4-20246810

Indonesia Singapore Malaysia Thailand Phillipina*ProjectionSource: WEO, IMF Juni 2011


THE USTHE US


JAPANJAPAN


CHINACHINA


INDIAINDIA


EUEU


GREECEGREECE


EU AREA DEBTEU AREA DEBT


EU AREA FISCAL DEFICITEU AREA FISCAL DEFICIT


DEBT AND COUPON DUE IN 2012DEBT AND COUPON DUE IN 2012(US$ BILLION)(US$ BILLION)


GLOBAL ECONOMIC GROWTH PAST AND PROJECTEDGLOBAL ECONOMIC GROWTH PAST AND PROJECTED

COUNTRY 2007 2008 2009 2010 2011F 2012F* 2011F 2012F 2011F 2012F

US 1.9 -0.3 -3.5 3.0 1.7 2.1 1.5 1.8 2.6 2.9

JAPAN 2.4 -1.2 -6.3 4.0 -0.4 2.5 -0.5 2.3 0.1 2.6

EUROPE 2.8 0.4 -4.2 1.8 1.6 0.7 1.6 1.1 1.7 1.8

CHINA 14.2 9.6 9.2 10.4 9.2 8.6 9.5 9.0 9.3 8.7

INDIA 9.5 7.5 7.0 9.0 7.5 7.9 7.8 7.5 8.0 8.4

Bloomberg* IMF World Bank

INDIA 9.5 7.5 7.0 9.0 7.5 7.9 7.8 7.5 8.0 8.4

SINGAPORE 8.0 1.9 -0.8 14.6 5.5 4.9 5.3 4.3 5.0 6.0

MALAYSIA 6.5 4.8 -1.6 7.2 5.0 5.4 5.2 5.1 4.8 5.0

THAILAND 5.0 2.5 -2.3 7.8 4.1 4.7 3.5 4.8 3.7 4.2

PHILIPPINES 7.1 3.9 1.1 7.7 5.0 5.7 4.7 4.9 5.0 5.4

SOUTH KOREA 5.1 2.3 0.3 6.2 3.6 3.8 3.9 4.4 4.8 4.6

INDONESIA 6.3 6.0 4.6 6.1 6.5 6.6 6.4 6.3 6.3 6.5

* Bloomberg & Asia Pacific Consensus Forecasts, November 2011.


139Source: Asian, 2011

– = unavailable, e = ADB estimates, FY = fiscal year, GDP = gross domestic product, Lao PDR = Lao People’s Democratic Republic, US = United States, and y-o-y= year-on-year.1Aggregates are weighted according to gross national income levels (atlas method, current $) from the World Bank’s World Development Indicators.2Excludes Myanmar for all years as weights are unavailable. Quarterly figures exclude Brunei Darussalam, Cambodia, Lao PDR, and Myanmar for which quarterly data is notavailable.3Includes Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Philippines, Singapore, Thailand, and Viet Nam.4Figures from Asian Development Outlook 2011 Update, Asian Development Bank, published in September.5Seasonally adjusted.6Flash estimate, seasonally adjusted for 2011Q3.


IMPACT ONINDONESIA’S ECONOMY

GDP GROWTHGDP GROWTH


WWHY INDONESIA IS MORE RESILIENT?HY INDONESIA IS MORE RESILIENT?

MEASURES TAKEN IN 1998/1999 NOT ONLY TOOVERCOME THE CRISES BUT ALSO TO BETTERPREPARE THE ECONOMY AGAINST FUTURE(EXTERNAL) ECONOMIC SHOCKS, ESTABLISHINGSAFETY MECHANISM AND CRISIS PROTOCOL.

LESSER DEGREE OF INTEGRATION INTO THEGLOBAL FINANCE (COMPARED TO REGIONAL ANDPEER COUNTRIES).

MEASURES TAKEN IN 1998/1999 NOT ONLY TOOVERCOME THE CRISES BUT ALSO TO BETTERPREPARE THE ECONOMY AGAINST FUTURE(EXTERNAL) ECONOMIC SHOCKS, ESTABLISHINGSAFETY MECHANISM AND CRISIS PROTOCOL.

LESSER DEGREE OF INTEGRATION INTO THEGLOBAL FINANCE (COMPARED TO REGIONAL ANDPEER COUNTRIES).


INDONESIA DEPENDS MORE IN ITS DOMESTICTHAN EXPORT MARKET. ITS EXPORT IS ALSO MOREDIVERSIFIED. AND NATURAL RESOURCED BASEDSUCH AS ENERGY, FOOD AND MINERALS THATTHE WORLD HUMAN POPULATION WILL ALWAYSNEED, CRISIS OR NO CRISIS.

INDONESIA DEPENDS MORE IN ITS DOMESTICTHAN EXPORT MARKET. ITS EXPORT IS ALSO MOREDIVERSIFIED. AND NATURAL RESOURCED BASEDSUCH AS ENERGY, FOOD AND MINERALS THATTHE WORLD HUMAN POPULATION WILL ALWAYSNEED, CRISIS OR NO CRISIS.


EXPORT TO GDP RATIOEXPORT TO GDP RATIO

40.8

39.1

32.7

34.0

31.029.4

35

40

45

144

32.7

30.532.1

31.029.4

29.9

24.1 24.626.4

15

20

25

30

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


Malaysia Philippines Singapore Thailand Korea Taiwan Hong Kong

2000 119.8 55.2 192.4 66.7 38.6 52.9 143.0

2001 110.5 49.4 188.1 65.9 35.8 50.0 138.6

Asian Countries

EXPORT TO GDP RATIOEXPORT TO GDP RATIOCOMPARED TO OTHER REGIONAL COUNTRIESCOMPARED TO OTHER REGIONAL COUNTRIES

2002 108.4 50.4 189.0 64.2 33.1 52.2 149.1

2003 106.8 49.7 207.7 65.7 35.3 55.4 170.7

2004 115.3 51.0 219.6 70.7 40.9 61.4 189.9

2005 117.5 47.7 230.0 73.5 39.3 62.4 198.4


Malaysia Philippines Singapore Thailand Korea Taiwan Hong Kong

2006 116.5 47.5 234.4 73.7 39.7 68.0 205.2

2007 110.1 42.9 218.9 73.3 41.9 72.0 207.9

Asian Countries

EXPORT TO GDP RATIOEXPORT TO GDP RATIOCOMPARED TO OTHER REGIONAL COUNTRIESCOMPARED TO OTHER REGIONAL COUNTRIES

2007 110.1 42.9 218.9 73.3 41.9 72.0 207.9

2008 103.0 37.2 233.4 76.4 53.0 73.0 212.4

2009 96.2 32.4 199.9 68.3 49.8 62.3 194.5

2010 97.4 35.0 211.1 71.3 52.4 73.6 222.9


INDONESIA’S EXPORT DESTINATIONINDONESIA’S EXPORT DESTINATION

147

*January – July 2011


148

NIE = newly industrialized economy.1Refers to merchandise exports in US dollars as percent of nominal gross domestic product.2Includes emerging East Asia plus Japan.3Includes ASEAN, NIEs, and People’s Republic of China.4Excludes Singapore.Source: ADB, 2011


149

GDP = gross domestic product; NIE = newly industrialized economy.na = not applicable.1Includes emerging East Asia plus Japan.2Includes ASEAN-10 (Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Viet Nam); People’sRepublic of China; Hong Kong,China; Republic of Korea; and Taipei,China.Source: ADB, 2011


150

NIE = newly industrialized economy.1Based on first-digit level Standard International Trade Classification, Revision 3.2Refers to the sum of chemicals and related products, manufactured goods classified chiefly by material, machinery and transportequipment, and miscellaneous manufactured articles.3Includes emerging East Asia plus Japan.4Includes ASEAN-4 plus Viet Nam, NIEs, and People’s Republic of China.Source: ADB, 2011


151

GDP = gross domestic product, na = not applicable, NIE = newly industrialized economy.1Selected emerging East Asia includes Hong Kong, China; Indonesia; Republic of Korea; Malaysia; Philippines; Singapore; and Thailand whereportfolio investment data are available. Emerging East Asia includes People’s Republic of China; ASEAN-4 plus Viet Nam and NIEs. East Asiaincludes emerging East Asia plus Japan.Source: ADB, 2011


POST CRISIS ECONOMICPERFORMANCE

Page 152

EXPORTEXPORT


5.78%

7.24%

6.46%

6.50%7.82%

4.70%

0.79%

4.92%3.64%

4.78%5.50%

6.06%

4.30%

6.10%

6.50%

1%

4%

7%

GDP GROWTH 1988GDP GROWTH 1988--2011201119

8819

89

1990

1991

1992

1993

1994

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

-13.13%-14%

-11%

-8%

-5%

-2%

1988

1989

1990

1991

1992

1993

1994

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011


RUPIAH MOVEMENTRUPIAH MOVEMENT


COMPARED TO SOME ASIAN COUNTRIESCOMPARED TO SOME ASIAN COUNTRIES


FISCAL DEFICIT (%)FISCAL DEFICIT (%)FISCAL DEFICIT (%)FISCAL DEFICIT (%)


PRINSIP KEHATI-HATIAN FISKAL TETAP TERJAGA

779 824 807 808

47%

39%35%

33%

28%26% 25% 24%

22%20%

20%

25%

30%

35%

40%

45%

50%

1,500

2,000

2,500

3,000

3,500

4,000(% GDP)(Trillion Rp)

DEBT PROFILEDEBT PROFILEDEBT PROFILEDEBT PROFILE

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014GDP 2,774 3,339 3,957 4,954 5,613 6,423 7,227 8,120 9,123 10,278Total Debt 1,313 1,302 1,389 1,637 1,590 1,677 1,813 1,958 2,012 2,029

659 693 737 784 836 902 1,034 1,134 1,205 1,221

655 609 652853 754 774 779 824 807 808

0%

5%

10%

15%

20%

0

500

1,000

1,500

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Domestic Foreign % GDP (right)


DEBT TO GDP RATIODEBT TO GDP RATIOIN SELECTEDIN SELECTED COUNTRIESCOUNTRIES (2009)(2009)

159Day1_GRIPS 2012 www.ginandjar.com 159


161

e = estimate, GDP = gross domestic product, p = projection.1Central government debt.2Federal government debt.3National government debt.Source: Article IV Consultations, International Monetary Fund; CEIC (Public Debt); and Joint External Debt Hub database (External Debt).


162

GDP = gross domestic product.1Fiscal year.22011 figures are ADB forecasts, budget estimates and government targets of respective economies. Figures as of 25 Nov 2011.Source: Asian Development Outlook, 2011


163

PRC = People’s Republic of China, UK = United Kingdom, US = United States.1Daily stock price indexes of combined Shanghai and Shenzhen composites, weighted by respective market capitalizationsSource: ADB, 2011


NATIONAL CURRENCY RESERVENATIONAL CURRENCY RESERVE

124.6

114.0111.0

8

9

10

90

110

130

NIR Bulan Impor

Billion US$ Month

Month import

164

5

6

7

30

50

70

200 9 201 0 201 1


8

10

12

14

Inflasi UmumInflasi MakananNon-makanan

(%)

INFLATIONINFLATION

% yoyTotalFoodNon-Food

Source: BPS

4.15

0

2

4

6

J 20

09 F M A M J J A S O N D

J 20


J 20



POVERTYPOVERTY


UNEMPLOYMENTUNEMPLOYMENT


LESSONS TO BE LEARNEDLESSONS TO BE LEARNED

Loss of confidence

169

Financial problems forcompanies, banks,

households

Pluging currency, risinginterest rates, slumping

economy

(PAUL KRUGMAN, 2009)


THE GLOBAL ECONOMIC SYSTEM HAS NOT WORKED ASMANY HAD HOPED. GLOBALIZATION HAS LED TOUNPRECEDENTED PROSPERITY FOR MANY, BUT IN 2008IT HELPED TRANSMIT THE U.S. RECESSION TOCOUNTRIES AROUND THE WORLD—TO THOSE THAT HADMANAGED WELL THEIR FINANCIAL SYSTEMS (FAR BETTERTHAN THE UNITED STATES) AND TO THOSE THAT HADNOT, TO THOSE THAT HAD GAINED ENORMOUSLY BYGLOBALIZATION AND TO THOSE THAT HAD BENEFITEDLESS.

THE GLOBAL ECONOMIC SYSTEM HAS NOT WORKED ASMANY HAD HOPED. GLOBALIZATION HAS LED TOUNPRECEDENTED PROSPERITY FOR MANY, BUT IN 2008IT HELPED TRANSMIT THE U.S. RECESSION TOCOUNTRIES AROUND THE WORLD—TO THOSE THAT HADMANAGED WELL THEIR FINANCIAL SYSTEMS (FAR BETTERTHAN THE UNITED STATES) AND TO THOSE THAT HADNOT, TO THOSE THAT HAD GAINED ENORMOUSLY BYGLOBALIZATION AND TO THOSE THAT HAD BENEFITEDLESS.

170

(JOSEPH E. STIGLITZ, 2010)Day1_GRIPS 2012 www.ginandjar.com

THOSE COUNTRIES THAT WERE MOST OPEN, MOSTGLOBALIZED, WERE HIT THE WORST. FREE MARKETIDEOLOGY UNDERPINNED THE CAPITAL AND FINANCIALMARKET LIBERALIZATION THAT PLAYED SUCH A BIG ROLEIN THE RAPID SPREAD OF THE CRISIS AROUND THEWORLD.

THOSE COUNTRIES THAT WERE MOST OPEN, MOSTGLOBALIZED, WERE HIT THE WORST. FREE MARKETIDEOLOGY UNDERPINNED THE CAPITAL AND FINANCIALMARKET LIBERALIZATION THAT PLAYED SUCH A BIG ROLEIN THE RAPID SPREAD OF THE CRISIS AROUND THEWORLD.

Day1_GRIPS 2012 www.ginandjar.com 171

THE RULES OF THE GAME HAVE CHANGED GLOBALLY.THE WASHINGTON CONSENSUS POLICIES AND THEUNDERLYING IDEOLOGY OF MARKET FUNDAMENTALISMARE DEAD. IN THE PAST, THERE MIGHT HAVE BEEN ADEBATE OVER WHETHER THERE WAS A LEVEL PLAYINGFIELD BETWEEN DEVELOPED AND LESS DEVELOPEDCOUNTRIES; NOW THERE CAN BE NO DEBATE.

THE POOR COUNTRIES SIMPLY CAN'T BACK UP THEIRENTERPRISES IN THE WAY THAT THE RICH DO, AND THISALTERS THE RISKS THAT THEY CAN UNDERTAKE.

THE RULES OF THE GAME HAVE CHANGED GLOBALLY.THE WASHINGTON CONSENSUS POLICIES AND THEUNDERLYING IDEOLOGY OF MARKET FUNDAMENTALISMARE DEAD. IN THE PAST, THERE MIGHT HAVE BEEN ADEBATE OVER WHETHER THERE WAS A LEVEL PLAYINGFIELD BETWEEN DEVELOPED AND LESS DEVELOPEDCOUNTRIES; NOW THERE CAN BE NO DEBATE.

THE POOR COUNTRIES SIMPLY CAN'T BACK UP THEIRENTERPRISES IN THE WAY THAT THE RICH DO, AND THISALTERS THE RISKS THAT THEY CAN UNDERTAKE.


THEY HAVE SEEN THE RISKS OF GLOBALIZATION BADLYMANAGED. BUT THE HOPED-FOR REFORMS IN HOWGLOBALIZATION IS MANAGED STILL SEEM ON THEDISTANT HORIZON.

THE QUESTION IS: WILL WE SEIZE THE OPPORTUNITY TORESTORE OUR SENSE OF BALANCE BETWEEN THEMARKET AND THE STATE, BETWEEN INDIVIDUALISM ANDTHE COMMUNITY, BETWEEN MAN ANDNATURE, BETWEEN MEANS AND ENDS.

THEY HAVE SEEN THE RISKS OF GLOBALIZATION BADLYMANAGED. BUT THE HOPED-FOR REFORMS IN HOWGLOBALIZATION IS MANAGED STILL SEEM ON THEDISTANT HORIZON.

THE QUESTION IS: WILL WE SEIZE THE OPPORTUNITY TORESTORE OUR SENSE OF BALANCE BETWEEN THEMARKET AND THE STATE, BETWEEN INDIVIDUALISM ANDTHE COMMUNITY, BETWEEN MAN ANDNATURE, BETWEEN MEANS AND ENDS.


WE NOW HAVE THE OPPORTUNITY TO CREATE A NEW FINANCIALSYSTEM THAT WILL DO WHAT HUMAN BEINGS NEED A FINANCIALSYSTEM TO DO; TO CREATE A NEW ECONOMIC SYSTEM THAT WILLCREATE MEANINGFUL JOBS, DECENT WORK FOR ALL THOSE WHOWANT IT, ONE IN WHICH THE DIVIDE BETWEEN THE HAVES ANDHAVE-NOTS IS NARROWING, RATHER THAN WIDENING.

AND, MOST IMPORTANTLY OF ALL, TO CREATE A NEW SOCIETY INWHICH EACH INDIVIDUAL IS ABLE TO FULFILL HIS ASPIRATIONSAND LIVE UP TO HIS POTENTIAL, IN WHICH WE HAVE CREATEDCITIZENS WHO LIVE UP TO SHARED IDEALS AND VALUES, IN WHICHWE HAVE CREATED A COMMUNITY THAT TREATS OUR PLANETWITH THE RESPECT THAT IN THE LONG RUN IT WILL SURELYDEMAND.

(JOSEPH E. STIGLITZ, 2011)

WE NOW HAVE THE OPPORTUNITY TO CREATE A NEW FINANCIALSYSTEM THAT WILL DO WHAT HUMAN BEINGS NEED A FINANCIALSYSTEM TO DO; TO CREATE A NEW ECONOMIC SYSTEM THAT WILLCREATE MEANINGFUL JOBS, DECENT WORK FOR ALL THOSE WHOWANT IT, ONE IN WHICH THE DIVIDE BETWEEN THE HAVES ANDHAVE-NOTS IS NARROWING, RATHER THAN WIDENING.

AND, MOST IMPORTANTLY OF ALL, TO CREATE A NEW SOCIETY INWHICH EACH INDIVIDUAL IS ABLE TO FULFILL HIS ASPIRATIONSAND LIVE UP TO HIS POTENTIAL, IN WHICH WE HAVE CREATEDCITIZENS WHO LIVE UP TO SHARED IDEALS AND VALUES, IN WHICHWE HAVE CREATED A COMMUNITY THAT TREATS OUR PLANETWITH THE RESPECT THAT IN THE LONG RUN IT WILL SURELYDEMAND.

(JOSEPH E. STIGLITZ, 2011)


Date post:	30-Oct-2014
Category:	Education
Upload:	ginandjar-kartasasmita
View:	16,646 times
Download:	2 times