POLICY RESPONSE TO ECONOMIC CRISES: 1998 AND 2008

by
Ginandjar Kartasasmita

National Graduate Institute for Policy Studies
Tokyo, Japan
2012

Economic
Miss-
management • Globalization
• Political
Stability of Ideas
1965/
Old Political New • Economic • Political 1998
1966 Development Opposition Crisis Reform Democratization
Order Instability Order Growth
Chaos • Equity • Fragile
Economic
Communist Vs Structure
Non
Communist
Confrontation
Global Financial 2008
International Meltdown Crisis
Conflicts

Political Economic

 Impact
 Response

Day1_GRIPS 2012 www.ginandjar.com 2

“Law & Order”

Tight Political
Control

Support of Western
Countries

Market Economy
Open Capital Success Story
Account
• Political Stability
Trade
Deregulation
Old 1965/1966 New Financial
• High Economic
Chaos Growth
Order Order Deregulation

Rice Self • Accelerated
Sufficiency Poverty Reduction

6 year
Compulsory
Education

Health;
• Family
Planning
• Public Health
• Social Service

Infrastructure
Development

Internal Dynamics

• Fall of Information
Barrier
• Rise of Middle Class
• Social Awareness
• Enlightened Public
• Political Islam
Collapse of the
Economy
• Overheated Economy
• Lack of Banking
Oversight Breakdown of
• Aggressive Social Compact
Foreign (Short Term)
Setting 1998
Lending Reform
For Crisis
Change Movement
Disparity :
Role of Student
• Income
• Sectoral Political Elite
• Regional
Mlitary
• Ethnic
• Opportunity
Abandonment of
Closed System International
• Cronyism External Forces : Support
• Corruption
• Nepotism • Fall of Global
Communism
Dysfunctional • Democratization
Bureaucracy
Day1_GRIPS 2012 • Humanwww.ginandjar.com
Rights 4

Release of
Political
Prisoners
International
Multi Party Acknowledgement
Freedom of
Speech • Strong
Parliament
Human
Political • Constitutional
Rights Court
Rule of Law • Robust Civil
Habibie Gus Dur Society
Good • Free Press
Megawati SBY
Governance
Decentralization Early Stage of
Economic
Fall of Recovery
Reversed
New Reform 1999 Constitutional 2004 Democratic
Economic
Order Election Amendments Election Government Return of
Downturn
Economic Stability
Early Stage of
Economic Return of Growth
Recovery
Return of Poverty
Foundation for Reduction
Sustainable
Economic
Growth Fight Against
Corruption
Independence
Economic of Monetary Regional
Authority Autonomy
Dismantling
Monopolies Peace in
Free and Fair •Aceh
Competition •Papua

Good
Day1_GRIPS 2012 Corporate www.ginandjar.com 5
Governance

Active Formal
Opposition

Externally
Induced

SBY vs MEGAWATI
Economic
Dynamic Response
Economic
& 2008 2009 SBY
Political Crisis Election Reelected
Condition
Political
Response

Dissatisfied
Public

Nostalgia for
Original 1945
Constitution

Call for 5th
Amendment


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


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

CONTENTS
– 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 CRISIS
 CRISIS IN THE MAKING
– THE UNFOLDING CRISIS


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


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


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 LEARNED

NEW ORDER DEVELOPMENT STRATEGY

 WITH UNIFORMITY OF PURPOSE AND METHOD THE NEW
ORDER EARNESTLY EMBARKED ON ECONOMIC
DEVELOPMENT, WHICH WAS WIDELY CONSIDERED AS
SUCCESSFUL USING VARIOUS STANDARD OF
MEASUREMENTS
 DEVELOPMENT TRILOGY:
STABILITY
GROWTH
EQUITY


EAST ASIAN MIRACLE
 THE ECONOMIC PERFORMANCE OF PRE-CRISIS
INDONESIA COULD BE SEEN AS PART OF A GENERAL
PATTERN OF SUCCESSFUL ECONOMIC DEVELOPMENT IN
ASIA.
 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.


CHARACTERISTICS

 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 AND
INVESTMENT.
 HIGH INITIAL LEVELS AND GROWTH RATES OF HUMAN
CAPITAL.

INDONESIA’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.

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.


RISING PER CAPITA INCOME

 OVER THE PERIOD 1965-95 REAL GDP PER CAPITA
GREW AT AN ANNUAL AVERAGE RATE OF 6.6%.
 IN THE MID L960S INDONESIA WAS POORER
THAN INDIA.
 BY MID 1995, INDONESIA’S GDP PER CAPITA
EXCEEDED $ 1,000, OVER 3 TIMES INDIA’S


COMPARATIVE RATES OF GROWTH
FOR 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 INFLATION

 THE VERY HIGH LEVELS OF INFLATION SEEN IN
THE MID- TO LATE-1960S WERE BROUGHT UNDER
CONTROL.
 IN THE YEARS IMMEDIATELY PRECEDING THE
CRISIS, INDONESIA HAD MANAGED TO KEEP
INFLATION IN THE SINGLE DIGIT RANGE


INCREASING FOOD SUPPLIES AND THE
ATTAINMENT OF RICE SELF-SUFFICIENCY
SELF-

 MARKET INTERVENTIONS THAT HELPED REDUCE
PRICE INSTABILITY AND INFLATION, COMBINED
WITH STRATEGIC INVESTMENTS THAT INCREASED
AGRICULTURAL PRODUCTIVITY, RESULTED IN
RISING RURAL INCOMES AND WELFARE, AND
REASONABLY STABLE RICE PRICES.


A RISING SHARE OF MANUFACTURING
OUTPUT IN GDP
 THE SHARE OF THE MANUFACTURING SECTOR IN GDP
ROSE FROM 7.6% IN 1973 TO NEARLY 25% IN 1995.
 THIS WAS DRIVEN BY THE RAPID GROWTH OF
MANUFACTURED EXPORTS
 NON-OIL EXPORTS, WHICH WERE PREDOMINANTLY
MANUFACTURED PRODUCTS, GREW BY ROUGHLY 22%
PER ANNUM OVER THE DECADE FROM 1985, WHEN
TRADE LIBERALIZATION WAS FIRST IMPLEMENTED, TO
1995; A RATE FOUR TIMES FASTER THAN THE GROWTH
OF WORLD TRADE


SHARPLY DECLINING LEVELS OF POVERTY

THE PROPORTION OF THE POPULATION LIVING BELOW THE NATIONAL
POVERTY 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-ORIENTED
GROWTH STRATEGY, BACKED BY A STRONG
RECORD IN HUMAN RESOURCE
DEVELOPMENT, BROUGHT ABOUT ONE OF THE
SHARPEST REDUCTIONS IN POVERTY IN THE
DEVELOPING WORLD.


 AT THE SAME TIME, THIS STRATEGY RESULTED IN REAL
WAGES RISING ABOUT AS FAST AS PER-CAPITA GDP
AND, AMONG OTHERS, BENEFITED WOMEN BY
PROVIDING THEM WITH RAPIDLY GROWING PAID
EMPLOYMENT IN THE FORMAL SECTOR, THAT ALLOWED
THEM TO SWITCH OUT OF UNPAID WORK IN THE RURAL
SECTOR.
 SOCIAL INDICATORS, SUCH AS INFANT
MORTALITY, FERTILITY AND SCHOOL
ENROLLMENTS, ALSO SHOWED SIGNIFICANT
IMPROVEMENT.
World Bank document (l997)

THE UNEXPECTED THUNDERSTORM
 THE DEPTH AND DURATION OF THE ECONOMIC CRISIS IN
INDONESIA WERE ARGUABLY UNIQUE
 FROM 1989 TO 1996, ANNUAL REAL GDP GROWTH
AVERAGED 8 PERCENT, SPURRED BY STRONG
INVESTMENT BEHAVIOR
 THE OVERALL FISCAL BALANCE WAS IN SURPLUS AFTER
1992
 PUBLIC DEBT FELL AS A SHARE OF GDP, THE
GOVERNMENT USED PRIVATIZATION PROCEEDS TO
REPAY LARGE AMOUNTS OF FOREIGN DEBT.
 INFLATION WAS BELOW 10%

1998 CRISIS


 ON 2 JULY 1997, THE CENTRAL BANK OF THAILAND WAS
FORCED TO ABANDON ITS FIXED EXCHANGE RATE
REGIME AND THE BAHT IMMEDIATELY DEPRECIATED BY
ALMOST 20%.
 AS QUESTIONS BEGAN TO BE RAISED ABOUT THE
STRUCTURAL SOUNDNESS OF THE EAST ASIAN
ECONOMIES THERE WAS A SUDDEN AND DRAMATIC
REVERSAL OF CAPITAL FLOWS AS INFLOWS TURNED INTO
MASSIVE CAPITAL OUTFLOWS AND BANKS THAT WERE
ONCE EAGER TO LEND TO NEARLY ANY ASIAN INVESTOR
SUDDENLY REFUSED TO RENEW SHORT-TERM CREDIT
LINES.


 DURING THE THREE MONTHS BETWEEN JULY AND
SEPTEMBER 1997, THE ASIAN FINANCIAL CRISIS
GATHERED FULL FORCE AND BEGAN TO AFFECT
INDONESIA DESPITE CONTINUED EXPRESSIONS
OF CONFIDENCE THAT THE SOUNDNESS OF ITS
ECONOMIC FUNDAMENTALS AND MANAGEMENT
WOULD SEE IT THROUGH WITH LITTLE DAMAGE.


THE 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 SECTOR
DEPOSITS OUT OF COMMERCIAL BANKS
 SEPTEMBER 1997, “TEN POLICY-MEASURES” COVERING THE
FINANCIAL, MONETARY AND BANKING SECTORS, AS WELL AS
THE REAL SECTOR.
 IN THE BANKING SECTOR TWO IMPORTANT DECISIONS WERE
MADE: 1) TO BAIL OUT HEALTHY BANKS FACING TEMPORARY
LIQUIDITY DIFFICULTIES AND 2) UNHEALTHY BANKS SHOULD
BE MERGED WITH OTHER BANKS OR BE LIQUIDATED.

 THE DECISION ALSO INCLUDED THE POSTPONEMENT OF
THE IMPLEMENTATION OF LARGE PROJECTS (PROJECTS
WITH A TOTAL COST OF $13 BILLION) THAT NEEDED
OVERSEAS LOANS.
 THE GOVERNMENT ANNOUNCED FURTHER ECONOMIC
REFORMS AND DEREGULATION MEASURES IN EARLY
SEPTEMBER, INCLUDING A COMMITMENT TO RENEWED
EFFORTS TOWARD STRENGTHENING AND ENFORCING
BANK PRUDENTIAL REGULATIONS.
 THE INITIAL ANNOUNCEMENT WERE NOT FOLLOWED BY
IMPLEMENTATION MEASURES, PROVIDING FURTHER
EVIDENCE THAT THE GOVERNMENT WAS NO LONGER
UNIFIED ON MEASURES NEEDED TO STEM THE IMPACT
OF THE CRISIS.

 THE CURRENCY CONTINUED TO DEPRECIATE, AND BY
EARLY SEPTEMBER HAD MOVED BEYOND 3000 PER
DOLLAR
 OCTOBER L997 THE INDONESIAN GOVERNMENT TURNED
TO THE IMF FOR ASSISTANCE.
 THE INITIAL IMF PROGRAM WAS BASED ON THE
ASSUMPTION THAT THE CRISIS WAS ESSENTIALLY A
MODERATE CASE OF CONTAGION—AN OVERSHOOT OF
THE EXCHANGE RATE (IMF, 2003: 78)—AND DESIGNED A
PROGRAM THAT WAS STANDARD AND CONVENTIONAL
FOR SUCH A “MILD” CRISIS.


 THE PROGRAM FOCUSED ON (1) TIGHTENING
MONEY SUPPLIES IN ORDER TO RAISE INTEREST
RATES AND PREVENT CAPITAL FROM FLEEING
AND ATTRACTING THE ALREADY FLEEING CAPITAL
BACK INTO THE COUNTRY AND; (2) STRUCTURAL
REFORM.
 MISJUDGMENT BY BOTH THE GOVERNMENT AND
THE IMF OF THE DEPTH AND NATURE OF THE
CRISIS.


CRITICISM AGAINST THE IMF

 PAUL VOLKER CRITICIZED THE IMF IMPOSED
STRUCTURAL CONDITIONALITY AS IRRELEVANT TO
FINANCIAL STABILIZATION, CYNICALLY CALLING THE
CONDITIONS ON MARKET REGULATIONS IN
CLOVES, ORANGES AND OTHER FOODSTUFFS AS A
“RECIPE”.
 THERE IS SOME SPECULATION THAT THE NEGATIVE
ASSESSMENT ON THE IMF PACKAGE COMING FROM A
PERSON WITH SUCH DISTINGUISHED BACKGROUND MAY
HAVE INFLUENCED THE MARKET NEGATIVELY.


 JOSEPH STIGLITZ CRITICIZED THE IMF FOR APPLYING THE
LATIN AMERICAN CASE TO THE ASIAN CRISIS RESULTING
IN WRONG DIAGNOSIS WHICH LED TO THE WRONG ---
AND IN INDONESIA’S CASE FATAL--- PRESCRIPTION IN THE
HANDLING OF THE CRISIS.
 HE MAINTAINED THAT IN THE HIGHLY INFLATIONARY
ENVIRONMENT OF LATIN AMERICA, WHAT WAS NEEDED
WAS A DECREASE IN DEMAND; WHILE IN THE CASE OF
EAST ASIA, THE PROBLEM WAS NOT EXCESS DEMAND
BUT INSUFFICIENT DEMAND.


THE ECONOMIC ABBYSS
 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 OF
RESTRUCTURING THE BANKING SYSTEM: RP. 650
TRILLION (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 MASSIVE
CAPITAL FLIGHT AND THE BREAKDOWN OF THE
DISTRIBUTION SYSTEM.


INDONESIA: PRE AND DURING CRISIS

Indicator Pre Crisis Crisis
Income (US$ Billion) 218 (1996) 120 (2000)
Income/Capita (US$) 1,110 (1996) 570 (2000)
GDP Growth (%) 6.6 (1965-1995) -13.6 (1998)
GDP (% Manu- 25 (1995) -14.2 (1998)
facturing Share)
Inflation (%) Single digit 78 (1998)


Indonesia: Pre and During Crisis

Indicator Pre Crisis Crisis
Exchange 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)
Poverty Line 11.9% (1996) 18.2% (1999)


THE CONFUSION

 NOVEMBER 1997, THE GOVERNMENT CLOSED 16 BANKS
FACING SERIOUS LIQUIDITY PROBLEMS, ONE OWNED BY
SUHARTO’S SON ALLOWED TO RESURFACE UNDER A
DIFFERENT NAME.
 SUHARTO ENDORSE EXCEPTIONAL TREATMENT OF HIS
FAMILY ASSETS.
 JANUARY 1998, AN UNREALISTIC OVERALL BUDGET
SURPLUS OF 1.3% OF GDP WAS TARGETED FOR FISCAL
YEAR 1998/99.


 THE CONFUSION OF PROJECTIONS ON
GROWTH:
• THE NOVEMBER IMF PROGRAM PROJECTED GROWTH OF
5% FOR 1997/98 AND 3% FOR 1998/99.
• IN THE JANUARY PROGRAM THE 1998/99- GROWTH
PROJECTION WAS REVISED AND REDUCED TO ZERO, WHILE
IN REALITY THE 1998/1999 GDP ACTUALLY DECLINED BY
13%
 THE RUPIAH CONTINUED TO DEPRECIATE
DESPITE ALL THE EFFORTS AND SUPPORT FROM
THE IMF AND DONOR COUNTRIES.


REALIZING THE SEVERITY OF THE CRISES

 IN LATE JANUARY 1998, PRESIDENT SUHARTO
ESTABLISHED:
• COUNCIL FOR THE STABILIZATION OF ECONOMIC AND
FINANCIAL RESILIENCE (DPKEKKU)
• INDONESIAN BANK RESTRUCTURING AGENCY
(IBRA/BPPN) TO TAKE OVER BANKS FACING LIQUIDITY
PROBLEMS


 THE JANUARY 1998 LOI CONTAINED THE 50-POINT
PLAN 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 DOMINATED
THE HEADLINES .


 THERE WAS A STRONG INDICATION THAT THE PRESIDENT
HAD NO INTENTIONS TO FOLLOW THROUGH THE
REFORM PROGRAM AGREED ON WITH THE IMF
 THE GOVERNMENT SERIOUSLY CONSIDERED ADOPTING
A CURRENCY BOARD SYSTEM (CBS)
 THE PRESIDENT AND THE IMF RELATIONSHIP HAD COME
TO A NEW LOW, HE DREW AN ANALOGY OF HIS DEALING
WITH IMF WITH A “GUERRILLA WAR”
 MARCH 6TH1998, FRUSTRATED BY THE LACK OF
PROGRESS ON THE JANUARY PROGRAM, THE IMF
ANNOUNCED THAT IT WAS DELAYING A $3BILLION
INFUSION SCHEDULED TO BE DISBURSED ON MARCH
15TH


SUHARTO’S RE-ELECTION
RE-

 REFLECTED IN THE GENERAL ELECTION OF 1997,
SUHARTO STILL HELD A STRONG GRIP ON THE
POLITICAL SYSTEM.
 MARCH 11TH, 1998 SUHARTO WAS INDEED RE-
ELECTED FOR ANOTHER FIVE-YEAR TERM BY THE MPR.
 A NEW CABINET ESTABLISHED MARKING THE DEMISE
OF THE ECONOMIC TECHNOCRATS.


EFFORTS AT ECONOMIC RECOVERY

 DISREGARDING THE POLITICAL CONTROVERSIES THE
NEW ECONOMIC TEAM SET OUT TO GET THE ECONOMY
MOVING AGAIN.
 MAJOR POLICY INITIATIVES:
• REPAIRING THE RELATIONS WITH THE INTERNATIONAL
COMMUNITY, AND;
• RESTORING MARKET CONFIDENCE.
 ALL THE MAJOR CREDITOR COUNTRIES WERE READY TO
GIVE SUPPORT TO INDONESIA’S EFFORTS AT
RECOVERY, THROUGH OR IN COOPERATION WITH THE
IMF.


 THE FIRST PRIORITIES WERE DIRECTED AT BOTH THE
RESTRUCTURING OF THE FINANCIAL AND BANKING
SYSTEM AND RESOLVING THE CORPORATE DEBT
PROBLEM
 THE GOVERNMENT ECONOMIC TEAM IMMEDIATELY RE-
ESTABLISHED DIALOGUE WITH THE IMF TO WORK ON A
RENEWED PROGRAM
 STRUCTURAL REFORMS WERE EMBRACED BY THE
ECONOMIC TEAM AS THEIR OWN
 THE NEED TO PROTECT THE POOR FROM THE WORST OF
THE CRISIS
 CLOSING INSOLVENT BANKS TO STOP THE BLEEDING OF
THE FINANCIAL SYSTEM

 STRENGTHENED THE EFFORTS TO DEAL WITH
CORPORATE DEBT PROBLEM WHICH HAD ACTUALLY
BEGAN IN 1997
 RESULT: ALTHOUGH INFLATION WAS STILL HIGH, THE
RUPIAH EXCHANGE RATE WAS STRENGTHENED FROM
10,000 AT THE START OF THE NEW CABINET TO 7,500
BY MID APRIL AND REMAINED BELOW 8,000 UNTIL
THE MAY TROUBLES OCCURRED


THE FLASH POINT

 WHILE THE ECONOMY SHOWED SAME IMPROVEMENT,
IN THE POLITICAL FRONT, THE SITUATION DETERIORATED
 SUHARTO HAD NO INTENTION TO UNDERTAKE REFORMS
AS THE POLITICAL AND ECONOMIC SITUATION
DEMANDED
 HOWEVER, THE ELITES AND LEADERS OF THE VARIOUS
REFORM MOVEMENTS WERE STILL WARY OF SUHARTO’S
POWER
 THE HIKE IN FUEL PRICES CHANGED EVERYTHING


 IT SET THE STAGE FOR THE ENDGAME OF THE
POLITICAL DRAMA
 THE CULMINATION OF POLITICAL CONFRONTATION
WAS REACHED WHEN IN EARLY MAY 1998 THE
GOVERNMENT ANNOUNCED A RISE IN FUEL
PRICES, WITH THE ACCOMPANYING CONSEQUENCES
OF A RISE IN PUBLIC TRANSPORTATION FARES
 SUHARTO RESIGNED 21 MAY 1998.


HABIBIE GOVERNMENT

 A NEW GOVERNMENT ESTABLISHED.
 THE ECONOMIC SITUATION AT THE TIME
HABIBIE CAME TO POWER HAD GROWN
MUCH WORSE LESS THAN A YEAR AFTER THE
FINANCIAL CRISIS HIT THE ECONOMY.


THE ECONOMIC QUAGMIRE
 DUE TO THE UPHEAVALS IN MAY, THE DISTRIBUTION
NETWORKS HAD BEEN SERIOUSLY DAMAGED.
 BASIC SUPPLIES WERE DISRUPTED. RICE, COOKING
OIL, SUGAR AND OTHER ESSENTIAL ITEMS BECAME
SCARCE AND PRICES WERE RISING.
 RICE IMPORTS HAD TO BE INCREASED BECAUSE OF THE
PROLONGED DROUGHT.
 DUE TO THE SUDDEN SURGE OF IMPORTS—AMOUNTING
TO 4.1 MILLION TONS FOR FISCAL YEAR 1998/99—
PRICES IN THE INTERNATIONAL MARKETS SOARED.


 THE INCREASED COST FOR IMPORT MEANT MORE
PRESSURE ON THE COUNTRY’S DEPLETED FOREIGN
EXCHANGE RESERVE.
 TO MAKE MATTERS WORSE, OVERSEAS BANKS CONTINUED
TO REFUSE TO HONOR INDONESIA’S LETTERS OF
CREDIT, MEANING THAT ALL IMPORTS HAD TO BE PAID FOR
BY CASH.
 PUBLIC TRANSPORTATION WAS ALSO DISRUPTED BECAUSE
OF THE LACK OF SPARE PARTS, A SUBSTANTIAL NUMBER OF
WHICH HAD TO BE IMPORTED.
 AS A RESULT, EXPORTATION OF MANUFACTURED GOODS
WAS DISRUPTED AT THE TIME WHEN INDONESIA’S
EXPORTS SHOULD HAVE ACTUALLY ENJOYED AN
ADVANTAGE BECAUSE OF THE HUGE DEPRECIATION OF THE
CURRENCY.

 THE HEAT GENERATED FROM POLITICAL TENSION DID
NOT HELP THE ECONOMY.
 FOREIGN INVESTORS STAYED AWAY, AND INSTEAD OF
INCOMING CAPITAL, RAMPANT CAPITAL FLIGHT TOOK
PLACE.
 BY THE TIME HABIBIE’S GOVERNMENT TOOK OFFICE THE
ECONOMY WAS OUT OF FOREIGN CURRENCY.


 DOMESTIC COMPANIES WERE STRUGGLING FOR SURVIVAL.
MANY HAD SIMPLY STOPPED PAYING THEIR
DEBT, DOMESTIC AS WELL FOREIGN.
 THE DEFAULT MADE THE CONDITION OF THE ALREADY
BATTERED BANKING SECTOR EVEN WORSE AS THE VOLUME
OF THEIR NON-PERFORMING LOANS SUDDENLY JUMPED.
 THE INDONESIAN BANKING AND CORPORATE SECTORS
WERE BOTH IN A DOWNWARD TAILSPIN, EACH PULLING
THE OTHER FURTHER DOWN.
 THE AMOUNT OF FOREIGN DEBT OWED BY INDONESIAN
COMPANIES WAS STAGGERING.
 BY MARCH 1998 THE TOTAL AMOUNT OF PRIVATE FOREIGN
DEBT HAD REACHED $84 BILLION, AROUND $30 BILLION
DUE IN 1998.

 WITHOUT A WAY OUT OF THE DEBT BURDEN INDONESIAN
DOMESTIC COMPANIES WOULD REMAIN PARALYSED.
 WITH THE STEEP DEPRECIATION OF THE RUPIAH, THE RISE
IN FOOD, FUEL AND OTHER COMMODITIES, INFLATION
SURGED. BETWEEN JANUARY AND MAY 1998 INFLATION
HAD REACHED 40%.
 DURING THE SAME PERIOD THE YEAR BEFORE IT HAD BEEN
LESS THAN 3%.
 BY THE END OF AUGUST INFLATION HAD REACHED 70%.
 BECAUSE OF THE COLLAPSE OF MANY INDUSTRIES AND
BUSINESSES, UNEMPLOYMENT INCREASED, AND WITH THE
HIGH LEVEL OF INFLATION, THE NUMBER OF POOR
FAMILIES ALSO INCREASED SUBSTANTIALLY.

 THE PROGRESSIVE REDUCTION OF POVERTY, ONE OF THE
MOST SIGNIFICANT ACHIEVEMENTS OF THE NEW
ORDER, HAD BEEN SET BACK.
 POVERTY LEVELS WENT FROM 11% IN 1996 POVERTY TO
24.2% OF THE POPULATION OR 49.5 MILLION BY THE END
OF 1998
 IN YEAR 1997-1998 THE NUMBER OF WAGE EARNERS
DECLINE BY 5.1%, WHILE AT THE SAME TIME REAL WAGES
DECLINED SHARPLY BY 35%.
 ILLUSTRATING THE RESULTING RE-MIGRATION FROM THE
CITY BACK TO THE RURAL AREAS IS THE DROP IN THE
EMPLOYMENT OF THE MANUFACTURING SECTOR BY
9.8%, WHILE IN THE AGRICULTURAL
SECTOR, EMPLOYMENT ACTUALLY INCREASED BY 13.3%.

 INDICATING THE PRESSURE EXERTED ON THE MEAGER
ECONOMY IN THE RURAL AREAS AS URBAN EMPLOYMENT
WAS SHRINKING
 THE IMPACT ON SOCIAL AND HEALTH SECTORS WAS
DEVASTATING.
 THERE WERE MEDICINES SHORTAGES BECAUSE OF THE
DIFFICULTY OF IMPORTING THE RAW MATERIALS. THOSE
MEDICATIONS THAT WERE AVAILABLE HAD GONE UP IN
PRICE.
 INFANT MORTALITY WAS RISING. ACCORDING TO A REPORT
OF THE MINISTER OF HEALTH, IN MARCH 1999, TWO
MILLION CHILDREN UNDER FIVE YEARS OLD SUFFERED
FROM SEVERE MALNUTRITION.
 THERE WERE REPORTS FROM VARIOUS REGIONS THAT
CHILDREN WERE DYING FROM MALNUTRITION.

 THERE WERE TALKS ABOUT A LOST GENERATION AS A
RESULT OF MILLIONS OF CHILDREN GROWING UP
UNDERNOURISHED, THUS RETARDING THEIR MENTAL AND
PHYSICAL DEVELOPMENT FOR YEARS TO COME.
 MANY SCHOOL CHILDREN HAD TO LEAVE SCHOOL BECAUSE
THEIR FAMILIES COULD NOT AFFORD THE COST.
 MANY WERE FORCED TO FIND WORK OR OTHER WAYS TO
HELP THEIR FAMILIES, INCLUDING FLEEING TO THE CITIES
TO BECOME STREET URCHINS.
 THE INCREASING UNEMPLOYMENT AND POVERTY CAUSED
A STEEP RISE IN CRIME.


 ESPECIALLY DISTURBING—NOT LEAST FROM THE
ENVIRONMENTAL PROTECTION POINT OF VIEW—WAS
ILLEGAL LOGGING, INCLUDING IN PROTECTED FORESTS.
 THE CRISIS HAD BY NOW BECOME COUNTYWIDE.
 THIS CREATED AN ENVIRONMENTAL AND HEALTH
HAZARD THAT ADDED ANOTHER DIMENSION TO THE
PROBLEMS ALREADY FACED BY THE COUNTRY.


LAYING THE GROUNDWORK FOR
ECONOMIC RECOVERY

 UNDAUNTED BY THE SURROUNDING POLITICAL
CONTROVERSY, THE NEW GOVERNMENT’S
ECONOMIC TEAM IMMEDIATELY EMBARKED ON
A SERIES OF MEASURES TO HALT THE
DETERIORATION AND RESTART THE RECOVERY
OF THE ECONOMY.


 THE ECONOMIC RECOVERY AGENDA CONSISTED
OF 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 SOCIAL
SAFETY NET


 INTERNATIONAL COOPERATION SUPPORTING INDONESIA’S
EFFORTS AT RECOVERY WAS CHANNELED THROUGH
MULTILATERAL VENUES: IMF, CGI, AND THE PARIS CLUB
 THE IMF PROGRAM STARTED WITH THE FIRST AGREEMENT
IN NOVEMBER 1997 AND WOULD TERMINATE AT THE END
OF 2000.
 THE FINANCIAL SUPPORT ORIGINALLY PROVIDED
INDONESIA WITH ACCESS TO FUNDS UNDER A STAND-BY
ARRANGEMENT (SBA) AMOUNTING TO SDR 8.3 BILLION OR
THE EQUIVALENT OF US $11.4 BILLION.
 IN AUGUST 1998 THE SBA WAS REPLACED BY A MORE
CONCESSIONARY EXTENDED FUND FACILITY (EEF) TO THE
AMOUNT OF SDR 5.4 BILLION, EQUIVALENT TO US $7.2
BILLION.

 THE FIRST IMF LOI UNDER THE HABIBIE’S GOVERNMENT
WAS AGREED ON JUNE 24, 1998.
 DUE TO THE SEVERITY OF THE CRISIS, THE AGREEMENT
WAS REVIEWED ALMOST EVERY MONTH DURING
1998, RESULTING IN RENEWED LOI.


 THE CGI MEETING WAS CO-HOSTED BY THE INDONESIAN
GOVERNMENT AND THE WORLD BANK.
 DURING HABIBIE'S PRESIDENCY THE CONSORTIUM MET
TWICE IN PARIS, ON 29-30 JULY 1998 AND 27-28
JULY1999.
 MEMBERS OF THE CGI WERE INDONESIA’S DONOR
COUNTRIES AND INTERNATIONAL ORGANIZATIONS SUCH
AS THE WORLD BANK, THE ASIAN DEVELOPMENT
BANK, THE ISLAMIC DEVELOPMENT AND THE EUROPEAN
UNION.


 TWO OF THE BIGGEST DONORS WERE JAPAN AND THE
WORLD BANK.
 JAPAN USUALLY PROVIDED ONE THIRD OF THE PLEDGE
COMING OUT OF THE CGI MEETING.
 IN THE 1998 CGI MEETING THE DONORS PLEDGED $ 7.9
BILLION—THE HIGHEST EVER FIGURE—TO BE DISBURSED
IN FISCAL YEAR 1998-99, AND IN JULY 1999 MEETING
THE PLEDGE WAS $5.9 BILLON FOR FISCAL YEAR 1999-
2000.


 ANOTHER MEETING ALSO HELD IN PARIS WAS TO
RESCHEDULE INDONESIA’S SOVEREIGN DEBT UNDER THE
AEGIS OF THE “PARIS CLUB.”
 THE RESCHEDULING OF DEBTS WAS ESSENTIAL IN VIEW OF
THE FISCAL BURDEN THAT INDONESIA WAS FACING.
 THERE IS BUT ONE CAVEAT FOR A PARIS CLUB DEBT
RESCHEDULING: THE COUNTRY CONCERNED NEEDS TO BE
UNDER AN IMF PROGRAM.
 ON SEPTEMBER 23, INDONESIA SUCCESSFULLY
NEGOTIATED THE RESCHEDULING OF ITS DEBT DUE TO FALL
IN THE 1998-99 AND 1999-2000 TO THE AMOUNT OF $4.2
BILLION.
 IT WAS A MUCH-NEEDED RELIEF TO THE SEVERE FISCAL
SITUATION.

RESTRUCTURING OF
THE BANKING SECTOR

 THE ECONOMIC TEAM RECOGNIZED THAT
IMPLEMENTING A COMPREHENSIVE SOLUTION FOR THE
BANKING SYSTEM SHOULD BE GIVEN A HIGH PRIORITY.
 IT WAS AN ESSENTIAL CONDITION FOR THE RECOVERY
OF THE CORPORATE SECTOR AND TO GET THE ECONOMY
MOVING AGAIN.
 THE OBJECTIVE WAS TO RESOLVE THE FINANCIAL
DIFFICULTIES OF THE WEAKENED BANKS AND ESTABLISH
A SOUND FUNCTIONING BANKING SYSTEM AS QUICKLY
AS 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 CLOSE
THEM, WHILE AT THE SAME TIME
C. MAINTAINING THE COMMITMENT TO SAFEGUARD
THE INTEREST OF DEPOSITORS AND CREDITORS.


 THE ECONOMIC TEAM ESTABLISHED THAT DECISIONS
REGARDING INDIVIDUAL BANKS HAD TO BE BASED ON
UNIFORM, TRANSPARENT AND PUBLICLY KNOWN
CRITERIA, DRAWING FROM THE RESULTS OF PORTFOLIO
REVIEWS DONE BY INTERNATIONAL ACCOUNTING FIRMS.
 THE REMAINING 211 BANKS WERE SUBJECTED TO
AUDIT, OF WHICH ALL THE 67 BANKS THAT WERE
LICENSED TO CONDUCT FOREIGN EXCHANGE TRADING
WERE AUDITED BY THE “BIG SIX” INTERNATIONAL
AUDITING FIRMS, AND THE REST WERE AUDITED BY
BANK INDONESIA.


 OWNERS AND MANAGEMENT OF THE BANK ALSO HAD
TO GO THROUGH A CERTAIN FIT AND PROPER TEST.
 IN MARCH 1999 THE GOVERNMENT ANNOUNCED THAT
SEVENTY-THREE BANKS, COMPRISING 5 PERCENT OF
BANKING SECTOR ASSETS, WERE STRONG ENOUGH TO
CONTINUE WITHOUT GOVERNMENT SUPPORT.
 NINE BANKS COMPRISING 10 PERCENT OF BANKING
SECTOR ASSETS WERE ELIGIBLE FOR JOINT
RECAPITALIZATION SCHEME WITH THE GOVERNMENT.


 SEVEN BANKS COMPRISING 3 PERCENT OF BANKING
SECTOR ASSETS HAD FAILED THE CRITERIA FOR JOINT
RECAPITALIZATION, BUT DUE TO THEIR SIZE —HAVING
MORE THAN 80.000 DEPOSITORS —THEY WERE TAKEN
OVER BY IBRA; AND
 THIRTY EIGHT BANKS COMPRISING 5 PERCENT OF THE
BANKING SECTOR WITH BELOW THE MINIMUM CAPITAL
ADEQUACY RATION (CAR), WERE CLOSED.
 THE EFFORTS TO ESTABLISH A HEALTHY BANKING
SYSTEM WAS NOT ONLY LIMITED TO BANK
RESTRUCTURING. A STRONG FOUNDATION WAS NEEDED
TO PREVENT SIMILAR CRISIS IN THE FUTURE AND TO
PROVIDE FOR SOUND GOVERNANCE IN THE BANKING
SECTOR.

 STRENGTHENING REGULATORY AND PRUDENTIAL
FRAMEWORK FOR A SOUND BANKING SYSTEM
CONSTITUTED ANOTHER IMPORTANT ELEMENT OF THE
STRATEGY TO REFORM THE BANKING SECTOR.
 IN OCTOBER 1998, THE PARLIAMENT PASSED THE
AMENDMENT TO THE BANKING LAW (LAW
NO10/1998), ALLOWING FOR MAJOR IMPROVEMENTS IN
AREAS OF BANK LICENSING AND OWNERSHIP, OPENNESS
TO FOREIGN DIRECT INVESTMENT, BANK SECRECY AND
EMPOWERMENT OF IBRA.
 THE MOST FAR REACHING WAS THE NEW LAW ON
CENTRAL BANK PROVIDING FOR INDEPENDENCE OF BANK
INDONESIA PASSED IN MAY 1999 (LAW NO 23/1999).


 THE NEW LAW ON THE CENTRAL BANK WAS INTENDED
TO REDUCE THE DANGER OF MORAL HAZARD AND
PROHIBIT GOVERNMENT INTERFERENCE IN THE
BANKING AND MONETARY POLICIES.
 ACCOMPANYING THE LAW ON THE INDEPENDENCE OF
THE CENTRAL BANK ANOTHER LAW WAS PASSED TO
AUGMENT THE AUTHORITY OF THE CENTRAL BANK TO
MONITOR THE TRAFFIC OF FOREIGN CURRENCY AND
CORPORATE EXTERNAL DEBT (LAW NO 24/1999).


RESTRUCTURING OF
THE CORPORATE SECTOR

 THE FINANCIAL RESTRUCTURING OF THE PRIVATE
SECTOR WAS CRUCIAL TO THE ECONOMY, AND AN
ESSENTIAL COUNTERPART TO THE BANKING SYSTEM
RESTRUCTURING, AS A SOUND CORPORATE SECTOR IS
NECESSARY FOR A SOUND BANKING SYSTEM AND VICE
VERSA.
 THE ECONOMIC TEAM PRESSED AHEAD WITH A
COMPREHENSIVE PROGRAM OF MEASURES TO ADDRESS
THE PERVASIVE DEBT PROBLEMS OF THE PRIVATE
SECTOR.


 THE PRIVATE EXTERNAL DEBT TEAM, SUPPORTED BY
THE GOVERNMENT HAD COLLECTED DATA FROM
CORPORATIONS ON THEIR EXTERNAL
OBLIGATIONS, AND HAD TAKEN THE INITIATIVES TO
HOLD TALKS WITH REPRESENTATIVES OF THE
CREDITORS.
 AN AGREEMENT BETWEEN REPRESENTATIVE OF
INTERNATIONAL LENDERS AND INDONESIAN
COMPANIES ON A FRAMEWORK FOR CORPORATE DEBT
RESCHEDULING WAS REACHED IN FRANKFURT ON JUNE
4, 1998.


 KNOWN AS THE “FRANKFURT AGREEMENT” THE SCHEME
THROUGH THE INDONESIAN DEBT RESTRUCTURING
AGENCY (INDRA)—UNDER BANK INDONESIA—PROVIDED
FOR THE VOLUNTARY RESTRUCTURING OF THE DEBT OF
CORPORATIONS TO FOREIGN BANKS ON TERMS THAT
WERE CONSISTENT WITH INDONESIAN’S OVERALL
EXTERNAL PAYMENT CAPACITY, AND THUS GAVE CASH
FLOW RELIEF TO DOMESTIC CORPORATIONS.
 THE SCHEME WAS SIMILAR TO THAT USED IN MEXICO
DURING ITS FINANCIAL CRISIS, CALLED THE FICORCA
SCHEME.
 ONE IMPORTANT ASPECT OF THE SCHEME WAS TO
RESOLVE THE PROBLEM IN THE PROVISION OF TRADE
FINANCING WHICH HAD BEEN SEVERELY DISRUPTED.

 TO COMPLEMENT THE NEWLY AMENDED LAW AND
INDRA SCHEME A NEW INITIATIVE WAS LAUNCHED IN
SEPTEMBER 1998, CALLED THE “JAKARTA INITIATIVE”.
 THE OBJECTIVE WAS TO PROMOTE VOLUNTARY
RESTRUCTURING OF CORPORATE DEBT BETWEEN THE
CREDITOR AND THE DEBTOR, ESTABLISHING GUIDELINES
FOR OUT-OF-COURT CORPORATE RESTRUCTURING.
 UNDER THE “JAKARTA INITIATIVE” VARIOUS MEASURES
WERE ALSO UNDERTAKEN TO IMPROVE CORPORATE
GOVERNANCE.


 ANOTHER ESSENTIAL PART OF THE CORPORATE DEBT
RESTRUCTURING STRATEGY WAS TO THE
ESTABLISHMENT OF AN EFFECTIVE BANKRUPTCY
SYSTEM.
 THE EXISTING LAW ON BANKRUPTCY WAS CENTURY OLD
HAVING BEEN INHERITED FROM THE COLONIAL
ERA, AND COULD NO LONGER COPE WITH THE
COMPLEXITY OF MODERN COMMERCE.
 IN JULY THE PARLIAMENT RATIFIED THE REVISED
BANKRUPTCY LAW (LAW NO 4/1998).


 IN FURTHER EFFORTS TO IMPROVE GOVERNANCE, IN
EARLY 1999 THE PARLIAMENT PASSED THE LAW ON THE
PROHIBITION OF MONOPOLY PRACTICES AND UNFAIR
COMPETITION (LAW NO 5/1999).
 THE LAW PROVIDES LEGAL GUIDELINES FOR THE
PREVENTION OF CORRUPT PRACTICES THROUGH THE
GRANTING OF LICENSES, SPECIAL TREATMENT AND
MONOPOLIES TO CERTAIN GROUP OF PEOPLE.
 A LAW ON CONSUMER PROTECTION WAS ALSO
PROMULGATED (LAW NO 8/1999). THE ROLE OF CIVIL
SOCIETY IN CONSUMER PROTECTION WAS CONSTITUTED
IN THE LAW.


 THE PARLIAMENT ALSO PASSED A NEW LAW ON
ENVIRONMENT PROTECTION PROVIDING FOR A
STRONGER ROLE OF THE COMMUNITY AND CIVIL
SOCIETY ON MATTERS RELATED TO ENVIRONMENT (LAW
NUMBER 23/1999).
 THE 1967 LAW ON FORESTRY WAS REVISED
ESTABLISHING THE PRINCIPLES OF ENVIRONMENTAL
PROTECTION, EQUITY, JUSTICE AND TRANSPARENCY IN
THE FORESTRY MANAGEMENT AND EXPLOITATION (LAW
NO 41/1999).


 THE ECONOMIC TEAM GAVE PARTICULAR ATTENTION TO
PUBLIC ENTERPRISES THAT STILL PLAYED AN IMPORTANT
ROLE IN THE ECONOMY.
 TO IMPROVE THEIR EFFICIENCY AND GOVERNANCE
INTERNATIONAL AUDITORS SUBJECTED KEY PUBLIC
COMPANIES TO SPECIAL AUDIT.
 INTERNATIONAL AUDITING COMPANIES WERE ASSIGNED
TO AUDIT THE FINANCIAL ACCOUNT OF PERTAMINA
(STATE OIL COMPANY), PLN (THE STATE ELECTRICITY
COMPANY), BULOG (THE LOGISTICS AGENCY) AND THE
REFORESTATION FUND.


 THE SECOND ROUND OF SPECIAL AUDIT INCLUDED THE
PRINCIPAL NATIONAL AIRLINE, THE PORT
CORPORATIONS, THE DOMESTIC TELECOMMUNICATION
COMPANY, AND THE TOLL ROAD OPERATORS.
 A MASTER PLAN ON THE REFORM OF STATE ENTERPRISES
HAD BEEN DEVISED INCLUDING THE RESTRUCTURING
AND PRIVATIZATION OF STATE ENTERPRISES TO IMPROVE
EFFICIENCY, PROFITABILITY, AND SERVICE-DELIVERY AND
THEREFORE LAY THE FOUNDATION FOR FUTURE
GROWTH.


 TO PROVIDE FOR A STRONGER LEGAL BASIS TO DEFINE
AND CRIMINALIZE CORRUPT PRACTICES, IN MAY
1999, THE PARLIAMENT PASSED THE LAW ON CLEAN
GOVERNMENT (LAW NO 28/999).
 THIS LAW INCLUDES PROVISIONS REQUIRING FAIR AND
EQUAL TREATMENT FROM GOVERNMENT OFFICIALS FOR
ALL PEOPLE, AS WELL AS THE RIGHT OF THE PUBLIC TO
SEEK INFORMATION ABOUT POLICY-RELATED MATTERS
AND TO EXPRESS VIEWS ON THOSE ISSUES IN A
RESPONSIBLE MANNER.


 ANOTHER PROVISION OF THIS LAW REQUIRES THAT
PUBLIC OFFICIALS —ELECTED AS WELL APPOINTED—
SHOULD REPORT THEIR WEALTH BEFORE AND AFTER
TAKING OFFICE, SUBJECT TO INVESTIGATION BY A
SPECIAL COMMISSION TO ENSURE THAT GOVERNMENT
OFFICIALS DO NOT ENRICH THEMSELVES IMPROPERLY.
 IT WAS FOLLOWED BY ANOTHER LAW ON THE
ERADICATION OF CORRUPT PRACTICES (LAW NO
31/1999). THIS LAW PROVIDES STRONGER GUIDELINES
ON INVESTIGATION AND PROSECUTION OF CORRUPT
PRACTICES.
 THE NEW LAW ALSO PROVIDES FOR THE ESTABLISHMENT
OF AN INDEPENDENT COMMITTEE TO ERADICATE
CORRUPTION.

HELPING THE POOR

 HIGH PRIORITY WAS GIVEN ON MEASURES TO PROTECT
THE POOR FROM THE WORST IMPACT OF THE CRISIS.
 THE STRATEGY CONSISTED OF TWO ELEMENTS: A)
GENERAL ECONOMIC POLICIES THAT WOULD HAVE
IMPACT ON THE POOR, AND B) TARGETED POLICIES FOR
THE BENEFIT OF THE POOR.
 FOREMOST IN THE FIRST PRONG OF THE STRATEGY WAS
RESTORING MACROECONOMIC STABILITY.


 IMPROVEMENT OF THE VALUE OF THE CURRENCY AND
ARRESTING INFLATION WOULD SUBSTANTIALLY IMPROVE
THE ECONOMIC CONDITION OF THE POOR, DIRECTLY
AND INDIRECTLY AS THE ECONOMY BEGAN TO RECOVER.
 ADEQUATE SUPPLY OF FOOD AND OTHER BASIC
NECESSITIES WOULD REDUCE THE COST OF THOSE
ITEMS.
 AS AN EMERGENCY MEASURE, THE GOVERNMENT HAD
IMPOSED A TEMPORARY BAN ON EXPORTS OF
RICE, WHEAT AND WHEAT
FLOUR, SOYBEANS, SUGAR, KEROSENE, AND FISHMEAL.


 TO THE SEVERITY AND COMPLEX ITY OF THE CRISIS THE
GENERAL ECONOMIC POLICIES ALONE WERE NOT
ENOUGH TO PROTECT THE POOR FROM THE WORST
IMPACT OF THE CRISIS WITHOUT A SPECIFICALLY
TARGETED POLICY FOR THE POOR.
 THE TARGETED POLICIES FOR THE POOR, OR THE SOCIAL
SAFETY NET ENCOMPASSED THREE BROAD AREAS OF
ACTION: I) MAINTAINING THE AVAILABILITY AND
AFFORDABILITY OF KEY COMMODITIES IMPORTANT TO
THE POOR; II) GENERATING EMPLOYMENT AND
MAINTAINING INCOMES; III) PRESERVING KEY SOCIAL
SERVICES.


 THE MOST IMPORTANT BASIC COMMODITY WAS RICE. A
PROGRAM WAS INITIATED IN JULY 1998 TO PROVIDE 10
KG OF RICE AT ABOUT ONE-HALF OF THE MARKET PRICE
TO LOW-INCOME FAMILIES FIRST IN THE JAKARTA AREA
AND IN SEPTEMBER EXTENDED TO COVER 7½ MILLION
VERY POOR FAMILIES THROUGHOUT THE COUNTRY.
 IN DECEMBER THE MONTHLY ALLOCATIONS UNDER THE
SCHEME WAS INCREASED FROM 10 KILOGRAMS TO 20
KILOGRAMS PER FAMILY COVERING 17 MILLION POOR
FAMILIES


 TO IMPROVE PURCHASING POWER IN RURAL AND
URBAN AREAS, THE GOVERNMENT HAD SET UP PUBLIC
WORKS PROJECTS THROUGHOUT THE COUNTRY TO
BOOST INCOMES OF THE POOR, THE UNEMPLOYED AND
THE UNDEREMPLOYED.
 TO SUPPLEMENT THESE EFFORTS, CASH-FOR-WORK
PROGRAMS ARE BEING IMPLEMENTED IN DROUGHT-
STRICKEN AREAS OF THE COUNTRY.


 PRESERVING ACCESS TO CRITICAL SOCIAL SERVICES FOR
THE POOR CONSTITUTED AN IMPORTANT ASPECT OF THE
SOCIAL SAFETY NET.
 IN WHAT WAS CONSIDERED BY THE WORLD BANK AS THE
MOST SUCCESSFUL INTERVENTION, AMONG THE SOCIAL
SAFETY NETS HAD BEEN THE SCHOLARSHIP AND GRANT
PROGRAM DESIGNED TO MAINTAIN ENROLMENTS AND
QUALITY OF SCHOOLING AT PRE-CRISIS LEVEL.


 THE PROGRAM EXTENDED TO THE POOREST 6 PERCENT
OF STUDENTS ENROLLED IN PRIMARY SCHOOLS, 17
PERCENT IN JUNIOR SECONDARY AND 10 PERCENT IN
SENIOR SECONDARY SCHOOLS.
 IT ALSO PROVIDED GRANTS TO THE 60 PERCENT OF THE
POOREST IN EACH CATEGORY (SEE WORLD BANK, 1999).
 THE PROGRAM HAD REACHED 4 MILLION STUDENTS.


 IN HEALTH SERVICES, THE PRIORITY WAS GIVEN TO THE
POOR TO HAVE ACCESS TO BASIC HEALTH SERVICES AND
ESSENTIAL MEDICINES, AND PREVENTED MALNUTRITION
AND MICRONUTRIENT DEFICIENCIES.
 THE GOVERNMENT MADE AVAILABLE SUPPLEMENTARY
FOOD FOR YOUNG CHILDREN THROUGH THE SCHOOL
SYSTEM AND PREGNANT AND LACTATING WOMEN IN
POOR VILLAGES.
 THIS PROGRAM HAD REACHED 8.1 MILLION PUPILS IN
52.5 THOUSAND SCHOOLS NATIONWIDE.


ON THE CUSP OF RECOVERY

 BY THE END OF HABIBIE’S PRESIDENCY, INDONESIA WAS
EMERGING FROM THE CRISIS
 THE EXCHANGE RATE, INFLATION AND INTEREST RATE
HAD RESPONDED WELL TO THE GOVERNMENTS
ECONOMIC RECOVERY POLICIES
 THE GRADUAL RETURN OF MARKET AND INVESTOR
CONFIDENCE, REVITALIZING THE STOCK MARKET AND
RESTARTED EXPORTS


 SPECIAL ATTENTION WAS GIVEN TO EMPOWER THE
SMALL BUSINESS
 THE NUMBERS IN POVERTY HAD ALSO STOPPED RISING
 THE PROGRESS TOWARD RECOVERY HAD REACHED THE
STAGE WHERE IN FISCAL POLICY THE GOVERNMENT HAD
SHIFTED ITS FOCUS FROM FISCAL STIMULUS TO FISCAL
SUSTAINABILITY


MONTHLY RATE OF INFLATION
(IN PERCENT)

Month
Year
1 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
Source: President’s Accountability Speech to the People’s Consultative Assembly of the
Republic of Indonesia in October 1999.


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)
1996-


 PUTTING FIREWALLS AROUND THE FINANCIAL SYSTEM
THROUGH VARIOUS MECHANISMS, TO PREVENT
ECONOMIC COLLAPSE CAUSED BY FITURE EXTERNAL
SHOCKS.
 A DECADE AFTER THE 1998 CRISIS INDONESIA’S
ECONOMY NOT ONLY HAD RECOVERED BUT WAS WELL
ON ITS WAY TO BECOME ONE OF THE MOST DYNAMIC
EMERGING ECONOMIES.
 INDONESIA NOW BELONGS TO THE G-20, THE 20
LARGEST ECONOMIES IN THE WORLD.


2008 CRISIS


 AFTER THE FINANCIAL CRISES OF 1997 AND 1998, THE
GOVERNMENTS OF THE AFFECTED COUNTRIES TRIED TO
PROTECT THEMSELVES AGAINST A REPEAT
PERFORMANCE.
 THEY AVOIDED THE SHORT TERM FOREIGN BORROWING
THAT HAD MADE THEM VULNERABLE TO A CUTOFF OF
OVERSEAS FUNDING. THE IDEA WAS TO "DECOUPLED"
FROM THE UNITED STATES.


 HOWEVER THERE WAS ANOTHER TRANSFORMATION IN
THE CHARACTER OF THE FINANCIAL SYSTEM OVER THE
PAST FIFTEEN YEARS, WITH MUCH OF IT TAKING PLACE
AFTER THE ASIAN CRISIS-NAMELY, THE RISE OF
FINANCIAL GLOBALIZATION, WITH INVESTORS IN EACH
COUNTRY HOLDING LARGE STAKES IN OTHER
COUNTRIES.


 IN 1996, ON THE EVE OF THE ASIAN CRISIS, THE UNITED
STATES HAD ASSETS OVERSEAS EQUAL TO 52 PERCENT OF
GDP, AND LIABILITIES EQUAL TO 57 PERCENT OF GDP.
 BY 2007, THESE NUMBERS WERE UP TO
128 PERCENT AND 145 PERCENT, RESPECTIVELY.
 THE UNITED STATES HAD MOVED DEEPER INTO NET
DEBTOR STATUS; BUT THE NET IS LESS IMPRESSIVE THAN
THE VAST INCREASE IN CROSS-HOLDINGS.


 LIKE MUCH OF WHAT HAPPENED TO THE FINANCIAL
SYSTEM OVER THE PAST DECADE OR TWO, THIS CHANGE
WAS 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 OF
THEIR WEALTH IN THE UNITED STATES, THEY WERE LESS
EXPOSED TO A SLUMP OVERSEAS.


 BUT A LARGE PART OF THE INCREASE IN FINANCIAL
GLOBALIZATION ACTUALLY CAME FROM THE
INVESTMENTS OF HIGHLY LEVERAGED FINANCIAL
INSTITUTIONS, WHICH WERE MAKING VARIOUS SORTS
OF RISKY CROSS-BORDER BETS.
 AND WHEN THINGS WENT WRONG IN THE UNITED
STATES, THESE CROSS-BORDER INVESTMENTS ACTED AS
WHAT ECONOMISTS CALL A "TRANSMISSION
MECHANISM," ALLOWING A CRISIS THAT STARTED WITH
THE U.S. HOUSING MARKET TO DRIVE FRESH ROUNDS OF
CRISES OVERSEAS.


 THE FAILURE OF HEDGE FUNDS ASSOCIATED WITH A
FRENCH BANK IS GENERALLY CONSIDERED TO HAVE
MARKED THE BEGINNING OF THE CRISIS; BY THE FALL
OF 2008, THE TROUBLES OF HOUSING LOANS IN PLACES
LIKE FLORIDA HAD DESTROYED THE BANKING SYSTEM
OF ICELAND.


 IN THE CASE OF THE EMERGING MARKETS, THERE WAS A
SPECIAL POINT OF VULNERABILITY, THE SO-CALLED
CARRY TRADE. THIS TRADE INVOLVES BORROWING IN
COUNTRIES WITH LOW INTEREST RATES, ESPECIALLY BUT
NOT ONLY JAPAN, AND LENDING IN PLACES WITH HIGH
INTEREST RATES. IT WAS A HIGHLY PROFITABLE TRADE AS
LONG AS NOTHING WENT WRONG; BUT EVENTUALLY
SOMETHING DID.


THE UNFOLDING CRISIS

 THE ONLY SURPRISE ABOUT THE ECONOMIC CRISIS OF
2008 WAS THAT IT CAME AS A SURPRISE TO SO MANY. A
DEREGULATED MARKET AWASH IN LIQUIDITY AND LOW
INTEREST RATES, A GLOBAL REAL ESTATE BUBBLE, AND
SKYROCKETING SUBPRIME LENDING WERE A TOXIC
COMBINATION.
 ADD IN THE U.S. FISCAL AND TRADE DEFICIT AND THE
CORRESPONDING ACCUMULATION IN CHINA OF HUGE
RESERVES OF DOLLARS-AN UNBALANCED GLOBAL
ECONOMY-AND IT WAS CLEAR THAT THINGS WERE
HORRIBLY AWRY.

 TO OBSERVERS IN THE UNITED STATES AND EUROPE, THE
EAST ASIAN BAILOUTS IN 1997 WERE A SUCCESS
BECAUSE THE UNITED STATES AND EUROPE HAD NOT
BEEN HARMED.
 WHAT WAS DIFFERENT ABOUT THE 2008 CRISIS FROM
THE MULTITUDE THAT HAD PRECEEDED IT DURING THE
PAST QUARTER CENTURY WAS THAT THIS CRISIS BORE A
"MADE IN THE USA" LABEL. AND WHILE PREVIOUS
CRISES HAD BEEN CONTAINED, THIS "MADE IN THE USA"
CRISIS SPREAD QUICKLY AROUND THE WORLD.


 THE UNITED STATES HAD A HOUSING BUBBLE. WHEN
THAT BUBBLE BROKE AND HOUSING PRICES FELL FROM
THEIR STRATOSPHERIC LEVELS, MORE AND MORE
HOMEOWNERS FOUND THEMSELVES "UNDERWATER.”
 THEY OWED MORE ON THEIR MORTGAGES THAN WHAT
THEIR HOMES WERE VALUED. AS THEY LOST THEIR
HOMES, MANY ALSO LOST THEIR LIFE SAVINGS AND
THEIR DREAMS FOR A FUTURE-A COLLEGE EDUCATION
FOR THEIR CHILDREN, A RETIREMENT IN COMFORT.


 THE COLLAPSE OF THE BUBBLE AND THE TIGHTENING OF
CREDIT HAD INEVITABLE CONSEQUENCES. THE
ECONOMY SLOWED. AS THE ECONOMY SLOWED, THE
NUMBER OF FORECLOSURES MOUNTED.
 THE PROBLEMS IN REAL ESTATE FIRST SURFACED IN THE
SUBPRIME MARKET BUT SOON BECAME MANIFEST IN
OTHER AREAS.


 IF PEOPLE COULDN'T MAKE THEIR HOUSE PAYMENTS,
THEY WOULD ALSO HAVE TROUBLE MAKING THEIR
OTHER—INCLUDING CARD—CREDIT PAYMENTS.
 WITH REAL ESTATE PRICES PLUNGING, IT WAS ONLY A
MATTER OF TIME BEFORE PROBLEMS IN PRIME
RESIDENTIAL AND COMMERCIAL REAL ESTATE
APPEARED.
 AS CONSUMER SPENDING DRIED UP, IT WAS INEVITABLE
THAT MANY BUSINESSES WOULD GO BANKRUPT-AND
THAT MEANT THE DEFAULT RATE ON COMMERCIAL
LOANS WOULD ALSO RISE.


 TWO-THIRDS TO THREE-QUARTERS OF THE ECONOMY
(OF GDP) WAS HOUSING RELATED: CONSTRUCTING NEW
HOUSES OR BUYING CONTENTS TO FILL THEM, OR
BORROWING AGAINST OLD HOUSES TO FINANCE
CONSUMPTION.
 IT WAS UNSUSTAINABLE-AND IT WASN'T SUSTAINED.


 FALLING HOME PRICES HAVE A DIRECT NEGATIVE EFFECT
ON EMPLOYMENT THROUGH THE DECLINE IN
CONSTRUCTION.
 THEY TEND TO LEAD TO REDUCED CONSUMER SPENDING
BECAUSE CONSUMERS FEEL POORER AND LOSE ACCESS
TO HOME EQUITY LOANS; THESE NEGATIVES HAVE A
MULTIPLIER EFFECT AS FALLING EMPLOYMENT LEADS TO
FURTHER DECLINES IN SPENDING.


 WHEN THE BUBBLE POPPED, THE EFFECTS WERE
AMPLIFIED BECAUSE BANKS HAD CREATED COMPLEX
PRODUCTS RESTING ON TOP OF THE MORTGAGES.
WORSE STILL, THEY HAD ENGAGED IN MULTIBILLION-
DOLLAR BETS WITH EACH OTHER AND WITH OTHERS
AROUND THE WORLD.
 THIS COMPLEXITY, COMBINED WITH THE RAPIDITY WITH
WHICH THE SITUATION WAS DETERIORATING AND THE
BANKS' HIGH LEVERAGE, MEANT THAT THE BANKS
DIDN'T KNOW WHETHER WHAT THEY OWED
TO THEIR DEPOSITORS AND BONDHOLDERS EXCEEDED
THE VALUE OF THEIR ASSETS.

 AND THEY REALIZED ACCORDINGLY THAT THEY
COULDN'T KNOW THE POSITION OF ANY OTHER BANK.
THE TRUST AND CONFIDENCE THAT UNDERLIE THE
BANKING SYSTEM EVAPORATED.
 BANKS REFUSED TO LEND TO EACH OTHER-OR
DEMANDED HIGH INTEREST RATES TO COMPENSATE FOR
BEARING THE RISK. GLOBAL CREDIT MARKETS BEGAN TO
MELT DOWN.
 THIS CRISIS QUICKLY BECAME GLOBAL-AND NOT
SURPRISINGLY, AS NEARLY A QUARTER OF U.S.
MORTGAGES HAD GONE ABROAD.


 THE INTENSIFICATION OF THE CREDIT CRISIS AFTER THE
FALL OF LEHMAN BROTHERS, THE SUDDEN CRISIS IN
EMERGING MARKETS, A COLLAPSE IN CONSUMER
CONFIDENCE, ALL POINT TO THE WORST RECESSION IN
THE UNITED STATES, AND IN THE WORLD AS A
WHOLE, SINCE THE EARLY 1980s.
 AFTER ALL THE U.S. ECONOMY IS STILL THE
LARGEST, AND IT IS HARD FOR A DOWNTURN OF THIS
MAGNITUDE NOT TO HAVE A GLOBAL IMPACT.
 MOREOVER, GLOBAL FINANCIAL MARKETS HAVE
BECOME CLOSELY INTERLINKED.


 IN THE BEGINNING, MANY IN EUROPE TALKED OF
DECOUPLING, THAT THEY WOULD BE ABLE TO MAINTAIN
GROWTH IN THEIR ECONOMIES EVEN AS AMERICA WENT
INTO A DOWNTURN.
 THE GROWTH IN ASIA WOULD SAVE THEM FROM A
RECESSION.
 BUT ASIA'S ECONOMIES ARE STILL TOO SMALL (THE ENTIRE
CONSUMPTION OF ASIA IS JUST 40 PERCENT OF THAT OF
THE UNITED STATES).
 THEIR GROWTH RELIES HEAVILY ON EXPORTS TO THE
UNITED STATES.
 EVEN AFTER A MASSIVE STIMULUS, CHINA'S GROWTH IN
2009 WAS SOME 3 TO 4 PERCENT BELOW WHAT IT HAD
BEEN BEFORE THE CRISIS.

 WHILE EUROPE'S FINANCIAL INSTITUTIONS SUFFERED
FROM BUYING TOXIC MORTGAGES AND THE RISKY
GAMBLES THEY HAD MADE WITH AMERICAN BANKS,
A NUMBER OF EUROPEAN COUNTRIES GRAPPLED WITH
PROBLEMS OF THEIR OWN DESIGN.
 THE WELFARE STATE SYSTEM AND THE MONETARY
UNIFICATION OF EUROPE (EURO) HAD AMPLIFIED THE
FINANCIAL CRISES AFFECTING MANY EUROPEAN
COUNTRIES, NOT ONLY ECONOMICALLY BUT ALSO
POLITICALLY.


SLOWING DOWN ECONOMIC GROWTH

14,0
% yoy

9,0
12,4

4,5 3,0
4,0
8,2 6,7

4,1
5,0

4,2 3,1
4,3 4,5

-1,0
2,9

2008 2009 2010 2011* 2012*
2,7 -0,5

-6,0
GDP
-11,0 Inflation
Trade Volume
-10,9
*Projection
Source: WEO, IMF Juni 2011


REGIONAL ECONOMIC PERFORMANCE

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

4,0
4,0 2,92,52,7 2,9
% yoy
16
%, yoy

1,82,01,7
2,0
14 2009 2010

12 2011* 2012*
0,0 10
-0,7
-2,0 8

-2,6
-4,0
6

-4,1 4

-6,0 2
-6,3
-8,0
0
Indonesia Singapore Malaysia Thailand Phillipina
US Europe Japan
-2

-4
*Projection 2009 2010 2011* 2012* *Projection
Source: WEO, IMF Juni 2011 Source: WEO, IMF Juni 2011


THE US


JAPAN


CHINA


INDIA


EU


GREECE


EU AREA DEBT


EU AREA FISCAL DEFICIT


DEBT AND COUPON DUE IN 2012
(US$ BILLION)


GLOBAL ECONOMIC GROWTH PAST AND PROJECTED
COUNTRY 2007 2008 2009 2010 2011F 2012F* 2011F 2012F 2011F 2012F

Bloomberg* IMF World Bank

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

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.


– = 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 not
available.
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.

Source: Asian, 2011

IMPACT ON
INDONESIA’S ECONOMY

GDP GROWTH


WHY INDONESIA IS MORE RESILIENT?

 MEASURES TAKEN IN 1998/1999 NOT ONLY TO
OVERCOME THE CRISES BUT ALSO TO BETTER
PREPARE THE ECONOMY AGAINST FUTURE
(EXTERNAL) ECONOMIC SHOCKS, ESTABLISHING
SAFETY MECHANISM AND CRISIS PROTOCOL.
 LESSER DEGREE OF INTEGRATION INTO THE
GLOBAL FINANCE (COMPARED TO REGIONAL AND
PEER COUNTRIES).


 INDONESIA DEPENDS MORE IN ITS DOMESTIC
THAN EXPORT MARKET. ITS EXPORT IS ALSO MORE
DIVERSIFIED. AND NATURAL RESOURCED BASED
SUCH AS ENERGY, FOOD AND MINERALS THAT
THE WORLD HUMAN POPULATION WILL ALWAYS
NEED, CRISIS OR NO CRISIS.


EXPORT TO GDP RATIO

45
40.8
40 39.1
34.0
35
32.7 31.0
29.4
30 32.1 29.9
30.5

25 26.4
24.6
24.1
20

15
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


EXPORT TO GDP RATIO
COMPARED TO OTHER REGIONAL COUNTRIES

Asian Countries
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

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


EXPORT TO GDP RATIO
COMPARED TO OTHER REGIONAL COUNTRIES

Asian Countries
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

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 DESTINATION

*January – July 2011


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


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


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 transport

equipment, and miscellaneous manufactured articles.
4Includes ASEAN-4 plus Viet Nam, NIEs, and People’s Republic of China.

Source: ADB, 2011


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 where

portfolio investment data are available. Emerging East Asia includes People’s Republic of China; ASEAN-4 plus Viet Nam and NIEs. East Asia
includes emerging East Asia plus Japan.
Source: ADB, 2011


POST CRISIS ECONOMIC
PERFORMANCE

Page 152

EXPORT


GDP GROWTH 1988-2011
1988-

7.24% 7.82%
6.50%
6.06% 6.10% 7%
5.50%
5.78% 6.46% 4.92% 4.78% 6.50%
4.70% 3.64%
4%
4.30%

0.79%
1%

1998

2000
1999

2001
1988
1989
1990

2002
-2%

2003
2004
1991
1992
1993
1994
1996
1997

2005
2006
2007
2008
2009
2010
2011
-5%

-8%

-11%

-13.13%
-14%


RUPIAH MOVEMENT


COMPARED TO SOME ASIAN COUNTRIES


FISCAL DEFICIT (%)


DEBT PROFILE
PRINSIP KEHATI-HATIAN FISKAL TETAP TERJAGA
(Trillion Rp) (% GDP)
4,000 47% 50%

3,500 45%
39%
40%
3,000 35%
33% 35%
2,500 28%
26% 30%
25% 24%
2,000 22% 25%
20%
824 807 808 20%
1,500 779
853 754 774 15%
1,000 655 609 652
10%
500 836 902 1,034 1,134 1,205 1,221 5%
659 693 737 784
0 0%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Domestic Foreign % GDP (right)

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


DEBT TO GDP RATIO
IN SELECTED COUNTRIES (2009)

159

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).


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


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 capitalizations

Source: ADB, 2011


NATIONAL CURRENCY RESERVE
Billion US$ Month

130 10
124.6

NIR Month import
Bulan Impor
114.0
111.0
110 9

90 8

70 7

50 6

30 5
200

201

201
9

0

1


INFLATION
(%) Total Umum
Inflasi
Inflasi Makanan
Food
Non-Food
% yoy
Non-makanan
14

12

10

8

4.15
6

4

2

0
A

A

A

A

A

A
S

N

D

S

N

D

S

N

D
M

M

O

M

M

O

M

M

O
J 2009

J

J

J 2010

J

J

J 2011

J

J
F

F

F
Source: BPS

POVERTY


UNEMPLOYMENT


Loss of confidence

Financial problems for Pluging currency, rising
companies, banks, interest rates, slumping
households economy

(PAUL KRUGMAN, 2009)


 THE GLOBAL ECONOMIC SYSTEM HAS NOT WORKED AS
MANY HAD HOPED. GLOBALIZATION HAS LED TO
UNPRECEDENTED PROSPERITY FOR MANY, BUT IN 2008
IT HELPED TRANSMIT THE U.S. RECESSION TO
COUNTRIES AROUND THE WORLD—TO THOSE THAT HAD
MANAGED WELL THEIR FINANCIAL SYSTEMS (FAR BETTER
THAN THE UNITED STATES) AND TO THOSE THAT HAD
NOT, TO THOSE THAT HAD GAINED ENORMOUSLY BY
GLOBALIZATION AND TO THOSE THAT HAD BENEFITED
LESS.

(JOSEPH E. STIGLITZ, 2010)

 THOSE COUNTRIES THAT WERE MOST OPEN, MOST
GLOBALIZED, WERE HIT THE WORST. FREE MARKET
IDEOLOGY UNDERPINNED THE CAPITAL AND FINANCIAL
MARKET LIBERALIZATION THAT PLAYED SUCH A BIG ROLE
IN THE RAPID SPREAD OF THE CRISIS AROUND THE
WORLD.


 THE RULES OF THE GAME HAVE CHANGED GLOBALLY.
THE WASHINGTON CONSENSUS POLICIES AND THE
UNDERLYING IDEOLOGY OF MARKET FUNDAMENTALISM
ARE DEAD. IN THE PAST, THERE MIGHT HAVE BEEN A
DEBATE OVER WHETHER THERE WAS A LEVEL PLAYING
FIELD BETWEEN DEVELOPED AND LESS DEVELOPED
COUNTRIES; NOW THERE CAN BE NO DEBATE.
 THE POOR COUNTRIES SIMPLY CAN'T BACK UP THEIR
ENTERPRISES IN THE WAY THAT THE RICH DO, AND THIS
ALTERS THE RISKS THAT THEY CAN UNDERTAKE.


 THEY HAVE SEEN THE RISKS OF GLOBALIZATION BADLY
MANAGED. BUT THE HOPED-FOR REFORMS IN HOW
GLOBALIZATION IS MANAGED STILL SEEM ON THE
DISTANT HORIZON.
 THE QUESTION IS: WILL WE SEIZE THE OPPORTUNITY TO
RESTORE OUR SENSE OF BALANCE BETWEEN THE
MARKET AND THE STATE, BETWEEN INDIVIDUALISM AND
THE COMMUNITY, BETWEEN MAN AND
NATURE, BETWEEN MEANS AND ENDS.


 WE NOW HAVE THE OPPORTUNITY TO CREATE A NEW FINANCIAL
SYSTEM THAT WILL DO WHAT HUMAN BEINGS NEED A FINANCIAL
SYSTEM TO DO; TO CREATE A NEW ECONOMIC SYSTEM THAT WILL
CREATE MEANINGFUL JOBS, DECENT WORK FOR ALL THOSE WHO
WANT IT, ONE IN WHICH THE DIVIDE BETWEEN THE HAVES AND
HAVE-NOTS IS NARROWING, RATHER THAN WIDENING.
 AND, MOST IMPORTANTLY OF ALL, TO CREATE A NEW SOCIETY IN
WHICH EACH INDIVIDUAL IS ABLE TO FULFILL HIS ASPIRATIONS
AND LIVE UP TO HIS POTENTIAL, IN WHICH WE HAVE CREATED
CITIZENS WHO LIVE UP TO SHARED IDEALS AND VALUES, IN WHICH
WE HAVE CREATED A COMMUNITY THAT TREATS OUR PLANET
WITH THE RESPECT THAT IN THE LONG RUN IT WILL SURELY
DEMAND.
(JOSEPH E. STIGLITZ, 2011)


POLICY RESPONSE TO ECONOMIC CRISES: 1998 AND 2008

Recommended

Recommended

More Related Content

Viewers also liked

Viewers also liked (18)

Similar to POLICY RESPONSE TO ECONOMIC CRISES: 1998 AND 2008

Similar to POLICY RESPONSE TO ECONOMIC CRISES: 1998 AND 2008 (20)

More from Ginandjar Kartasasmita

More from Ginandjar Kartasasmita (19)

Recently uploaded

Recently uploaded (20)

POLICY RESPONSE TO ECONOMIC CRISES: 1998 AND 2008