Essays on Indonesia and the 1997 Asia Financial Crisis Case Study

Download full paperFile format: .doc, available for editing

The paper "Indonesia and the 1997 Asia Financial Crisis" is a good example of a finance and accounting case study.   Warwick and Martin indicate that the financial crisis in Asia was the duration of financial crunch that engulfed most of Asia starting in July 1997, and developed alarm of global economic meltdown as a result of financial infectivity (2). Thailand was the initial start point of this crisis where there was financial fall of the Thai baht as a result of government decision of floating baht following comprehensive efforts to back it in the period of harsh financial over expansion that was partly driven by real estate.

During that period, Thailand was bearing a huge foreign debt that resulted in the nation to be bankrupt even prior to the fall of its currency. Japan and the majority of Southeast Asia experienced the fall of currencies, an abrupt increase in private debt, and devalued asset prices and stock markets. Thailand, South Korea and Indonesia were the nations that were heavily affected by the crisis. Additional, Philippines, Laos, Malaysia, and Hong Kong were also affected by the financial crunch.

Countries like Vietnam, Brunei, Singapore, Taiwan, India, and the People’ s Republic of China were slightly affected but they experienced a loss of confidence and demand in the entire region. In Indonesia, it has been thirteen years since the fall of the regime of Soeharto’ s New Order on the height of the 1997 economic crisis. During this period, the economy of Indonesia shrunk by over 13% in 1998 alone (Lewis and Marwa, 4). This was after thirty years of the nearly uninterrupted rapid growth of the economy and resulted in heightened political and social crises.

While nations like Thailand and South Korea were able to defeat their economic crisis in a shorter period, Indonesia’ s crisis recovery has been convoluted by the instability of politics, up to 2004, and by a sluggish trajectory of recovery. Indonesia was formally being managed by International Monetary Fund (IMF) from 1997 to the ending of 2003, years of transition that experienced drastic institutional reforms like the expansion of local autonomy, constitutional reviews, and promulgation of the new law governing national planning, state finance, and the Bank of Indonesia (BI) (McLeod and Ross, 1998).

All of these reforms of institutions happened against the environment of an often-chaotic process of economic policymaking, mostly under Wahid and Habibie. According to Aspinall and Gregory, the enactment of The Central Bank Law in 1990 under the rule of Habibie was aimed to guarantee the independence of the Bank of Indonesia from the government and abolished the BI from buying domestic bonds of government. Independence of BI was put under test when Wahid, the president, requested governor of BI to resign and was promised another post.

The governor declined to resign but later was arrested and jailed. There was a sign of marginalization of technocrats from the process of economic policy-making. Since the president had the aim of destabilizing the power of National Development Planning Agency (BAPPENAS), no appointment of a minister for national development planning was carried out. Megawati came to power in July 2001 and the president top priority was to restore stability of macro-economy. Megawati selected professionals who were uninhibited by politics of party to two strategic positions for this aim.

Burhanuddin was appointed as BI governor and Boediono as finance minister. Both appointees carried out their mandate well to attain stability of macroeconomy and sector of banking reform to establish the means for graduating Indonesia from the program of IMF (Stephan and Maxfield, 113). However, ministers of the economy failed to work as a team. The 2003 enactment of Law Number 17 on state finance was of great significance. It brought in the European Union Maastricht Treaty- type rule to attain financial and economic tranquillity by legally abiding the government to maintain the sum issuance of government bonds (both local and the central government bonds) under 60% of the gross domestic product and the deficit of annual budget under 3% of the GDP.

This meant that the law held the government politically answerable in upholding a fiscal policy of self-restraining. This law resulted in the realignment of the MOF (Ministry of Finance), swelling its authority, and transforming the relationship between the BAPPENAS and MOF. The Agency for Fiscal, Economic, and International Cooperation Research was established from the previous Agency for Fiscal Analysis and was put accountable for making of budget, while the function of budget planning was given to Budgeting Directorate-General.

The mandate to develop a macroeconomic framework and fiscal policy was put under the power of MOF with the enactment of the new law.

Works Cited

Aspinall, Ellen and Fealy Gregory, Local Power and Politics in Indonesia: Decentralization and

Democratization. Singapore: Institute of Southeast Asian Studies, 2003.

Dornbusch, Russel. “Exchange rate expectations and exchange rate dynamics.” Journal

of Political Economy, 84. 6 (1976):1161-1176.

Hill, Hal and Takashi Shiraishi. “Indonesia after the Asian crisis.” Asian Economic Policy

Review, 5. 2 (2007): 123–141.

Ito, Turner. “The Asian currency crisis and the IMF, ten years later: Overview.” Asian Economic

Policy Review, 2. 1, (2007): 16–49.

Lewis, Colin, and AlNasaa Marwa, Indonesia. (2006): 2-15.

McLeod, Ross H. and Garnaut, Ross. East Asia in Crisis: From Being a Miracle to

Needing One. New York: Routledge Publishing, 1998.

Stephan, Haggard and Sylvia Maxfield, “The Political Economy of Financial Internationalization

in the Developing World,” International Organization, 50. 1 (1996): 96-157.

Warwick, McKibbin and Martin Will, The East Asian Crisis: Investigating Causes and Policy

Responses, (1999): 2-60.

Download full paperFile format: .doc, available for editing
Contact Us