Indonesian Crisis: Shared Blame

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Indonesia is half a world away and the current economic crisis in the world's fourth most populous nation may seem distant to Americans. Yet the United States has genuine stakes in this nation's recovery, which is a significant key to Asia's economic health and to the restorations of market and investment opportunities in that region.

Indonesia's crisis is severe. As an editorial in Asia Week commented, "Its plight is worse than Russia's, yet the latter commands far greater global attention." The value of the economy has dropped by almost 14 percent; inflation is running at 82.4 percent. A UN report in August showed about 140 million people - two-thirds of Indonesians - are likely to be living in poverty in 1999 (compared with one tenth in 1996). One-fifth of the workforce is unemployed. Two years ago, Indonesia was self-sufficient in rice, but drought, inflation, and hoarding created a food shortage; this year it may need to import a fifth of the rice normally traded on commercial terms worldwide.

The banking sector has collapsed. The New York Times reports that at least 60 percent of loans made by Indonesian banks probably won't be repaid; of more than 200 banks, perhaps no more than 10 will emerge intact from the crisis. All this has happened as the authoritarian system that oversaw prosperity for 30 years unravelled.

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Indonesians acknowledge that they bear much of the responsibility. Corruption sapped resources. Loans to political cronies weakened bank stability. Anti-Chinese riots drove out Chinese capital. Political indecision and reluctance of the Suharto government to face reality delayed essential actions.

Outsiders also bear a share of the responsibility. The Asian currency collapse started in Thailand. Before that, foreign financial institutions and investors surged into Jakarta, often with little knowledge of the country. In so doing, many fed the corruption that helped undermine the system. Bankers and short-term capital providers departed en masse as quickly as they came. In 1996 Southeast Asian countries received $93 billion in private capital. In 1997, these nations saw a net outflow of $12 billion.

The insensitivity of approaches by both national and multinational financial officials led to Indonesian resistance to reform. Americans, among others, fostered an untrammeled free market philosophy unaccompanied by reminders of the market controls essential to the US system.

As the rapid Indonesian decline was the result of failures both within the country and from abroad, the road back requires both internal and external action. Indonesia has the resources for recovery - in natural wealth, a skilled population, educated technocrats, and a national spirit. Much of such a process is psychological. A heavy burden rests on President B.J. Habibie to restore confidence, preserve national unity, reform the political system, and assure corruption-free food supplies to areas verging on starvation. His task requires finding a role for the Army. Mr. Habibie has set dates in May and December 1999, respectively, to elect a new national assembly and a president. A task force is at work on constitutional reform. The next few months will tell whether the patience of the nation can be preserved until new institutions and new leadership is in place.

The international community also shares in the process of restoring confidence. Individual nations, including the US, are considering emergency food aid. The International Monetary Fund is at work on an assistance package with demands for reform modified by its earlier Jakarta experience. The success of such measures depends on how soon private outside capital will return.

The Indonesian crisis revealed dramatically the vulnerability of developing nations to the rapid financial movements of a global economy. The crisis illustrates also the responsibility of the developed world for more prudent management of globalization.

* David D. Newsom is a former ambassador and undersecretary of state for political affairs.

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