'Dollar diplomacy' rises again as foreign-policy tool
It's May 20, 1998, in Jakarta. The Indonesian economy is in shambles. Rioting has claimed hundreds of lives. And as 30,000 protesters occupy a plaza outside parliament, the vice president calls on President Suharto to step down.Skip to next paragraph
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But ultimately, it was a "foreign power" wielding financial "weapons" that ousted him, the former Indonesian president said in a recent account.
Back in the "foreign power" in question - the United States - officials scoff at Mr. Suharto's claim, and the former strongman offers no evidence. But his charge is the latest sign that Washington is pursuing dollar diplomacy more widely and aggressively than at any time in decades.
Since turmoil in world capital markets erupted 18 months ago, the US Treasury has ranged from Seoul, South Korea, to So Paulo, Brazil, trying to safeguard the world economy's flow of capital.
But as the globe's lifeguard of liquidity, the US Treasury is not always appreciated. Its involvement in the affairs of nations with troubled economies may backfire - possibly leading some of them to renounce the laissez faire ethos and impose controls on international capital.
Consider Indonesia. Last year the US thwarted a Suharto plan to restore economic stability by introducing a "currency board." This would have backed the Indonesian rupiah with a fixed amount of US dollars, allowing the currency to freely trade at a fixed rate against the dollar.
The US said Suharto lacked the credibility to maintain a rigorous currency board, saying it would have helped his family spirit away some of their riches.
The Suharto regime "found itself incapable of making the hard economic and political decisions that were required," says Alan Larson, assistant secretary of State for economic and business affairs. "It faced a difficult test and failed it."
Critics disagree. Within the US, "there was a feeling Suharto was just another Ferdinand Marcos [former president of the Philippines] and we had to get rid of him," says Merton Miller, a University of Chicago professor and winner of a Nobel Prize in economics. Treasury's objection to a currency board was "not that it wouldn't work but that it would, and if it worked, they were stuck with Suharto."
"The Clinton administration was determined to mortally wound or topple President Suharto, and it was betting on monetary chaos to do the job," says Steve Hanke, professor of applied economics at Johns Hopkins University here and a Suharto adviser. (A similar claim by Suharto was reported recently in the Indonesian newspaper Harian Terbit.)
US officials deny the assertions. "There are only so many ways you can say it is simply not true," Mr. Larson says. Moreover, Washington has merely met requests for help: Indonesia and every other troubled country during the past 18 months has called for US technical and financial aid, officials note.
Whether real or imagined, US involvement can create hostility to open international markets. Warning of foreign abuse, Malaysia last September imposed capital controls.