RACE, RIOTS, AND MONEY:
THE ROLE OF THE BRETTON WOODS INSTITUTIONS IN THE INDONESIAN FINANCIAL CRISIS

By : J. Soedradjad Djiwandono
Gurubesar tetap Ilmu Ekonomi, Universitas Indonesia


A presentation in a panel 'Race, riots and Money: The Role of the Bretton Woods Institutions in the Indonesian Financial Crisis' during The American Society of International Law or ASIL's 93rd Annual Meeting, "On Violence, Money Power and Culture: Reviewing the International Legacy" Washington, DC, March 24-27, 1999.

-oOo-

INTRODUCTION

  • The aim of our discussion is to offer an assessment on whether the Bretton Woods Institutions (BWIs), the World Bank (WB) and the International Monetary Fund (IMF), have in effect been contributing to or facilitating efforts to cope with the lethal mixture of racial/ethnic tensions and economic turmoil as experienced by Indonesia recently.

  • I will address this issue by assessing what has been these two institutions' role in Indonesia's efforts to cope with the crisis. As the crisis ultimately implicated almost all aspects of people's life, it had also some bearing on problems related to ethnic and race. In Indonesia, race and ethnic problems are usually associated with economic issues. I will try to deal with questions like, had these two institutions been taking racial/ethnic issues into consideration in their role of assisting the Indonesian government to cope with problems of development? How important a factor are they in the resolution of the crisis? Did or didn't they pay adequate attention to the political and ethnic dimensions of Indonesian political economy in the policy advice they gave prior to the crisis? Should the BWIs be required to explicitly incorporate issues of inter-ethnic or inter racial relations into their operations in Indonesia?


SOME CAVEATS

  • In the Indonesian context, the term ethnic or ethnicity is used to refer to Indonesian of different ethnicity, like the Javanese, Balinese, Bataks, Minangkabaus, Manadonese, Ambonese etc. The term race is used to refer to different racial groups, like the Chinese, Arabs, Indians, etc. For the present purpose, the term ethnic/race, is basically a reference to the second one. Thus, the more relevant ethnic grouping in the Indonesian economy is between the Chinese, that is singled out as a distinct group, and the non-Chinese that is considered to be the indigenous group (the Pribumis).

  • I don't have any expertise in analyzing issues related to the role of each ethnic group or other types of grouping in the Indonesian economy. What I would do is sharing with you my assessments of what have been developing in the financial crisis which has been spreading to different aspects of people's lives. In this condition, efforts to address the problem will, for sure, be involving issues of social and political aspects, including the role of ethnic Chinese in the Indonesian economy. And since the WB and the IMF have been very much involved in the evolution of the crisis and its resolution, it is only proper to evaluate their past involvement for future improvement.


@ Professor of Economics, the University of Indonesia, Jakarta, currently a Visiting Scholar at the Harvard Institute for International Development (HIID), Cambridge, MA.

SOCIAL AND POLITICAL IMPLICATIONS OF THE CRISIS

  • The Indonesia crisis originated from an external shock in the form of a regional financial panic that hit the Indonesian financial market to cause the national currency, Rupiah, experienced a very drastic depreciation. Facing the shock, the national economy that was embedded with structural weaknesses, in the financial as well as real sectors, crumbled. A contagious process developed, such that a currency shock very quickly spread to become a financial crisis, and soon after, an economic crisis. And since the social structure as well as the political structure was also suffering from weaknesses, the contagion worked quickly to hit the social and political foundation, and ultimately Indonesia experienced a total crisis.

  • In one single year of 1998 the economic deterioration was so shocking for everyone, even the pessimists. It was demonstrated by statistics that included the followings; a drastic reversal of a long period of high growth rates of GDP (7 to 8 per cent) to negative growth of close to 15 per cent, a cut of income per capita in dollar terms into a half, a very sizable amount of reversal in private capital flows (the estimates range between $25 to $ 40 billion), high jump of inflation rate, (from a single digit to 80 per cent), and an 80% depreciation of the national currency.

  • The crisis has been so virulent that the social and political impacts have been so devastating. They include a drastic increase of unemployment, especially in urban areas of Jawa (some estimate put a figure of more than 5 million additional people unemployed), a drastic increase in people living below poverty line from 11% to close to 40% of total population in 1998, a drastic increase in school drop outs at all levels of schooling, increasing rate of petty crimes and prostitution, and other social problems.

  • Aside from all the horrors that have been reported most recently in Ambon, West Kalimantan, East Timor, and other places, recent developments seemed indicating a process of disintegration. Crosby Corporate Advisory cited 1998 statistics that could be interpreted as signaling some social disintegration as follows; there were nearly 2,000 student demonstrations; 1,300 rallies by nongovernment groups; 500 strikes; and 50 riots.

  • The crisis had forced Suharto, who ruled the country for thirty-two years, to resign in disgrace. He was succeeded by his close protégé Dr.Habibie, who has been serving as President since late May 1998.


  1. The World Bank produced a report Addressing the Social Impact of the Crisis in Indonesia: A Background Note for the 1998 CGI (mimeo), and a more general reportSocial Consequences of the East Asian Financial Crisis, Washington, DC: The World Bank, September 1998.
  2. Taken from a column by Lim Say Boon, "The Art of the Possible", Far Eastern Economic Review, February4, 1999.
  3. Arief Budiman, Capitalism,Tribalism and Religion, a presentation at Harvard Asian Center seminar, March, 1999.

RACE, RIOTS AND MONEY, WHAT HAPPENED?

  • The fall of Suharto in May of 1998 was preceded by social upheavals spearheaded by student demonstrations, demanded his exit and reforms in Indonesian political, social and economic lives. However, in mid May 1998, the student demonstrations were followed with days of brutal riots, in which more than one thousand people died, more than a hundred of rapes reported, and countless of shops, houses and vehicles were set on fire in many cities all over the country.

  • Some disturbing pictures could be drawn from the riots, the burning and the rapes. They seemed to be targeted to a particular race, namely the Chinese, and they seemed to be organized, at least in some cases. I will not analyze as to whether all these rioting, burning and raping, were organized, or that they were aimed specifically at the Chinese, since I don't have any expertise for doing so. I could only conjecture, based on rough observations on the issue. That is to say that there are elements of race as well as economics, mixed with religious beliefs and politics in the Indonesia upheavals as shown in the many riots, with killings, burning, looting and raping during the recent financial crisis and its aftermath.

  • Riots which led to the burning, looting, killing and raping with mostly ethnic Chinese being victimized were preceded by the financial crisis that in short time spread into social and political crisis. As described very summarily above, the crisis was so devastating economically such that the social and political impacts that followed were also devastating. Such a situation, even in the absence of no organized effort to provoke violence, could easily breed riots and crimes for the afflicted parties, which had been the case in Indonesia. And when riots occurred in mid May 1998 all hell really broke loose.

  • In passing, I would mention here, that it has been historical in Indonesia, many social upheavals resulted from a mixture of economic, social and political problems. However, the tendency had been that this would be used to fulfill people vindication of their feelings of animosity against Chinese. Prof. Arief Budiman, a sociologist and former Indonesian activist, argued that racism is a variant of tribalism, which he defined as an instinct to treat other people outside his/her family/tribe as subhuman or non-human. In an economy that exhibited impressive record of high growth and absolute poverty reduction for decades, all differences that could lead to social friction were not surfacing, but they existed. In addition, under repressive rule of Suharto, not only political opposition was silenced; public discussion on ethnicity, race and religion problem was also not allowed. The economic hardship led to distress and fragile condition, and any incidence could lead to a riot in which people resorted to 'tribalistic instinct' for treating people outside their own group, due to different race, ethnicity, religion, region, gender, as enemies or sub-human. And thus, the killings, burning, rapes, etc. This may be part of the explanation for people resorting to tribalism when they faced with hardships resulting from the crisis. Furthermore, it may also explain why Indonesia is the hardest hit by the crisis.

  • With respect to the burning and killings in Ambon and West Kalimantan recently, the race (Chinese) issue did not seem to explain well. In both cases the lynchpin seemed to be the disharmony of the 'incoming people' through transmigration programs or as a result of economic betterment in general, with the 'local people'. In the course of years of growth and development, the locals felt economically and socially threatened by the incoming groups. Ultimately, this feeling changed to a strong resentment of local group against the migrants. In good times of material improvement, and under suppressive government of Suharto, the resentment was not surfacing. But, when hardship came with the crisis, the resentment erupted in ugly forms of burning and killings. In some cases, like in Ambon and other areas in the eastern part of Indonesia, a religious complication was added through the fact that these two groups have different religion. In Ambon, the locals (the Ambonese) are Christian, while the migrants are Bugis form South Sulawesi, who are Moslems.


BWIs AND THE INDONESIAN CRISIS

  • In the midst of polarization of views, between those who believe that the origin of the Asian crisis is external, the work of contagion from financial panic, and others who believe that it is akin to domestic problems associated with crony capitalism, I have a strong opinion that the Indonesian crisis stems from the combination of the two. Indonesian crisis started with an external shock in the currency market, which caused the rupiah to depreciate drastically. However, due to its structural weaknesses, the banking system could not function robustly to support the policy response and the private sector's reaction to the currency shock, so that the shock led to a crisis. It started with a banking crisis, but soon it become economic and ultimately social as well as political crisis. The crisis was rapidly spreading, from banking to economic, and later social, and political due to the problems of crony capitalism as well as weaknesses in the social and political structures permeating in Indonesia.

  • Asia crisis, which was followed by Russia and Brazil, served as a wake-up call for the world to address problems originated from and related to the crisis. From criticisms targeted at the IMF's handling of problems in the crisis countries, as well as internal studies by the BWIs on their role in assisting member countries, we could make some evaluation as to how did the two institutions fare in their role of supporting the crisis countries. We are familiar now with IMF critics, like Jeff Sachs, Paul Krugman, Martin Feldstein, Joe Stiglitz, George Schultz, William Simon, and many others. Recently, IMF and the WB had also conducted internal studies to evaluate their respective roles in assisting these member countries. The report on the implementation of IMF Supported Programs in Thailand, Korea and Indonesia is basically defending its much criticized policy advises to the three countries in coping with the crisis. While a WB report on Indonesia is a self-criticism of its role prior to the crisis by stating that the performance of the Indonesian Government policies supported by the WB has been 'marginally satisfactory'.

  • It would be too harsh for attributing the cause of the crisis to any single factor, whether the government, the IMF or the WB, the private sector or the hedge fund managers or others. Let us just say that both the policy as well as the reactions of market players to the policy were working together to change the shock and distress in the financial sector into a financial and economic crisis. And later, from an economic crisis to others, including social and political crises.

  • To a certain degree, the fact that all the sets of players (the Indonesian government and the BWIs who advised the government, and the private sectors, both domestic and foreign) were not fully prepared to see the devastation that the crisis could create implies that one way or another they are contributing to the problems actually came out.

  • There are at least two areas which one could make arguments here. One, the adverse implications of high interest rates policy on the real sectors, especially when it was done for a long period. Some would argue that, in Indonesia, the policy was not effective to strengthen the currency, while the negative impacts on the real sectors were severe. To a certain degree this is due to different school of thoughts, which is very difficult to resolve. Two, the execution of the policy to close insolvent banks as a part of banking restructuring to raise confidence, that actually resulted in total lost of banking confidence. The tendency to ignore the social and political implications of policy implementation turned out to be very costly. The argument that the assets of the sixteen closed banks constituted merely 3% of total banking assets, so that their closure wouldn't cause a ripple turned out to be a grave mistake. It is also curious to note the contrary reaction came from the domestic and foreign market. The facts that even banks owned by politically well-connected individuals were closed draw a very positive reaction from foreign market. But, domestically, the reaction was negative due to the fact that in a fragile situation many thought that if even well-connected banks were closed what would happened to other banks. These had never been discussed before, but it turned out to have devastating implications.

  • In a society where transparency in government as well as private sector's operation has been weak, where governance in both sectors is also weak, rumors could become credible. As a result, misunderstanding could jeopardize the effectiveness of economic policy. There were very strong rumors that bank closures were applied only to indigenous banks. There were similar rumors that the central bank only provides liquidity assistance to Chinese banks, and other similar rumors.

  • However, programs to dissolve some monopoly practices that sometimes involved Chinese businessmen in cooperation with politically well connected families, could also be mentioned as some of the BWIs' contribution to solving the problem that Indonesia faced.

SOME NOTES

  • I did not answer many questions on the role of the BWIs prior to or in the resolution of the crisis in Indonesia. And in some answers that were given, they are not direct answers. However, by making assessments on how the crisis unfolded as well as the process for coping with it, certainly some conjectures could be drawn as to the contributions of WB and IMF in both the cause and the resolution of the crisis.

  • WB internal review of its years of involvement in Indonesian development was very critical. The internal report mentioned before stated that "the Bank (WB) should have been better prepared for the crisis, but it could not have prevented it" and "On balance over the past decade, the outcome of the Bank's strategy, the Bank's performance as well as the Government's performance is rated marginally satisfactory" There is no particular reference to racial problems, but the report gave an overall evaluation, which was used to design its new guidelines for the WB operation in Indonesia.

  • IMF produced a report 'IMF-Supported Programs in Indonesia, Korea, and Thailand: A Preliminary Assessment' which reviewed the program implementation in the three most affected crisis countries. The IMF report is specifically on the IMF-supported programs, so it makes evaluation on the implementation of the programs coping with the crisis. It is basically defending the steps that IMF took in response to the respective government proposals to ask for stand by arrangements. It defends the policy for high interest rates for stabilizing exchange rates, citing the experiences of Korea and Thailand. In short the report shows as Jack Boorman, Director of the Policy Development and Review Department of the IMF said 'Let me say that the paper says, in essence, that the policies the Fund recommended and which to varying degree the three countries-Indonesia, Korea, and Thailand-followed were broadly appropriate to the circumstances given what was known as these programs unfolded'

  • On the future role of the two institutions, I guess all criticisms aimed at the IMF's handling of the Asian crisis as well as self criticism of WB operation are signaling towards the urgent need for improvement of the implementation of the current programs and more comprehensive reform on their whole operation. The crisis has showed us that the two BWIs role in the resolution of the crisis is extensive. The IMF supported programs in the crisis countries constituted economic, finance and their infrastructures. But, economic and financial infrastructures include issues that are traditionally in the realm of social and politics. Be that as it may, racial and ethnic considerations should be part of the two institutions operation in the future. Identifying which areas to be included and how to include these issues in the BWIs operation is the issue here.


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