The IMF and the Indonesian crisis

Abstract

Given the strong performance and resilience of the Indonesian economy over the previous three decades, the depth and duration of the 1997–98 crisis was unexpected. The IMF's initial policy prescription was in keeping with the nature of the crisis—characterised by a reversal of foreign capital inflows, interacting with a weak domestic financial sector. But this prescription would work only if there was a quick restoration of market confidence. This was not achieved, and indeed public disputation over the elements of policy undermined confidence. Additional policy elements were needed that would address the capital outflows more directly and resolve the banking collapse. There was a loss of policy cohesion between the Fund and the Indonesian authorities, and among the authorities themselves. Before alternative policies could be put in place, the political dimension became paramount.