DDP 722. Steven Radelet. "Indonesia: Long Road to Recovery." June 1999. 28 pp.

This paper examines the collapse of the Indonesian economy in late 1997 and 1998, and analyses the most pressing economic problems inhibiting its recovery. It explores several weaknesses that emerged in the economy in the early 1990s, including a high dependence on short-term foreign borrowing, a weak banking system, a modestly overvalued exchange rate, and the seemingly unbridled growth of the business interests of the family and associates of President Suharto. These problems were serious, and they made the economy vulnerable to a significant slowdown. However, on their own, they cannot explain the magnitude and speed of the Indonesian collapse. Mismanagement of the crisis by the Indonesian government, especially President Suharto, and by the International Monetary Fund made the contraction much deeper than was necessary or inevitable. Looking ahead, the major ingredient necessary for economic recovery is a political stability, which depends on smooth parliamentary and presidential elections in 1999. On the economic front, the main challenges that lie ahead are the reorganization and recapitalization of the banking system, restructuring of corporate debt, stimulating exports, and containing the budget deficit.

JEL Classification Codes: F31, F32, O53

Keywords: Financial crises, exchange rates, Indonesia

Steven Radelet is a Fellow at HIID and the Director of the Institute’s Macroeconomics Program. He was resident advisor on macroeconomic policy to the Ministry of Finance in Indonesia from 1991-95.