Academic journal article Global Governance

Pathways through Financial Crisis: Indonesia

Academic journal article Global Governance

Pathways through Financial Crisis: Indonesia

Article excerpt

This article examines economic policymaking in Indonesia from the eve of the 1997 financial crisis to 2005 and asks whether engagement with the IMF widened or narrowed the choices available to Indonesian policymakers. It argues that engagement with the Fund expanded the menu of policy options available to the government when the IMF could count on a powerful internal champion that was ready to use its relationship with the Fund to strengthen its own position in the domestic political game. However, the Fund's actions had the effect of constraining policy space during periods when the power of its internal champion was in decline, when a champion failed to materialize at all, or when trust between the Fund and the country authorities deteriorated rapidly. KEYWORDS: Indonesia, IMF, financial crisis, politics, policy space, conditionality, economic policy, technocrats.

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This article examines Indonesia's pathway through the Asian financial crisis of 1997-1998. The archipelago suffered by far the most traumatic experience of all the countries affected by the regional shock. Not only did Indonesia undergo the most severe economic contraction, it also experienced the worst political crisis, one that not only ended President Suharto's thirty-two years of rule but also precipitated the collapse of an authoritarian, single-party political system. In addition, Indonesia engaged the International Monetary Fund (IMF) longer than any of the other countries affected by the crisis--Fund programs were not terminated until 2003, six years and four presidents after their launch in late 1997. Thus, Indonesia makes for particularly fertile ground to study the nexus between Fund programming and policy choices in a variety of political settings.

Rather than retelling the story of Indonesia's financial collapse and economic reconstruction--a story already recounted in a large and still-growing literature--I provide an account of Indonesia's pathway through crisis as seen through the lens of "policy space." I focus, following Ngaire Woods in her introduction to this issue, on whether engagement with the IMF widened or narrowed the choices available to Indonesian policymakers. I also examine how the Fund's position was itself affected by changes in policy space.

The piece makes two arguments. First, it contends that the Indonesian government's engagement with the Fund expanded the menu of options available to policymakers when the IMF could count on a powerful internal champion within government, a champion that was ready to use its relationship with the Fund to strengthen its own position in the domestic political game. Second, I argue that the IMF's actions had the effect of constraining policy space during periods when the power of its internal champion was in decline, when a champion failed to materialize at all, or when trust between the Fund and the country authorities deteriorated rapidly. In these cases, the Fund was far more likely to use its leverage to block the government's independent policy initiatives.

I begin by defining "policy space" before giving a brief background to the dynamics of economic policymaking in Indonesia and the evolution of its relationship to the IMF from the 1960s to the eve of the 1997 crisis. I then analyze the impact of Fund programming on policy space in Indonesia in the period from 1996 to 2005.

Conceptualizing Policy Space

The concept of policy space is often invoked in contemporary political discourse, but its meaning is rarely defined clearly. Currently, policy space is most often used in debates about how certain rules in the global economy--particularly those emanating from the World Trade Organization (WTO) and its subsidiary agreements--constrain countries' policy options for medium- and long-term economic development. For example, Nancy Birdsall, Dani Rodrik, and Arvind Subramanian talk about the need for poor countries to have "enough space to craft their own economic policy" and "adequate room for policy autonomy and experimentation. …

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