Indonesian Financial Crisis (1997-1998)

Question

Please identify literature on the social impacts of the financial crisis in Indonesia (1997-1998) with particular attention to the causes of social unrest (including unemployment). Please include information on the policy responses implemented.

Summary

In the 1980s and early 1990s, Indonesia along with other Asian countries experienced strong economic growth which produced reductions in poverty and improvements in social indicators. The financial crisis of 1997 undid many of these improvements as GDP dropped, unemployment rose, wages eroded, and prices increased dramatically. The rapid descent into economic hardship strained already-present tensions in society and contributed to increased criminality. President Suharto’s government lost its legitimacy and control, and in 1998 the President stepped down amid widespread social unrest.

Although the financial crisis was the catalyst that triggered the fall of the Suharto government, it was not the underlying cause. Social conflicts, divisions along regional, class, and cultural lines, corruption, and criminal gangs were deeply rooted in Indonesian society. While overt violent conflict had been mostly suppressed under the Suharto regime, the underlying tensions remained. The financial crisis weakened state institutions and brought the situation to breaking point, allowing repressed tensions to flare up. A far-reaching governance and economic transition ensued.

During the crisis, social safety net programmes were implemented to improve food security, stimulate the economy, and provide basic health and education services. There were serious doubts, however, both internationally and within Indonesia, about the programmes’ effectiveness and targeting, and about the potential for corruption.

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