Various studies that examine the Asian financial crisis have been carried out, from different angles as well. Generally seen a pattern and characteristics that apply equally across the country were hit by the crisis. However, in terms of its depth and duration, Indonesia can be said to be very unique. It's hard to find the comparison, perhaps the most appropriate country to compare the time it is Russia, and now maybe Argentina. Therefore, in the following descriptions we will examine briefly why the crisis in Indonesia was so severe, and why recovery is so slow.
In introspection, we must admit that the crisis in Indonesia is really unexpected coming, absolutely it was unprecedented. As noted by Furman and Stiglitz (1998), that among the 34 countries with problems are taken as samples (sample) study, Indonesia was the country hardest hit by the crisis are not expected when compared with other countries in the sample, these. When Thailand began showing symptoms of the crisis, people generally believe that Indonesia will not meet the same fate. Indonesian economic fundamentals are strong enough to withstand credible external shock (external shock) due to the fall of the Thai economy.
Here are four causes of Indonesia's Economic Crisis of 1997-1998:
1. The first, the stock of private foreign debt is very large and generally short term, has created conditions for "instability". This is exacerbated by excessive self-confidence, and even tend to ignore, from the ministers in the economic and banking community itself deal with the amount and terms of private debt.
The government has always been extra careful in managing government debt (or other public debt), and always keep within the limits that can be handled (manageable). However, for loans made by the Indonesian private sector, governments have absolutely no oversight mechanism. After the crisis, then realized that private debt is really a serious problem. Between 1992 until July 1997, 85% of Indonesia's foreign debt increase comes from private loans (World Bank, 1998). This is similar to that of other countries in Asia hit by the crisis. In many ways, arguably the country has become a victim of its own success. Why is that? Because the foreign creditors would eagerly lend their capital to firms (private) in a country that has low inflation, a budget surplus, has a well-educated workforce in large numbers, have adequate facilities and infrastructure, and running an open trading system.
The attraction of "dynamic economies'" This has resulted in net capital inflows or capital inflows (which includes long-term debt, foreign investment, and equity purchases) to the Asia Pacific region increased from U.S. $ 25 billion in 1990 to more than U.S. $ 110 billion in 1996 (Greenspan 1997). Unfortunately, the number of incoming capital is not sufficiently utilized for productive sectors such as agriculture or industry, but instead went into financing the consumption, capital markets, and especially for Indonesia and Thailand, to the housing sector (real estate). In these sectors is an explosion (boom) due in part influenced by capital inflows before, but otherwise export performance which has been the economic mainstay precisely the national slowdown, due to exchange rate appreciation that occurred, among others, due to rapid flow of capital into it. In addition, private debt is much that is not based on economic feasibility, but rather rely on political connections, and if supported by the perception that the state will bear the cost if failure occurs later. Financial institutions make loans on the basis of calculation of assets that have been "inflated" which in turn encourages more of further appreciation (Kelly and Olds 1999). This is the result of a system often referred to as "crony capitalism". Moral hazard and asset bubbles, as explained by Krugman (1998), is a strategy of "if I get lucky, if not I who bear loss (heads I win tails somebody else loses)." In the middle of the vortex (virtous circle) which is becoming increasingly bigger, the financial institutions to borrow U.S. dollars, but to channel its loans in local currency (Radelet and Sachs 1998). Who participated made it worse was the time limit loan (maturity) private debt is the average shorter. In times of crisis, the average private sector loan deadline is 18 months, and by December 1997 the number of debts to be repaid in less than one year amounted to U.S. $ 20.7 billion (World Bank 1998).
2. The second, and closely related to the problems mentioned above, is the number of weaknesses in the banking system in Indonesia. With the banking systemic weaknesses, external private debt problem immediately turning to the domestic banking problems.
While liberalization of the banking system enacted in the mid-1980s, and control mechanism supervision of the government is ineffective and unable to follow the rapid growth of the banking sector. What's worse, there is almost no enforcement against banks that violate the provisions, particularly in the case of lending to a group of his own business, loan concentration in a particular party, and violations of proper criteria for credit. At the same time a lot of banks that actually do not have capital sufficient (undercapitalized) or lack of capital, but still allowed to operate. All this means, when the rupiah began to depreciate, the banking system is not able to place itself as a "shock damage", but instead became a direct victim of an unhealthy due to their balance sheets.
3. The third, in line with the increasing lack of clarity about the direction of political change, then the issue of automatic government evolve into an economic problem as well.
Hill (1999) writes that the number of parties who have vested interests with political intrigues that spreads everywhere have impeded or hinder the government's motion, to take decisive action in the midst of a crisis. Long before the crisis happens, foreign investors and businessmen operating in Indonesia has always complained about the lack of transparency, and lack of protection and legal certainty. This issue is often associated with high "hidden costs" that must be paid when the people doing business here. Strangely, during Indonesia enjoys economic boom that negative perceptions are not too hamper economic Indonesia. But once the crisis hit, then all the weaknesses that appear to be a hindrance for the government to be able to control the crisis. This problem is precisely that reduce the ability of government institutions to act quickly, fairly and effectively. Eventually it all evolved into a "crisis of confidence" which turns out to be the most common cause of all the economic problems faced at that time. Due to the crisis of confidence, the capital brought ran out did not come back, let alone the new capital.
4. The fourth, the development of the political situation has been getting warmer due to the economic crisis, and in turn memberbesar impact of economic crisis itself. This factor is the most difficult to overcome. Failure to restore stability in the socio-political has complicated economic performance in achieving the momentum of steady and sustainable recovery.
Although the issue of banking and private debt into the causes of economic crisis, however, the latter two factors above is the cause of the slow recovery of the crisis in Indonesia. Abstruse economic recovery, if not impossible to achieve, without recovery of market confidence and market confidence is not likely to recover without political stability and the Governement of reliable (credible).
In the future INDONESIA MAY NOT HAVE MORE ECONOMIC CRISIS.
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