Indonesia is currently in the midst of a major financial crisis. The country’s currency, the rupiah, has lost more than half its value against the US dollar since 1997, and the economy is reeling from the effects of high inflation, declining consumer confidence, and investor flight.
What lessons can China learn from Indonesia’s experience? First and foremost, it is important to maintain a strong and stable currency. Indonesia’s currency crisis was exacerbated by a weak rupiah, which made it difficult for the country to repay its foreign debt obligations. China must therefore take measures to ensure that its own currency, the renminbi, remains strong against international currencies.
Another crucial lesson is the importance of keeping inflation under control. Indonesia’s high inflation rate was one of the main factors behind the country’s economic problems. China must therefore take steps to keep inflation in check, such as keeping interest rates high and avoiding excessive credit growth.
Finally, it is important to maintain investor confidence. Indonesia’s financial crisis was triggered in part by a loss of confidence on the part of foreign investors. China must therefore work to create an environment that is conducive to investment and business confidence.
While Indonesia’s current economic troubles are certainly cause for concern, there are also lessons to be learned from the country’s experience. By taking measures to maintain a strong currency, keep inflation under control, and attract foreign investment, China can avoid many of the pitfalls that have led to Indonesia’s current crisis.
Indonesia is fast coming to pieces, as it has long been predicted. This process is highly relevant to China, whose military, like Indonesia’s, was used to making a profit and now resents the fact that the good times have come to an end. Making money became the basis for military loyalty in both countries, with the army serving as a guarantee. However there’s no longer any financial profit being made by China’s military, and senior government officials are not permitted to pursue commercial interests.
The Indonesia military’s involvement in business was never as widespread as in China, but it was significant enough to grease the skids for the country’s current problems. The military owned everything from gas stations to resorts, and soldiers routinely were assigned to work in businesses rather than on battlefields. The Indonesia military also had its own investment holding company, which invested in a wide range of businesses.
All of this came to an end when Indonesia’s President Suharto stepped down in 1998 amid economic and social turmoil. The military’s business empire quickly crumbled, and many soldiers were left without jobs or income.
The same thing is happening in China, where the military has long been involved in a wide range of businesses, from construction to tourism. But China’s President Xi Jinping has been cracking down on military involvement in business, and that is causing problems for the military.
The Indonesia military’s experience provides a cautionary tale for China. The Indonesia military was once one of the most powerful institutions in the country, but it lost its power and influence when the regime changed and its business interests were no longer viable. The same thing could happen to the China military if Xi Jinping’s crackdown on military involvement in business continues.
We’ve long maintained that the Asian financial crisis, as its ultimate legacy, would alter Asia’s politics. We meant this in both the international and domestic senses: Nations would act differently after the disaster than they did during a generation of exceptional wealth. The political realignments between China and America are an early example of this. But it is changes at home that are most significant and will have the longest-lasting effect on international relations.
Indonesia is the country where these consequences are being most acutely felt. Indonesia also provides a cautionary tale for China. The Indonesian crisis is, first and foremost, a domestic political one. It is the result of the collapse of the Suharto regime, which for 32 years had maintained an extraordinarily tight grip on power. That grip was made possible by Indonesia’s oil wealth, which financed a patronage network that bought off potential opponents and allowed the regime to buy support from key groups, such as the military.
The fall in oil prices in the 1980s began to undermine this system, as did Indonesia’s increasing indebtedness. But it was not until 1997, when the price of oil collapsed and Indonesia was forced to devalue its currency, that the Suharto regime began to unravel.
The Indonesian crisis has had a number of international repercussions. The most immediate has been the flight of Indonesia’s ethnic Chinese community, which has been subjected to widespread violence. This has created a significant refugee problem in neighboring countries, particularly Malaysia. Indonesia’s economic collapse has also contributed to the financial crisis in Japan, which is Indonesia’s largest creditor nation.
The Japanese banks that have lent Indonesia billions of dollars are now facing the prospect of massive write-offs. Finally, the Indonesian crisis has called into question the wisdom of the International Monetary Fund’s (IMF) policies of austerity and deregulation, which are widely seen as having exacerbated Indonesia’s problems.
The Indonesian crisis also has important implications for China. Indonesia is China’s closest neighbor and, until recently, was its largest trading partner in Southeast Asia. The Chinese government has been quick to provide Indonesia with financial assistance, including a $5 billion loan package announced in late 1997. But China is also watching the Indonesian crisis closely, for it holds important lessons for China about the dangers of over-reliance on exports and foreign investment and about the need for political reform.
The most immediate lesson of the Indonesian crisis for China is that its own export-led economic growth strategy is not without risk. Like Indonesia, China has relied heavily on exports to drive its economic expansion. And like Indonesia, China has attracted large amounts of foreign investment. As a result, both countries are now facing severe problems as a result of the sharp drop in demand for their exports. Indonesia’s experience demonstrates that export-led growth is not a panacea; indeed, it can be quite dangerous.
The Indonesian crisis also highlights the need for political reform in China. The Suharto regime was able to stay in power for so long because it systematically suppressed all forms of political dissent. As a result, Indonesia lacked the institutions and mechanisms necessary to deal with the country’s mounting economic problems.
When the crisis finally erupted, there was no one to turn to except the military, which proved to be an incompetent and brutal ruler. The Chinese government has long justified its own repressive policies by pointing to the need for stability. But Indonesia shows that stability cannot be achieved through repression alone; it must be built on a foundation of democratic institutions and civil society.
