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The Impact of the Crisis - Decline and Recovery

CID Faculty Working Paper No. 103

Joseph J. Stern
January 2004

Abstract

When the Asian financial crisis broke in mid-1997, the expectation was that Indonesia would weather the crisis with minimal damage. Actual events soon proved these expectations widely wrong and the Indonesian economy was more severely affected than other Asian countries. In part this outcome reflected Indonesia's fundamental institutional weakness that had been overlooked in the euphoria that marked international financial markets during the 1990s, and in part the impact of the financial crisis was magnified by inconsistent internal policies and by an overly ambitious IMF program that tried to achieve too much in to short a period of time. The result was not only a severe economic contraction with rising poverty levels and growing social unrest, but a political change that resulted, in the short-run, in further economic instability and effectively delayed Indonesia's recovery.

Keywords: Indonesia, Asian financial crisis, currency board, IMF conditionality, bank failures, political change

JEL subject codes: O11, O19, 024, O53, N25