The financial crisis began in Thailand, and had been expected as far back as 1994, when the Mexican peso came under attack from speculators. Thailand ran a current account deficit of 5 %, thanks to inflows of capital from Wall Street force-fed to the East Asian countries by the International Monetary Fund in a bid to increase return for American financial companies.
''The global economic crisis began in Thailand, on July 2, 1997. The countries of East Asia were coming off a miraculous three decades: incomes had soared, health had improved, poverty had fallen dramatically. Not only was literacy now universal, but, on international science and math tests, many of these countries outperformed the United States. Some had not suffered a single year of recession in 30 years. (http://www.mindfully.org/WTO/Joseph-Stiglitz-IMF17apr00.htm)''
The other East and South-East Asian countries all had very low current account deficits (with the possible exception of Malaysia), and yet they were affected by what economists call ''contagion'' – investors taking irrational fright as a herd fleeing non-existing danger.
''As the crisis spread to Indonesia, I became even more concerned. New research at the World Bank showed that recession in such an ethnically divided country could spark all kinds of social and political turmoil. So in late 1997, at a meeting of finance ministers and central-bank governors in Kuala Lumpur, I issued a carefully prepared statement vetted by the World Bank: I suggested that the excessively contractionary monetary and fiscal program could lead to political and social turmoil in Indonesia. Again, the IMF stood its ground. The fund's managing director, Michel Camdessus, said there what he'd said in public: that East Asia simply had to grit it out, as Mexico had. He went on to note that, for all of the short-term pain, Mexico emerged from the experience stronger.
''But this was an absurd analogy. Mexico hadn't recovered because the IMF forced it to strengthen its weak financial system.... It recovered because of a surge of exports to the United States, which took off thanks to the U.S. economic boom, and because of NAFTA. By contrast, Indonesia's main trading partner was Japan-which was then, and still remains, mired in the doldrums. Furthermore, Indonesia was far more politically and socially explosive than Mexico, with a much deeper history of ethnic strife. And renewed strife would produce massive capital flight (made easy by relaxed currency-flow restrictions encouraged by the IMF). But none of these arguments mattered. The IMF pressed ahead, demanding reductions in government spending. And so subsidies for basic necessities like food and fuel were eliminated at the very time when contractionary policies made those subsidies more desperately needed than ever.''
According to Reynolds, the World Bank estimate was that in June 1998, the number of Indonesians living on less than a dollar a day rose from twenty million to forty million, that is, the poverty rate doubled overnight – and it was no fault of Suharto (Reynolds, 633).
The emergence of post-war Indonesia is usually divided into three periods (Colin Brown, 'Sukarno to Suharto', ed. Colin Mackerras, Eastern Asia (Melbourne: Longman Cheshire, 1994, pp.336-355)):
(1) 1949 - late 1950s: parliamentary or constitutional democracy;
(2) late 1950s - mid- to late 1960s : guided democracy;
(3) mid- to late 1960s - 1998 : New Order period.
One notices a progressive rejection of democracy initiated by the divisive effects of the parliamentary elections of '55; the ensuing militarization of politics; the post-colonial internationalism of Sukarno which bankrupted the economy; followed by the anti-communist regionalism of Suharto and his total emphasis on development. Suharto, therefore, inherited certain aspects of his rule, and disinherited his country of those which pauperised and splintered it.
Parliamentary Democracy: 1949 - late 1950s
Under the decade-long Western style parliament, the presidency held by Sukarno was largely ceremonial; members of political parties sat in parliament, to which a cabinet was responsible, and the army was subordinate to the civil power. The first political gauntlet to be run by the new set-up was the amalgamation of the federated states, for the Dutch had bequeathed the Republic of the United States of Indonesia (RUSI).
The Republic of Indonesia, with its capital in Yogyakarta, was merely one of fifteen states or provinces within RUSI. Republican politicians, most notably Sukarno himself, saw in the federation a Dutch machination to divide the nation and prolong its influence. On August 17th, 1950, this obnoxious state of affairs was terminated and the Yogyakarta-based Republic of Indonesia was born. Yet the change caused anxiety in peripheral areas : they feared excessive centralisation of power in Jakarta, presaging the civil war of the late '50s. The question of the role of Islam remained alike in abeyance : in 1948, those who had wished to create a Muslim state had formed the Darul Islam. Its presence, albeit non-militant, kept the problem visibly open.
In the early '50s, government turnover was rapid : Hatta (December '49 - August '50), Natsir (September '50 - March '51), Sukiman (April '51 - February '52), Wilopo (April '52 - June '53), Ali Sastroamidjodjo (July '53 - July '55), Harahap (August '55 - March '56), and again Ali Sastroamidjojo (March '56 - March '57). The chronic instability and selfishness of governments contrasted sharply with the heroism of the independence struggle, bringing disillusionment. Also, centrifugal tendencies appeared as conflict between the export-producing Outer Islands and the densely-populated island of Java. In December 1956, uprisings by military commanders occurred.
The election results of 1955 had heralded the coming regional dissidence. The popular vote was spread among no less than 28 parties. The leaders were : the Nationalist Party of Indonesia (PNI; 22%); Masjumi (21%) and Nahdatul Ulama (18%), both Islamic parties; and the Communist Party of Indonesia (16%). A working coalition was unthinkable. The PNI, the NU and the PKI, which together commanded 141 of the 257 parliamentary seats, represented the ethnic Javanese heartlands in central and east Java; The Outer Regions and the western third of Java were represented by only one major party : the Masjumi. Non-Javanese felt threatened. Sukarno, already chaffing against his midget presidency, set forth his political philosophy in October 1956 :
