The Meltdown of the Indonesian Economy in 1997-1998: Causes and Responses

Indonesia was hit hardest by the recent economic crisis. Overinvestment in non-traded sector and manufacturing industries that required high level of protection was the root cause of the crisis. The weak financial system of Indonesia also exacerbated the crisis. The crisis was aggravated further by the political uncertainty that evolved around the departure of Suharto. The lack of government determination to adopt sound macroeconomic management did not help, either. This paper reviews the banking and currency crisis still unfolding in Indonesia from various angles. For this purpose, it first reviews the recent macroeconomic developments prior to the crisis. Then the paper discusses the banking crisis in detail. An analysis of the policy responses to the crisis is another integral part of the paper.