Introduction: According to an essay by Gary Vocke published online by the United States Department of Agriculture, after years of rapid growth, poverty reduction, and political stability, Indonesia slipped into a deep economic crisis in 1997-1998. The financial crisis in Indonesia was triggered by a larger regional financial crisis that began in Thailand in July of 1997. Indonesia's sudden economic collapse had several contributing factors. These included a rapid increase of short-term private debt and a weakly regulated banking system. The Indonesian economy was especially hard hit because of the borrowing practices of Indonesian companies. For a number of years, private firms were saving 9 percent to 11 percent on the cost of loans by borrowing in foreign currencies without hedging against currency devaluation. These companies assumed that the Indonesian government's exchange rate controls would protect them from this risk, but these controls did not work as hoped (Vocke).
According to a Congressional Research Service Report written by Dick Nanto, the Asian financial crisis involves four basic problems: (1) a shortage of foreign exchange that has caused the value of currencies and equities in Indonesia and elsewhere to fall dramatically, (2) inadequately developed financial sectors and mechanisms for allocating capital in the troubled Indonesia and elsewhere, (3) the effects of the crisis on the U.S. economy, and (4) the role, operations, and replenishment of funds of the International Monetary Fund.
Nanto notes that the Indonesian financial crisis of 1997 begin with two rounds of currency depreciation began occurring in early summer of 1997. The first round resulted in a dramatic drop in the value of the Indonesian rupiah. As the rupiah began stabilizing, a second round began with downward pressures hitting the Taiwan dollar, South Korean won, Brazilian real, Singaporean dollar, and Hong Kong dollar. Go...