The Long Lasting Brunt of Indonesia’s Currency Depreciation: a historical analysis on Suharto’s reign and the decades-long condemnation of low-wage workers

Abstract

The 1997 Asian Financial Crisis had a significant impact on the Indonesian financial sector. Despite statistics showing an increase in low-wage workers’ employment, reduction in overall confidence resulted in bank runs, consequently weakening the Rupiah. Amidst currency depreciation and Suharto’s faulty economic policies, the Indonesian labor market proved unsustainable. When banks began to declare bankruptcy, industries with services that depended on banks also faced the difficulty of dismissing employees or lowering their wages. The labor market was restructured in a way that increased inter-sectoral mobility and widened income inequality. Reduction in real workers’ wages, heavy decrease in government budget and a weakening of export-dependent sectors were all factors that contributed to an increase in the number of people living on or below the poverty line. Indonesia’s continued ethnic divide and corrupt governance made market restructuring rigid and irreversible, further prolonging the crisis and widening the population of low-wage workers. Suharto’s policies that occurred on the backdrop of the crisis had dire consequences that exceeded his presidency. President Suharto’s regime lasted from 1967 to 1998 marked the longest ranging Indonesian presidency. It carries the infamy of mass genocide and a cycle of economic crises. Although the 1997 Asian economic crisis caused great currency depreciation for Indonesia, statistics show increased employment for low-wage workers. However, said influx is ignorant of individuals’ purchasing power amidst other issues like inflation. These consequences are still true for modern-day low-wage workers. Suharto’s unstable regime was the catalyst for the Indonesian currency crisis, resulting in numerous short term harms and decades-long restructuring of the labor market. The creation of the low-wage worker crisis, which spills into today, can largely be traced back to policies made in 1997. The worrying amounts of under-employment and gruesome working conditions resulted from increased mobility across sectors, a shift in labor market structures, and the widening of income inequality. These three distinct problems, stemming from Indonesia’s stagnating economy ultimately can be traced back to currency depreciation. A mixture of faulty policies and a shift in global capitalism led to the eruption of the Asian economic crisis in 1997. Prior to the crisis, Asian regimes such as Thailand and Japan experienced massive growth due to western investors attempting to liberalize trade and privatize Asian markets (Bell, 2010). Monetary authorities could control such increase in capital flows, eventually leading to unstable currency fluctuations (McLeod, 2000). Indonesia, however, marks a different case among these other Asian nations. Before 1997, the Indonesian economy was considered better than Thailand’s as data showcases higher real GDP rates. Throughout 1997, however, the crisis depreciated currencies of nations including Indonesia, Thailand and Korea. In the early stages of the crisis, the Indonesian Rupiah depreciated by around 50% and inflation stayed within single digits (Feridhanusetyawan, 199). In fact, experts still considered the economy to be growing. This came to a halt in the beginning of July 1997 when the Indonesian crisis started as a contagion of Thailand’s currency crisis (Sadli, 1998). Towards the end of 1997, Suharto’s administration started losing more credibility. The nation’s lack in confidence International Affairs and Economics, ESIA ‘20, stephpurwanto@gwu.edu