"If I do these things, they will throw me out": economic reform and the collapse of Indonesia's new order: why did the economic crisis in 1998 unseat Suharto when previous crises had not? Why did the military and political elites--Suharto's longstanding allies--finally abandon him?

• Author: Smith, Benjamin
• Position: Strong and weak states: cases of governance

On 18 May 1998, the leadership of GOLKAR, the ruling party that had stood by Indonesian President Suharto's side through numerous crises, announced its intention to compel him to resign. On May 21, despite a statement of support for the president by the armed forces chief, General Wiranto, two hours after the party announcement, Suharto did in fact resign, ending a thirty-two year reign and one of the most durable authoritarian regimes in the developing world. Even though the regime collapsed during an economic crisis whose impact on the Indonesian economy exceeded that of the Great Depression on the United States, the breakdown of Suharto's New Order government came as a shock to nearly all observers. The "smiling general" had ridden out so many prior upheavals that the longevity of his regime was widely assumed to depend only on his mortality. Even at 76, he appeared to be firmly in control of Indonesian politics well into 1998.

The speed with which the Suharto government in Indonesia collapsed surprised many observers. William Liddle, for example, remarked on 14 May 1998 that "as recently as a few weeks ago, most observers were not predicting that" Suharto's tenure in office would come to an end. (1) Most analyses of Suharto's fall place primary emphasis on his actions during the Asian economic crisis of 1997-98, his inability to act as a result of age or poor health, or problems inherent in the economy (2) These factors are important; what they fail to address, however, is why the regime's original pillars of political support, the military and GOLKAR, abandoned Suharto on 20 and 21 May 1998. That is, why did the leaders of these two institutions--once seen as the definitive hard-liners in the regime--with draw their support at a time when most observers expected them to hold fast to Suharto's leadership? Ultimately, it is these events that changed a political crisis into a regime breakdown.

In this essay I argue that a dramatic change in the structures of political authority that began in the mid-1980s best explains the regime's inability to respond when a major crisis emerged in 1997. That change occurred during the enactment of significant economic policy reform in response to the oil price collapse of 1986. The ease with which these reforms were adopted allowed Suharto to push the leaders of the army and GOLKAR out of the tightest circle of authority. In the process, the leaders of these institutions lost the influence that had earlier guaranteed their allegiance to Suharto. Consequently, their support became increasingly contingent on economic stability-which ensured the political stability that defined the institutional missions of both organizations--making it more likely that a crisis could encourage them to turn against the president. Thus, Suharto fell victim in 1998 not to his own indecisiveness but to an inability to maintain either the coalition built in the 1980s or economic stability. Dual pressures from above (international financial institutions demanding an end to corruption among Suharto's family and close friends) and below (mass protests responding to the economy's meltdown and subsequent army and GOLKAR defection from the ruling coalition) proved more powerful than his cadre of new economic elites. Most important, the political fallout of economic reforms in the 1980s made it much more likely that, in an economic crisis, the military and GOLKAR would turn on Suharto. The experience of Indonesia between 1980 and 1998 has important implications for the study of governance in authoritarian settings. Governance--the manner in which political power is, or is not, exercised in pursuit of national goals--depends crucially in non-democratic polities on the steadfastness and compatibility of coalition partners as much as it does in democratic ones. The transition in Indonesia from resource-based development to neoliberal reform-based development in the late 1980s created just the sort of "hard times" for rulers that Peter Gourevitch rightly maintains can shed light on the dynamics of coalition formation and change. (3) Yet, this particular episode of hard times actually posed little threat to Suharto's rule, and the seeming lack of political urgency allowed him to tighten his ruling circle by largely excluding the two institutions that had allowed him to consolidate his regime. Because the oil boom years had allowed the regime to build such considerable economic autonomy, and because the regime had thoroughly consolidated its authority and marginalized the opposition by 1986, the transition to an open economy carried little of the political urgency that had characterized the regime's consolidation. With little perceived need to build a new, robust coalition in support of a more open economy, Suharto was politically free to limit the range of interests that he was committed to support. As a result, the reforms of the late 1980s pitted the interests of a narrow group of economic elites--and by connection Suharto himself--against the military (4) and GOLIKAR, which continued to be committed to economic stability and political order. Once a crisis emerged that forced Suharto to favor his inner circle at the expense of economic stability, subsequent decisions were bound to test the allegiance of the party and army.

INDONESIA'S CRISIS: ECONOMIC MELTDOWN AND REGIME COLLAPSE, 1997-1998

Like all of the Asian countries that suffered during the economic crisis of 1997-1998, Indonesia experienced economic problems tied to the origins of the crisis, the collapse of the Thai baht in July 1997. The decision by the Thai government to allow the baht to float freely provoked massive selling by investors holding listed currency shares. Within a few weeks the Indonesian government also floated its national currency, the rupiah, which had been allowed to fluctuate only within a narrow range against the dollar throughout the New Order era. This move provoked the same wave of currency sell-offs and devaluation as it had in Thailand, and within a few months had also triggered capital flight and large-scale bank insolvency. As in Thailand, currency weakness in Indonesia turned out to be merely the start of a cascade of economic problems that by early 1998 had reduced the rupiah to one-seventh of its pre-crisis exchange rate value, spurred inflation and driven many of the country's banks out of business. (5)

Despite the economic problems that emerged so quickly in the second half of 1997, it initially appeared that the Indonesian government was willing and able to implement the IMF-mandated reforms necessary to secure a multi-billion dollar emergency loan package and to stabilize the economy. In late October, Suharto and his advisors agreed to a broad package of reforms, including fiscal and banking reform, "improved budget discipline," reduction of trade barriers, deregulation of agricultural commodities and policies to control inflation. (6) At this point, as in past crises, Indonesia's highly centralized authoritarian polity was seen as a plus by international financial organizations, which expected that the government would once again be able to push through the required changes in economic policy without significant opposition. In addition, Indonesia's economic and political indicators looked more positive in late 1997 than those of most other countries in Southeast Asia, raising the prospect that Indonesia would fare better than its neighbors in 1998 (See Table 1). As Hal Hill notes, Indonesia's "authoritarian political system looked better able than Thailand's to deliver a clear response to the crisis, Bank Indonesia had not squandered its international reserves trying to fight the foreign exchange market, Indonesia's exchange rate regime had not been so rigid, Indonesia had invited the IMF in advance for 'consultation,'" and "Indonesia's geo-strategic significance is such that no major country could afford not to participate in a rescue package." (7)

Politically, the regime looked to be nearly as capable as ever. Notwithstanding the protests surrounding the 1997 elections, the major targets of which were corruption in Suharto's family and a lack of progress in political liberalization, by July the regime seemed to have gotten things under control. As late as January 1998, Andrew Macintyre wrote admiringly that "the relative autonomy of the political executive and the decisiveness of the policy process have greatly facilitated the task of maintaining a generally sound macroeconomic framework as well as liberalizing trade, investment and financial regulations." (8) It seemed unlikely that any opposition groups could pose any real threat to the New Order, and the economic problems of late 1997 did not immediately produce a political crisis. Most expectations were that the Suharto government would respond effectively and ride out the crisis, as it had always done before.

In September 1997, the government announced a "self-imposed IMF program," which was to include the cancellation of $62 billion in investment projects (many of which would have been granted to Suharto relatives or cronies), an injection of significant capital into the economy by Bank Indonesia, and a promise to close insolvent banks, including some owned by members of Suharto's family. Later in September, however, the announcement of default on considerable foreign private debts spurred the first serious exodus of domestic and foreign private investors, and the rupiah took another plunge. On October 8, the government invited the IMF in to negotiate a loan package. The IMF's demands included a 1998 budget with a fiscal surplus equal to one percent of GDP, the closure of insolvent banks and a sharp increase in interest rates. These measures were intended to cope with the short-term liquidity crisis. (9) In addition to these steps, however, the IMF also demanded a set of far-reaching reforms that seemed to have been on its "wish list"...