Can Indonesia Bounce Back?

Of the Asian crisis economies, Indonesia has suffered the longest and rebounded most slowly. Last month’s free and peaceful elections firmly established the country – the world’s largest majority-Muslim state – as a functioning democracy. But can it bounce back to its pre-crisis performance? Indonesia was always different. Most of the Asian crisis victims – Thailand, Malaysia, South Korea – suffered sharp cutoffs in foreign lending, but investment dollars generally stayed put. Indonesia, by contrast, experienced spectacular capital flight. Not at first. In the first two quarters of the crisis, inflows continued. And then, in three disastrous months in 1998, over $5 billion in equity capital fled the country. And in following months, more of the same. What happened? The answer is that in May 1998, Indonesians set upon their ethnic Chinese countrymen in an orgy of violence that claimed over 1,000 lives. The Chinese were hated for their wealth. Though four percent of the population, they controlled an estimated sixty percent of the country’s assets. And at that point, all these assets were sent offshore. Estimates of total capital flight top $20 billion. This triggered an economic meltdown far messier than anywhere else in Asia. South Korea, Malaysia and Thailand bounced back. But foreign direct investment into Indonesia actually turned negative and stayed that way into the new millennium. So will Indonesia rebound? The odds are long. To be sure, Indonesia has just accomplished something extraordinary. The world’s largest majority-Muslim country has become a genuine democracy. The incumbent candidate, competent but uninspiring, lost to a secular challenger with a reform agenda. The Islamic parties that did best in...