Thayer Watkins
Silicon Valley
& Tornado Alley

The Asian Financial Crisis of 1997-98 in in Indonesia

Asia's so-called miracle was shattered in truth by thousands upon thousands of ill-conceived projects financed by a deluge of cheap money.[...] Instead of the patient capital of the past that built railroads and steel mills, the bulk of these billions were in short-term instruments that could be jerked from one country to the next at the press of a button by jittery twenty-something traders and fund managers.

Mark Clifford and Pete Engardio
in Meltdown: Asia's Boom, Bust, and Beyond
(Prentice-Hall Press, 2000), pp. 9-10

The financial crisis that hit Thailand, Indonesia, South Korea and to a lesser extent Hong Kong and Taiwan in 1997 was not generally anticipated but it should have been. Although the macroeconomic variables such as budget balances, both fiscal and trade, were in good shape and they had vast holdings of foreign currency to use to maintain their exchange rates as pegged to the dollar the microeconomic situation was quite different. Firms in the affected countries had made large amounts of loans from Western banks and they were borrowing short term to finance long term projects. The firms were committing themselves to foreign currency payments and not hedging the exchange rate risk. This meant that if the value of the domestic currency fell with respect to the foreign currencies the amount of domestic currency required to make payment committments would increase and could increase to the point of bankrupting the firms. The notion of hedging and risk management never seemed to have occured to many of the firms in these countries. The decision makers had taken the East Asian prosperity as unassailable. This unrealistic attitude was in part due to the fact that many of the decision makers were not real business people. Many were people who had strong contacts with the government and made their money as a result of special priviledges. Others were heirs to family fortunes who did not appreciate the necessity of economizing and weighing risks. But many were legitimate business people who had developed false notions of what constitutes the proper basis for making decisions. Profitability was not given its rightful place in making decisions. This disdain for profits as opposed to sales and market share was often rationalized as a focus on long term profitability versus they saw as the misguided emphasis of short term profitability of Western business. But this was a coverup for a feudalistic, militaristic orientation versus an economic orientations. In military events resources are wasted prodigously to gain victory and the rewards come after the opponents have been vanquished. But in market economies the loss incurred in gaining market share generally can never be recouped. The industrial organizations in Japan and elsewhere that ignored the necessity of making a profit were houses of cards that ultimately had to collapse.

To sum up the East Asian Financial Crisis of 1997-98 had its roots in the lack of a proper criterion for deciding an investment project is worthwhile. Instead the decision to go ahead with a project was based upon whether financing could be obtained. That could have placed the burden of doing an analysis of the net present value of the project on the lender. But the lenders also did not exercise this option. Instead the lenders placed reliance on a belief that the sovereign governments would not permit a financial collapse. There is a distinct element of feudalism in the attitudes toward business in the countries affected by the crisis. There was an attempt to replace economic analysis with a militaristic mentality that appeared to work when times were prosperous but failed miserably when conditions soured.


What people in history have been subjected to so many wrenching, cataclysmic changes as the Malay peoples? The Malays make up the vast majorities of the populations of Malaysia, Indonesia and the Philippines. In classical times invaders from India established Hindu culture and religion in the area. The remnants of this cultural invasion survives in a few places such as Bali and in the monuments. Then came Islam displacing the Hindu culture. In the 16th century the Portuguese and Spanish came but the Portuguese were soon displaced by the Dutch and the English. After centuries of Dutch and English domination suddenly in the 1940's the Japanese expelled both. After a period of transition there was independence under regimes which were the successors to the Dutch and English. Sukarno ruled the former Dutch possessions and allied himself with leftist forces. Quite abruptly Sukarno was stripped of his power and a former general, Suharto, was the dominating figure after a civil blood bath. Then came decades of stability and corruption. But within the course of a singel year Suharto was out of power. Again after of period of political instability and transition with many of the most effective citizens leaving the country the daughter of Sukarno is in power. With such political turmoil it is surprising that any of the common people can continue to keep the economy operating.

Major Indonesia Enterprises

It is important to distinguish between firms which owe there existence to efficiency and skill and are likely to survive a change of regime and firms which are dependent upon special privilege granted by a particular regime and which will eventually disappear with the end of that regime.

The Suharto Family

Suharto Associates

Chinese Family Enterprises

(To be continued)

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