Indonesia into the vortex

FRFI 143 June / July 1998

A vortex of imploding debt is swallowing up entire economies and governments. Indonesia's financial crisis ignited the fires that burnt down Jakarta. The complacency with which capitalist commentators greeted last year's Asian currency and stock market falls - talk of necessary adjustments, temporary aberrations - has given way to grim mutterings of a global crash. They are right. Trevor Rayne describes the context of the Indonesian uprising.

'For miles the streets of Jakarta look like the set of a disaster film. Hundreds of shops, houses, public buildings, police stations, hotels, discos, shopping centres and markets were burnt.' Richard Lloyd Parry, The Independent, 15 May, 1998

Tanks and armoured cars criss-crossed the city, squadrons of troops on motorbikes raced around looking for targets, but the anger of the workers and the poor could not be suppressed. The official tally of the 15 May outpouring is 3,000 buildings destroyed, including 500 banks, 1,000 cars and 500 motorbikes, at a cost of $230 million. The National Commission on Human Rights say 1,188 people were killed.

So much for the New Tiger, for the air-conditioned shopping malls, skyscraper hotels and annual economic growth of 7-8%. The business community had fled to hotels overseas or went into hiding. Sweden's Ericson was closed. So were Total, Mobil, Deutsche Bank, Credit Suisse, First Boston, etc: staff had vanished. Of 50 main supermarket stores in Jakarta, 30 were damaged, six burnt to the ground. Just 12 firms traded shares on the stock market. The Indonesian government and international capital might have been able to cope with the students, but this movement into the streets of the dispossessed masses was something else.

On 20 May US Secretary of State Madeleine Albright suggested that it might be wise if President Suharto, to keep his 'reputation intact', were to resign. On 21 May Suharto bade farewell to the position he had known for 32 years. Into his place stepped one of his most loyal cronies, a good friend of German Chancellor Kohl and General Electric chairman John Welch. New President Habibie's family network of companies only extends to some 80 firms, compared to Suharto's family's 1,247 companies. Suharto had to go or imperialism risked seeing the working class quickly form radical, independent organisations that would mount a sustained challenge to its operations in Indonesia. 

A global issue

What happened in Indonesia has characteristics that are specific to that country's history, but it was triggered by a condition that is general to southeast Asia and is a structural problem for world capitalism. In December we said,

'The massive capital flows to southeast Asia, the easy credit that has financed the global stock market boom, the growing monopolisation of capital through mergers, acquisitions and privatisations, the unprecedented autonomy of the financial system from real production, and the growing rivalry between the major imperialist powers, have the same cause - an overaccumulation of capital in the heartlands of capitalism. The frenetic international expansion of capitalism - globalisation - has now spread that crisis to every part of the world. The latest shocks to the world's financial system are just another stage in the countdown to capitalism's collapse.' 1

Overaccumulation of capital manifests itself in the overproduction of commodities and speculative surges of money desperately seeking profits and avoiding losses. World demand for semi-conductors is contracting; petrochemical prices have dropped 20% since October 1997; oil prices have fallen; world demand for aircraft engines is down; overcapacity is rapidly becoming the concern in industry after industry. This is a global phenomenon; it has heightened expression in southeast Asia. Over 1996-97 the Philippines, South Korea, Thailand, Malaysia and Indonesia saw a net reversal of flows of private funds of $109 billion, 10% of their combined gross domestic product. This money has poured into US and European stock markets. European stock markets are up 53% since the beginning of 1997. An index of Wall Street shares is up 150% on its 1994 level. This vast speculative balloon cannot inflate indefinitely while the productive base lags and even begins to shrink, a process which the Asian crisis is accelerating. The credit crunch that has smashed into the Tigers, is now upon the Japanese economy and confronts European and US markets with the prospect of meltdown.2  


Suharto took over the presidency in 1966 from Sukarno after the killing of over 500,000 people, many of them members of the biggest communist party in the world outside the socialist countries. The communist party was unarmed. Sukarno established an independent oil company, Petromina, and nationalised foreign oil assets. Suharto was blessed with US aid and multinational investment. Much of this investment had to be made in joint ventures with local companies that the Suhartos had a stake in. The CIA estimated the Suharto family wealth at $30 billion; other estimates go as high as $70 billion. Whatever, it dwarfs the accumulated plunder attained by the Marcos family in the Philippines. Suharto never faced a vote from the people, never had an electoral opponent. He presided over the most violent and corrupt government, but he had the complete backing of the US, British and Australian governments. But friends in high places turn cool when the credit runs out. (Nevertheless, the Suhartos own property in London and visas have been isssued).

Indonesia's private company debt is $80 billion. Of this, the credit rating agency Moody's described three quarters as bad. Banks with the biggest exposure to Indonesia are the Hong Kong and Shanghai Banking Corporation (HSBC - owner of Midland Bank) with $1.8 billion, Standard Chartered with $1.7 billion, Chase Manhattan $2.5 billion, Bank of Tokyo Mitsubishi $3.7 billion, Fuji Bank $1.8 billion. There are also major exposures of French and German banks. Overall, HSBC and Standard Chartered's loans to Asia amount to 40% and 70% of all their loans respectively. Into this dilemma stepped the trouble-shooting International Monetary Fund (IMF).
At the end of last year the IMF put together a $43 billion bailout plan. Suharto's government consumed $4 billion of this before he fell. Suharto rejected IMF proposals that would undermine his family businesses: 'The IMF consists of a lot of Jews and that is how Israel influences the IMF' he opined. IMF money was stopped. On 4 May Suharto acceded to IMF demands to remove subsidies on fuel - the street protests and rebellion grew. Inflation is around 80%, the rupiah has lost 70% of its exchange rate value in a year, real wages have been halved, non-oil exports fell 60% in the last nine months of 1997 and unemployment grew rapidly. Under these conditions, not just the poorest are pushed into desperation, but also those whose aspirations were fuelled by the credits: all workers and the newly prosperous middle class.

Imperialism has bought itself a breathing space with Habibie. New loans are forthcoming, but debt was the problem to begin with. Under popular pressure many of the deals between multinationals and Suharto's company network were under threat of suspension. Thames Water, Rolls Royce, Rio Tinto, BP, United Biscuits, PowerGen, Taylor Woodrow, GEC Alsthom, British Aerospace and the Bank of Scotland are among the British firms tied to the family businesses. Thames Water's contract was temporarily suspended, then restored, presumably after a suitable new palm was found to grease. 


It is the deteriorating condition of the world's second biggest economy that most alarms capitalism's apologists. Moody's described Japanese banks as being in a state of slow motion collapse. Two years ago nine of the banks cited were in the world's top ten companies for assets held: Dai-Ichi Kangyo, Sumitomo, Bank of Tokyo Mitsubishi etc. Together they have written off over $70 billion in bad loans. Their overall lending to Asia is $271.4 billion, of which $44 billion is conceded as bad. They lent $23 billion to Indonesia. 61% of the increase in Japanese exports between 1985-95 went to Asia.
Asia's share in Japanese exports rose from 19% in 1985 to 40% in 1995. These have fallen by a fifth in a year and the situation is worsening: exports to Indonesia halved in April alone. Mitsubishi made a loss for the year and cut investment by a third. Hitachi's earnings are down 35% and investment by a third; Nissan's 97%; NEC's 25%, and so on. Their credit worthiness is descending to junk status. Meanwhile, unemployment, at 4.1%, is at a post-war record level.

Japan accounts for 70% of the regional gross domestic product. It is Asia's main export market and imports into Japan are down 28% on the year. In 1995 Japan generated 60% of the world's net capital outflows. The USA absorbed 45% of the inflows. Japan financed the USA's 1980s arms build up and 1990s investment growth. Japan holds a quarter of the USA's foreign debt. If the Japanese economy declines any further, capital will be pulled out of the USA in such proportions that the vortex will engulf Wall Street and the City with it. Six officials from the Bank of Japan and the Japanese finance ministry have hanged themselves in the recent period. It is, as they say, an honourable thing to do.

South Korea

The world's eleventh biggest economy contracted for the first time in 18 years, shrinking 3.8% in the first quarter of 1998. Investment in machinery and equipment fell 41%. Bad debts are expected to grow from $50 billion to $90 billion by the end of the year. South Korea has $10 billion in loans to Indonesia. Half the major banks are considered non-viable in terms of assets held. In return for a $58 billion IMF-bailout the government agreed to end protection for the chaebol monopoly combines, open them up to western multinationals and end job protection. The stock market dropped 20% in four days in May on news that Hyundai was to sack a fifth of its 46,000 workers. Corporate bankruptcies have doubled in a year and unemployment has tripled. Workers are threatening a general strike in opposition to a new law making redundancies easier for firms.

Suicides are up 36% this year and a recent survey showed that over a quarter of South Koreans feel an urge to kill themselves. People are desperate: robberies in Seoul are up 45%, housewives and unemployed workers are turning to crime to make ends meet.

...and the other Tigers

Malaysia saw fit to build the world's tallest building; it remains largely empty with no takers. Domestic loans equal 150% of the gross domestic product. A quarter are considered unpayable. Singapore's non-performing loans have tripled in a year to 10% of the total, and property prices are down a third as business demand evaporates. The Thai economy is shrinking and private investment has halved in a year.

Trade war threatens

 'There is an invasion of foreign capital, especially US capital, underway. A type of colonisation of Asia has started.' The Secretary General of Japan's ruling Liberal Democratic Party.

US and European companies are buying up Asian assets cheaply. At the same time tension is increasing over growing trade imbalances and the cost of trying to bail out the sinking economies. To try and stimulate domestic demand the Japanese government has pumped trillions of yen into the economy, to no avail. Instead, the increased money supply has devalued the yen to a seven-year low against the dollar. As Japanese firms try to export their way out of crisis, the USA recorded a record monthly trade deficit of $13 billion in March. The first quarter US trade deficit was $36.8 billion, 26% up on the corresponding 1997 deficit. Lost US sales to Asia are expected to total $100 billion this year. As the yen falls China is under pressure to devalue its currency to compete in US, European, and what remains of Asian markets. A series of competitive devaluations threatens Asia, triggering another wave of crashes.

Having spent $50 billion bailing out Mexico in 1995 and $100 billion so far in Asia, the IMF is running out of money. Voices are raised in US financial circles against giving the IMF any more. Triumphal capitalism is running out of credit. There is no economic power big enough to hold the global system together, no locomotive strong enough to haul the world economy back from the abyss. Pride goes before a fall. 


  1. David Yaffe, 'Countdown to Capitalism's Collapse', FRFI 140, December 1997/ January 1998.
  2. See Trevor Rayne, 'Meltdown', FRFI 127, October/November 1995 and 'The 1929 Crash', FRFI 125, June/July 1995.


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