The ill-fated currency board proposal for Indonesia

Abstract

Abstract. In February 1998 Indonesia toyed briefly with the idea of introducing a currency board system as a means of extricating itself from the Asian financial crisis. Although the then president Soeharto announced his government’s intention to implement such a system, international and domestic opposition was so vociferous that he aborted the plan. In my view this opposition was ill-informed. Moreover, it was motivated, to a considerable extent, by a desire to use the crisis to force a president widely disliked among the urban intelligentsia to discontinue some of his favoured economic policies—if not to bring about an end to his presidency—rather than giving top priority to dealing with the crisis itself. The nature of the crisis as it played out in Indonesia remains poorly understood, such that an analysis of the currency board proposal provides an opportunity to correct some misunderstandings and dispel some of the myths about this major episode in Indonesia’s modern history. In this paper I argue that in fact Soeharto’s embrace of the proposal was sensible, and that it was motivated by the desire to restore macroeconomic stability—which would have been not only to his own benefit but also that of Indonesia’s citizens.Keywords. Currency board; Proposal; Indonesia.JEL. F11; F12; F13