Indonesia was in a parlous condition in 1998. Only a few years earlier, in the mid-1990s, it had often been portrayed as one of the Third World's success stories. President Soeharto's military-backed New Order was certainly authoritarian but it had underwritten political stability for almost three decades since the bloody upheaval surrounding the collapse of President Soekarno's Guided Democracy in 1965–66. Over the next three decades, that political stability had provided the foundation for average annual economic growth of 7 per cent that had raised per capita income to over US$1,000 and transformed Indonesia by the mid-1990s into a “near-NIC” on the brink of achieving Newly Industrializing Country (NIC) status. But the Asian Monetary Crisis — spreading from Thailand in July 1997 — brought rapid growth to a sudden halt. Tied to a maze of patronage networks, the Soeharto regime had been much less able than other regional governments to take the firm measures necessary to avert the crisis or at least mitigate its consequences. Indonesia's economy was in disarray with a virtual halt to investment and sharply rising unemployment — aggravated fortuitously by the impact on agriculture of drought caused by El Nino climatic conditions. As beggars re-appeared in large numbers on the streets of Jakarta and other cities, crime rates rose and looting became commonplace, while anti-Chinese rioting spread through Java and on other islands. Finally, massive student demonstrations triggered two days of anti-Chinese rioting in Jakarta in May 1998 that forced the resignation of President Soeharto and marked the end of his New Order.

The timing of the collapse of Indonesia's authoritarian regime was clearly not a direct result of domestic social and political change driven by economic growth but rather the opposite — the sudden interruption and indeed reversal of that growth in response to unexpected external factors. The Indonesian case, however, did not mean that the level of economic development is unimportant for understanding the fall of an authoritarian regime and transformation in the direction of democratization. As argued by Rueschmeyer, Stephens and Stephens, “An agrarian society before or in the incipient stages of penetration by commercial market relations and industrialization is unlikely to gain or sustain a democratic form of government.”