Two Countries, Two Trajectories

On the morning of July 14, 1997, citizens of Jakarta and Kuala Lumpur awoke to a new world. The difference from the previous day was seemingly minor and distant – several hundred miles to the north, the government of Thailand had abandoned its long-standing informal currency peg of the baht to the American dollar. Few would have believed that this decision was the first in a chain of events that would fundamentally remake the political economy of Southeast Asia. Even as foreign investors turned their eyes toward other Asian countries, reconsidering the health of their financial systems, political and economic upheaval seemed unlikely. Indonesia and Malaysia had long embraced the world economy. They were competently run economies with popular leaders who had engineered decades of impressive economic growth. Despite their excesses, authoritarian rule in each country bred stability, prosperity, and development.

A year later, Indonesia and Malaysia were in turmoil. Sustained capital outflows and currency speculation had led to massive depreciation of the rupiah and ringgit and heavy losses in each country's stock market. Economic growth, which for a decade had been among the highest in the world, became economic collapse – GDP contracted nearly 8 percent in Malaysia and more than 13 percent in Indonesia during 1998. In each country, thousands of borrowers in the business community were unable to service their debts. Financial upheaval forced both countries to seek emergency funds from foreign donors to keep their once-buoyant economies afloat.