Introduction

Since August 2007, the U.S subprime mortgage crisis has not only threatened the U.S. economy into a recession, but affected the global financial system. The spread of the U.S. financial storm triggered a global credit crunch and tipped Western economies into recession. World GDP growth decrease from –1.7 per cent in 2007 to –2.9 per cent in 2008 (World Bank 2008). Many countries responded by launching massive public investment programmes and employing expansionary fiscal policies to weather this once-in-a-century financial tsunami. In the United States besides the well publicized US$100 billion approved by Congress, the Federal Reserve attempted to bail out institutions and markets with about $1.3 trillion in investments in various risky products. In addition, many developed and developing countries also provided astronomical amounts to rescue the economy.

This chapter reports on how the Taiwanese Government rescued its economy during the financial crisis, with particular focus on small and medium enterprises (SME). During the financial crisis, Taiwan's economy also dipped to the bottom. While its GDP growth was recorded as 4.2 per cent, 4.8 per cent, 5.7 per cent, and 1.9 per cent from 2005 to 2008, the expected GDP growth rate in 2009 was –4.0, a record low in history since 1980. To safeguard the stability of Taiwan's economic growth by stimulating domestic demand as a means of sustaining the economic growth momentum, the government adopted the short- and long-term policies to revitalize the economy. With respect to the short-term policies, the government issued consumption vouchers for an immediate stimulus measure in January 2009. It also announced the “three-pillar support policy” to restore the confidence of the Taiwanese people. This “three-pillar support” means that the government would support banks, bank would support enterprises, and enterprises would support their workers. For its long-term policies, the government adopted a four-year project (2009– 12) to expand and accelerate the implementation of public works, with the aim of creating a second wave of economic revitalization effect to augment the benefits generated by the consumption voucher scheme.

The “Great Recession” and East Asian Economies

The global economy has barely recovered from the recent shock of the “Great Recession”, which originated in the United States in 2008, first as the twin crisis of the subprime mortgage meltdown and the bursting of its housing bubble, and then quickly engulfed Wall Street to develop into the worst global economic crisis in decades.

The main causes of this financial crisis are now sufficiently well known. They include: (1) A long period of loose monetary policy, along with low interest rates in developed economies, generating too much easy liquidity to fuel excessive financial speculation activities; (2) Excessive “innovation” in the financial sector, leading to the proliferation of too many unsound financial products and too many complex financial instruments, for example, structured products such as CDOs (collective credit obligations) and derivatives such as CDSs (credit default swaps); (3) Deficient and inadequate regulations and supervision on banks and financial institutions, particularly the investment banks, e.g. many of their off-balance sheet activities; and (4) Failure of credit rating agencies in rating the many complex debt instruments correctly.

Meanwhile, as the global financial sector has basically recovered from the crisis, finance ministers, central bankers, and financial bureaucrats in the developed countries are busy debating and deliberating on a plethora of new policy measures to regulate the operations and practices of the financial sector in order to prevent the recurrence of similar crises in future. Many economists are also taking a critical look at the relevance and applicability of time-honoured economic theories such as rational expectation and the efficient market hypothesis that had been widely received and practised by financial economists and financial sector players.

When looking back, many economists have been greatly surprised not just by the rapid spread of the financial tsunami from one market to another, but by how rapidly the financial sector crisis had brought down the “real sectors” (production, exports, and employment) of the economy, that is, how the problems in “Wall Street” have been so quickly transmitted to “Main Street”.

Introduction

In many respects, the world is driven by major crises. The recent global financial crisis, which was triggered by the U.S. subprime mortgage crisis, is bound to bring dramatic changes to the world economic structure and international finance architecture. As a rising developing economy, China certainly could not escape the effects of the crisis. Its export-led development strategy is facing a serious challenge after the outbreak of the crisis. The shrinkage of external demand has led to the weak performance of Chinese's export growth, which hampers economic growth and labour employment. Because of income distribution inequality among sectors and inside households, as well as the underdevelopment of social public goods such as education, medical care, and a social safety net, household consumption is constrained at a very low level. Although the Chinese Government could ensure short-term economic growth by stimulating fixed asset investment, the fast growing investment will turn into much more serious excess capacity in the next three to five years not only in the manufacturing sector, but also in the infrastructure area, without the parallel growth of internal and external final demands. The enlarging excess capacity will result in a decline of profitability of Chinese corporations, a surge of non-performing loans on the balance sheet of Chinese commercial banks, and consequent deflationary pressure. If the Chinese Government does not make necessary structural readjustments to its old growth model in time, sustainable economic growth cannot be achieved.

This chapter will not focus on the real economy, but on the financial side of the story. Due to its export-led and FDI-led development strategies, China has accumulated huge foreign exchange reserves. While this may be a valuable national asset, it is also a reflection of tremendous resource misallocation that has led to twin surpluses of both China's capital and financial accounts. A large proportion of China's foreign exchange reserves is invested in U.S. dollar- denominated assets, especially U.S. treasury bonds.

INTRODUCTION

In this chapter, we will attempt to address the following main question that this book tries to answer: “To what extent can the dynamics of Indonesian foreign relations in the post-Cold War period be explained in terms of the threat perceptions held by the country's foreign policy elite?” While the text aims to bring together both the theoretical and empirical aspect of this book, the discussion primarily draws on a set of assumptions and principles on which the balance of threat theory is based. In particular, this chapter aspires to prove that the dynamics of the Indonesian elite's foreign policy decision-making can be explained by means of the balance of threat concept. The theory is thus employed as an analytical tool by which to qualitatively and quantitatively evaluate the empirical findings from the 2004–06 research. As suggested in Chapter 2, one of the main arguments behind the balance of threat theory is that leaders’ perceptions of a particular country always need to be placed in the broader context of the elite's worldview. Importantly, from the Indonesian perspective, both at the elite level and public at large, the country's relationship with the United States and China can be viewed in a triangular form. Thus, in line with the “mendayung antara dua karang” thesis, it is possible to argue that we cannot understand Indonesia's approach towards the U.S. unless we place the country's relationship with the U.S. in the context of the Indonesian elite perceptions about the rise of China — and vice versa.

As argued in preceding chapters, a major determinant that shapes the elite's foreign policy preferences is the degree of the leaders’ agreement about the nature and urgency of the threat. The elite's consensus about the threat determines what foreign policy tool will be employed to deal with a particular danger to the state's security. Consequently, to provide a better understanding of the role of elite perceptions on the foreign policy decision-making process, this chapter also addresses a second important question: “Is the Indonesian elite unanimous in its view of the world, which has been the official version and policy of the country's consecutive administrations, or is the elite divided in its foreign policy perception?”

THE SUMMARY OF FINDINGS

The Indonesian foreign policy elite's strategic thinking about the country's foreign relations and how to achieve maximum security for Indonesia in the post-Cold War period have been to a great extent in line with the precepts of the balance-of-threat theory. However, we have found that the balance-of- threat theory is capable of explaining Indonesia's foreign policy dynamics provided it extends the analysis beyond the elite's threat perceptions by putting more emphasis on the degree of the elite's consensus about the threat.

Although the interviewed members of the Indonesian elite ostensibly declared that they generally regard threats to the country's national interest that are internal in origin as more dangerous and serious than external threats, it should not be by any means interpreted as that the leaders are not concerned about the more traditional state-based security threats. In fact, the elite perceives both the United States and China as the two most potent state-based external factors with the potential to endanger Indonesia's national interests and security. From the perspective of many Indonesians, both at the elite level and public at large, Indonesia's relationship with the “incumbent” and the “rising” superpower can be viewed in a triangular form. On the one hand, among all state actors, the interviewed leaders identified the United States during the George W. Bush's Administration as the most significant malign factor affecting Indonesia's national security. China's growing influence is at present seen quite positively for it enhances multipolarity in the international system and eases the pressure especially from what is widely considered as an excessive, ubiquitous power of the United States. Concurrently, however, China is seen as the principal danger in the long run and a number one external factor that needs to be constrained.

The Indonesian leaders are convinced that, in light of the uncertainty about how China will use its power in the future, it is absolutely vital for Indonesia to hedge its relations with China. The elite's main security concern is about the trajectory the rising might of China will follow in the future, namely the prospect of facing a giant with hegemonic intentions at its doorstep.

Many countries will be “torn between” in the 21st century — called on to modulate their relations between the United States and China. Daniel Novotny's book stands as a work of foresight and imagination, attempting to understand the pressures that policy-makers face as the world moves into a new age of two great powers after the collapse of the Soviet system and a generation of unchallengeable U.S. dominance.

Novotny's book has a number of qualities to recommend it. First, there is the focus on how an Asian country and the world's largest Muslim country (yet with a powerful Chinese minority) finds its way between the United States, its friend since the 1960s, and a growingly powerful China, keen to assert its ascendancy in its region. Readers curious about China, Islam, and Southeast Asia need this book.

Second, Novotny raises teasing questions about how “foreign policy” is made. To what extent are the policies of modern states dictated by their material facts of life — their geographic boundaries, the richness of their economies, the ethnicities of their people? Or, do foreign policies get made by small elites who constantly balance their own interests, prejudices, and long-term judgements against the pressures of domestic politics?

Novotny makes an important contribution by trying to get at “the mind” of a bureaucracy and a state's elite as they formulate policy towards the world outside their political boundaries. His diligent interviewing highlights the qualities that scholarship can bring to the study of contemporary affairs: a journalist might do an interview here and there; Novotny, the scholar, had a hit-list of more than forty interviewees whose views he sought systematically and relentlessly.

This relentless interviewing highlights another aspect of the book. Novotny brings to his research the multiple lenses of a widely travelled European, highlighted by his own remarkable linguistic talent. He is a Czech who is fluent in three European languages and Indonesian. (He used to speak passable Spanish and Russian but says he has forgotten them through lack of use.) He has lived and worked throughout Europe, travelled widely in northern Africa and Southeast Asia, lived in Indonesia with his Balinese wife and their children and had much of his academic experience in Australia.

INTRODUCTION

In this chapter, we are going to establish the theoretical and conceptual framework underpinning the study. The text introduces the balance-of-threat theory, outlines its main attributes and explains why it is a useful analytical tool for understanding the dynamics of Indonesian foreign policy. The discussion is carried out in the context of, first, the debate over the utility of Western-designed international relations theories in explaining dynamics of interstate relations in Asia and, second, the polemics over the virtues of a particular analytical approach to the exclusion of others — here the chapter points out limitations of the realist theory and the balance-of-power concept.

There have been a number of books that look at how domestic factors have influenced Indonesia's role in international affairs. Studies examining Indonesian foreign policy in the Sukarno and Suharto era were dominated by a leader-centric approach that emphasized the important foreign policy roles of these two leaders. This approach was sensible because both Sukarno and Suharto as ironhanded leaders exercised control and overriding influence over the foreign policy-making process and thus virtually dictated the foreign policy orientation. Yet, for much of the post-WWII period up to the 1990s, these studies offered, by and large, mostly a narrative, descriptive and atheoretical account of how Jakarta's foreign policy was designed and influenced by some domestic considerations. The limitation of these texts stems from their failure to use a theoretical framework to organize and assess empirical findings. Only very few studies of Indonesia, or non-Western countries generally, employ a systematic approach within a theoretical framework to explain the correlation between external and internal and between material and non-material factors, and the process in which these shape their foreign relations.

Not only scholars, in general, but also some foreign diplomats posted in Indonesia seem to find it difficult to establish a sort of “road map” by which to comprehend the pattern of foreign relations of this “big amorphous mass”.

The origins of this book can perhaps be found somewhere inside the extensive maze of narrow corridors or in the State Rooms of the “Office of the President” that is located within the splendid Prague Castle perched on top of the hill in the heart of Prague, the capital city of the Czech Republic. As an intern and later an aide in the Political Department during President Václav Havel's tenure, I enjoyed the privilege of watching closely the “human dimension” behind foreign policy-making. I was often taken aback when I saw how much impact the President's, senior diplomats’ and policymakers’ personal idiosyncrasies (shaped by past experiences), their personal perceptions, attitudes and preferences would have on the dynamics and actual outcomes of a state's foreign relations. One of the main arguments underlying the discussion in this book is the idea that policy-makers’ perceptions are as important as realities, in that they shape their real actions.

This book was written for many thousands of people — students, academics, professional diplomats, as well as a general audience who are interested in and want to learn more about foreign policy-making in general and the important role Indonesian policy-makers’ threat perceptions play in shaping the country's foreign policy in particular. I spent more than four years researching this topic — including countless hours of interviews with present and former Indonesian presidents, cabinet ministers and senior diplomats (and days spent at the library) — and, finally, wrote this book out of passion and curiosity. “International relations” and “foreign policy” are fascinating objects of study. However, most texts on foreign policy formation tend to use mostly narrative, descriptive and atheoretical approaches and generally seem to downplay the important role of decision-makers’ threat perceptions in explaining foreign policy outcomes. Their limitation stems from the failure to use a theoretical framework to organize and assess empirical findings. While this book brings a theoretical perspective based on the balance-of-threat concept to bear on the study of foreign policy elite perceptions, it puts a special emphasis on the elite's state-based security concerns. The balance-of-threat theory is employed here as a predictor about how Indonesia will behave and whether it will implement policies intended to prevent other countries from endangering Indonesia's national interests and security.

INTRODUCTION

Post-Cold War international relations have been marked by far-reaching shifts in the balance of power with the perhaps most widely known example being the challenge rising China poses to the predominance of the United States. It has been increasingly apparent that many smaller states are forced to respond to this trend by carefully manoeuvring between these two major powers. A case in point is Southeast Asian states’ growing difficulty in effectively managing their relationship with the incumbent and the rising superpower. To this end, there has been much debate about the present dynamics and possible future direction of Indonesia's foreign policy — of particular interest is Indonesia's approach to its relations with the United States and China. From the perspective of many Indonesians and other Southeast Asians, both at the elite level and public at large, this relationship can be viewed in a triangular form. Here, referring to this “triangular” relationship, Dewi Fortuna Anwar has aptly expressed the question that many people nowadays ask in the title of her authoritative article, “Indonesia's Foreign Relations: Going West or East?”.

How can a developing, democratic and the world's most populous Muslim country like Indonesia manage its foreign relations, while facing a myriad of security concerns (which are often multi-layered and multi-sourced in nature) and dilemmas in the increasingly complex situation of the post- Cold War international politics, without compromising its national interests and sacrificing its independence? Approaching this problem from the vantage point of the Indonesian elite, this study explores the influence of (and the complex interactions between) Indonesian foreign policy elite's threat perceptions on the decision-making process behind the country's foreign policy. To illustrate the ways in which contemporary Indonesian leaders’ perceptions, with a special emphasis on the United States and China, have affected the country's participation in the post-Cold War international affairs, this book presents a graphic picture of what members of the Indonesian elite see when they view the outside world and Indonesia's dilemmatic position within the “tricky” and “perilous” international system, while systematically seeking out the sources of the leaders’ perceptions.