On the Fall of the Rupiah and Suharto

This article appeared in Globe Asia, January 27, 2007.

On August 14, 1997, shortly after the Thai bahtcollapsed on July 2, Indonesia floated the rupiah.This prompted Stanley Fischer, DeputyManaging Director of the International MonetaryFund, to proclaim that "the managementof the IMF welcomes the timely decision of theIndonesian authorities. The floating of the Rupiah, in combinationwith Indonesia's strong fundamentals, supported byprudent fiscal and monetary policies, will allow its economyto continue its impressive economic performance of the lastseveral years."

Contrary to the IMF's expectations, the rupiah did notfloat on a sea of tranquility. It plunged from 2,700 rupiahs perU.S. dollar at the time of the float to lows of nearly 16,000rupiahs per U.S. dollar in 1998. Indonesia was caught up inthe maelstrom of the Asian crisis.

By late January 1998, President Suharto realized that theIMF medicine was not working and sought a second opinion.In February, I was invited to offer that opinion and began tooperate pro bono as Suharto's Special Counselor. Although Idid not have any opinions on the Suharto government, I didhave definite ones on the matter at hand. After the usual opendiscussions at the President's private residence, I proposed asan antidote an orthodox currency board in which the rupiahwould be fully convertible into the U.S. dollar at a fixed exchangerate. On the day that news hit the street, the rupiahsoared by 28 percent against the U.S. dollar. These developmentsinfuriated the U.S. government and the IMF.

Ruthless attacks on the currency board idea and the SpecialCounselor ensued. Suharto was told in no uncertain terms – byboth the President of the United States, Bill Clinton, and the ManagingDirector of the IMF, Michel Camdessus – that he would haveto drop the currency board idea or forego $43 billion in foreignassistance. He was also aware that his days as President would benumbered if the rupiah was not stabilized.

Economists jumped on the bandwagon too. Every half-truthand non-truth imaginable was trotted out against the currency boardidea. In my opinion, those oft-repeated canards were outweighed bythe full support for an Indonesian currency board (which receivedvery little press) by four Nobel Laureates in Economics: Gary Becker,Milton Friedman, Merton Miller, and Robert Mundell.

Why all the fuss over a currency board for Indonesia? MertonMiller understood the great game immediately. As he wrote whenMrs. Hanke and I were in residence at the Shangri-La Hotel in Jakarta,the Clinton administration's objection to the currency boardwas "not that it wouldn't work but that it would, and if it worked,they would be stuck with Suharto." Much the same argument wasarticulated by Australia's former Prime Minister Paul Keating: "TheUnited States Treasury quite deliberately used the economic collapseas a means of bringing about the ouster of President Suharto."Former U.S. Secretary of State Lawrence Eagleburger weighed inwith a similar diagnosis: "We were fairly clever in that we supportedthe IMF as it overthrew (Suharto). Whether that was a wise wayto proceed is another question. I'm not saying Mr. Suharto shouldhave stayed, but I kind of wish he had left on terms other than becausethe IMF pushed him out." Even Michel Camdessus could not find fault with these assessments. On the occasion of his retirement,he proudly proclaimed: "We created the conditions that obligedPresident Suharto to leave his job."

To depose Suharto, two deceptions were necessary. The first involvedforging an IMF public position of open hostility to currencyboards. This deception was required to convince Suharto that he wasacting heretically and that, if he continued, it would be costly. TheIMF's hostility required a quick about-face: Less than a year beforethe Indonesian uproar, Bulgaria (where I was President Stoyanov'sadvisor) had installed a currency board on July 1, 1997 with theenthusiastic endorsement of the IMF, and Bosnia and Herzegovina(where I advised the government on currency board implementation)had followed suit under the mandate of the Dayton PeaceAgreement and with IMF support on August 11, 1997.

Shortly after Suharto departed, the IMF's currency board deceptionbecame transparent. On August 28, 1998, Michel Camdessusannounced that the IMF would give Russia the green lightif it chose to adopt a currency board. This was followed on January16, 1999 with a little-known meeting in Camdessus' office at theIMF headquarters in Washington, D.C. The assembled group includedIMF top brass, Brazil's Finance Minister Pedro Malan, andthe central bank's Director of Monetary Policy Francisco Lopes. Itwas at that meeting that Camdessussuggested that Brazil adopt a currencyboard.

The second deception involvedthe widely-circulated story that Ihad proposed to set the rupiah's exchangerate at an overvalued level sothat Suharto and his cronies couldloot the central bank's reserves. Thistake-the-money-and-run scenariowas the linchpin of the Clinton administration'scampaign against Suharto.It was intended to "confirm"Suharto's devious intentions andrally international political supportagainst the currency board idea andfor Suharto's ouster.

The overvaluation story was enshrinedby the Wall Street Journalon February 10, 1998. The Journalreported that Peter Gontha had summoned me to Jakarta and thatI had prepared a working paper for the government recommendingthat the rupiah-U.S. dollar exchange rate be set at 5,500. This wasnews to me. I did not meet, nor know of, Peter Gontha, nor had Iauthored any reports about Indonesia or proposed an exchange ratefor the rupiah.

I immediately attempted to have this fabrication corrected.It was a difficult, slow, and ultimately unsatisfactory process. Althoughthe Wall Street Journal reluctantly published a half-bakedcorrection on February 14, the damage had been done.

The Journal's original fabrication (or some variant of it) wasrepeated in virtually every major magazine and newspaper in theworld, and it continues to reverberate to this day, even in so-calledscholarly books and journals. For example, in his 2000 memoir,From Third World to First, The Singapore Story: 1965-2000, LeeKuan Yew asserts that "in early February 1998, Bambang, the president'sson, brought Steve Hanke, an American economics professorfrom Johns Hopkins University, to meet Suharto to advise him thatthe simple answer to the low exchange value of the rupiah was toinstall a currency board." This bit of misinformation was a surprise,since I have never had any contact with Bambang Suharto. But it isnot just politicians who fail to "fact check" their assertions. TheodoreFriend's 2003 tome, Indonesian Destinies, misspells my nameand then proceeds to say that I "counseled the [Suharto] family topeg the exchange rate at 5000."

Setting the record straight has been complicated by the officialspinners at the IMF. Indeed, they have been busy as little bees rewritingmonetary history to cover up the IMF's mistakes, and Indonesiarepresents one of its biggest blunders. To this end, the IMF issued a139-page working paper "Indonesia: Anatomy of a Banking Crisis:Two Years of Living Dangerously1997–99" in 2001. The authorsinclude a "politically correct"version of the currency boardepisode asserting, among otherthings, that I counseled PresidentSuharto to set the rupiah-dollarexchange rate at 5000. Thispseudoscholarly account, whichincludes 115 footnotes, fails todocument that assertion becauseit simply cannot be done. Thatofficial IMF version of eventsalso noticeably avoids referencingany of my published works or interviewsbased on my Indonesianexperience.

That episode and its manipulationsare not unique inthe political world. It is useful,though, after time and events unfold, to set facts straight in orderto understand the situation then and now. Other countries, suchas China, are currently experiencing some of the vagaries of similartreatments. Let's hope that they and all of us do not have to pay laterfor such blunders and mistakes.