The Fall of Suharto: How Indonesia's Dictator Was Overthrown by Economic Crisis and Political Shift

Indonesia's authoritarian leader Suharto's rule, known as the New Order, came to an abrupt end in less than a year, once the economic stability of the country began to wane. This article explores the factors that led to Suharto's downfall in 1998, focusing on the 1997 Asian Financial Crisis, the end of the Cold War, and the effects of deregulation in the financial sector.

The 1997 Asian Financial Crisis

The 1997 Asian Financial Crisis had a profound impact on Indonesia, Suharto, and his New Order regime. This crisis, which started in Thailand, quickly spread to other Asian countries, causing the Indonesian Rupiah to plummet. The Orde Baru regime, which had been in power for 32 years, was unprepared for such a sudden economic downturn. When the crisis hit, Suharto's New Order supporters fled, and external support from the Western Bloc, which had backed Suharto for decades due to his anti-communist stance, was no longer available.

Suharto, realizing the gravity of the situation, stepped down to prevent further collapse. The New Order government, which had previously been a stronghold, crumbled almost overnight. The crisis revealed how unprepared and volatile the foundations of the Indonesian economy were, leading to massive unemployment and widespread social unrest.

The End of the Cold War

The end of the Cold War in 1991 had a significant influence on the fate of Suharto in Indonesia. The New Order regime had deeply aligned with the Western Bloc, primarily due to its strong opposition to communism, culminating in the mass killings of communists and leftists in 1965-66. However, as the Soviet Union collapsed, the global threat of a communist revolution diminished. Consequently, the West lost its strategic interest in supporting Suharto.

The political winds were changing, and the economic crisis in Asia intensified the pressure on Suharto. With the US no longer having a reason to support him, and the financial instability in the region, Suharto's regime faced a crucial turning point. The lack of foreign support, combined with the domestic financial crisis, created a untenable situation for the New Order regime, making its collapse inevitable.

The Deregulation of the Financial Sector

In the late 1980s, the Indonesian government implemented a series of deregulation measures intended to stimulate the financial market and encourage foreign investment. This deregulation included lowering the minimum capital requirements for banks, eliminating restrictions on bank ownership, and easing rules on sound banking practices. These reforms were aimed at creating a more competitive and efficient banking system.

The deregulation package, however, had unintended consequences. It led to a rapid increase in the number of banks, many of which were poorly capitalized and operated on unsound practices. These banks often misused depositor's funds for personal business ventures. Additionally, the deregulation allowed companies to borrow US Dollar-denominated short-term loans, which exposed them to foreign currency risks when the Rupiah's value plummeted.

The sudden collapse of the Rupiah's value triggered a series of events that further destabilized the country. Many businesses were forced to use depositor's money to service their foreign loans, leading to a cash crunch and mass layoffs. This, in turn, led to widespread protests and demonstrations, first by students and then by the middle class. The government sought help from the International Monetary Fund (IMF), but the attached neoliberal reforms, which included closing troubled banks and canceling fuel subsidies, triggered a massive public backlash.

Keywords: Suharto, Indonesian Revolution, 1997 Asian Financial Crisis