Anatomy of a disaster: the IMF's war on corruption in Indonesia and the effects of structural adjustment

This thesis examines the advice given by the International Monetary Fund (IMF) to Indonesia, during and after the Asian crisis and the impact that this had on corruption and subsequently Foreign Direct Investment (FDI). It argues that the key mistake made by the IMF was the assumption that foreign business is averse to corruption and state involvement in economic development. This assumption relied on a key tenet of neo-liberalism — that the only state intervention in the economy should be to ensure the primacy of the so-called free market. While the aim of the IMF’s Structural Adjustment Program (SAP) in Indonesia was to stem the crisis and facilitate economic recovery, Indonesia’s economic, social and political situation continued to deteriorate after the implementation of the IMF 'reforms'. The thesis argues that the Indonesian experience provides a number of lessons for developing economies, International Financial Institutions (IFIs), and the neo-liberal project generally. Specifically these are that corruption can operate in a functional or dysfunctional manner depending upon the political and economic environment in which it exists; that democratisation processes within a state cannot be achieved quickly simply by altering its political structure; that developing states have a valid role in regulating investment and the economy for the purpose of economic development; that the state can play a role in preventing or at least reducing the impact of a major financial crisis; that neither national economies nor the international financial system are insulated from vested interests; that FDI privileges economic certainty and profit over issues of economic regulation and corruption; and that the so-called free market system is dependent upon state intervention to prevent collapse. In Indonesia's case, while the IMF program sought to reduce the high level of corruption by diffusing politico-business power and dismantling the country’s authoritarian system of government, the measures succeeded only in fragmenting corruption so that any previously existing checks and balances were abolished. Instead of improving the situation with respect to FDI, these measures resulted in intolerable levels of economic and business uncertainty for foreign investors. Indonesia was no longer considered an attractive place for business to invest as the country became too economically and politically volatile. In fact, while other crisis-affected countries had begun to recover by 1999, Indonesia’s economic situation remained volatile until 2005, when its political situation stabilised.