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  • Print publication year: 2010
  • Online publication date: October 2015

Postscript: The 2008 Financial Crisis

Summary

Even though the sources, magnitude and complexity of the 2008 global financial crisis differ from those of the 1997–98 Asian financial crisis, the impact on the Indonesian economy and on the economies of many other developing countries will most probably be very much the same, particularly in terms of reduced economic growth, shrinking employment opportunities and a worsening of socioeconomic development. We live in an interconnected world where the current crisis, triggered by the slump in the U.S. housing market and the simultaneous escalation of international oil and food prices, could have an immense effect on economies in the developing world. Thus the subsequent burden will be borne not only by the poor living in wealthy countries but also by the billions of poor and vulnerable people in low-income countries that include Indonesia.

Much has been written in the press and in academic circles arguing that the current global financial crisis will lead to an economic recession in developed countries, particularly the United States and Europe. This would reduce demand for exports from developing countries like Indonesia, and could be exacerbated if the United States and Europe adopt trade protectionism as their response to the crisis. Furthermore, foreign aid and direct foreign investment are likely to be cut since international mobile capital will most probably be secured in the safe havens of the United States and Europe.

Indonesia will face extensive economic problems, some of which are already being felt with the volatility of the stock market, the liquidity crunch in the banking sector, and a rapid weakening of the exchange rate pressuring the balance of payments and liquidity in the financial system. Even though the impact on current exports has been minimal so far and has resulted in relatively small account deficits, many observers predict that the full impact on the real sector will start to be felt in the first quarter of 2009. This is attributed to factors such as the falling demand for Indonesian commodities from developed economies, which may lead to fewer employment opportunities for the poor and the non-poor alike.